CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press

Beat the Press

 facebook_logo  Subscribe by E-mail  


Has Anyone at the Washington Post Heard of National Income Accounting? Print
Sunday, 01 May 2011 07:47

It seems that the answer is no. The Post ran a major front page article about the switch from the huge budget surpluses projected in 2000 to the large deficits that we are now seeing today. It never once discussed the implications of such surpluses for the economy.

National income accounting is helpful for understanding items like budget deficits because it provides a simple framework in which their impact can be examined. National income accounting has the advantage that it is by definition true -- there is literally no way around these accounting identities. National income accounting is also taught in every introductory economics class so it is reasonable to expect that the people who deal with economic issues at major news outlets would be familiar with it.

One of the identities in national income accounting is that the trade surplus (actually current account surplus, but these can terms can be used pretty much interchangeably for the United States) is equal to the net national savings. Net national savings in turn is equal to the government budget surplus (public savings) and the excess of private savings over private investment (private savings).

As a conscious policy under the Clinton administration (pushed by his second Treasury secretary, Robert Rubin) the United States begin to push for a high dollar. It used its control of the IMF in dealing with the East Asian financial crisis and subsequent crises in the developing world to put muscle behind the high dollar policy.

The high dollar in turn led to a large trade deficit. If the dollar is over-valued by 25 percent it has roughly the same impact as imposing a 25 percent tariff on all U.S. exports and giving a 25 percent subsidy to all imports. In other words, we expect a high dollar to be associated with a large trade deficit. This is exactly what happened in the late 90s, the high dollar sent the trade deficit soaring to record levels.

Using national income accounting, if the United States has a trade deficit of 4.0 percent GDP (roughly the 2000 level), then it must have negative national savings equal to 4.0 percent of GDP. There is no way around this, it has to be true.

If it has negative national savings equal to 4.0 percent of GDP then some combination of budget deficits and negative private savings must sum to 4.0 percent of GDP. In a context in which the country has a large trade deficit, if the government runs large budget surpluses, as it did in 2000 and CBO projected at the time would continue over the next decade, it would imply that there would be large negative private savings.

This could come about because of an investment boom, it is very hard to raise non-residential investment by much. Even at the peak of the Internet bubble in 2000, non-residential investment was up by only about 1.0 percentage point of GDP from its peak in the 80s cycle and was below its 70s level. This means that the huge budget surpluses projected by CBO in 2000 implied either extremely low private savings or a boom in residential construction. The last decade gave us both.

If the Post knew national income accounting it would have realized that it is pointless to discuss the budget deficit without reference to the trade deficit. This in turn means a discussion of the value of the dollar. Those who know national income accounting knew that the surpluses projected in 2000 were not plausible and furthermore would not have been desirable even if they were plausible. Without a large fall in the dollar, they implied a whole generation approaching retirement with almost no savings, since their failure to save was a logical implication of the budget surplus.

The real problem facing the economy is a hugely over-valued dollar. For some reason the Post, like most of the media, refuses to discuss this issue, instead distracting readers with phony morality tales about the budget deficit.

 
German Workers Might Get Pay Increases, Call In the Central Bank! Print
Saturday, 30 April 2011 08:31

The NYT reports that the low unemployment rate in Germany might allow workers to get higher wages, which could put upward pressure on the inflation rate. The only sources cited in this story are Jean-Calude Trichet, the head of the European Central Bank, Rainer Brüderle, the Economics minister for the conservative German government, and Jörg Krämer, the chief economist at Commerzbank in Frankfurt. It would have been useful to include the views of someone who believes that German workers should see pay increases.

Real wages in Germany have barely risen over the course of the last decade, even as productivity has grown by close to 2 percent a year. This has led to a shift from wages to profits. It has also meant that German labor costs have fallen relative to labor costs of the countries like Greece, Portugal, and Spain. The only way that trade between Germany and these countries can become more balanced (as long as they remain in the euro) is by having some combination of higher labor costs in Germany and lower labor costs in the peripheral countries. For this reason, higher wages for German workers would not just be beneficial to these workers, it would also be an important part of the re-balancing needed within the euro zone. It is remarkable that this obvious point is never mentioned in this article.

It is also worth noting that this article uses misleading unemployment data. It gives readers the official German unemployment rate of 7.1 percent. This measure counts part-time workers as unemployed. The OECD measure, which uses a similar methodology to the United States, shows that Germany has an unemployment rate of 6.3 percent. There is no excuse for not using the OECD measure since it is readily available and provides readers with a more accurate assessment of Germany's labor market situation.

