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New Economic Study: If People Don't Eat Chicken, They Will Starve to Death Print
Thursday, 29 July 2010 17:21

This surprising result -- that the failure to eat chicken leads to starvation -- would be shown true using the same methodology of a new study on the impact of the TARP. The study, by Princeton University Professor Alan Blinder and Mark Zandi, the chief economist at Moody's Analytics, examines the impact of the TARP and the stimulus on economic growth and unemployment. It finds that GDP would be 11.5 percent lower in 2010 had it not been for these two policies, with about three quarters of the benefits attributable to the TARP and various Fed/Treasury/FDIC policies that provides aid to the financial sector.

While the analysis of the stimulus is pretty standard and very much in keeping with other estimates, this is not the case with the analysis of the financial sector policies. The problem with the study is the implicit counterfactual. It effectively assumes that if we did not do the TARP and related policies, that we would have done nothing even as the financial sector melted down.

This is comparable to doing an analysis of the benefits of eating chicken where the counterfactual is that people eat nothing. Needless to say, we would find very large benefits to eating chicken in such a study.

Suppose as an alternative counterfactual, we let the market do its work. Citigroup, Goldman Sachs, Bank of America, Morgan Stanley would be out of business, with their highly paid CEOs walking the unemployment lines. Rather than doing nothing, we could have the Fed flooding the system with liquidity (much as it did), without having to worry about money being siphoned off by bonuses for the honchos who led these banks to ruin.

It would be difficult to fully flesh out the counterfactual in this scenario, but it is certainly more plausible than the one described by Blinder and Zandi. If we need a study to make us feel good about the fact that the Wall Street is rich while the rest of the country is poor, it fits the bill, but it is not serious analysis and the media should not treat it as such.

 
Fits and Starts Are Not Common in the Early Stages of a Recovery Following a Steep Downturn Print
Thursday, 29 July 2010 13:24

The Post noted the weak economic data in recent weeks and then told readers:

"fits and starts are common during early stages of economic expansion."

This is not true for recoveries from steep downturns like the one the U.S. has just experienced. In the first four quarters of recovery following the 1974-75 recession the economy grew 3.1 percent, 6.9 percent, 5.3 percent and 9.4 percent. In the first five quarters following the 1981-82 recession the economy grew by 5.3 percent, 9.3 percent, 8.1 percent, 8.5 percent, and 8.0 percent.

We should be seeing robust economic growth right now based on past patterns. It is a very bad sign that we are not.

 
Economists Still Have Not Heard of the Housing Bubble Print
Wednesday, 28 July 2010 06:12

It is incredible that economists and economic reporters still focus on consumer confidence. Consumers are actually spending at a relatively high rate. (The savings rate is well below historic levels.) The problem is that they lost $8 trillion in housing wealth. The housing wealth effect on consumption is something that economists have known about for more than 60 years. It's too bad that they seem to have forgotten and so have the reporters who cover this issue.

The problem is not confidence. It is a lack of money. That is why consumers are not spending more and will not anytime soon regardless of how happy they are.

 
The Fed Could Try Talking About Bubbles Print
Tuesday, 27 July 2010 07:04

The Washington Post had an article discussing the debate over how central banks can prevent future economic collapses like the current one. As is its practice, the Post relied exclusively on economists who were not able to see the crisis coming. As a result, it fundamentally misrepresents the crisis as being primarily financial in nature.

In fact, the main problem was that the housing bubble was driving the economy, generating $1.2 trillion in annual demand through construction and housing equity driven consumption. There is no easy mechanism through the economy can replace this much lost demand. That would be the case whether or not the collapse of the bubble was associated with a financial crisis.

The article also fails to list one of the most simple and obvious ways that central banks can combat a bubble: talk. During the run-up of the housing bubble, Federal Reserve Board Chairman Alan Greenspan repeatedly said that everything was fine in the housing market, as did Ben Bernanke, who was a governor at the Fed for most of the period. This helped undermine the case of those who were warning of the bubble.

By contrast, if Greenspan had explicitly warned of the bubble and documented its existance and potential dangers with extensive research from the Fed staff, it may have been effective in containing its growth. The financial industry cannot simply ignore research from the Fed and there was no serious response to the evidence that the Fed could have presented.

There is no reason the Fed and other central banks cannot use the full capabilities of their research staff to attempt to counter dangerous financial bubbles. There is a virtually costless strategy with enormous potential payoffs.

