In the wake of the release of the new CBO numbers projecting that the debt-to-GDP ratio is actually projected to fall over the next decade, the Washington Post decided to give us one of its classic deficit/debt fear-mongering stories. The piece could not avoid noting the obvious fact that there is nothing that could remotely pass as a deficit crisis in the immediate future, but it did tell us:

"Policymakers have capped spending on agency budgets, permitted across-the-board spend­ing cuts known as the sequester to take effect, let a temporary cut in the payroll tax expire and raised taxes on the nation’s wealthiest households. They have done nothing, however, to tackle the long-term affordability of Social Security and Medicare, which are projected to be the biggest drivers of future borrowing as the population ages."

Of course one of the highlights of this and other recent reports has been the sharply lower projected rate of growth of health care spending which was driving the projections of bloated deficits in future years. One factor in the slower projected growth is the Affordable Care Act, so this assertion from the Post is simply untrue.

However the real gem is this line:

"the improvement in the short-term forecast has removed the air of crisis that has hovered around the budget deficit since President Obama took office."

Wow, an "air of crisis." And where did this "air of crisis" come from? It surely did not come from financial markets, where investors have shown a willingness to lend the United States government trillions of dollars at very low interest rates in the years since President Obama took office. It certainly did not come from competent economists who were able to recognize that the large deficits were a direct result of the economic collapse in 2008. It also did not come from the millions of people who lost their jobs due to the downturn and looked to government stimulus as the only possible source of demand that could re-employ them.

A more accurate statement might be that:

"the improvement in the short-term forecast has removed the air of crisis around the budget deficit that the Washington Post and its allies have sought to promote since President Obama took office."

Let's be serious here, the crisis was invented by people in Washington who have an agenda for cutting Social Security and Medicare. That is as clear as day. The deficit crisis does not actually exist in the world. In the world we have a crisis of a grossly under-performing economy that the Post and its allies have attempted to perpetuate. 

We know this because they are spouting utterly absurd lines which Paul Sullivan unfortunately felt he had to repeat in his NYT column. Sullivan discusses the number of people who could be hit by President Obama's proposal to cap tax sheltered savings at $3.4 million.

The discussion is ridiculous throughout. It makes a point of saying that under optimistic assumptions we could get 10-20 million people rubbing up against the proposed limits. (Yes, 10 percent of the population will have millions of dollars in financial assets.) However even more ridiculous is that there is no reason any serious person should give a damn.

If a person has $3.4 million in a tax sheltered account is there some national tragedy that the additional $50,000 they want to save will be subject to normal tax rules. If this ever rises to the point of meriting serious policy consideration then the world is way better off that I thought.

But here's the best part:

"Any discussion of retirement savings that suggests 'taking away tax-advantaged investing and capping investment amounts is detrimental to the system and society as a whole,' said Robert L. Reynolds, president and chief executive of Putnam Investments and one of the people considered responsible for popularizing the 401(k) plan.

"'Right now elderly poverty is at an all-time high,' Mr. Reynolds said. 'If that tells government anything, it’s we should do more to encourage saving for retirement.'"

Actually elderly poverty is nowhere close to being at an all-time high, but more importantly, what does Mr. Reynolds think he is talking about? The elderly who are in poverty are not worried about brushing up against the $3.4 million tax-exempt limit being proposed by President Obama. He is spouting non-sequiturs. 

Apparently that is the state of the debate on this issue. And, the NYT's retirement columnist presented this nonsense as a serious argument.

Steven Pearlstein is upset that the austerity pushers, like the Post's editors, are looking rather foolish these days. After all, it seems they not only have problems with basic economic logic, they also have trouble with Excel spreadsheets. He notes the serious structural problems in Greece and some of the other crisis countries, then tells readers:

"Unfortunately, this is not how the anti-austerity crusaders talk about Greece or Italy or Portugal. They offer no reasonable alternative other than the rest of the world should line up to pour more money into a uncompetitive economies and profligate governments, under the theory that they can grow their way out of the hole they’ve dug. They can’t."

Hmmm, I wish I knew some of the "anti-austerity crusaders" that Pearlstein is talking about. Folks I know have been talking about the need for adjustments in relative wages that can best be brought about by having wages in Germany and other surplus countries rise more rapidly so that the southern countries can regain competitiveness.

There are of course other problems in the crisis countries, in Greece most importantly the problem that people don't like to pay taxes. This anti-austerity crusader has recommended a tax amnesty which would be coupled with serious penalties for people who don't comply. (How do you spell "life in prison.") My guess is that if millionaire and billionaire tax evaders got the impression that they would never get to see their families or money, they might be a bit more conscientious about adhering to the tax codes.

