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Goldman Sachs Finds Cutting Government Spending Slows Growth, Post Columnist Michael Gerson Says Opposite Print
Saturday, 24 July 2010 08:30

The folks who thought the housing bubble was cool are now working overtime to make the victims of its collapse suffer as much as possible. This presumably explains the reason that Washington Post columnist Michael Gerson claimed that a Goldman Sachs study of 44 countries found that a study of 44 countries found that: "reducing government expenditures by one percentage point, in contrast, increases average annual growth by 0.6 percentage points."

What the study actually found was that a one percentage point decline in government consumption expenditures was associated with a 0.63 percent increase in growth. However, it found that a one percentage point increase in government investment expenditures (spending on education, research, infrastructure etc. ) was associated with a 1.25 percentage point increase in growth. This would mean, for example, that a one percentage point decline in spending that was split evenly between cuts to government consumption and cuts to investment would lead to 0.31 percentage point decline in GDP growth.

There are reasons that this study is inapplicable to current circumstances. Most notably, the bulk of the benefit from spending cuts appears to come through the channel of lower interest rates inducing more investment. This is unlikely to be a important channel given that interest rates are already extremely low, however, even ignoring this issue, Gerson has seriously misrepresented the findings of the study that he cited.  

 
Has Anyone at NPR Heard About the Housing Bubble? Print
Friday, 23 July 2010 05:06

The housing bubble -- you know that $8 trillion run up in house prices. When it burst it led to a financial crisis that almost brought down the financial system. It also pushed the economy into the worst downturn in 70 years, since its collapse caused construction to plummet and consumption (which had been fueled by bubble created home equity) to plunge.

You would think that people who report on the housing market would have noticed the bubble -- sort of like environmental reporters taking note of global warming -- but that doesn't seem to be the case at NPR. It ran two separate stories this morning on the housing market, neither of which made any reference to the housing bubble.

The second included an extended presentation of the views of Nicolas Retsinas, the director of the Joint Center for Housing Studies at Harvard. Mr. Retsinas gained notoriety for insisting that there was no bubble during the peak years of the run-up in house prices and insisting that it was still a good time for moderate income families to buy homes. 

 
The Fed Can Just Hold Mortgage Backed Securities, Reducing Interest Burdens Print
Friday, 23 July 2010 04:44

The NYT portrayed the Fed as facing a serious dilemma in dealing with its portfolio of mortgage backed securities (MBS). It argued that it can either start selling them now and risk slowing the economy or wait until the economy has recovered more and risk losing money by selling them in a higher inflation environment.

There actually is another option that would address the deficit concerns that appear constantly in the NYT and other media outlets. The Fed could simply hold the bonds indefinitely and then reinvest the proceeds in Treasury bonds when the MBS are paid off. This means that the Fed would have a constant flow of interest income which would be rebated to the Treasury, reducing the interest burden from the debt to the Treasury. Insofar as it is worried about inflation, the Fed could raise bank reserve requirements (on a fixed schedule) among other actions.

This option should have been discussed in the article. Japan's central bank has gone the route of holding large amounts of long-term debt for long periods of time. In spite of this fact, the country remains far more concerned about deflation than inflation.  

 
Gates Can't Build Every Weapon System in Sight and Still Meet the Rising Defense Budget: Where is the Paradox? Print
Friday, 23 July 2010 04:33

The NYT had a peculiar front page article in which it portrayed Defense Secretary Robert Gates as a budget cutter even though he wants to increase the defense budget by 1.0 percent a year in excess of inflation. It notes that he doesn't want the government to buy some of the weapons system being pushed by Congress. It then comments:

"In one of the paradoxes of Washington budget battles, Mr. Gates, even as he tries to forestall deeper cuts, is trying to kill weapons programs he says the military does not need over the objections of members of Congress who want to protect jobs."

It is not clear what the article views as paradoxical. Increasing the defense budget by 1.0 percent a year in excess of inflation does not imply an austere budget. Nonetheless it also doesn't imply an infinite budget. There is nothing paradoxical about the defense secretary having to set priorities in this context.

The article also includes the peculiar comment that defense spending:

"has averaged an inflation-adjusted growth rate of 7 percent a year over the last decade (nearly 12 percent a year without adjusting for inflation), including the costs of the wars."

Inflation has not averaged anywhere near 5 percent over the last decade, so the 12 percent nominal growth rate is inconsistent with the 7 percent real growth rate.

 
Businesses Are Not Hiring Because of a Lack of Demand, Not Confidence Print
Thursday, 22 July 2010 08:42
USA Today wrongly told readers that: "private employers are uncertain about the economy's health and are hesitant to add jobs." The uncertainty of businesses does not explain their reluctance to add workers. If this were the case, then businesses would be increasing the number of hours worked per worker. While average weekly hours are up somewhat from the low hit last fall, they are still down by 0.7 hours from their pre-recession level. This indicates that firms are not hiring because they have no need of additional labor.
 
