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Home Publications Blogs Beat the Press Weird Things With Economic Numbers at the Washington Post

Weird Things With Economic Numbers at the Washington Post

Saturday, 20 April 2013 07:30

There are some things that we can learn from economics, just as there are things we learn from astronomy. The vast majority of people in the United States believe that the earth goes around the sun because of what astronomers tell us. After all, we all see the opposite every day in the sky.

For this reason, when a major newspaper tells us that when it comes to economics it is all just so confusing (except for what they insist you believe), it is doing a serious disservice. While some aspects of economics are difficult, many of the fundamentals, such as why we have a prolonged economic slump and millions of people are unemployed, are not. (Lack of demand in the economy, if you have to ask.)

In this vein, the Post article, "It's an old numbers game. What if they're wrong?" seems almost like a deliberate effort to confuse readers into thinking there is nothing that can be done about the economy except to have the government reduce deficits.

The second paragraph tells people:

"How much debt can the nation manage? The United States was at about 102 percent in 2012, with the amount of debt held by the public closer to 75 percent. To some, that signals danger. Others say we could handle even more. In certain wonky circles, the debate over what ratio is sustainable is almost endless. And yet, serious people assess the president’s budget, indeed any budget, by how it decreases this ratio in years to come."

This is almost completely wrong. For example, many economists would not even look to the ratio of debt to GDP as being an important variable since debt can be quickly reduced by selling assets. If a high debt level is some horrible burden on the economy, then the United States could just sell several trillions of dollars of assets and immediately lower its burden. People who understand balance sheets know this.

Also, the price of debt fluctuates with interest rates. Debt issued at low interest rates can be repurchased at steep discounts when interest rates rise. This means that if debt-to-GDP ratios are what matters, we will have a great opportunity to quickly reduce this ratio when interest rates rise later in the decade as is widely predicted. This is a reason that serious people tend to focus on the interest burden, which is near a post-World War II low.

The last claim that:

"serious people assess the president’s budget, indeed any budget, by how it decreases this ratio in years to come,"

can be called an outright lie. Serious people look at how overall levels of spending and taxes will affect growth and jobs in the near future. They also look at how spending on various types of investment (infrastructure, education, and research) will affect the economy in decades ahead. They may look at what the numbers for 2018 and beyond show for the direction of debt to GDP, but since they know both that our predictions for this period are subject to enormous error and that several new budgets will be passed in the interim, they are unlikely to pay too much attention to the numbers that we write down in 2013 for these years.

The piece also spreads bizarre confusion in its discussion of the U.S. trade deficit with China. It is of course true that much of the price of goods imported from China is attributable to inputs from elsewhere, including the United States; this is hardly news. Economists have recognized this problem for decades. The OECD recently compiled a useful data set showing trade balances that measure the value-added being exported and imported between countries. In the case of the U.S. and China, the OECD data show a deficit that is roughly one-third smaller than the standard measure, but still quite large.

The piece should have noted this OECD data rather implying that we have to just throw up our hands because we can't know anything. That may be true at the Washington Post, but the rest of us can use data to make judgments about policy.

Comments (12)Add Comment
written by John Q, April 20, 2013 9:11
["serious people assess the president’s budget, indeed any budget, by how it decreases this ratio in years to come,"

can be called an outright lie. Serious people look at how overall levels of spending and taxes will affect growth and jobs in the near future.]

The Post is referring to the Very Serious People derided by Duncan Black and Paul Krugman. They are not the same as informed and genuinely serious people.
Again this nonsense about selling assets
written by Kaleidic, April 20, 2013 10:10
Just what is the market for national parks and military bases, and would we even want to sell these things if there was a market. Most examples of selling public assets and privatizing leads to very good deals for the crony capitalists and very poor deals for the public.
Market for national parks and military bases
written by Dean, April 20, 2013 10:13
The market for national parks and military bases is enormous -- these are otherwise known as "land" and often very desirable land. Would we want to sell them? I wouldn't, but of course if the nonsense about the impact of debt on growth were true, I would reconsider. The implication would be that we might be 30 percent richer in a decade or two if we sold off a chunk of these assets. That's in addition to the savings on interest payments.

But no one really believes this -- that is why it is such a dishonest debate.
Debunking the common wisdom in economics and astronomy
written by mejimenez, April 20, 2013 11:19
You've been doing great work in debunking the common wisdom promulgated by the Very Serious People regarding issues in economics. Your approach in this debunking is to take the analysis of the problem just one or two steps further than is commonly done, and thereby expose a clear logical fallacy. The stuff you've written about the obsession with the debt to GDP ratio, is a good example: you point out that when interest rates go up, we will be able to do a bond buyback at deep discounts, but our interest burden will remain the same.

