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Franklin Raines on Deficit Reduction: More Advice from the Folks That Wrecked the Economy Print
Friday, 16 July 2010 05:24

As the continued interest in the thoughts of Alan Greenspan shows, there is absolutely no amount of failure and incompetence that can get a person removed from the ranks of wise people once they have held an important government office. In keeping with this spirit, the Washington Post turned to Franklin Raines, a former director of the Office of Management and Budget (OMB), to get advice for Jack Lew, the income director, on dealing with the deficit. 

Mr. Raines was a past director of OMB, but his greatest claim to fame was probably his tenure as CEO at Fannie Mae, which ended in 2004 due to an accounting scandal. While Fannie and Freddie are not the villains of the housing bubble that the right likes to claim (private issuers of mortgage backed securities were far bigger sinners), the mortgage giants were incredibly irresponsible in their failure to recognize the bubble (which was already evident by 2004) and to adjust their lending accordingly. 

This is why it is more than a bit infuriating to see Mr. Raines tell us that:

"Most of the long-run deficit is composed of the interest on debt piled up because we were unwilling to pay today (or over an economic cycle) for the spending we want today." 

Yes, we did not run up huge surpluses in prior years in anticipation that there would be a huge housing bubble, the collapse of which would devastate the economy and require massive government stimulus to restore growth. I suppose that we can all plead guilty on that one.

 

[Addendum: Yes, I had earlier written in Harold Raines, which I corrected after a reader e-mailed me. The cause of the confusion is of course the legendary Chicago White Sox outfielder, Harold Baines.]

 
Alan Greenspan Wants the Tax Cuts to Expire: Why Should Anyone Care? Print
Friday, 16 July 2010 05:07

When he was Fed chairman, Alan Greenspan was almost a cult figure, with the media treating every pronouncement as a gem containing great wisdom. His status is somewhat lower now that is apparent that his incredible mismanagement of the economy has given us the worst economic crisis since the Great Depression.

This raises the issue of why the media, or anyone else, should care that Alan Greenspan now thinks that it would be a good idea to let the Bush tax cuts lapse in their entirety. Those who care about such trivia may recall that Mr. Greenspan had originally been an important advocate of these tax cuts. His stated reason was that he was concerned that the government would pay off its debt too quickly.

 
Lost Housing Equity, Not Stock Declines Forced Older Workers to Keep Working Print
Friday, 16 July 2010 04:58

A NYT blogpost noted the rise in labor force participation among older workers and the decline in participation among younger workers. It lists the fall in stock prices and therefore 401(k) values as one reason for the rise in older workers' participation.

This is not likely to be an important factor, since few older workers had a substantial amount of stock even before the crisis. The loss of housing equity was likely a far more important factor in causing older workers to remain in the workforce. For the vast majority of older workers housing equity is their major source of wealth.

(The piece also lists the rise in the minimum wage as a reason that younger workers may be leaving the labor force. There is a vast amount of economic research that indicates that minimum wages have very little effect on the employment of younger workers.)

 
Goldman Sachs Did Not Just Survive, It Was Rescued Print
Friday, 16 July 2010 04:14

In its report on Goldman Sachs $500 million settlement of its case with the SEC, NPR described Goldman as a "survivor" of the financial crisis. While Goldman obviously did survive the crisis, it only did so with massive assistance from the government. This included loans through the TARP, loans and loan guarantees from the Federal Reserve Board and the FDIC, and the payment of $13 billion in obligations from AIG. However the most important form of assistance stemmed from the Fed's decision to allow Goldman to become a bank holding company in the middle of the crisis, giving it the explicit protection of the Fed and the FDIC. 

Describing Goldman as a "survivor" may imply that it managed to get through the crisis by its own ingenuity and mastery of finance. In fact, Goldman survived in the same way that an earthquake victim survives when the rescue squad digs them out from the rubble and rushes them to the emergency care ward. Its ingenuity in this context was only in its ability to get its political allies to come to its aid with enormous amounts of taxpayer dollars while demanding almost nothing in return.

