Beat the Press

Do Republicans Face Voters in November?

The Washington Post doesn't seem to think they will. In an article on the creation of a special deficit commission that will issue a report that will be voted on after the November election, the Post tells readers that: "the commission would deliver its recommendations after this fall's congressional elections, postponing potentially painful decisions about the nation's fiscal future until after Democrats face the voters." If the purpose of this arrangement is to allow members of Congress to support positions like cutting Social Security and Medicare, which are highly unpopular, then the point is that the commission's proposals will be voted on after members of both parties have faced voters. It is hard to understand why the Post just noted that the commission proposal will be voted on by Congress after Democrats face voters. This front page article is littered with adjectives more appropriate for an editorial. For example, the first sentence begins: "faced with growing alarm over the...

The New York Times Funny Section on Too Big to Fail Banks

Andrew Ross Sorkin did a good job of making things up to argue that we shouldn't have a policy against "too big to fail banks." Sorkin argued the need for big banks by telling readers that: "If Pfizer, for example, needs to raise $20 billion for a takeover bid, or Verizon needs to raise billions to lay fiber optic cable for its FiOS service, they cannot efficiently go to 20 different community banks looking for the money." Okay, this statement has about as much to do with the argument on breaking up too big to fail banks as the score in the NFL playoff games. At this moment, no significant actor in the debate on breaking up banks is advocating leaving the country with nothing but community banks. Simon Johnson has proposed a cap on liabilities equal to 4 percent of GDP ($560 billion) for commercial banks and 2 percent of GDP ($280 billion) for investment banks. I would probably cut these numbers at least in half, but let's imagine we put the cap way down at $100 billion. Is there...

Before Betting on a Jobs Rebound, Know Your Bet

Floyd Norris had a column in the NYT yesterday noting that recessions with sharp job declines tend to be followed by sharp rebounds. This has been a past pattern, but it is likely not to hold in this case because the nature of the downturn is different. The past downturns would brought about by the Fed raising interest rates to slow the economy and reduce inflation. This pattern made it easy to set the stage for the recovery. The Fed lowered rates setting off a surge of construction of purchases of cars and other durable goods. Construction and manufacturing employment surged in the upturn, accounting for 56.9 percent of the job growth in the private sector in the first year after the 1958 recession and 52.0 percent of the growth following the 1961 recession. The impact of these sectors was somewhat less following the 1981-82 recession, but they still accounted for 33.9 percent of the private sector job growth in the first year after the recession. The economy has lost more than 8...

Kickbacks and Corruption: The Predicted Result of Patent Protection

The NYT reports that Johnson & Johnson paid kickbacks to a pharmacy company to get it to distribute its drugs for unauthorized uses to nursing home residents. This article would have benefited from some economic analysis. This is the textbook response that would be predicted from government interference in a market through the granting of patent monopolies. The monopoly allows the patent holder to charge prices that are far above he cost of production. This gives them an enormous incentive to make side payments or bribes to increase their sales. This is a similar situation to one in which the market imposes a price control on a product that is below the free market price. In that situation, the seller has an incentive to try to sell the item on the black market at a price that is above the regulated price. The same situation exists with patent protection, except the gap in prices is almost certainly much larger. Patent protected drugs can often sell for several hundred dollars per...

Industrial Production: Don't Get Fooled by the Weather

The Federal Reserve Board reported that industrial production increased by 0.6 percent in December. This would ordinarily be good news, except that a closer examination showed that manufacturing output actually shrank slightly for the month.The December increase was driven almost entirely by a 5.9 percent jump in output at utilities. This tells us about the weather across the country in December, but it doesn't tell us much about the state of the economy. --Dean Baker

Classics in Bad Analysis: Thank Geithner That We Avoided a Great Depression

Michael Grunwald at Time Magazine does some first class apologetics for Treasury Secretary Timothy Geithner in his latest column . He repeats the line that we should be thankful to Geithner and company that we didn't have another Great Depression. While we all should be happy that we didn't get another Great Depression, the only reason why anyone is talking about a Great Depression is because of the incredible economic mismanagement of Greenspan/Bernanke/Geithner. Remarkably, they either could not see or did not care about the growth of an $8 trillion housing bubble. It was totally predictable that the collapse of this bubble would throw the economy into a severe downturn. It is also important to remember that no other country has fallen into a Great Depression (apparently Mr. Grunwald's missed this fact) therefore there was nothing unique about Mr. Geithner's skills in this regard. It also is worth noting that almost every major financial institution would have been bankrupt in the...

