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European Economic Growth: Can We Make Reporters Multiply by 4? Print
Saturday, 13 November 2010 08:07

In the United States economic growth numbers are almost always presented as annual rates. In Europe and much of the rest of the world they are typically presented as quarterly rates. This means that if a reporter simply presents the official rate from a government agency, as the Post did in an article on the debt crises in Ireland and Portugal, they will be giving readers a quarterly growth rate. This will likely leave a large portion of the paper's readers confused as to actual growth rate.

It is a very simple matter to convert a quarterly growth rate into an annual rate. The proper way is to take the 1 plus the growth rate to the fourth power, an operation that could be done in far less than a second by almost any calculator produced in the last 15 years. However, for small numbers, like the 0.4 percent growth figure reported for the euro zone last quarter, it is just fine to multiply the quarterly rate by 4 to get a 1.6 percent annual rate.

 
The Impact of Expiring Tax Cuts: Can We Get Names? Print
Saturday, 13 November 2010 07:50

The Post told us about the prospect that the Bush tax cuts would expire in January:

"The stakes are enormous. Millions of taxpayers could see hundreds of dollars sliced from their paychecks in January unless Congress acts. Economists say expiration of the tax cuts would deal a devastating blow to the fragile U.S. economy, and has the potential to push it back into recession."

There can be little doubt that the impact of pulling money out of the economy at this point will be negative, and given that the economy is scraping against zero growth already, it would not take much to throw it into another recession. But it might be a bit much to describe this as a "devastating blow." The expiration of the Make Work Pay tax credit and other parts of the stimulus will also pull money out of people's pockets and slow growth. The Post has never issued similar warnings about this prospect.

It would have been appropriate to refer to actual statements of specific economists rather than present overblown adjectives as being the considered judgment of the economics profession. In the same vein the article later describes the $4 trillion cost of continuing all the credits for a decade as a "budget buster." This assessment should come from a participant in the debate, not the newspaper.

 
Erskine Bowles' Conflict of Interest -- Why Is the NYT's Tobin Harshaw Upset That People Mention It? Print
Friday, 12 November 2010 22:15

I have a general policy at BTP of not mentioning articles that directly refer to me or CEPR. I am making an exception here because I think there is a very important point that deserves attention.

In an NYT blogpost ("A Deficit of Respect") Tobin Harshaw discusses the response of liberals and progressives who attacked Erskine Bowles and Alan Simpson, the co-chairs of President Obama's deficit commission. He concludes by criticizing those who:

"have begun the battle with ad hominem attacks on the commission’s chairmen as unserious, ill-intentioned, mentally unbalanced, avatars of the “money party.”

I would certainly fit as one of those who described at least one of the co-chairs (Erskine Bowles) as an avatar of the money party, even if I did not use exactly these words. The fact is that Mr. Bowles is a director of Morgan Stanley, one of the bailed out Wall Street banks. He gets $335,000 a year for his work with Morgan Stanley. This may be one of the reasons that the co-chairs report did not mention a financial speculation tax as a possible source of revenue, even though financial sector taxes have been widely advocated by policy analysts around the world, including even the I.M.F.

The exclusion of any new taxes on the financial sector is especially striking since Senator Simpson boasted at their joint press conference about having "harpooned every whale." The financial industry is a pretty big whale to overlook.

When I first came to Washington I worked at the Economic Policy Institute, a think tank that gets 20-25 percent of its funding from labor unions. Media outlets, including the New York Times, routinely felt the need to notify readers of this source of funding with the idea that it could have bearing on my work and that of my colleagues. Given this practice, it certainly would seem reasonable to note that Mr. Bowles is currently getting huge amounts of money directly from a major Wall Street bank. Readers can decide for themselves whether this money affects his views on the best way to deal with the budget deficit.

Since we are on the topic, given his behavior, it hardly seems out of line to describe the other co-chair, Alan Simpson, as "as unserious, ill-intentioned, mentally unbalanced." Mr. Simpson has sent several late night e-mails to his critics (I was one recipient), which displayed extraordinary ignorance of the finances of the Social Security program, contempt for its beneficiaries, as well as a serious misunderstanding of bovine anatomy. One e-mail was also openly sexist, implying that the head of a major national women's organization was too dumb to read a simple graph.