 
If House Members Who Voted for Energy Bill Are Out on a Limb, It is Only Because of Bad Reporting Print
Tuesday, 27 July 2010 06:57
The Washington Post reported that House Democrats who voted for the energy bill are worried that it will hurt them in the election because their opponents have labeled it as a job killer. It would have been worth noting that there is no reason to believe that the bill would have led to a substantial loss of jobs. If opponents of the bill are able to score political points by describing the bill as a job killer it is only because the media have done a poor job in describing its impact.
 
Goldman's AIG Exposure Print
Tuesday, 27 July 2010 04:53

The NYT notes that recent documents suggest that Goldman Sachs was largely hedged against a potential AIG bankruptcy and that it had taken collateral from AIG and other counter-parties that would have almost fully compensated for any losses.

It is not clear that Goldman was as hedged as the documents suggest since, as the article mentions in passing, a bankruptcy court may not have clawed back some of the collateral posted. The other issue that would have been worth mentioning in this piece is that the government and Goldman resisted the release of documents at every point in this process. For 6 months after the initial bailout of AIG the government provided no information whatsoever about the counter-parties who had been paid with the money.

 
Why Did David Brooks' Pro-Growth Heros All Support the Policies that Gave Us the Economic Crisis? Print
Tuesday, 27 July 2010 04:39
I'm just asking. By the way, what measure is he using that shows that the United States has declining human capital? All the data with which I am familiar shows the workforce is getting more educated through time.
 
Is There a Shortage or Glut of Freight Shipping Capacity? Print
Tuesday, 27 July 2010 04:30

That is what readers of an NYT article on higher shipping fees for faster service must be wondering. The article tells readers that shippers now have a shortage of space because:

"With little demand for shipping, ocean carriers took ships out of service: more than 11 percent of the global shipping fleet was idle in spring 2009, according to AXS-Alphaliner, an industry consultant."

Okay, so we are seeing a big run-up in prices and, "fighting for freight, retailers are outbidding each other to score scarce cargo space on ships, paying two to three times last year’s freight rates — in some cases."

ummm, what happened to the 11 percent of shipping fleet that is now idle? The article does make a brief reference to this idle capacity later, noting that firms are reluctant to bring it back on line. This sounds a bit like a case of collusion to keep prices high. It might make for a good article by an enterprising reporter.

(I'm back from the DC power failure - 32 hours in my hood.)

 
Reporters Say the Darndest Things: CNN and Per Capita GDP Print
Sunday, 25 July 2010 14:18

CNN had a segment on inequality in Brazil in which it told viewers:

"The country's Gross Domestic Product -- the value of goods and services it produces -- was $2 trillion in 2009, the 10th largest in the world, according to the CIA World Factbook. But per capita income for the same year was estimated at $10,200, the 105th highest in the world. Simply stated, most of the wealth being produced is not finding its way down to most Brazilians."

Actually, per capita income reveals nothing about inequality. It is simply GDP divided by the population. Brazil has a relatively low per capita income because it has a large population. The number for per capita income would be the same if everyone had the same income or one person had it all.

The piece could have referred to Brazil's Gini index, which is a measure on inequality. At 56.7, it is one of the highest in the world, although it has been dropping in recent years.

(HT to Robert Naiman.)

 

 
The Post Cleans Up for Republican Tax Cutters Print
Sunday, 25 July 2010 07:13

The lead article in the Sunday Post reported on the battle over extending President Bush's tax cuts. At one point it told readers that: "because they [the tax cuts] were expected to eventually cause huge deficits, Republicans wrote them to expire in 2010."

Actually the story is somewhat more pernicious. President Bush had set a budget target for his tax cuts. Had they run through 2011 the cost would have exceeded his target. Therefore they wrote the law so that the cuts ended in 2010, keeping the 10-year cost within his target.

The article also includes the bizarre statement: "And with unemployment at 9.5 percent, even some Democrats are queasy about raising taxes on high earners -- a category that includes many small-business owners -- when policymakers are trying to encourage them to create jobs."

Actually, there is little evidence that raising taxes on high income households will have any notable impact on job creation. (Job growth was quite rapid under the Clinton era tax rates.) Furthermore, many of the Democrats who oppose raising taxes on the wealthy have opposed many or all of President Obama's stimulus measures, indicating that they have little concern about job creation.

It is certainly more plausible that these politicians are worried about campaign contributions from high income households, an issue that remarkably was never mentioned once in this article.

 
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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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