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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.

 
A 10 Percentage Point Tax Increase: Help for Homeowners, Washington Post Style Print
Friday, 02 July 2010 13:09

The huge baby boom cohort is just approaching retirement. Workers in their 50s and 60s have just seen much of the wealth that they were able to accumulate destroyed with the collapse of the housing bubble and the resulting plunge in the stock market. As a result of this loss of wealth the overwhelming majority of baby boomers will be relying on Social Security for the overwhelming majority of their retirement income.

Thankfully the Washington Post has the perfect remedy. It proposes to immediately start to raise the normal retirement age to 67 (from 66) for those just about to retire and to continue raising it until it hits 70 for workers born in 1971. This increase in retirement age would be equivalent to roughly a 5 percent cut in benefits for those just now reaching retirement age and a 15 percent cut in benefits for those retiring in 25 years.

Since Social Security will be the overwhelming source of income for most near retirees a cut in benefits is the same as a tax increase of the same amount. So, the Washington Post is effectively proposing to help homeowners near the age of retirement with the equivalent of an income tax increase of 5-15 percentage points.

It is remarkably that the editorial does not include one word about the loss of wealth from the collapse of the housing bubble. The Washington Post's news and editorial departments were completely unable to recognize the $8 trillion housing bubble prior to its collapse (columnist Steven Pearlstein is a partial exception). Apparently, they still don't know anything about the bubble even after its collapse led to the largest economic downturn in 70 years.

 

 
There Is No Mystery About Slow Job Growth in a Weak Recovery Print
Friday, 02 July 2010 05:33

Morning Edition implied that there is some mystery about the weak job growth in the recovery to date, at one point referring to it as a "jobless recovery." It then tried to blame the health care bill and other issues for the lack of jobs. There is actually no mystery whatsoever behind weak job growth.

The recovery is extremely weak, with GDP growth of just 2.7 percent in the first quarter. Final demand, which excludes the impact of inventory fluctuations, grew by just 1.0 percent. Given the severity of the downturn we should be expecting growth in the 7-8 percent range. With such weak growth, it would be a surprise if the economy was creating jobs at a rapid pace.

 
The Washington Post Still Has Not Heard About the Housing Bubble Print
Friday, 02 July 2010 05:23

It apparently takes a long time for news to reach Washington, or at least the Washington Post. That is the only possible conclusion that comes from reading the front page Post article on data showing very weak pending home sales in May that told readers:

"Home sales were expected to decline once the credit ended, but May's acute drops have surprised many analysts. If the trend continues through the rest of the year, it could upend the market's tepid rebound and undermine the broader economy."

Actually analysts who follow housing data were not at all surprised by the sharp drop in pending home sales in May. The Mortgage Bankers Association purchase mortgage applications index had plunged after the expiration of the homebuyers tax credit at the end of April. 

It is also reasonable to expect further declines in house prices since the bubble has not fully deflated. House prices are still about 15 percent above their long-term trend levels.

The Post had a policy before the bubble bursts of talking exclusively to economists who were unable to see the $8 trillion housing bubble or unwilling to talk about it. It appears to still have this policy.

 

 
Congress Passes Tax Fraud Credit for Homebuyers Print
Friday, 02 July 2010 04:51

Can the realtors possibly do anything that would impair their credibility with reporters? It seems not. After all, they ran around touting the run up in house prices all through the boom, insisting that house prices never fall. David Lereah, the chief economist for the National Association of Realtors (NAR), even wrote a book insisting that house prices will not fall. If it is possible for an organization to be shown to not be a credible source, the NAR fits the bill.

This is why NYT readers might be baffled to see that the assertions from the NAR taken at face value. The article reports unquestioningly an assertion from Lawrence Yun, Mr. Lereah's successor as chief economist at the NAR, that as many as 180,000 who qualify for the homebuyers' tax credit may have met the requirement that they sign a contract by April 30th, but have been unable meet the requirement that they close by June 30th.

This one is ridiculous on its face. There was an uptick in home sales in April, but the level did not come close to the bubble peaks of 2005-06, so it should not have strained the system to any great extent. Furthermore, demand collapsed immediately after the April 30th deadline, so this would have freed staff to process loan applications that had been filed in April.