People can make their own judgment as to whether or not these e-mails and Mr. Simpson's other erratic actions (he once cursed out a reporter for asking him his views on Social Security) are evidence of being unserious, ill-intentioned or mentally unbalanced. However, it hardly seems inappropriate to raise the question.

Mr. Harshaw obviously approves of the thrust of the recommendations of the co-directors. That is fine and it would be good to have an open debate on the need for and merits of these recommendations. Wall Street investment banker Peter Peterson and other wealthy supporters of the co-directors agenda are doing their best to stack the deck, spending hundreds of millions of dollars to push their agenda, to ensure that nothing resembling a fair debate occurs.

However, the questions raised by the critics of the co-directors, including issues about conflict of interest and erratic conduct, are typical of the sort of questions that the NYT and other media outlets routinely raise in their news reporting. Insofar as Harshaw objects to such questions being raised about Bowles and Simpson he is asking that they be granted special protection. That is a request that does not deserve to be treated seriously. 

 
The Washington Post's Name-Calling On Trade Print
Friday, 12 November 2010 06:15

Everyone knows that the Washington Post abandons any pretext of objectivity when it comes to trade. It once even famously claimed that Mexico's GDP had quadrupled from 1988 to 2007 in order to tout the benefits of NAFTA. (The actual increase was 82 percent.) So, it is hardly surprising that it resorted to name-calling in denouncing the opponents of the trade pact with South Korea.

It referred to these opponents as "protectionist voices" within the Democratic Party. Of course everyone involved in trade debates is protectionist, the only issue is who is being protected. This trade agreement would actually increase protections for items like copyrights and patents, increasing the cost to consumers of items like prescription drugs and recorded music and videos. This will slow growth and reduce jobs. The deal also does little or nothing to reduce the barriers that protect highly paid professionals like doctors and lawyers from international competition.

This is why it inappropriate to refer to the Korean pact as a "free-trade" deal. Does the Post require that reporters refer to every trade deal that it likes as a "free-trade" pact, instead of increasing accuracy and saving space by referring to it simply as a "trade" deal?

The Post also repeats the silly old trick of telling readers that the pact will help the economy creating 70,000 jobs in firms exporting goods to South Korea. Of course, the real story on job creation depends on both exports and imports. (Come on, does the Post really think it can fool readers with this one?) The country's trade deficit has increased with most of the countries with whom it has signed trade pacts in the last two decades, implying that by this crude measure the deals have been job losers. 

So, the main information that readers get from this front page article is that the Washington Post really likes the proposed trade pact with South Korea. But regular Post readers already knew this.

 
David Brooks' Apocalypse Print
Friday, 12 November 2010 05:35
"Elections come and go, but the United States is still careening toward bankruptcy. By 2020, the U.S. will be spending $1 trillion a year just to pay the interest on the national debt. Sometime between now and then the catastrophe will come.

It will come with amazing swiftness. The bond markets are with you until the second they are against you. When the psychology shifts and the fiscal crisis happens, the shock will be grievous: national humiliation, diminished power in the world, drastic cuts and spreading pain"

I still like the biblical version with the four horseman and the rivers flowing upstream, but hey, it's the oped page of the NYT. No one expects that people will be reading this stuff 1500 years from now.

Anyhow, let's take a closer look at Mr. Brook's apocalypse. The U.S. will be spending $1 trillion a year just to the pay the interest on the national debt." Pretty scary, huh?

Well, first it is probably worth noting that Brooks is somewhat more pessimistic on this score that the Congressional Budget Office (CBO) which puts interest in 2020 at $916 billion. How scary is that?

Let's get out the GDP projections. CBO tells us that GDP will be $22.5 trillion in 2020 [thanks Jeff]. This means that Mr. Brooks scary interest burden will be equal to about 4.1 percent of GDP. Will that be the end of the world or least national humiliation, as Brooks promises? The interest burden peaked at 3.3 percent of GDP in 1991, so we would not be in hugely different territory than we were during the Bush I presidency.

