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The Arrogant David Brooks Tells Readers That Stimulus Will Risk National Insolvency Print
Tuesday, 06 July 2010 03:27

David Brooks has decided to jump into the debate over stimulus with both feet. In a column in which he warns against arrogance he tells readers that additional stimulus would: "risk national insolvency on the basis of a model."

Mr. Brooks doesn't tell readers how he has determined that further stimulus carries this risk. He doesn't explain how raising the country's debt to GDP ratio by 4-8 percentage points over the next few years would jeopardize the creditworthiness of the U.S. government. This is certainly a rather strong assertion, given that even with this additional indebtedness, the debt-to-GDP ratio in the United States would still be far lower than it had been at prior points in its history.

Even after a decade of accumulating debt at a rapid pace, the U.S. would still face a lower debt burden than countries like Italy do today. Italy is currently able to borrow in financial markets at very low interest rates. Projections for 2020 show that the debt burden of the United States would still be less than half of the current debt burden of Japan, which still pays less than 2.0 percent interest on its long-term debt.

Financial markets also don't seem to share Mr. Brooks view that national insolvency is a serious concern. The people who are putting their money on the line are willing to buy 10-year Treasury bonds at just 3.0 percent interest rates. That would seem to suggest that insolvency is not a real concern, but Mr. Brooks insists that President Obama should hesitate on stimulus because he thinks that insolvency is a problem anyhow, and the people who disagree with him are arrogant.

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Alan Krueger is Wrong, Robust Recoveries Do Move In Straight Lines Print
Monday, 05 July 2010 12:00

In an article reporting on the weak jobs report for June, the NYT quoted Alan Krueger, the chief economist at the Treasury Department, as saying "economic recoveries don’t move in straight lines.” Actually robust recoveries from steep downturns, like the one we just experienced do move in pretty much straight lines.

When the economy first start creating jobs rapidly in April of 1983, following the 1981-82 recession, it generated more than 200,000 jobs a month for 20 straight months. The one exception was in August of 1983 when a strike at AT&T led to a reported loss of 308,000 jobs. This was more than offset by a gain of 1,114,000 jobs in September. Given the growth in the labor force, 200,000 jobs in 1983 would be equivalent to more than 300,000 jobs a month in 2010.

 
Douthat Redefines Pessimism Upwards Print
Monday, 05 July 2010 07:56

The NYT's Ross Douthat gave pessimism a new meaning when he noted the economy's poor jobs performance in June and commented that:

"It’s now been 30 months since the beginning of the recession, and it looks as if it could take another 30 or so to regain the level of employment we enjoyed in the autumn of 2007." Actually, we are down about 7.7 million jobs right now from the pre-recession peak. Making this up in 30 months would require creating jobs at a rate of more than 250,000 a month. This is a faster pace than we have seen in any month of the recovery thus far (excluding Census jobs). There are few forecasters who are this optimistic about the economy's performance over the next two and a half years.

It is also worth noting that his claim that the economy was harmed by pessimism surrounding the stagflation of the late 70s is somewhat dubious. Investment, the component of output most sensitive to attitudes, was at a record share of GDP at that time. The investment share of GDP in the late 70s still has not been exceeded. 

 
TARP Martyrs: The Post Mourns Politicians Who Lost for Helping the Banks Print
Monday, 05 July 2010 06:57

The lead editorial of the Washington Post today mourned the "TARP martyrs" (seriously) who lost their seats in Congress for having supported the bank bailout. The Post's main points are that we were threatened with "financial Armageddon" had TARP not passed (talk about shrill), and it really didn't cost us any money.

Starting with "financial Armageddon," let's use a little common sense. Suppose TARP had not passed. The Fed actually already had enormous power to lend money to keep the financial system operating. The most immediate threat to the system, which Fed Chairman Ben Bernanke and others highlighted, was the risk that the commercial paper (CP) market would shut down. They claimed that even healthy corporations were unable to borrow in the CP market. Since most large corporations depend on the CP market to finance their payroll and other ongoing expenses, the loss of this market would quickly cause the economy to grind to a halt.

While there is some debate as to how bad things were in the CP market at the time (the Minneapolis Fed disputes the claim that the market was shutting down), the more important point is that this issue was irrelevant to TARP. The Fed had the power to single-handedly support the CP market. In fact, the weekend after Congress approved the TARP Ben Bernanke announced the creation of a special lending facility to support the commercial paper market. So, that part of the financial Armageddon story was just a fairy tale for children, reporters and columnists, and members of Congress.

Suppose the TARP money had not started flowing and we saw the chain of bank collapses continue. The two remaining independent investment banks, Goldman Sachs and Morgan Stanley, would surely have been killed absent TARP and other special assistance from the Fed. It is all but certain that Citigroup and Bank of America would have gone belly up as well, along with many other large financial institutions.