Btw, it would be interesting to know how much Goldman made on the deal for which it is paying this fine. If the fine is not many times larger than the profit, it is not sending much of a message. The probability of getting caught in this sort of fraud is very low. It is a safe bet that the SEC never would have brought its case if the participants at Goldman had not been incredibly foolish in leaving a substantial paper (e-mail) trail. Had they been somewhat smarter, the SEC would have had nothing with which to make their case.

Given the low probability of detection, a fine has to be very large relative to the potential gains from fraud in order to provide an effective deterrence. This, and other pieces on the settlement, never even discuss this issue.

 
Drug Patents Give Companies Like GlaxoSmithKline Incentive to Lie Print
Thursday, 15 July 2010 22:10

A NYT editorial commented on evidence that the drug maker GlaxoSmithKline had concealed negative research findings on its diabetes drug Avandia:

"The clearest lesson to emerge from the hearings and other recent revelations is that GlaxoSmithKline, the maker of Avandia, can’t be trusted to report adverse clinical results fairly. The company must be watched like a hawk as additional trials that it sponsors go forward."

Arghhhhhhhhhhhhhhhh! Doesn't the NYT believe in the profit motive and incentives? The patent system, by granting monopolies that raise prices several thousand percent above the cost of production, gives drug companies an enormous incentive to conceal negative research findings. As long as these perverse incentives exist, then we have to watch every drug company like a hawk.

Maybe some wacko socialists think that drug companies will act for the public good and willingly forego vast profits, but those who believe on markets and economics know that drug companies will try to get away with anything they can get away with. One day maybe an iota of original thought will be allowed into public policy debates on the patent system, but we haven't gotten there yet. 

 
The Washington Post and National Public Radio Think that Central Banks Performed Perfectly in the Great Depression Print
Thursday, 15 July 2010 04:56

Economists across the political spectrum believe that the Federal Reserve Board and other central banks failed miserably in the Great Depression, failing to respond quickly to the financial collapse in the U.S. and elsewhere. In addition, they extended the downturn by refusing to pursue aggressive monetary policy that would have countered the deflationary trends in the world economy.

While the media are not actively discussing the history of the Great Depression, the deference in current reporting to central banks certainly implies that they would not have reported any criticisms of the central banks' behavior in the Great Depression. For example, the Washington Post today reported on concerns expressed by the IMF and others over a wave of refinancing that will be necessary in the next few years. Central banks, like the Fed and the European Central Bank (ECB), could provide the money needed to support this refinancing.

While this would involve pumping trillions of dollars into the world economy, there is little basis for concern about inflation given the enormous excess capacity in nearly every sector and every country. Tens of trillions of private sector wealth has disappeared with the collapse of the housing bubble in the United States and elsewhere, so even very aggressive monetary policies would only replace a fraction of the paper wealth that existed a few years ago.

In a similar vein, NPR ran a piece on the economic crisis in Spain and never once mentioned the possibility that overly-restrictive policy by the ECB was a factor in the country's double-digit unemployment rate. Whatever other problems Spain has, it certainly would be in better shape if the euro region had a 3-4 percent inflation rate rather than the near zero rate that has resulted from current ECB policy.

Central banks often make mistakes. They made horrendous mistakes in the 30s that led to enormous suffering. This downturn was the result of their failure to recognize housing bubbles and to take steps to counter them. If an economic reporter is unable to recognize the fallibility of central banks then they should be in a different line of work.

 

 
Lack of Demand, Not Lack of Confidence, Is the Reason that Businesses are Not Hiring Print
Thursday, 15 July 2010 04:30

Like the school kid who is always coming up with silly excuses for not doing their homework, corporations always blame the government for their failures. Lately they have been whining that the reason they don't hire more workers is the uncertainty created by government regulations. The Washington reported these complaints on the front page.

