Beat the Press

Morgan Stanley Profits: The Story on Risk Goes Both Ways

Thu, 02 Jul 2009 01:23:13 -0500

The NYT noted that one factor depressing Morgan Stanley's profit last quarter was its improved credit standing, which increased the market value of its debt. The NYT implied that this was a peculiar accounting rule.

The rule may be peculiar, but it goes both wars. In prior quarters, Morgan Stanley increased its profits (or lowered its losses) by writing down the market vale of its debt as its credit quality deteriorated.

--Dean Baker

Thomas Friedman is Right!

Wed, 01 Jul 2009 08:03:08 -0500

I just wanted to see if my computer could type those words. His assessment of the Waxman-Markey bill looks right on the money to me. It's worth reading.

--Dean Baker

Political Philosophers Take Over Congress

Tue, 30 Jun 2009 00:08:58 -0500

That would seem to be the case based on a front page Washington Post article with a subhead: "Diverse Ideology Cuts Democratic Edge." The piece is referring to a number of Democrats in the House and Senate who tend to side with the Republicans on many issues.

It could be the case that these Democrats side with Republicans on issues like health care because they have carefully contemplated issues and concluded that the Republicans were right. Of course it is also possible that they side with Republicans on issues like health care because they get lots of campaign contributions from special interest groups like the insurance companies, the pharmaceutical industry, and the A.M.A.

I don't know the answer to this question, but neither does the Post. It might be best if the Post just gave its readers the information and let them decide for themselves rather than asserting that politicians are motivated by their political ideology.

It is worth noting that the views of these Democrats are close to those of the Post (a.k.a. "Fox on 15th). It is of course more desirable for a politician to have their actions attributed to political principle rather than campaign contributions.

--Dean Baker

Now the Media Are Calling Other Governments "Socialists"

Mon, 29 Jun 2009 10:32:01 -0500

The Republicans are fond of calling any Obama administration policy that they don't like "socialist." Apparently focus groups show that it can be effective rhetoric with at least some segment of public, but it's not a terribly serious way to discuss policy.

Therefore it was surprising to see the NYT refer to some of the policies of the Argentine government as "socialist." Unless the government itself describes the policies this way, the NYT would be providing more information to readers if simply described the content of the policies without an adjective that will likely be viewed by many as pejorative.

--Dean Baker

What Does "Free Trade" Have to Do With Taxing Greenhouse Gas Emissions

Mon, 29 Jun 2009 10:09:46 -0500

That is the question that the NYT should have been asking in an article that reported President Obama's opposition to taxing imported items from countries that have not taken steps to curb greenhouse gas emissions. The point of his cap and trade program is to make items that require large amounts of greenhouse gas (GHG) emissions more expensive, thereby discouraging their consumption.

If goods can just be imported from countries that have no tax on GHG, then the point of cap and trade is undermined, as goods that require large amounts of fossil fuels will just be produced abroad. It is understandable that importers and other special interest would be opposed to measures that prohibit this sort of evasion, but that has absolutely nothing to do with "free trade."

The NYT completely misrepresents the issue by implying that this is somehow a debate over principles of free trade. It is a debate of whether special interests will be allowed to import goods to undermine the limits set by a cap and trade bill for GHG emissions.

--Dean Baker

Washington Post (a.k.a. Fox on 15th) Starts Evaluating Political Arguments for Substance

Sun, 28 Jun 2009 13:02:20 -0500

It would be great if, as a general practice, newspapers did take the time to assess the accuracy and plausibility of the arguments put forward by political figures. If they considered this part of their job, they would have pointed out, for example, that drilling for offshore oil would have never have a substantial effect on the price of oil ever, and none at all for the next decade. If they evaluated the substance of arguments that could have told readers that the projected cost of the Waxman-Markey bill to limit global warming is trivial compared to the cost of the Iraq War.

However, newspapers rarely view it as their job to evaluate the validity of the arguments by political figures. That is why it was striking to see the Post tell readers in a news story that Adam Green, the interim chief executive of Change Congress (a grassroots Democratic organization) "in an interview, was hard-pressed to articulate a substantive argument for the public plan [a public health insurance plan]."

Of course the Post (a.k.a. Fox on 15th) has not been supportive of President Obama's health care plan.

