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Home Publications Blogs Beat the Press The Post Makes Stuff Up in the News Section to Push Its Deficit Reduction Agenda

The Post Makes Stuff Up in the News Section to Push Its Deficit Reduction Agenda

Saturday, 08 May 2010 07:02

The Washington Post (a.k.a. Fox on 15th Street) pulled out the stops in pushing its deficit reduction agenda today. Its news section includes a lengthy story on the euro crisis that makes things up in order advance the Post line about evil budget deficits.

It starts by misrepresenting the central problem: "and the currency that was designed to rival the U.S. dollar for power and influence is foundering because of a lack of fiscal discipline among its weakest members." While Greece's problems can be attributed in large part to a lack of fiscal discipline, this is clearly not the case with Spain and Ireland, both of whom had budget surpluses and low debt to GDP ratios prior to the downturn. Portugal is a more ambiguous case. The euro would not be facing a crisis if only Greece and Portugal, two relatively small economies, were facing difficulties.

The euro's problem stem from the fact that many economies across Europe were driven by a housing bubble. The European Central Bank (ECB), like the Fed, thought that bubbles were fun and opted to ignore the growth of dangerous housing bubbles in many countries.

For this reason, the sentence: "The euro, created 11 years ago, has always stood upon two unequal legs: a disciplined European Central Bank that has set interest rates for the entire monetary union and a wide variety of national budgets and economic policies ranging from prudent to profligate," could perhaps be more accurately written: "The euro, created 11 years ago, has always stood upon two unequal legs: an incompetent European Central Bank that has set interest rates for the entire monetary union and a wide variety of national budgets and economic policies ranging from prudent to profligate." Had the ECB done the proper job of a central bank it would have taken steps to pierce the bubble (which could have involved many measures other than raising interest rates) before it grew to such dangerous proportions.

It is worth noting that the Post consistently ignored the economists who warned of the dangers of the housing bubble in the build up to the crisis. It is continuing to ignore the bubble even after its collapse led to the worst economic crisis in 70 years.

The Post also gets the necessary remedies confused. It tells readers: "If Greece still had its own currency instead of being tethered to the euro zone, a sudden devaluation would have already slashed the value of the country's wages and benefits." Actually, the important point is not the absolute fall in Greece's wages and benefits, but rather their decline in value relative to those of other countries in Europe.

This is the key point, the issue is less the budget problems, but rather that the fixed exchange rate precludes and effective process of economic adjustment to a period of lower budget deficits. Because Greece and the other troubled countries are stuck in the euro zone, they can neither lower interest rates nor decrease the value of their currency to offset the contractionary impact of deficit reduction. As a result, deficit reduction can lead to a downward spiral in which lower output leads to a higher budget deficit, requiring further cuts, and therefore causing a further drop in output.

Comments (6)Add Comment
Wages are not the problem or the solution
written by skeptonomist, May 08, 2010 9:46
Greece, Spain and Portugal all have lower median income than the OECD average. How is it that "liberal" economists can speak of excessive wages as even contributing to the problem, let alone take it for granted that the problem could be solved by reducing wages? As for benefits, these countries all have better health care than the US, but they pay well under half as much per capita as the US.

There are obvious political and special-interest economic reasons why Republicans and conservatives in general want to pretend that workers or social-welfare policies are somehow responsible for the weakness of these countries, and to spread alarm about the supposed dangers of deficits. The media mostly take their cue from the big-money interests. But why do economists fall in with their assumptions?
Lots of incompent central banks?
written by skeptonomist, May 08, 2010 10:06
Dean argues that the ECB was incompetent for not recognizing the housing bubble. So were the Fed and the BofE - as far as I know all central banks of countries in which there was a bubble failed to recognize the problem. Governments in many countries, like the US, had tax and other policies to encourage home buying. The clever Maestros and legislators had figured out that housing and construction are among the best sectors to make monetary and tax manipulations bite in a recession.

In the face of all this bumbling, Paul Krugman, Dean Baker and many other economists think that the problems of the weak countries could have been avoided or could be solved if they had independent central banks. Maybe, but it is likely that independent monetary bumblers would have led their individual countries into other and different financial crises, or that they would do so in the future.
written by izzatzo, May 08, 2010 11:12
Fixed exchange rates = fixed relative prices
A Bretton Woods clamp of proportional vices

Floating exchange can't match and marry
A nation's relative worth in cash and carry

With monetized debt and currency devices
That take comparative advantage of relative prices

Lie in the Bubble Bed made, suckers and saps
Stifled and frozen in the Euro trap
On the Plus Side...
written by leo, May 08, 2010 12:42
On the plus side, at least we're not so totally enamored with Reagan-Greenspan-Rubin-omics, that anyone takes WaPo seriously anymore. The current crisis has cured us of that illusion.
written by Queen of Sheba, May 08, 2010 7:08
You're spot on that "we" are no longer enamored of the economic philosophy of the last 30 years and have awakened from our reverie.

Unfortunately the Rubinites and those who drank the heady wine of lassiez faire capitalism during that time are still besotted, and they are in charge of making the decisions that will be imposed on the rest of the country. We are the ones now suffering from the hangover.
Stuck in the Eurozone with Germany
written by BigBadBank, May 09, 2010 10:49
With respect it's not that 'troubled' countries are stuck in the Eurozone per se, but that they are stuck there with other untroubled countries that have different interest rate and currency needs.

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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.