 
The Post and Times Do He Said/She Said on Gas Prices Print
Saturday, 30 April 2011 08:11

It is difficult to understand why newspaper editors think that their typical readers have more time to evaluate the truth of politicians' claims that reporters who have a full time job to do such things. However these seems to be a widely held view, since so often articles are devoted to telling us what the politicians claim without including any effort to uncover what is true.

Today's he said/she said in the Post and the NYT is about high gas prices. The Democrats are looking to take back tax breaks from the oil industry while the Republicans are pushing to "drill here, drill now." It would have been useful to include a bit of analysis so that readers could judge the likely impacts of the two policies.

In the case of taking back tax breaks, there could be some modest deficit reduction to help the budget. The $4 billion annual figure cited by the Democrats would be a bit more than 0.1 percent of total spending. There could be some marginal impact on oil exploration and therefore future output, but given the likelihood that prices will remain high in the future, the plausible impact on supply and price in future years would most likely be too small to be measurable.

The plans to drill here, drill now would have zero impact on prices for some time, since most of the areas that have been put off limits to drilling by environmental regulation are difficult to explore and/or reach, like the Arctic Wildlife refuge or deep sea drilling in protected areas of the Gulf of Mexico. It would several years before any noticeable about of oil could be produced from these areas.

Furthermore, there is a world price of oil, not a domestic U.S. price. This means that increased drilling in the United States has roughly the same impact on U.S. prices as increased drilling in Kazakhstan or Iran. Plausible estimates of the amount of oil potentially produced from protected areas would be unlikely to lower the world price of oil by more than 10 percent and most likely less than 5 percent. (Drilling is unlikely to increase world supply by more than 2 million barrels a day, roughly 2 percent of world production.)

Even in this case, the increased supply would only be available for approximately 10 years. After that point, production levels would dwindle as would the impact on prices.

It would have been useful if these articles included some information on the likely impact of the policies being proposed, since most readers do not have more time than the Post and NYT reporters to examine these issues. 

 
The Drug Companies Mislead People About the Effectiveness of Their Drugs #54,732, Can We Ever Talk About Patents? Print
Friday, 29 April 2011 08:58

The NYT had an article about new research showing that a drug that sells for $50 a dose is just as effective in treating an eye disease as a drug that sells for $2,000 a dose. Why was Medicare and private insurers paying 4000 percent more than necessary to treat this eye disease? Because a drug company (Genetech) has a patent on the expensive drug which allows it charge prices that are far higher than its cost of production.

Economic theory predicts that when government interference in the market allows firms to charge prices above the cost of production, then they will engage in various rent-seeking behaviors to maximize their profits. These rent-seeking actions, like expensive lawsuits and paying off politicians, are a pure waste from an economic standpoint.

Economists usually get very upset when they see this sort of behavior, for example when an import tariff raises the price of a product by 20-30 percent. For some reason economists don't seem to notice the problem when government granted patent monopolies raise the price of products by several thousand percent above their free market price, even though they can use the exact same graph to show the costs.

The ignorance of economists should not be an excuse for bad reporting. The fact that patent protection is at the root of the problem noted in this article should have been mentioned.

 
Doesn't Anyone Care About Homeownership Anymore? Print
Friday, 29 April 2011 07:40

It seems not given the almost complete lack of coverage of the release of data from the Census Bureau showing that the homeownership rate had fallen to its lowest level since the 4th quarter of 1998. I date the bubble as beginning in 1996. It remains to be seen whether all the growth in homeownership associated with the bubble will be reversed. 

On a more positive note, the release did show a substantial decline in vacancy rates, although they are still at historically high levels. With most of the air now gone from the housing bubble, we may finally be getting back to a more normal market.

 
The Post Is on Another Planet: Job Growth in the First Quarter Was Not Strong Print
Friday, 29 April 2011 05:57

The calls for the bankruptcy of the Washington Post (a.k.a. Fox on 15th Street) are getting louder. The post told readers that:

"The job market was a bright spot in the first quarter ... with the unemployment rate falling and job growth coming in strong."

The economy added an average of 159,000 jobs a month in the first quarter. At this pace it will take more than 14 years to get back to normal levels of unemployment. By comparison, in the year following the end of 1981-82 recession the economy created almost 290,000 jobs. Adjusting for the growth in the labor force, this would be a pace of more than 450,000 jobs a month now.

In the four years from 1996 to 2000, when we had already fully recovered from the prior recession, the economy generated 250,000 jobs a month. It is not clear what criterion the Post is using in describing the job growth in the first quarter as "strong."