Would this have led to financial Armageddon? Well, it surely would have created considerable disorder in the financial markets and led to a few million lawsuits, but the Fed and FDIC no doubt would have taken over these institutions to keep the system of payments operating. The Fed had a contingency plan to take over the money center banks in the 80s when they were threatened by large amounts of bad debt in Latin America. It is inconceivable that it did not have a similar plan in place following the collapse of Bears Stearns in March.

This means that "financial Armageddon" would have meant the demise of Goldman Sachs, Morgan Stanley and most of the other Wall Street titans, but probably would not have led to a qualitatively worse economic situation for the rest of us than what we actually saw. In fact, there would have been a great benefit from this financial Armageddon in that it would let the market wipe out the fast dealing high flying Wall Street gang in a single blow.

This would eliminate the culture of synthetic CDOs and naked credit default swaps that provide ever more sophisticated and expensive ways to gamble. It would also eliminate many of the huge multi-million dollar paychecks that the Wall Street boys take home every year (or week). In other words, this is not obviously a bad story.

The other misleading aspect of the Post piece is its haughty claim that the TARP did not cost taxpayers any money. It is not clear whether this is an assertion based on ungodly stupidity or is just plain dishonest.

The TARP money was a form of insurance. The vast majority of insurance policies are never paid off, but that does not mean they have no value. The point here is that the banks were on the edge of going bankrupt. Private investors would not touch them. The government, through the TARP and the Fed, gave the banks the loans and the guarantees that assured the markets that the banks would survive. This meant that private investors could trust their money with the banks. That allowed the banks to weather the crisis that they had themselves created. They are now back on their feet and again paying their "top performers" tens of millions a year in bonuses.

Does the Post really not understand that TARP money was enormously valuable and imposed huge cost on society? If, back in the fall of 2008, the government had given a thousand community groups hundreds of billions of dollars of loans, accompanied by trillions of dollars of loan guarantees, these organizations could have used this money to make loans at very high interest rates and buy up assets at bargain basement prices. In this story, there would be no risk to the community groups, since if things went badly the government would be out the money. Of course, if the economy recovered, then they would be enormously rich, with large claims on society's resources as a result of successfully betting with the government's money.  In the Post's account, the prosperity created for these community groups would have cost taxpayers nothing.

This is the story of the TARP. If the government had not been so generous with the Wall Street banks, Goldman Sachs shareholders would not have claims to $67 billion of the economy's output. Morgan Stanley's shareholders would not have claims to $32 billion of the economy's output. This is all a gift from the taxpayers to some of the richest people in the country. It is hard to believe that the Post's editorial writers do not understand this fact.

 

 

 
AP Wants to Weaken Workers' Bargaining Power in Europe and Drive Down Their Wages Print
Sunday, 04 July 2010 16:38

That is what readers can infer from an article that celebrated efforts by governments to weaken public supports for workers and to undermine their bargaining power. The article is filled with vague assertions about these measures are being celebrated, for example the first sentence telles readers that"

"In the ashes of Europe's debt crisis, some see the seeds of long-term hope (emphasis added)."

It continues:

"That's because the threat of bankruptcy is forcing governments to implement reforms that economists argue are necessary to help Europe prosper in a globalized world – but were long viewed as being politically impossible because of entrenched social attitudes."

The article does not point out that there are actually sharp differences among economists on whether Europe needs to make changes to "prosper in a globalized world." Unlike the United States, which has huge trade deficits, Europe has consistently had near balanced trade.

Some countries like Germany and Denmark have consistently run large trade surpluses, in spite of having very strong welfare states. This is why many economists, including the OECD in its official assessment of member state economies, argue that strong welfare states are entirely consistent with international competitiveness. This article implies that there is a consensus among economists that European welfare states must be weakened. There is not the case.

 
Social Security Cuts Are Not Big News at the Washington Post Print
Sunday, 04 July 2010 07:41

In an interview with the Pittsburgh Tribune-Review laat week, House Minority Leader John Boehner called for cutting Social Security benefits to pay for the war in Afghanistan. Somehow, this comment passed largely unnoticed in the media, including a Washington Post column that discussed the interview.

The column complained that Boehner, "offered few concrete thoughts about the GOP agenda." It later went on to say:

"Nor did he seem eager to tip his hand on the terms of entitlement reform. In his interview with the Tribune-Review, Boehner volunteered that the Social Security retirement age might need to be raised to 70 for younger workers but he would go no further."

Boehner's suggested increase in the retirement age would be roughly equivalent to a 15 percent cut in benefits when it is fully phased in. Since most retirees are primarily dependent on their Social Security benefits for income, this would be comparable in many cases to a 15 percentage point increase in their income taxes. Furthermore, this cut will begin to hit near retirees soon, since it is a phased increase of three years in the retirement age that will be completed in 22 years. 