I have also suggested a vacant property tax to lower both residential and commercial rents, thereby raising real wages and providing a boost to business. I'd be happy to see many other reforms that would eliminate corruption that has developed over the years in these countries, as I suspect is the case with most anti-austerity crusaders. My argument, and I suspect that of my fellow crusaders, is that we have to keep our eyes on the ball.

These countries are suffering today from the fallout from collapsed asset bubbles, not their internal structural problems. The fault for these bubbles sits squarely with all the wise people at the ECB and EU who are now pushing austerity. Somehow they thought everything was fine in the years of the "Great Moderation" even though all the danger signs were flashing bright red.

Making the people in these countries suffer does not in any obvious way fix their structural problems. It just ruins lives. Yeah, me and my fellow crusaders don't think that's cute. Better to ruin the lives of the elites who caused this crisis. 

The NYT had a piece on changes to French labor market regulation that will make it easier for employers to cut wages. The piece implies that France has a seriously dysfunctional labor market:

"There is wide agreement that the country has to bring down its relatively high labor costs if it is to compete with lower-wage destinations overseas and even with Germany, which underwent its own painful labor-market restructuring over the last decade and currently has a jobless rate of just 5.4 percent.

"It is the kind of structural overhaul that European Union leaders are urging to increase employment and growth in France, which is being given two more years to get its budget deficit down to the European Union-mandated 3 percent of the gross domestic product. But even the government acknowledges that more must be done, including further changes to pensions.

"France is in the midst of an unemployment crisis, with nearly 11 percent of the work force unemployed in a period of near recession. Among people under 24, the problem is even worse, with more than 26 percent jobless."

France's economy is clearly depressed, but the more obvious culprit would seem to be the fallout from the collapse of housing bubbles across Europe and the austerity policies being imposed by the European Central Bank and the European Union. While France's unemployment picture does look bad, its employment to population ratio tells a different story. According to the OECD, the employment to population ratio (EPOP) in France, for people ages 16-64, was 63.9 percent in 2012, down only slightly from its 64.2 percent rate in 2007.

By comparison, the EPOP in the United States has fallen 4.8 percentage points over this period, from 71.9 percent in 2007 to 67.1 percentage points in 2012. The reason that the United States has not seen a comparable rise in its unemployment rate is that a large portion of those without jobs have given up looking for work. Most economists would probably not consider this evidence of a well-functioning labor market.

Undoubtedly everyone has seen stories in the media about how we need to expand high-skilled immigration because we have a shortage of workers with degrees in science, technology, engineering, and math (STEM). Claims of a shortage of STEM workers have been disconcerting to those of us who believe in economics since shortages are supposed to result in rising prices, or in this case, higher wages. We don't seem to be seeing rapidly rising wages in most areas, which makes the claims of shortages dubious.

It turns out that at least one major tech firm has figured out how markets work. Netflix apparently doesn't have any problem hiring STEM workers. It offers higher wages. According to Businessweek:

"Netflix can now hire just about any engineer it wants. That’s a function of the computer science the company does and its reputation as the highest payer in Silicon Valley. Managers routinely survey salary trends in Silicon Valley and pay their employees 10 percent to 20 percent more than the going rate for a given skill."

If Netflix can figure this out perhaps it would be possible for companies like Facebook, Microsoft, and other tech giants to get this down as well. It is always good for a company to get lower cost labor, just like they want to pay less for all of their inputs. But if these companies really need workers, the trick is to offer higher pay. Maybe remedial courses for top management would do the trick.

The Washington Post long ago abandoned the separation between news and editorials, routinely running pieces advocating cuts in Social Security and Medicare in its news section. It now appears as though the New York Times is following the Post's lead.

A news story on the budget made repeated assertions that Social Security and Medicare must be cut. At one point it referred to the:

"the inevitable pain that comes from curbing those huge and popular programs [Social Security and Medicare]."

Of course there is nothing inevitable about curbing spending on Social Security and Medicare and there is certainly not inevitable pain. The most obvious route for curbing costs in these programs from an economic standpoint would be cutting Medicare payments to drug companies, medical equipment companies, doctors and other providers. This would not be especially painful for anyone who does not derive income from the program.

Clearly the paper was expressing its desire to see these programs cut.

It later added:

"The longer the delay, the sharper and more immediate the changes Washington must eventually make to ease the long-term fiscal squeeze."

Again, this is an invention of the NYT. There is no evidence that the country is up against any "long-term fiscal squeeze" or that anything would be gained by making cuts now.

The NYT, unlike the Post, generally keeps these sorts of political views on the opinion page. It is unfortunate that it appears to have departed from its standard practice with this article.

Addendum

This piece is now (8:30 AM, 5-15) clearly labeled as "political memo," indicating that it is not a straight news story. That was not the case when it was posted last night. Here's the original for those of you who thought I made an Excel spreadsheet error.