--Dean Baker

Millions, Billions, Whatever: It's Hard to Get Good Help

Sat, 27 Jun 2009 14:33:51 -0500

Bernie Madoff did not forfeit $170 billion in assets, in spite of what the USA Today headline and the first sentence of the AP article say. Obviously it was a typo (they meant millions), but it is really asking too much of the copy editors of the business section of the country's most widely circulated paper to know the difference between millions and billions.

Bill Gates and Warren Buffet never had $170 billion. Madoff might be rich, but he's not that rich.

--Dean Baker

The Mysteries of the Housing Wealth Effect

Sat, 27 Jun 2009 06:59:16 -0500

The saving rate has risen, surprise, surprise, surprise. The housing wealth effect is one of the most well-known phenomena in economics. The basic point is that people will spend more as a result of their housing wealth. Estimates of the size of the effect vary, but most are in the range of 5-7 percent, meaning that people will spend 5-7 cents each year out of every dollar of housing wealth..

Because of this wealth effect, it is not surprising that the saving rate has now risen from below zero to above 6.0 percent. (The actual increase is even greater due to some measurement issues resulting from the statistical discrepancy in the National Income and Products Accounts.) The loss of more than $6 trillion in housing wealth implies a cutback in annual consumption on the order of $300 billion to $420 billion (3.0-4.2 percentage points of disposable income). With stock wealth also falling about $8 trillion (the stock wealth effect is estimated at 3-4 cents on the dollar), it would have been shocking if saving had not increased.

Nonetheless, the media continue to report it with surprise and suggest that a turnaround is imminent, even though housing wealth is still falling at the rate of $400 billion a month. For example, the Post attributes a statement to economist Mark Zandi about more affluent homeowners: "He says they have gotten 'their savings rate where they want it' and could resume spending soon."

Of course, if they keep their saving rate where they want it, they won't start spending, they will continue saving at the same rate. (Most likely the Post misrepresented Zandi's comment.)

--Dean Baker

The Post Still Hasn't Heard of the Housing Bubble

Sat, 27 Jun 2009 06:47:04 -0500

News travels slowly to our nation's capital. In an article on the slow rate of sales of high end homes the Post never once mentions the extraordinary run-up in prices over the last decade. It's only sources are connected with the real estate industry, including Lawrence Yun, the chief economist of the National Association of Realtors.

--Dean Baker

Bernanke and BoA: Read the Accusation

Fri, 26 Jun 2009 08:15:28 -0500

The Republicans seem intent on arguing that Federal Reserve Board Chairman Ben Bernanke threatened to remove Bank of America CEO Ken Lewis, if BoA backed out of its agreement to buy Merrill Lynch. Mr. Bernanke denied the accusation.

It might have helped matters if someone had bothered to read the evidence. The Post reports part of e-mail from Jeffrey Lacker, president of the Federal Reserve Bank of Richmond: "Just had a long talk with Ben. .... Also intends to make it even more clear that if they play that card [backing out of the purchase agreement on Merrill Lynch] and they need assistance, management is gone."

Note the "and they need assistance" part of the e-mail. Is this a threat to remove Ken Lewis? It looks like a statement from Bernanke that if BoA does not cooperate in carrying through on its agreement, then Bernanke will not help him in the future if he needs it.

That seems a bit far from a threat to remove Lewis. It is simply a statement that if Lewis doesn't cooperate with the Fed, then Bernanke will not come to his assistance if he needs it.

Given the large list of questionable actions in the various bailouts, this one doesn't seem to be worth a lot of time.

--Dean Baker

CBO Reports That If Health Care Wrecks the Economy We Will Have a Very Serious Deficit Problem

Fri, 26 Jun 2009 06:56:08 -0500

The Post (a.k.a. Fox on 15th Street) only told readers the second part of this story. CBO projected that the deficit would exceed 42 percent of GDP in 2080 under its baseline assumptions. This is like telling people what the deficit would be after a nuclear war without calling attention to the fact that the projection assumes a nuclear war. If the health care costs underlying these projections prove accurate, the economy will be so badly wrecked, no one will care about the size of the deficit.

-- Dean Baker

Can NPR Reporters Say "Trillion Dollars" Like Normal People?