There were roughly 600,000 contracts signed in April. If 60 percent qualified for the credit then 360,000 who bought a home in April qualified for the credit. (It is necessary to be either a first-time buyer or have lived in the same home for more than 5 years. There were also income caps.) Mr. Yun's figure implies that 50 percent of these homebuyers were unable to close by the end of June.

Since the contracts were distributed over the month (even if there may have been some clustering toward the end of the month), the vast majority of homebuyers would have had more than 10 weeks to close in order to meet the deadline. Typically, it takes 4-8 weeks to close on a home. There is no reason to believe that the system operating any more poorly in processing these loans that they would ordinarily, which means that it is reasonable to assume that the overwhelming majority of homes contracted prior to the expiration of the credit closed by the June deadline.

It is likely that the 180,000 figure from Mr. Yun is a complete that likely exaggerates the number of qualifying homeowners who missed the June deadline by more than an order of magnitude. By getting Congress to extend the deadline on closing to September 30th, the realtors are creating a great opportunity for tax fraud. It would be very easy for contracts signed in July and even August to backdated to April so that homebuyers could get their $8,000 credit.

At a time when Congress is voting to cutoff benefits for unemployed workers that average $300 a week, its willingness to pass a provision that will almost certainly result in widespread fraud should be an interesting news story.

 

 

 
NYT Claims of a Skills Shortage Disproved by Evidence in Article Print
Thursday, 01 July 2010 22:31

The NYT reported that manufacturers are having a hard time finding the skilled workers they need for their modern factories. However, the evidence presented in the article suggests the opposite. It reports that in Cleveland, the city on which the article is focused "more skilled workers earn $15 to $20 an hour."

This is not an especially high wage. For example, it is unlikely that many New York Times reporters live on $30,000 to $40,000 a year nor would they be very happy if their children got a job paying this much. The problem appears to be that manufacturers don't want to pay the market wage for the skills that they need. This is like someone who wants to buy a 4-bedroom home with a yard in a good neighborhood in Washington for $200,000, and then complains that there is a shortage of good homes.

There are good homes in Washington and there would be plenty of skilled workers for manufacturers to hire in Cleveland, if they were just willing to pay the market wage. The only evidence of a lack of a skills in this article is that the managers interviewed for the piece don't seem to have a good grasp of basic economics.

 
U.S. Growth in 2010 is Projected to Be Worse Than Anemic Print
Thursday, 01 July 2010 08:19

That's what readers could infer from the NYT's description of the 2.9 percent projected growth for Japan as "anemic." Japan's population is decreasing at the rate of 0.2 percent annually. Therefore this growth rate translates into a projected per capita growth rate of 3.1 percent.

By contrast, most forecasts put U.S. GDP growth in the range of 2.0-3.0 percent. Since the population in the United States is growing at a rate of 0.9 percent annually, this translates into a per capita GDP growth rate of 1.1 to 2.1 percent. In other words, the United States is expected to have a per capita growth rate that is least a percentage point slower than the Japanese rate that was considered "anemic."

 
Deficit Committee Co-Chair Reveals Himself as Numerologist Print
Thursday, 01 July 2010 05:15

Erskine Bowles, the Democratic co-chairman of President Obama's deficit commission, revealed that he was a numerologist yesterday when he suggested that the commission should set a limit on federal government spending at 21 percent of GDP. (Numerologists assign mystical powers to specific numbers.)This fact should have been highlighted more prominently because it is unusual to have people with such extraordinary beliefs in prominent positions in government.

More typically these people are pragmatists who believe that goods and services should be provided in the most efficient possible way. For example, if it is more efficient to provide retirement benefits through a public Social Security system or health care through a public Medicare-type system, most people in responsible positions would support expanding the public sector.

However, because of his belief in numerology, Mr. Bowles would waste resources, thereby slowing growth and eliminating jobs, by instead providing these services in a less efficient manner in the private sector. This is a very peculiar view and should be highlighted by those reporting on the deficit commission.

 
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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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