In prior posts I have often referred to the run-up in the dollar engineered by the Clinton-Rubin-Summers team in the 1990s as being the root of all evils. The point is that their over-valued dollar policy led to a large trade deficit. The only way the demand lost as a result of the trade deficit (people spending their money overseas rather than here) could be offset was with asset bubbles.

To fill this demand gap, the Clinton crew gave us the stock bubble in the 1990s and the Bush team gave us the housing bubble in the last decade. In both cases the bubbles crashed with disastrous consequences, the latter more than the former. (It took us almost 4 years to replace the jobs lost in the 2001 recession, so that downturn was not trivial either.)

Anyhow, my take away from this story is that, using the advanced economics from Econ 101, we need to get the dollar down. I have made this point in the past and readers have often commented that trade does not appear to be responding as would be predicted from a falling dollar. I would argue otherwise. The graph below shows the non-oil trade deficit measured as a share of GDP against the real value of the dollar.

Source: Bureau of Economic Analysis and the Federal Reserve Board 

One of the key issues in the financial crisis was the fact that mortgage backed securities (MBS), filled with subprime mortgages of questionable quality, managed to get Aaa ratings from the bond-rating agencies. While ignorance and stupidity may explain much of what happens on Wall Street, there were people at the rating agencies who did raise questions about the quality of these securities. In one e-mail at S&P an analyst complained that it would rate an MBS as investment grade if it were "structured by cows." The analyst's complaint was ignored for a simple reason, S&P was making lots of money rating MBS.

Senator Al Franken proposed a simple way to eliminate this obvious conflict of interest. He proposed having the issuer use the Securities and Exchange Commission (SEC) as an intermediary in the hiring process. Essentially, this means that the issuer would have to call the SEC when they wanted to have an issue rated and the SEC would then pick the rating agency. This would eliminate the incentive for the rating agency to issue an investment grade rating to get more business. The Franken Amendment passed the senate by a huge 65-34 majority, winning bi-partisan support. (Disclosure: I had written about this sort of reform and discussed it with Franken's staff.)

While this might have seemed like a victory for simple common sense, the amendment was largely eviscerated in a conference committee, apparently at the urging of then House Finance Committee Chair Barney Frank. Instead of implementing the amendment, the conference bill called for the SEC to study the issue and make a decision by the end of July, 2012.

The SEC is now almost a year late in this process, but apparently is prepared to ignore the rule, with an assist from the Washington Post. In an article discussing the SEC's plans, the Post dutifully repeated statements from the industry groups that were almost complete nonsense, without consulting any of the many experts who could have spoken in support of the Franken proposal.

The median pay for a member of the board of a Fortune 500 company is almost $240,000 a year. This typically involves 4-8 meetings a year. One of the top priorities of the board is supposed to be ensuring that top management doesn't rip off the company. They have not been doing a very good job as Gretchen Morgenson points out in her column today.

That raises the question of what exactly they get all this money for? Director Watch will be coming soon to a website near you.

As a general rule economists are not very good at economics. This is why almost none of them were able to recognize the $8 trillion housing bubble that sank the economy. (No, this isn't bragging, it only took simple arithmetic and basic logic.) Most economists are unable to conceptualize anything that someone with more standing in the profession did not already write about.

This is the only reason that the Reinhart-Rogoff 90 percent debt-to-GDP threshold was ever taken seriously to begin with. The point that I have tried to make in the past, apparently with little success, is that debt is an arbitrary number. It is not something that is relatively fixed, like the age composition of the population or the supply of land.

The country's debt is something that can and often is easily altered through simple steps. In this way the debt-to-GDP ratio can be thought of as something like the color of a house. Suppose Reinhart and Rogoff told us that people who lived in blue houses had 40 percent less income than people who lived in houses painted other colors. Presumably people would be skeptical of the results, but if their finding was really true, then we would probably want to encourage people in blue colored houses to paint them a different color.

In effect, Reinhart and Rogoff were making the same sort of claim about debt and GDP. Let me try to explain this in a way that even an economist can understand it.  

I have often pointed out that the value of long-term debt fluctuates with the interest rate. I didn't think this is a secret, but apparently few economists have followed what happens to bond prices when interest rates change. The point is that the value of our debt will plummet if interest rates rise, as the Congressional Budget Office and other forecasters expect. This means that we could buy back long-term debt issued today at interest rates of less than 2.0 percent for discounts of 30-40 percent. This would sharply reduce our debt-to-GDP ratio at zero cost.

Yes, this is really stupid, but if you believed the Reinhart-Rogoff 90 percent debt cliff, then you believe that we can sharply raise growth rates by buying back long-term bonds at a discount. It's logic folks, it's not a debatable point -- think it through until you understand it.