One might think that this sort of cut to the nation's most important social program would be big news, but apparently it did not go far enough for the Washington Post. Of course Boehner actually did suggest further cuts in his interview. He also proposed (in a somewhat mangled form) to have initial benefits indexed to prices rather than wages. This implies reducing scheduled benefits by approximately 1.0 percent a year. Under this formula, after 10 years retirees will get 10 percent less than is provided under current law and after 20 years they would get approximately 20 percent less. (Compounding reduces the impact slightly.) While the full cut would only apply to workers at the maximum wage (@$106,000 at present), workers earning $70,000 a year would see cuts that are close to half this size.

In short, Mr. Boehner has proposed very large cuts to the country's most important social program, to pay for an unpopular war (the Congressional Budget Office projects that the trust fund will be fully solvent until 2043, so the cuts are not needed to keep SS itself solvent), and the Post dismisses his comments by saying that "he offered few concrete thoughts on the GOP agenda." It is difficult to imagine what Mr. Boehner would have to say to get the Post to take his proposals seriously.

 
Another Failure of Arithmetic at the Washington Post Print
Sunday, 04 July 2010 07:04

The NYT reported Thursday that manufacturers in Cleveland were having difficulty getting skilled workers. It turned out that the problem seemed to be that the managers interviewed in the article were not willing to pay the market wage for skilled workers, offering jobs that pay just $15-$20 an hour.

While the NYT may have been wrong about the shortage of skilled manufacturing workers in Cleveland, there does appear to be a shortage of skilled economics writers at the Washington Post. In his column today, Frank Ahrens warns readers that when they assess Paul Krugman's dismal forecast for the economy:

"you need to read him through a filter. He believes that the $787 billion government stimulus approved last year was not enough to really kick-start the economy and that much more is needed."

While $787 billion is a big number, people who understand the economy would compare it to the gap the stimulus was intended to fill rather than just be awed by the size. The collapse of the housing bubble cost the economy more than $500 billion in annual construction spending (both residential and non-residential). It lost approximately the same amount of of annual consumption spending as homeowners cut back consumption in response to the loss of $6 trillion in home equity.

The $787 stimulus package was supposed to replace more than $1 trillion in annual demand. The stimulus package included a technical fix to the tax code of approximately $80 billion that provided no real stimulus. It also included around $100 billion that would be spent in 2011 and later. This left about $600 billion to be spent in 2009 and 2010, or $300 billion a year. Roughly half of this increased in spending at the federal level was offset by cutbacks at the state and local level, leaving $150 billion a year in net stimulus from the government sector to offset a loss of more than $1 trillion in annual spending from the private sector.

People who know economics would think that a $150 billion in net government stimulus is insufficient to offset a loss of more than $1 trillion. Unfortunately, Mr. Ahren is apparently paralyzed by large numbers and is not capable of making this sort of assessment himself. This leads him to mock Krugman for making completely reasonable statements about the economy.

Mr. Ahrens lack of skills apparently prevented him from understanding that the reponse he received from his equity strategist friend, Peter Bookvar, about the state of the economy made no sense whatsoever. Ahrens reported Bookvar's response to an e-mail asking about the economy:

"'Our fragile economy CANNOT handle any tax hikes whatsoever, particularly on capital and the income of those who invest, save and spend the most,' Boockvar wrote, meaning those American families that make more than $250,000 a year. The all-caps are his, but the feeling is shared by many."

It is not clear what Bookvar thinks that wealthy people will do with their tax cut. Saving and spending are direct opposite actions. He might think that saving will help the economy (it is very difficult to see how), but then spending would hurt the economy and vice versa. The only plausible meaning that can be attached to Mr. Bookvar's comment is that he wants wealthy people to have more money and apparently wants the government to run a larger deficit to ensure that they do. The comment concludes that "the feeling is shared by many," which would seem to contradict the Post's frequent assertions that everyone is obsessed by the deficit.

Mr. Ahrens also shared another piece of misinformation in his effort to discredit Krugman's assessment of the economy. In a recent column Krugman had made some comparison's of the current situation to the depression that began in 1873. Ahrens responded by telling readers:

"The fastest that information and capital could move in this sprawling nation in 1873 was about 80 mph -- the top speed of a steam locomotive. When bad times hit back then, they tended to settle in for a good, long time." 

This is not true. The telegraph was in use since the 1830s, with the first transcontinental line put in place in 1861.

Anyhow, it is too bad that the Post cannot find someone with the skills necessary to report on the economy.  

 
White House Energy Advisor: Small Oil Firms Depend on Government Handouts to Survive Print
Saturday, 03 July 2010 19:51

That is not the way the Wall Street Journal reported it, but this in fact what it effectively quoted White House Energy Advisor Carol Browner as saying. The piece is headlined: "Smaller Oil Firms Might Exit Gulf."

