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Conventional Economic Wisdom from People Who Couldn't See an $8 Trillion Housing Bubble is of Little Value Print
Tuesday, 01 June 2010 04:36

The Washington Post notes the conventional wisdom of the Washington elite that there should be a run on U.S. bonds because of the size of the country's debt and deficits. It then points out that the markets seem to be contradicting the conventional wisdom. It is worth noting that nearly all of the purveyors of this conventional wisdom completely missed the $8 trillion housing bubble, the collapse of which wrecked the economy. Missing a bubble of this enormous size suggests that this convention wisdom is not grounded in a serious understanding of the economy. It would have been worth noting this point in discussing the conventional wisdom.

The article also asserts that: "the mix of spending cuts and tax increases that could close the gap [the budget deficit] are wildly unpopular." This is not true. During a period of extraordinarily high unemployment, like the present, there is no reason that the Fed could not simply buy and hold the debt being issued in order to prevent future interest burdens from increasing. To reduce future health care expenditures the government could publicly finance clinical trials for prescription drugs, thereby allowing all new drugs to be sold as generics for a few dollars per prescription. It could also allow Medicare beneficiaries to buy into the lower cost health systems in other countries, sharing the huge savings with the beneficiaries. The government could also roll back defense spending to the levels projected before the wars in Afghanistan and Iraq. And, to raise revenue the government could impose a financial speculation tax like the one that currently exists in the UK.

There is no evidence to suggest that any of these measures are wildly unpopular although powerful interest groups may object to them.

 
What Money Does David Brooks Think Has Been Spent? Print
Tuesday, 01 June 2010 03:59

I'm not sure of the point of David Brooks' column today other than to fill space and earn his paycheck, but one of the items on his list of complaints simply does not make any sense. He tells readers, presumably in reference to the stimulus, that "the money is spent."

It's not clear what Brooks thinks he means by this. Insofar as the country still suffers from high unemployment (Brooks tells us in the next paragraph, "unemployment will not be coming down soon") there is no lack of money for additional stimulus. The government can have the Fed hold the debt issued to finance the spending so as not to increase the interest burden on the Treasury in future years. (The Fed refunds its interest to the receipts.) So there is no plausible meaning to the idea that "the money is spent". This just seems to be a case of Brooks wanting to express his generic unhappiness with the current situation.

 
Robert Samuelson's Cellphone Standard of Living Print
Monday, 31 May 2010 05:57

Robert Samuelson invokes the cellphone standard of living in his column today which complains about the Obama administration's adoption of a new measure of poverty as an alternative to the official standard. The administration will use both.

Samuelson argues that we have failed to pick up all the gains for the poor over the last four decades noting, among other things, that 48 percent of poor households own cellphones. Needless to say, the reduction in price of many products in recent decades has made them accessible in ways that would not have been possible in the recent past, but it is not clear how much this tells us about living standards.

In China, there are more than 600 million cell phones in use. This means that roughly the same percentage of people in China have cell phones as do poor people in the United States. China's per capita income on a purchasing power parity basis is less than one-sixth as high as per capita income in the United States. By Samuelson's cell phone standard of living the average person in China has the same standard of living as do poor people in the United States.

There are a couple of other points worth noting about Samuleson's diatribe. The Obama administration did not just invent the measure that Samuelson denounces as a "propaganda device." This is a measure developed by the National Academies of Science based on research by many of the country's leading poverty experts. It is fine to criticize the measure, but Samuelson should have at least noted its origins.

Finally, Samuelson reports on research from the American Enterprise Institute (AEI) that shows that spending on the poor from all sources may be as much as double their reported income. It is worth noting that much of this spending involves Medicaid expenditures, many of which may provide little benefit to the patient. For example, if a lab bills (or overbills) Medicaid for an expensive test that was not really needed, this would count as spending on the poor. For this reason, the AEI measure may not provide much insight into their well-being.

