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Home Publications Blogs Beat the Press Looniness in the Cause of Deficit Reduction at the NYT

Looniness in the Cause of Deficit Reduction at the NYT

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.

Comments (19)Add Comment
written by izzatzo, May 27, 2010 7:11
The Cheney One Percent Terrorism Doctrine has been converted to the Deficit Hawk One Percent Insolvency Inflationary Doctrine.

If there's a one percent chance of occurrence of a high risk outcome, it should be treated as a 100% expectation and acted on accordingly, just the way BP treats the risk of an oil spill.

Just as civil liberties were trampled after 9-11 like so many inconvenient obstacles in the search for terrorist needles in a haystack, economic opportunities for employment must be sacrificed for the greater good, to prevent insolvency and inflation at all costs.

As Bush said about Iraq, we will pay whatever it cost for the world to be safer without Saddam Hussein. Any economist knows that a car with 24 air bags is safer than one with only 12 air bags, no matter the opportunity cost of the 24th air bag at the margin.

Inflation, deficits and artificial jobs: You're either with the terrorists or with the deficit hawks.

Stupid liberals.
written by AndyfromTucson, May 27, 2010 8:06
This whole deficit hysteria leaves me puzzled; I just don't see why people seem to find it so compelling. When the housing bubble was in full swing it was very difficult to find anyone very concerned about households taking on mortgage debt they obviously couldn't afford to pay bubble prices for houses they would soon be underwater in. But now that governments who can print any money needed to pay their debt service are taking on debt everyone is freaking out? It's like the whole punditocracy is intentionally doing everything backwards.
written by SteveB, May 27, 2010 8:29
Isn’t “real GDP” determined from “nominal GDP” by applying an inflation correction. Isn’t Einhorn then correct, that a lower estimate of inflation leads to a higher real GDP?

It seems that those who have a political bias against government tend to complain about excessive government debt, while those who have a bias in favor of using government tend to dismiss this concern. I thus have trouble determining which side to believe in this debate about the risk of increasing government debt.
written by bakho, May 27, 2010 8:50
The deficit will never be fixed as long as unemployment is at ten percent. Under Clinton, unemployment dropped to 4 percent. Unexpectedly, the budget had surplus revenue.

Take care of unemployment and the budget deficit will correct itself.

The "Deficit" crowd is all about not raising taxes on the wealthy. They can't sell that argument so they offer a bait and switch.
written by tinbox, May 27, 2010 9:55
"...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."

That's just a misrepresentation (to be polite). Einhorn says those that argue for government spending to create jobs have a "valid point." He does question whether these gov't efforts can be expected to be temporary and whether these efforts cause an increase in debt that will eventually be, on balance, negative for incomes and employment.
Krugman and other economists give great weight to current trimmed mean, median, core, sticky inflation indexes. And they give a lot of weight to long-term interest rates that are a function of the Fed's ZIRP and leveraged buying of bonds. Is Einhorn loony for thinking the future may hold higher inflation if current policies are pursued indefinitely? Loony?

You can reasonably and honestly favor a level of gov't deficit spending like, say, 10% of GDP, but it shouldn't be portrayed as a risk-free alternative.
written by Matías Vernengo, May 27, 2010 11:02
Traditionally the risk of inflation for countries with big debts that are partially monetized are the result of a run on the currency and depreciation. The question is investors are going to run to what ... euros?!
That's one lie
written by Mike, May 27, 2010 11:33
How about the whopper where he asserts, without any evidence whatsoever, that the stimulus mostly resulted in hiring new government employees. It was mostly tax cuts and one-time grants.
Politics, politics
written by Greg, May 27, 2010 11:34
That David Einhorn and others like him neither opposed deficit spending under Bush nor oppose deficit spending in the form of military spending or tax cuts makes it difficult to take them seriously.

What this appears to be is an attempt to block policies that might reduce the unemployment rate. Keeping the unemployment rate high will influence the elections in the Republicans favor.

It is not surprising that people would try to influence the debate by trying to get things like this published. What is amazing that the NYT printed this editorial.
No hedge funds for me!
written by Joseph Kennedy, May 27, 2010 12:29
I think hedge funds (and buyout funds) are pretty much a waste of resources so i would not invest in them (even if I had the money, which i don't). Based on the comments from Einhorn, I'm assuming that one of the reasons they are so secretive (besides obscuring their economic irrelevance), is to hide the fact that that they are often led by right-wing fanatics and at least in Einhorn's case, ignorant to boot.
They'll run to Yuan
written by Ryan Toso, May 27, 2010 12:35
Or gold, or oil.
written by LL, May 27, 2010 1:45
whether he is correct or not your argument is a fail. Maybe they are right wing in your book,but virtually every fund manager with a value focus believes there is a high risk of inflation. The reasons are many and static dino economists will never recognize that. your reader btw should complete ignorance which right or wrong smart or dumb is a fail on their part
written by tinbox, May 27, 2010 2:38
Einhorn's great crime is that he challenges the current assessment of certain academic economists.

As far as being a right-wing nut, according to http://fundrace.huffingtonpost...name=David,
David Einhorn
Donation of $28,500 to Democratic Congressional
Campaign Committee

written by pireader, May 27, 2010 3:48
LL wrote--"virtually every fund manager with a value focus believes there is a high risk of inflation"

Then all those fund managers should bet the inflation spread (i.e., buy TIPS and sell conventional Treasuries).

If they did, the spread would widen dramatically. But it continues to predict 2.4% p.a. inflation for the next 30 years.

So either all those fund managers lack the courage of their convictions, or LL is talking rubbish. Hmmmm ...
Needle in the Haystack
written by Ethan, May 27, 2010 4:30
Everyone knows that the best way to find a needle in a haystack is to burn down the haystack and search the ashes with a magnet. So there.
Deficit Reduction?
written by Thomas Dooley, May 27, 2010 10:00
Deficit Reduction? That's the problem that needs our attention? What happen to health care, jobs, schools, civil liberties, public infrastructure, foreclosures, wars?

Deficit Reduction? I don't remember getting all worked up and casting a vote for deficit reduction. Truth be told I don't give a damn about deficit reduction. This is what we are supposed spend our days worrying about? Not our jobs? Not our health care? Not the endless wars? Deficit Reduction?

Screw deficit reduction and screw the politicians and pundits who are foisting it on us. They'd better get their asses to work on the real problems or we'll find people who will.
written by CPTBMan, May 30, 2010 1:46
"Under Clinton, unemployment dropped to 4 percent."

Thanks to a Republican Congress who insisted on capital gains tax cuts, a balanced budget, and welfare reform, all of which Clinton had to be dragged kicking and screaming to sign.
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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.