But, there is a further complication. The Fed currently holds much of the federal debt and it is actually increasing its share. This is what QE2 is all about. Given the massive amount of excess capacity and unemployment, coupled with the trend towards disinflation, there is no reason that the Fed should not continue to hold this debt. (It can take other steps, such as increasing reserve requirements, to ensure that an increase in reserves in the banking system does not lead to inflation in future years.)

If the Fed holds the debt, then it poses no burden to the government. The Treasury pays interest on the debt to the Fed and then the Fed refunds the interest to the Treasury. Last year the Fed refunded $77 billion in interest to the Treasury, nearly 40 percent of the net interest paid out by the Treasury.

If the share of interest going to the Fed is the same in 2020 as it is today, then the interest burden on taxpayers in 2020 will be equal to about 2.6 percent of GDP, well below the levels of the late 80s and 90s. If the Fed increases the share of the debt it holds, as it is doing now with QE2, then the interest burden on future taxpayers will be even less.

This doesn't leave much for Mr. Brook's apocalypse story. Of course, if Brooks really wants to tell a story of national humiliation he just has to look around beyond the streets and restaurants that he and his friends frequent. The country has more than 25 million people who are unemployed, underemployed or who have given up work altogether. Tens of millions of people are underwater in their mortgages and millions face the imminent prospect of losing their home through foreclosure.

This might not be the apocalypse, but it should be humiliating to the nation, especially since this suffering is entirely due to incompetent economic policy and therefore was and is entirely avoidable. And, Brooks doesn't even have to wait for 2020 to talk about this picture.

 

 
Trade Imbalances: More Economics 101 for Business Reporters Print
Friday, 12 November 2010 05:10

The discussion of the trade imbalances continues to be muddled even beyond the failure to realize that changes in relative currency prices are the main mechanism for adjustment in a system of floating exchange rates. Many news articles and columns have lumped together Germany and China as troublemakers due to their large trade surpluses. This is wrong.

The principle here is very simple. China is an extremely fast growing country where the return on capital is very high. Germany is a relatively slow growing country, where the return on capital is much lower. In standard trade models, capital is supposed to flow from countries where the return is low to countries where the return is high.

The implication of this simple point is that we should expect relatively wealthy slow growing countries like Germany to have trade surpluses. Their capital could in principle be better used in fast-growing developing countries. This would imply a trade surplus.

By contrast, it would be expected that a fast-growing country like China would be an importer of capital. This is due to the fact that capital gets a much higher return in China than in wealthy countries. This would correspond to a trade deficit, not a trade surplus.

The fact that China and many other developing countries are running trade surpluses does not mean that they have done something wrong. The real problem in this story has been the system of international finance designed primarily by the I.M.F. and therefore the United States. This system has not allowed developing countries to feel comfortable in accumulating foreign debt, forcing them to build up reserves to avoid being subjected to dictates from the I.M.F.. But, reporters should recognize what economic theory says about the current world trade imbalances.

 

 
NYT: Making Up Numbers to Push Trade Agreements Print
Thursday, 11 November 2010 20:56

The New York Times seems to be following in the footsteps of the Washington Post in terms of making up nutty numbers to promote trade deals. The NYT told readers that if Japan did not join in a pan-Asian trade agreement it would "eliminate eight million jobs."

According to the OECD, employment in Japan is just over 62 million. This means that the estimates in the NYT imply that not taking part in this trade agreement would cost Japan a number of jobs approximately equal to 13 percent of its current employment the equivalent of roughly 18 million jobs in the United States. Given that Japan already trades with these countries and this deal would simply expand trade, it is implausible that the agreement would increase its employment by even one-tenth this amount. 


 
The Falling Dollar and Developing country Exports Print
Thursday, 11 November 2010 05:44

The Washington Post notes that the Fed's new round of quantitative easing will:

"harm exports from developing countries. That's because steps to lower U.S. interest rates and put money into the economy have the effect of making other countries' currencies more expensive."

If world imbalances are going to be addressed, then developing country exports must be hurt. In economic theory, rich countries like the United States are supposed to have trade surpluses. This means that they export capital developing countries. The logic of this pattern of trade is that capital commands a higher rate of return in fast growing developing countries in which it is relatively scarce.