 
Serious Discussions of Inflation at the NYT Print
Sunday, 30 May 2010 18:54
The NYT asks the right questions in this piece on the European Central Bank's (ECB) policies. The ECB continues to insist that its main job is fighting inflation even though there is no inflation in sight. As the article points out, deflation is likely to pose the bigger risk for the immediate future.
 
Congressional Deficit Hawks Act to Slow Growth and Destroy Jobs Print
Saturday, 29 May 2010 07:23

This could have reasonably been the headline of news articles on the decision of many moderate Democrats to demand a smaller package of unemployment benefits and assistance to state and local governments. Instead, neither article noted at all the negative impact that the cuts would be expected to have on growth. The NYT piece even invented an alternative history, telling readers that the current debt and deficit levels come from a "lavish spending spree engaged in by both parties over the past decade," as opposed to being the result of an economic collapse caused by the bursting of the housing bubble.

The plans by the deficit hawks seem likely to trim $30 billion in unemployment benefits and aid to the states from the bill. Using the methodology in the Romer-Bernstein paper put out by the Obama administration to promote its stimulus package, the cuts will reduce GDP by approximately $50 billion. This will correspond to a job loss of more than 300,000 people. It is irresponsible to report on plans to reduce deficits without noting their likely impact on the economy.

The Post piece included the comment that Congressional Democrats looking to cut benefits are "saying 99 weeks of unemployment benefits may no longer be justified after four consecutive months of job growth." It would have been worth reminding readers that the rate of job growth over the last four months has only slightly outpaced the growth of the labor force. Projections from both the Congressional Budget Officie and the White House show that it will be more than 5 years before the unemployment rate returns to a more normal level.

 
How Do Washington Post Reporters Know Democrats are Concerned That: "Government Spending Is Out of Control" Print
Friday, 28 May 2010 05:58

Politicians sometimes don't say what they really believe. Therefore it is very impressive that the Washington Post is able to determine their true feelings about the world. An article about the failure of the Senate to approve an extension of unemployment benefits attributed the impasse to: " a growing concern among Democrats that government spending is out of control."

It's remarkable that the Post is able to determine the true concerns of politicians -- especially when it is easy to show that these concerns bear no relationship to the underlying reality. The main reason that the government deficit has expanded in the last three years has been due to the economic downturn. If the deficit were smaller right now, then more workers would be unemployed and more of our children would have unemployed parents.

If the Post is right in its assessment of Democrats' concerns then it owes its readers a good piece on how congressional Democrats became so far removed from reality and how this affects their views of other policies.

 
Unemployment Claims Go Unmentioned Again Print
Friday, 28 May 2010 05:33

Yes, I'm reusing blogpost titles, but that is only because the papers appear to be repeating their bad reporting. The Labor Department releaased its data on weekly unemployment claims on Thursday and it was moderately bad news. New claims were at 460,000 for the week, with claims for the prior week revised upward by 3,000 to 374,000. This put the 4-week moving average at 456,500.

Generally claims have to be below 400,000 a week before we see job growth. The current level is consistent with we would expect to see in a relatively mild recession. The 4-week average only reached this level in the 2001 recession in the immediate aftermath of the September 11th attack even though the economy continued to shed jobs for another two years.

Usually newspapers devote all or part of an article to reporting on weekly unemployment insurance claims. However, that was not the case this week.

 
International Agreement on Financial Reform: It's a Matter of Interpretation Print
Friday, 28 May 2010 05:23
The NYT headline told us: "Geithner sees consensus on finance reform." USA Today's headline was: "Geithner: US, Europe broadly agree on financial reform." The Post took a different perspective: "United States and Germany remain divided over financial regulation issues."

I'm inclined to agree with the Post. There is a push in Europe, led in part by Germany, for more extensive regulation of finance, including greater restrictions on hedge and private equity funds. It also seems likely that Europe will build up a reserve bailout fund in advance of a crisis, a provision that will likely be missing from the final bill coming out of Congress. And, Europe is very interested in taxes on financial speculation. The Obama administration is strongly opposed to any sort of financial transactions tax.
 