Fri, 26 Jun 2009 06:51:32 -0500

They seem to always have a need to emphasize the "tr" in some peculiar way. Perhaps they have difficulty with big numbers. The latest problem stems from a discussion of handling the cost of President Obama's health care reform proposal over the next decade.

Since NPR has a problem pronouncing the word "trillion," maybe it should just say "half of one percent of GDP." This would likely be more meaningful to listeners and would perhaps be easier for NPR reporters to say.

--Dean Baker

Actually, People Can Start Work Later and Retire Younger

Fri, 26 Jun 2009 06:34:45 -0500

The New York Times reported on plans in France to raise the retirement age from its current 60 years. The article included a quote from France's recovery director, Patrick Devedjian: "We start working later and later, and we stop, or at least we used to stop until now, earlier and earlier, and we live longer and longer,” Mr. Devedjian said. “Such an economic model is impossible.”

In fact, this model is not impossible. If workers opt to take the benefits of higher productive growth in the form of leisure time, a continual increase in the length of retirement and shortening of normal work lives is entirely workable. Since there is a strong correlation between income and greenhouse gas emissions, this approach is extremely desirable from an environmental perspective.

--Dean Baker

Deficits, Interest Rates and the Economy

Thu, 25 Jun 2009 23:33:49 -0500

The NYT has a lengthy front page article telling readers that President Obama wants to structure his health care reform package in a way that does not raise the deficit. It cites Robert Greenstein, the head of the Center for Budget and Policy Priorities (who is not an economist), saying that: "There’s a concern that if Congress were to pass a big health care bill that was heavily deficit-financed, financial markets could react negatively, with higher interest rates that could deepen the recession.”

Actually, it is almost inconceivable that any possible impact of a boost to the deficit from health care reform would have such a large effect on interest rates as to hurt the economy enough to offset the help that any increase in the deficit would provide to the economy. It is implausible that President Obama's advisors actually believe this. It is plausible that they believe that they could suffer political harm from raising the deficit, since many Republicans and media outlets like the Washington Post and Fox news will attack him for it.

The NYT should have found an economist to explain the relationship between deficit spending and economic growth in the context of a severe downturn like the one we are currently experiencing.

[For the record, it is perhaps worth explaining how higher interest rates, caused by larger deficits, could affect demand. There are three main channels.

Higher interest rates have some impact on investment, but most research shows that this effect is very limited. Growth in demand is a far more important determinant of investment than interest rates.

Higher interest rates can affect demand through consumption. If interest rates fall, then it is easier for people to borrow. In the current context, it is unlikely that lower interest rates will affect consumer spending to any great extent since most people have very limited ability to borrow as a result of the collapse of home prices and the loss of home equity. Also, almost everyone who has the ability to refinance has already done so.

Higher interest rates can have an effect on housing demand, although the marginal economic impact of even fairly large changes in interest rates (1.0-2.0 percentage points) is likely to be limited. The demand generated by sales of existing homes is not very large so that even a large increase/decrease in sales will not have very much impact on the economy. With the enormous inventory of unsold homes, it is almost inconceivable that building will pick up appreciably in the next couple of years.

Higher interest rates can raise the value of the dollar as foreign investors decide to hold more dollar-denominated assets. This would increase the trade deficit. However, the value of the dollar seems to be controlled far more by political decisions than market forces at the moment, so it is unlikely that it would rise much if the deficit grew.

In short, it is difficult to identify a channel whereby a higher long-term deficit can have a substantial negative impact on demand in the near future.]

--Dean Baker

Can the Post Find Any Pessimistic (i.e. realistic) Economists to Comment on the Fed?

Thu, 25 Jun 2009 15:43:54 -0500

The economists commenting in the Post on the Fed's latest decisions on interest rates seem convinced that everything is just fine. One of them, Kurt Karl, chief economist for Swiss Re, is quoted as saying: "If you were doing a progress report and had milestones every six weeks, they are right on target. ... There's no need to change their game."

Actually, the economy is not following the Fed's target. They had projected that unemployment rate in the fourth quarter of the year would average 8.9 percent. It's already at 9.4 percent and clearly will be much higher by the 4th quarter. That is about as far from the target as the Fed could plausible be.

It is understandable that the Post would want to include some wildly optimistic comments, since these represent the mainstream of the economics profession. However, it would also be useful to include some from economists who are not known primarily for how wrong they have been about the economy.

--Dean Baker