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Home Publications Blogs Beat the Press Another Failure of Arithmetic at the Washington Post

Another Failure of Arithmetic at the Washington Post

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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.  

Comments (12)Add Comment
More arguing wth wingnuts
written by Rich2506, July 04, 2010 7:52
Had a lengthy discussion with the local wingnuts about the economy after I read a Heritage Foundation piece that attempted to show that we didn't need to worry about repealing the Bush tax cutshttp://www.philly.com/inquirer...=#comments.
This was especially amusing -

Mike Welbourn
TCV - it's easy to be eloquent on economics when going against rich. Just look at his last post. He always just squawks that the government doesn't spend enough. Now he say there is no difference between the government created job and private sector job. If that is the case then the government should just create 10 to 12 million more government jobs and we would have the most dynamic economy in the world. squawk! squawk!

My response:

rich2506
"If that is the case then the government should just create 10 to 12 million more government jobs" in the short run, that's precisely the right answer. In the long run, it's better for private industry to handle a large assortment of different types of jobs. There's plenty of room for non-profit and government jobs, depending on which kind of function is handled most effectively by what type of entity. The important point right now is that private industry simply can't pick up the slack without government assistance.
...
written by skeptonomist, July 04, 2010 10:06
The 1873 recession was anomalous. Rapid turnarounds, even in the 19th century, have been more common until recently. After the Great Depression hit bottom in mid-1933, GDP and employment growth picked up quickly - GDP growth averaged 10% for 4 years after that - the problem was the depth of the slide 1929-1933, not the rate of recovery. The 1873 recession and the Japanese lost decade are better analogies for the dangers faced now than other recessions.

Calculated Risk has a good plot of employment trends:

http://calculatedriskimages.blogspot.com/2010/07/employment-recessions-june-2010.html

The census hiring may have given a false impression of both faster recovery and of a drop backwards than is really the case. At the moment the trend with census substracted is looking a lot like 2001 with respect to timing, but of course with much higher levels of unemployment.
...
written by skeptonomist, July 04, 2010 10:23
The empirical model for what Rich2506 describes is WW II - this is probably the best example of massive Keynesian intervention, though it was not deliberately Keynesian. The government basically took over the economy, putting everyone back to work. Then at the end of the war the private sector took over again, with no permanent harm or conversion to socialism. Note that a kind of austerity may have been critical as private demand built up during the war, but this was a very different kind of austerity from what is proposed now. Then, government debt balooned to 120% of GDP. Note also that high-bracket income-tax rates were at least 80% during the war and until 1965. Also note that the Fed lay low during this time, just handing out money when asked, and interest rates were never high. The years 1941-1965 were among the most prosperous in US history.
...
written by PeonInChief, July 04, 2010 10:37
For the last 30 years we've been cutting taxes on investors, and they seem to have done remarkably little of any use with the money. In the most recent period, it appears that they invested the money in dicey mortgages and credit default swaps. It might be better if we took the money away from them.
Spending and Saving are opposites?
written by David.C, July 04, 2010 11:59
You write "spending and saving are direct opposites" as though when someone saves, he puts cash in a mattress. Apparently, when someone saves the more usual way (investing in productive activities with expectation of profit or by depositing at a bank thus increasing its liquidity and capital ratio to enable loan activity) it is not nearly as good, economically, as when Uncle Sam hires Peter to dig up asphalt and Paul to lay it back down.

Really?

Those who have dined on an expense account know that they spent other people's money far less carefully than their own. Why is it that Keynesians can't confront this axiom?
Paradox of Thrift and Asphalt
written by izzatzo, July 04, 2010 12:53
Why is everyone saving?

So others can use it to invest.

Why isn't everyone investing?

Because there's not enough consumption.

Why not?

Because everyone is saving.

Why is Peter digging up asphalt and Paul laying it back down again?

To replace demand lost from reduced consumption.

Why are investors investing in government debt used to finance jobs for Peter and Paul?

Because investors are lending money to the government to spend, rather than borrowing from private savers to spend on investment themselves. They won't spend due to lack of demand, but the government will.

Why isn't this forced savings, in the sense that future taxes must eventually pay for government spending which reduces future consumption?

It could be, if Peter and Paul and millions like them were not working. That's the difference. Keynesians recognize the paradox of thrift and asphalt. More net total output is lost by laying off Peter and Paul in the name of austerity axioms than is gained by paying them to dig up asphalt and lay it down again.

It's not about Peter and Paul taking money from one pocket and putting it into another. It's about filling up both pockets with more money from more real output drawn from idle resources.
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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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