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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.
Can Someone Teach the Post National Income Accounting? Print
Wednesday, 27 April 2011 05:07

It has become fashionable for billionaire types to offer big prizes for all sorts of things: new green technologies, teaching inner city kids, raising poor people in the developing world out of poverty. In this spirit, we really need some enterprising billionaire to offer a big prize for teaching basic national income accounting to the Post's editorial board.

The lead Post editorial expresses great concern that the world may lose confidence in the dollar, first and foremost because of the country's budget deficit and debt. If the Post's editors knew national income accounting then they would understand the contradiction in this position. The only sustainable way to get the budget deficit down is by lowering the value of the dollar. In other words, if it wants lower budget deficits, it should want the dollar to fall.

The logic is simple. The trade surplus is equal to net national savings. This is a definition, sort of like 2+3 being equal to 5. There is no way around it: 2+3 will always equal 5 and the trade surplus will always be equal to net national savings.

When the United States has a large trade deficit, as it does today, then it means that net national savings are negative. This means that either private savings must be negative or public savings must be negative (i.e. we have big budget deficits) or some combination of the two.

In the last decade, we had very low private savings as the budget deficit shrank to just 1.0 percent of GDP. The low private savings were the result of the housing bubble. The bubble led to a huge amount of wasted construction (which counts as investment) and very low household savings as consumers spent based on bubble generated housing equity. While the Post may want a return to bubble driven growth, this is disastrous for the economy and it is certainly not sustainable.

In the absence of very low private sector saving, there is no alternative to having the government run large budget deficits to make the identity balance. (In principle, other investment could rise, but it is very difficult to find formulas to make that happen.) This means that the current trade deficit essentially requires a large budget deficit.

The way out of this story is for the dollar to fall. The Post and its deficit hawk buddies can jump up and down and call all sorts of people all sorts of names but the trade deficit is not going to fall by much unless the dollar falls. A lower valued dollar makes U.S. exports cheaper to foreigners, leading them to buy more of them. It makes imports more expensive for people in the United States, leading us to buy fewer imports.

For this reason, a lower valued dollar is an essential part of any sustainable recovery plan. If the Post's editors knew national income accounting they were be putting pressure on Bernanke and Geithner to reduce the value of the dollar, not pleading for pledges to a strong dollar.

Unfortunately, the Post's editors don't understand national income accounting so we get this confused editorial calling for lower budget deficits and a strong dollar. Isn't there some billionaire out there willing to put up the prize money so that these people can be taught? Please. 

Two Takes on the Fed: NYT and the WAPO Print
Wednesday, 27 April 2011 04:52

It is striking to see the difference in the NYT and the WAPO in their discussion of the Fed's track record in the last two years. NYT columnist David Leonhardt raises the obvious point: the unemployment rate is far above anyone's estimate of full employment with no signs of core inflation in sight. The question is why doesn't the Fed do more to spur the economy?

By contrast the Post emphasizes the risk that Bernanke took with his quantitative easing policy. It told readers:

"But the central bank, with its decision last November, also put its reputation on the line, essentially shouldering responsibility for getting the economy on track. In that sense, the Fed now owns the crummy economy in the public mind to a degree that it wouldn’t have had Chairman Ben S. Bernanke and his colleagues followed a more cautious path in setting monetary policy."

Actually it is the Fed's mandate to maintain full employment, so Bernanke really does not have the option to decide to do nothing when the economy faces high unemployment due to a shortfall in demand. The only question is what is the most effective policy to raise demand. If he had opted to do nothing, then he should equally own the economy, assuming that the media reported the situation accurately.

The Post also wrongly asserts that Bernanke has set 2.0 percent as his inflation target. This is his target for the core inflation rate. This point is important because the overall inflation rate has been above 2 percent recently due to sharp increases in energy and food prices. However the core inflation has been just over 1.0 percent.

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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.