Post Headline Declares Obama Winner With Chamber of Commerce Print
Thursday, 22 July 2010 04:58
But the article did not quite support the headline. Businesses always want more from the government. As the article points out, the Chamber of Commerce has won some big battles in limiting aspects of the financial reform bill, the health care bill, and other pieces of legislation. Naturally, the Chamber will complain about its losses and insist that business is being attacked, but this is a political tactic, not reality. The Post's headline writers should know this.
 
Small Business: The Source of the Vast Majority of Job Losses Print
Thursday, 22 July 2010 04:34

Politicians routinely praise small business as the source of all good. In reality, small businesses, just like large businesses, are a mixed bag. While they can be a source of economic dynamism and good jobs, many small business owners rip off their workers and their customers, cheat on their taxes, and contribute little of value to the economy before they fail.

It is the job of the media to report on small business with clear eyes, not just repeat happy-talk nonsense from politicians. Therefore, it was disappointing to read a NYT article on a package of special loans and tax breaks for small businesses that began:

"Perhaps the last best hope of Democrats to pass legislation aimed at creating jobs before the November elections seemed to be crumbling in the Senate on Wednesday as Republicans signaled that they would block a bill to expand government lending programs and grant an array of tax breaks to small businesses."

Why would the article assume that the bill is "aimed at creating jobs?" Yes, this is what the politicians said about the bill. But --- hold onto your hats boys and girls -- politicians sometimes say things that are not true.

An alternative explanation is that politicians want to give money to small businesses, a constituency that can be very influential in many upcoming congressional races. Many of the features of this package, such as tax breaks that apply to past actions, look more like measures to give businesses money than to create jobs.

Rather than attributing motives, it would be more appropriate to simply report the bill's contents and what various parties say about it.

 
The New York Times Doesn't Like the Welfare State in the UK Print
Wednesday, 21 July 2010 13:58

That is what readers of the article on David Cameron, the new Prime Minister would be led to believe. After all, the piece told readers that the previous Labor government's policies had turned:

"...Britain into one of the most heavily taxed, tightly regulated countries in the developed world, with government accounting for about half the work force and half of the economy."

The NYT's assertion is at odds with the data. In 2008 (the last year for which full data are available), according to the OECD, the share of government expenditures in GDP in the UK was 47.5%. This is slightly above the 45.6 percent average for the European countries in the OECD, but below the 52.7 percent share in France, the 50.1percent share in Belgium and the 48.7 percent share in Italy. In other words, the government share of the economy in the UK is somewhat above the average for wealthy European countries, but certainly not at the top in this category.

The article also told readers that government employment accounts "...for about half the work force." According to the Office of National Statistics in the U.K., public employment accounts for 21.1 percent of total employment.

The article includes numerous other comments that only serve to express disapproval of the UK welfare state rather than provide information. For example, it describes the new government's effort to "dismantle Britain’s sprawling bureaucracy." No less information would be provided without the word "sprawling."

At one point it reports on plans to establish: "...independent but publicly financed schools in which head teachers and their staff would be freed from the stifling oversight of local councils and the central education authorities." The same information could be provided without the word "stifling." 

Clearly the New York Times supports the agenda of the new government, but expressions of support for a government or political party belong the editorial page, not the front page.

 

 

 
USA Today Goes off the Deep End on the Estate Tax Print
Wednesday, 21 July 2010 09:31

USA Today had a major story warning that middle-class families may be hit by the estate tax. It warns that people with estates of just a million will be subject to the tax if the law is not changed. The article never points out that the tax will only affect the amount of the estate over $1 million, nor does it mention that the exemption is per person, so that a couple can easily pass $2 million on to their heirs and escape all tax liability. In short, this article gave readers absolutely no idea of the issues involved and it is likely to make many people, who will at most be trivially affected by the estate tax, to believe that they face serious liability.

The article also bizarrely asserts that partisanship has prevented a resolution of the issue. This is not true as can be clearly seen from the evidence presented in the article. While most Republicans support lowering or eliminating the estate tax, there are also some Democrats who have held out for lower rates. The article presents no evidence whatsoever that partisanship is preventing a resolution, as opposed to a conflict between people who want to pay lower taxes and others who want them to pay higher taxes.

 

 
Owning Versus Renting: It Matters If You Are In a Bubble Print
Wednesday, 21 July 2010 07:33

This article discusses the Obama administration's housing policy, which seems to be moving away from an exclusive focus on homeownership. The article notes that many moderate-income people who bought homes in the last decade ended up losing them.

It would have been worth mentioning the housing bubble in this context. In many cases, it might have made sense for families, in principle, to become homeowners in the years 2002-2007, but not when it meant purchasing homes at bubble-inflated prices. The bubble could have been easily detected by a simple examination of price-to-rent ratios and other fundamentals. Unfortunately, the vast majority of housing professionals, including the people at HUD and Fannie Mae and Freddie Mac, were too lazy to do this sort of assessment. As a result, millions of moderate-income families bought homes that they were not able to keep.

 
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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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