The item at issue is the $75 million liability cap that the government currently imposes for spills from offshore drilling. This cap effectively means that taxpayers are paying for the insurance for oil companies that drill offshore. The article reports that the smaller oil companies are complaining that they would not be able to compete if they had to pay for their own insurance.

It would have been helpful if the article had made this point more clear to readers. While there are arguments that the government should pay for items like education for children or fire protection, it is not clear what the argument is that government should pay for insurance for oil companies that cannot compete effectively in a free market.

 
Washington Post Pushes Myths on the Economy Print
Saturday, 03 July 2010 07:30

In its article on the June job numbers the Washington Post told readers that:

"the chances of a strong, self-sustaining expansion that can significantly improve the job market -- which seemed a real possibility during the spring -- are now slim"

It is not clear who saw a "strong, self-sustaining expansion that can significantly improve the job market" as a real possibility in the spring. Certainly the Obama administration did not, nor did the Congressional budget office. Both projected very slow growth that would leave the unemployment rate above 9.0 percent by the end of the year. Most private forecasters had similar projections. The Post does not identify anyone who had a more optimistic assessment.

The article then asserts, with absolutely zero evidence, that ambiguity about the economic situation is responsible for the gridlock in Congress over further stimulus:

"The confused outlook is causing paralysis on Capitol Hill, since the recovery is neither strong enough to provoke a turn toward deficit reduction, nor weak enough to lend momentum to President Obama's push for more economic stimulus. As Congress prepared to leave town for the week-long Fourth of July break, even funding for the wars in Iraq and Afghanistan was bogged down by the broader election-year squabble over spending"

This statement implies that if the data showed a weaker economy that the Republicans and Blue Dog Democrats, who are currently blocking stimulus spending, would somehow be more supportive of it. The article includes no statements from any of these members of Congress or anyone connected with them in any way that would support the claim that their votes on stimulus would change if the economy was weaker. The view that their votes on stimulus are responsive to the state of the economy is entirely an invention of the Post.

The article then presents events that were 100 percent predictable as surprises:

"In recent weeks, every pillar of the economic recovery that started a year ago has showed signs of weakening. Manufacturers had been cranking up production -- but now their inventories are largely rebuilt, and they are expanding more slowly. The housing market was recovering as well -- until the end of a federal tax credit for home buyers this spring."

Economists knew that the cycle of inventory rebuilding would come to an end. That happens in every recovery. They also knew that housing demand would fall after the expiration of the tax credit. The tax credit pulled purchases forward meaning that there would be fewer homes bought after it expired than the underlying trend and many fewer than during the period where the credit was in place. No remotely competent analyst could have been surprised by this falloff.

The article goes on to explain the lack of hiring as being due to a lack of confidence on the part of businesses:

"Increasingly, it appears that those months were an aberration and that businesses are too fearful to begin a hiring binge.

'People are still really cautious, and we haven't seen small businesses engage in any substantial way,' said Roy Krause, chief executive of SFN Group, a large employment-services company. 'I don't have any real indicator that would tell you things are going to accelerate faster than they're currently going.'"

A major problem with the fearful business explanation for the lack of hiring is that the average workweek fell in June (as noted in the article). Presumably firms are not cutting hours out of fear, but rather due to a lack of demand. If firms were not hiring because of fear, then we would expect to see hours per worker increase, as firms worked their current workforce harder in order to avoid hiring more workers. Since the opposite is happening, we can assume that the explanation for weak hiring is lack of demand, not fearful employers.

 
House Prices Will Fall Because They Are Over-Valued Print
Saturday, 03 July 2010 07:07

It is absolutely astounding that so many reporters at major news outlets apparently have not heard of the housing bubble. This is like people not knowing about the risk of war after the United States had been attacked at Pearl Harbor. Surely such people existed, but you would not have expected them to be writing at the New York Times.

The NYT has a lengthy article today discussing Illinois' severe budget problems in the context of the deficits hitting several large states. At one point, it tells readers:

"Should the largest struggling states — like California, New York or Illinois — lay off tens of thousands more in coming months, or default on payments, the reverberations could badly damage a weakened economy and push housing prices down still further."

House prices in these states have only partially corrected from their budget-inflated levels. They remains substantially above long-term trends. In all three states there are extraordinarily high ratios of price of house prices to rents. It is virtually certain that house prices will fall further regardless of how these states deal with their budget problems. (Interestingly, California is using hundreds of millions of dollars to temporarily prop up its house prices. Presumably, it will end these subsidies once its budget crunch gets too severe.)

At this point, reporters should be familiar with the housing bubble and know something about its general dynamic. Its collapse led to the largest downturn in 70 years. This is a big deal.

 
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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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