Unfortunately, in this post on the topic, you succumb to a very similar bit of fallacious common wisdom about astronomy. In modern societies, most people believe that astronomers have proved that the earth revolves around the sun, not the other way around. However, those same people accept the validity of the dictum "all motion is relative". If that rule is true, what could the astronomers have proved regarding motion of the earth and sun?

To paraphrase one of your favorite locutions, fans of analytic geometry will remember that the choice of the origin (x=0, y=0) in Cartesian Coordinates makes a huge difference in how the formulas describing a curve come out. The difference between the Geocentric/Ptolmaic and Heliocentric/Copernican views is merely a choice of where to put the origin of the Cartesian Coordinates. Put x=0 and y=0 at the center of the earth and you get an Geocentric description; put the origin at the center of the Sun and you get a Heliocentric description. As happens whenever you change or shift coordinate systems, the formulas you need to describe the same curves look very different. In the Ptolmaic system you need these complicated "epicycles" to describe the motionof the planets and describing the apparent motion of the starts is complicated too. The formulas are much simpler using the Copernican system, i.e., moving 0,0 from the Earth to the Sun. Great from an Occam's Razor's point of view. Very handy if you're planning inter-planetary travel. But if you're sailing a boat on an ocean on the surface of the Earth using an astrolabe, a Heliocentric model of the solar system is not much use.

This blog is not mainly a place for ruminations about the philosophy of science, but it is grating how often the statement "the earth revolves around the sun" is trotted out as an example of a "fact".
Agree that Post's articles are mostly foolish.
written by Kaleidic, April 20, 2013 12:04
I basically agree with you that the arguments of the "serious people" are often foolish and self-serving and that debt to GDP in itself is arbitrary and not necessarily a good measure of economic stress (although it could be, depending on circumstances), but that doesn't excuse your exchanging a strong argument, that the composition of the debt, and it's likely trend are more important than the exact ratio at a given instant (assuming that the debt service coverage ratio is within some acceptable bounds), for a weak argument, that this ratio is meaningless because national parks could be privatized or turned into shopping malls, or more likely into estates for crony capitalists, a one-time fix in any event. Furthermore, you make the assumption that the debt is actually being taken on for desirable purposes and that it can be reduced in the future, when too much of the increase in debt is due to wasteful spending on supporting the too big to fail banks, the military-industrial complex, the medical-industrial complex, the academic-industrial complex, etc. In medicine a high body mass index that is perfectly fine for an athlete indicates that a sedentary person is overweight.
written by fuller schmidt, April 20, 2013 1:34
There seems to be a new trend in website threads that I'm starting to think of as missing chromosome arguing.
Interest burden?
written by TerryH, April 20, 2013 4:36
"This is a reason that serious people tend to focus on the interest burden, which is near a post-World War II low."

I'm not sure how you define "interest burden", but the federal interest payments graph from FRED looks like this:


Can you explain?
Interest Burden is share of GDP
written by Dean, April 20, 2013 4:46
that's pretty standard. The portion of federal payments to foreigners doesn't really have anything to do with anything. If you're concerned about our indebtedness to foreigners then you want to look at total net income flows. The portion coming from the federal government has nothing to do with anything. Think it through people sell government bonds and buy stock, is the country better off?
written by Brett, April 20, 2013 6:01
That's a good link at the end of that post. What I found most interesting was the degree to which "Services" are a source of US added value, even in sectors of the economy not considered part of the "Service Sector" (such as car manufacturing, where they were 40% of all US value added).
written by Alex Blaze, April 21, 2013 3:05
I can't believe the Washington Post called itself "serious" in print. Not just atrios and Krugman, but digby, glenn greenwald, and enough other bloggers use "Serious" to mean exactly what the Post didn't want it to mean - idiots who attend cocktail parties instead of reading books and then have to pretend to be smart in front of cameras or on paper - that it's pretty much the first definition of the word that comes to mind when I see it in this context.

It's like putting on a big, red clown nose before going on Stephanopolos. Come to think of it, George Will already wears a bow tie....
written by Alex Blaze, April 21, 2013 3:14
Just for the record, what the debt is spent on means nothing when it comes to calculating the debt/GDP ratio. $2 million for an after school program or $2 million for a military aircraft is still $2 million.

Also, no matter who buys federal land, the federal government gets the money that they pay. The mafia or a charity paying $2 million is still $2 million, and if the only thing that matters is the debt/GDP ratio and nothing else, as the Post implies, then it's the same thing.

Maybe before responding you should just think about that for a while.
written by Ryan, April 22, 2013 8:30
"And yet, serious people assess the president’s budget, indeed any budget, by how it decreases this ratio in years to come."

The journalist failed to capitalize 'serious' and 'people'. This would have helped readers to immediately identify those whose assessments we would be expecting based on the ratio. We would then be able to safely follow or ignore, depending on dispositions.

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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.