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To Whom Did the Economy "Seemed Poised to Finally Strengthen?"

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Thursday, 02 June 2011 05:01

That's what readers of the Washington Post front page article on the economy are asking. Those who know economics saw that house prices were falling and would continue to fall. This decline has eliminated close to $1 trillion in housing wealth since the peak reached last July. It will likely eliminate another $1 trillion by the end of the year. The winding down of the original stimulus package, coupled with state and local government cutbacks, was expected to be another major source of drag on the economy.

The boost provided by the Fed's QE2 policy was generally anticipated to be limited, lowering 10-year Treasury rates by perhaps 20-30 basis points. The net stimulus from the tax cuts was very modest, with the 2 percentage point cut in the Social Security tax providing only marginally more stimulus than the Making Work Pay credit that it replaced.

The problem appears to be the Post relies on experts who are poorly informed about the economy. This is the reason it failed to notify its readers of the dangers created by the growth of the housing bubble. It continues to be a major problem with its economic reporting.

It is also worth noting one other potential source of stimulus not mentioned in this article: a lower valued dollar. A lower dollar would make U.S. goods more competitive in world markets. This would stimulate the economy by reducing imports and increasing exports.

In the longer run it will be necessary to have the dollar fall to bring the trade deficit closer to balance. Until the trade deficit is brought down, then by definition the country must either have a large government deficit or negative private savings, or some combination of the two. This is implied by the fact that the trade deficit is equal to net national savings so that if the country is running a deficit, then the public and/or private sector must have negative savings.

Comments (3)Add Comment
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written by skeptonomist, June 02, 2011 9:24
There is no gain without pain in adjusting the value of the dollar. Imports will be decreased and domestic production increased only after prices of imports rise. I don't know how many Congresspeople understand that they would be blamed for inflation if the dollar falls, but I'm sure Obama's advisors do.
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written by Ellis, June 02, 2011 9:44
It isn't just a housing crisis. In case you haven't noticed, the world is in a depression... and it's getting worse. As for your little bromide about lowering the value of the dollar and increasing exports-- everyone is trying to do the same thing in the teeth of stagnating and falling demand. All that does is exacerbate competition, with an underlying threat of trade wars... and worse.
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written by joe, June 02, 2011 12:17
I predicted real GDP growth in 2011 of 2% on this blog back when the Bush tax cuts were extended.

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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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