The Return of the "Committee to Save the World" Print
Thursday, 27 May 2010 07:29

The WSJ reported on Treasury Secretary Timothy Geithner's trip to Europe to push his agenda for financial reform and commented that:

"Mr. Geithner's European tour is reminiscent of the Asian financial crisis of a decade ago when many current Obama economic officials, including Mr. Geithner and White House economic adviser Lawrence Summers, traveled Asia doling out advice and worked behind the scenes at the International Monetary Fund to keep bailout cash flowing. Time magazine dubbed a trio of U.S. officials 'the Committee to Save the World.'"

It is worth noting that this prior effort at salvation did not turn out very well. In fact, it laid the groundwork for the current crisis. The IMF austerity plans were considered so painful that developing countries decided that they never wanted to be in a situation in which the IMF could impose the same sort of austerity plans on them. As a result, they began to accumulate massive amounts of reserves mostly in dollars. This reversed the normal flow of capital, with capital now going from poor countries to rich countries.

This led to the over-valuation of the dollar, which in turn caused the U.S. to run a massive trade deficit. The inflow of foreign capital, coupled with the trade deficit, also laid the basis for the continuation of the stock bubble in the 90s and the housing bubble in the next decade.The collapse of this bubble is the cause of the current economic crisis.

Hopefully, this effort at salvation will turn out better than the last one.

 
Looniness in the Cause of Deficit Reduction at the NYT Print
Thursday, 27 May 2010 04:24

With the deficit hawks in high gear, people are prepared to say anything in pursuit of the goal of deficit reduction. Remarkably, the NYT is apparently willing to print almost anything. Today the deficit cutting crusade is led by hedge fund manager David Einhorn. In a lengthy column Einhorn bemoans the fact that at least some people in the Obama administration are more concerned about getting people back to work than reducing the deficit.

Einhorn is a bit more knowledgeable about basic economics than many of those who worry that the United States will be unable to find investors to buy its debt. Since he has heard of the Federal Reserve Board, he recognizes that the actual concern should be inflation, not insolvency, since the Fed can always buy up government debt.

However, since one would have to struggle to find any evidence of inflationary pressures in recent economic data, Einhorn chooses to invent his own evidence:

"Government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years the government has changed the way it calculates inflation several times. According to the Web site Shadow Government Statistics, using the pre-1980 method, the Consumer Price Index would be over 9 percent, compared with about 2 percent in the official statistics today."

The main source of the difference between the government statistics dismissed by Einhorn and the "Shadow Government Statistics" he cites is due to the inclusion of asset prices, like house prices, in the shadow statistics. There are good reasons for excluding asset prices from measures of inflation, but Einhorn's subsequent comments simply don't make sense.

He tells readers that. "lower official inflation means higher reported real G.D.P., higher reported real income and higher reported productivity." Actually, this is not true insofar as asset prices are the cause of understated inflation. Asset prices do not affect GDP or productivity measures. It is remarkable that Einhorn apparently does not know this.

Einhorn also complains that his assessment of the understatement of inflation:

"doesn’t even take into account inflation we ignore by using a basket of goods that don’t match the real-world cost of living. (For example, health care costs are one-sixth of G.D.P. but only one-sixteenth of the price index, and rising income and payroll taxes do not count as inflation at all.)"

Actually, the government has a wide variety of inflation measures, many of which do include the full weight of health care expenditures. They all show the same thing as the consumer price index: inflation is very low and falling. In short, Mr. Einhorn either has no clue about government data, or he is deliberately trying to mislead readers.

The NYT has been far more responsible in discussing the deficit than most other news outlets. It is understandable that it would want to open up its oped columns to those with differing views. However, it should not allow them to simply make things up as Mr. Einhorn has done here.

 
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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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