There were in fact substantial flows of capital from rich countries to poor countries prior to the East Asian financial crisis in 1997. However, the harsh treatment of countries in the region by the I.M.F. led developing countries throughout the world to focus on accumulating vast amounts of reserves in order to avoid ever being in the same situation. This meant that developing countries had to run export surpluses with the United States and other wealthy countries.

In effect, the I.M.F, under the guidance of the Rubin-Summers Treasury Department, put in place a dysfunctional system that would inevitably explode. The effort to re-balance trade is about reversing those policies.

 
Erskine Bowles, Morgan Stanley, and the Deficit Commission Print
Thursday, 11 November 2010 05:08

The deficit report put out by the commission's co-chairs, Alan Simpson and Erskine Bowles, had one striking omission. It does not include plans for a Wall Street speculation tax or any other tax on the financial industry.

This omission is striking because the co-chairs made a big point of saying that they looked everywhere to save money and/or raise revenue. As Senator Simpson said: "We have harpooned every whale in the ocean - and some minnows." Wall Street is one whale that appears to have dodged the harpoon.

This omission is made more striking by the fact that at least one member of the commission, Andy Stern, has long been an advocate of such taxes. Presumably he raised this issue in the commission meetings and the co-chairs chose to ignore him.

The co-chairs apparently also chose to ignore the I.M.F. Noting the waste and extraordinary economic rents in the sector, the I.M.F. has explicitly recommended a substantial increase in taxes on the financial industry. It is even more striking that the co-chairs apparently never considered a speculation tax since Wall Street's reckless greed is at the center of the current economic crisis.

In this context, it is worth noting that one of the co-chairs, Erskine Bowles, is literally on Wall Street's payroll. He earned $335,000 last year for his role as a member of Morgan Stanley's (one of the bailed out banks) board of directors. Morgan Stanley would likely see a large hit to its profits from a financial speculation tax.

It would have been appropriate for the reporters covering the report to ask about a financial speculation tax. It would also be appropriate to explore the connection between Mr. Bowles role as a Morgan Stanley director and the absence of any financial taxes in this far-reaching report.

 
Econ 101 for Washington Post Reporters Print
Wednesday, 10 November 2010 05:44

One would hope that reporters who cover economic issues for the Washington Post know a little economics. Unfortunately, this does not seem to be the case. Therefore, BTP will provide a free economics tutorial for the Post's economic reporters.

The Post told readers today that:

"world leaders share the overall aims of bringing trade flows into better balance and curtailing recent clashes over currency values."

The whole piece in fact shows the opposite. In a system of floating exchange rates the mechanism for correcting trade imbalances is a change in currency values. Countries with trade surpluses are supposed to see the value of their currency rise. Countries with trade deficits are supposed to see the value of their currency fall.

When a country's currency falls in value, imports become more expensive meaning that they will import less. Its exports become cheaper for people in other countries, causing foreigners to buy more of their exports. This will reduce its trade deficit. The opposite holds for a country's whose currency rises in value.

This is really simple. If you want to see trade imbalances corrected, then you want to see the value of the currency fall for countries with large deficits like the United States. This is just like if you want the school fire put out, you want the firefighters to spray water on it.

On the other hand, if you don't want the firefighters to use water, then you really don't want the fire extinguished. In the same vein, all the officials cited in this article who complain about the decline in the value of the dollar obviously do not want the trade imbalances corrected. It is that simple, at least for folks who learned intro econ.

There is another interesting sidebar for the economically literate. The article tells us:

"Some developing countries took aim at the Fed move in part because it could weaken the dollar, making their own currencies relatively more expensive, hurting their exports and fueling inflation."

This is a non sequitur. If the dollar falls in value, then imports from the United States will be cheaper for developing countries. This will lower inflation, other things equal. In addition, reduced exports from these countries will also reduce domestic demand and employment, which will also put downward pressure on inflation. If developing countries actually make the claims attributed to them in this article then the news is that their officials have no better grasp of economics than a Washington Post reporter.

 
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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.

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