While the article did present the views of some economists, there is actually a very simple way to disprove the businesses' claim. The number of hours worked per worker has plunged in this downturn and risen only modestly from its lowpoint. The current average of 34.1 hours is almost 2 percent lower than the 34.7 average in December of 2007, the month the recession began.

If firms would otherwise hire workers but are being discouraged by uncertainty or regulations then the number of hours worked per worker should be increasing, not decreasing. Firms would be working their existing workforce longer rather than hiring new workers. Since firms are actually using their existing workforce less, this implies that the problem is a lack of demand pure and simple.

Businesses pay their lobbyists lots of money to develop stories that will make regulations more pro-business. Reporters should be able to assess these arguments, not just pass along to readers any silly story that a lobbyist can dream up.

 
Washington Post Editorializes for Trade Deals in News Section, Again Print
Wednesday, 14 July 2010 05:04
In an article on the jump in the trade deficit reported for May the Post referred to trade deals as "free trade" agreements. This is not accurate since the deals actually increase many protectionist barriers and do little or nothing to reduce the protectionist barriers that sustain high wages for many professionals. The Post could save space and increase accuracy if it just left out the word "free."
 
Can the European Welfare State Survive? Can National Public Radio Survive? Print
Wednesday, 14 July 2010 04:29

NPR wants to convince listeners that the European welfare state is on its last legs. While it tells listeners this, nothing in the piece actually supports this case.

For example, it implies that growth is grinding to a halt in Europe because of its generous welfare state, noting that Europe is expected to grow just 1.0 percent this year, while the U.S. is projected to grow by 3.0 percent. Actually, GDP growth in the U.S. is projected as being close to 2.1 percent this year by the Congressional Budget Office and most other forecasters, but this is really beside the point. More importantly, no one would draw any conclusions about growth based on a single year, especially one in the middle of a downturn.

Any economist could have explained to NPR that growth in the European Union (EU) is being constrained right now by lack of demand, not lack of supply. This means that the cause of weak growth in the EU right now cannot be welfare state restrictions on supply but rather bad policies from the European Central Bank and the Bank of England (they claim to fear inflation, which in the real world ranks slightly below an invasion from Mars on the list of risks right now). If the central banks pursued more expansionary monetary policy, there is little doubt that economies across Europe would be growing more quickly. It is almost inconceivable that NPR could do a piece referring to Europe's weak growth and not note this fact.

It is also important to note that Europe has much slower population growth than the United States. Economists usually focus on per capita income as a primary measure of economic well-being, not total GDP. (Indonesia has a much higher GDP than Denmark, but because it has 40 times the population, no one would claim that Indonesia is richer.) The difference in population growth is approximately 0.9 percentage points, which means that per capita growth in the EU and the U.S. are projected to be very comparable this year.

The piece also briefly commented on the universal health care provided in Europe and implied that this may no longer be affordable. It would have been worth noting that European countries pay on average less than half as much per person as the United States for health care. In fact, the government spends more money per person on our private health care system than governments do in Europe on their more publicly controlled systems. It is absurd to imply that a switch to a U.S.-type system would somehow save money.

 

 
Bowling Alone? Erskine Bowles Goes Off the Deep End Print
Tuesday, 13 July 2010 20:22

When the co-chairman of President Obama's deficit commission gets his deficit numbers off by 100 percent, you would think this would be worth a little media attention. But apparently this is not the case.

Therefore when Erskine Bowles warned the National Governors' Association that the country would be spending $2 trillion a year in interest on the debt in 2020, virtually no reporters thought it was worth mentioning that he had exaggerated the interest burden by a factor of more than 2 the Congressional Budget Office's "alternative scenario" (Table 1-2). 

It is difficult to believe that if Speaker Pelosi or some other prominent Democrat argued for a stimulus package because the unemployment rate is 19.0 percent that the media would ignore their disconnect with reality. It is hard to understand why neither Mr. Bowles nor his co-chair, former Wyoming Senator Alan Simpson, are not held to comparable standards of accuracy.

(Thanks to Jed Graham who got it right.)

 

 
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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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