 
The Washington Post Goes the No Evidence Route In Pushing Small Business Woes Print
Friday, 29 April 2011 05:45

The Washington Post devoted an article to the plight of small businesses in the recovery. It claimed that the weakness of small business growth, which it attributes primarily to a lack of access to capital, is a major factor impeding the recovery.

The piece gave absolutely no evidence that small business has performed markedly worse in this recovery than larger businesses. Nor did it give any evidence, other than the complaints of a person who owns a small coffee roasting business, that access to credit is a big problem for small businesses.

In fact, it cited the survey done by the National Federation of Independent Businesses that showed credit is not much of a problem. This survey has consistently shown that lack of demand is the major problem as noted in the article. 

If the Post did this piece based on evidence it would have highlighted the lack of demand that small businesses face. Lack of demand can of course best be addressed by additional spending, which would likely mean larger government deficits. That would directly contradict the Post's repeatedly expressed editorial position urging smaller deficits.

 
Bernanke Offers Little Help On Budget Deficit Print
Thursday, 28 April 2011 05:51

Given the deficit obsession of the Washington media it is remarkable that none of the reporters covering Federal Reserve Board Chairman Ben Bernanke's press conference noted the fact that he offered little help on dealing with the budget deficit. There were two obvious steps that he could have taken.

First, the main reason that the deficit has soared in the last few years is that the economy collapsed following the bursting of the housing bubble, which Bernanke apparently failed to see. (We are a very forgiving lot in Washington.) If the unemployment rate was brought down quickly by more aggressive monetary policy, then the deficit could be reduced by an enormous amount.

In 1996, the Congressional Budget Office (CBO) projected a deficit of almost $250 billion (@ 2.6 percent of GDP) for the 2000 fiscal year. The country actually had a budget surplus of almost the same size in fiscal 2000, representing a shift from deficit to surplus in the year 2000 of more than 5 percentage points of GDP.

Congress did not approve any major tax increases in this 4-year period, nor were there any major unscheduled cuts to spending. Rather this shift from deficit to surplus of more than 5 percentage points of GDP ($750 billion in today's economy) was attributable almost entirely to better than expected economic performance.

In 1996 CBO projected that the unemployment rate would be 6.0 percent in 2000. Unemployment actually averaged just 4.0 percent. This was due to the fact that Alan Greenspan ignored the overwhelming consensus in the economics profession and allowed the unemployment rate to fall below the conventionally accepted levels of the NAIRU.

This decision, which was made over the objections of the Clinton appointees to the Fed, allowed millions of more people to get jobs than would have otherwise been the case. It also allowed strong wage growth for people at the middle and bottom of the wage distribution as their labor was then in demand. And it reduced the budget deficit. Because Bernanke offered little hope of more aggressive Fed actions to reduce unemployment, he is not offering any similar growth dividend on the budget deficit.

The other potential help that Bernanke is not offering is holding large amounts of government debt. The Fed now holds close to $3 trillion in government debt and other assets. If it continued to hold this debt throughout the decade, rather than selling it back to the private sector, it would reduce interest payments by close to $1.5 trillion over the course of the decade. It could deal with any inflationary pressures resulting from these holdings by simply raising reserve requirements. Bernanke is not offering this help either.

It would have been useful to readers to point out what the Fed is not doing to help address the deficit.

 
Bernanke and the Fed Resisted Transparency Print
Thursday, 28 April 2011 05:37

Business reporters seem to have very bad memories. All of the media accounts of Federal Reserve Board Chairman's first press conference touted his commitment to Fed transparency.

These reporters are apparently too young to remember that the Fed strongly resisted giving out any information about the trillions of dollars of below market loans that it disbursed at the peak of the financial crisis. It only released this information when a coalition of conservative and progressive members of Congress, led by Ron Paul and Bernie Sanders, attached a provision requiring the release to the Dodd-Frank bill. Bernanke had claimed that releasing the information would jeopardize the stability of the financial system.

Bernanke also went to court to block the release of information about discount window borrowing from the Fed. He only gave up and released the requested data after all his legal options were exhausted. The description of Bernanke as unquestioned advocate of increased Fed transparency is wrong.

 
Defense Cuts: $400 Billion Is Less Than It Seems Print
Thursday, 28 April 2011 05:26
Morning Edition touted the qualifications of Leon Panetta, President Obama's pick to be Secretary of Defense, as budget cutter, noting that he will be asked to trim $400 billion from the Defense Department budget over the next decade. It would have been worth pointing out that is just over 5 percent of the almost $8 trillion that the department is projected to spend over the decade.
 
<< Start < Prev 301 302 303 304 305 306 307 308 309 310 Next > End >>

Page 303 of 397

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

Archives