China Is Already the World's Second Largest Economy

Relying on exchange rate measures of GDP, the Washington Post tells readers that China will soon pass Japan as the world's second largest economy. In fact, using the far more meaningful purchasing power parity measure of output, China long passed Japan. It's economy is now close to twice the size of Japan's. China now buys more cars than the United States each year, it has more computers with Internet access than the United States and twice as many cell phone users. Its manufacturing output exceeds that of the United States in many categories and it now graduates far more students each year with advanced degrees in science and engineering. It is absurd to imagine China's economy as being smaller than Japan's. It is by far the second largest economy in the world and is already surpassing the United States in many categories. --Dean Baker

NPR and the Economic Crisis: It's All So Complicated and Ever So Funny

Ten percent unemployment and millions of people losing their home, that's waaaaay more funny than anything on Jay Leno or Conan O'Brien. That is how they are playing it on Morning Edition . NPR told listeners that there are so many different theories. Yeah, I guess there are many different explanations for how human life took its current form, but evolution is the only one that serious people believe. The causes of the financial crisis are not complicated, even if NPR wants its listeners to believe they are. The economy was driven by an $8 trillion housing bubble. This bubble was easy for any competent analyst of the economy to see since there was an unprecedented run-up in prices with no plausible explanation in the fundamentals of the housing market. It was totally predictable that the collapse of this bubble would lead to a severe recession of the sort that we are now seeing. The bubble generated more than $1 trillion in annual demand through its effect on residential construction...

The Health Insurance Tax Is a Marginal Tax

It is important to point out that the proposed tax on high cost health insurance policies only applies to the amount over the cutoff. This means that if a plan costs $24,500, or $500 more than the new cutoff of $24,000 for a family plan, then the 40 percent tax would be applied to the $500, not the full $24,500. This means that a person would pay $200 in tax on this policy. This fact would probably not be clear to most readers of this Post article . --Dean Baker

How Do You Get More Vulnerable to Economic Collapse Than the Great Depression?

In September of 2008 Federal Reserve Board Chairman Ben Bernanke ran to Congress telling them that if they did not immediately approve $700 billion for the TARP that the economy would completely collapse. According to the NYT , he told Congress yesterday that: "stripping the Fed of its powers would leave the financial system more vulnerable to collapse." The NYT should have pointed out how bizarre Mr. Bernanke's assertion is in the wake of his previous claims that, under his guidance as Fed chairman, the economy had been brought to the brink of total collapse. In effect, Bernanke is claiming that the economy would have performed even worse than having been brought to the brink of complete collapse with an alternative regulatory structure. It is worth noting that, while many acknowledge that the Fed's failures brought the economy to the brink of collapse, they credit Mr. Bernanke for preventing another Great Depression. The Fed has been successful in this respect, but every other...

Context on the Bank Tax

President Obama's bank tax may produce some good theater, as the industry's lobbyists warn of an impending Armageddon, but it will do little to affect the fundamentals of the financial sector. The administration was projecting that the tax would raise roughly $9 billion annually over the next decade. By comparison, the annual profits of the banks in question run close to $90 billion a year. The bonuses at these institutions are likely to be in the same neighborhood. This means that the tax will be equal to roughly 5 percent of the combined profits and bonuses at the large banks. From the standpoint of those wishing to make the industry pay for some of the damage that it has done, this is better than nothing, but it certainly is not going to lead to any fundamental changes in the way business is conducted on Wall Street. This context had been almost completely absent from the reporting on the proposed tax. It would also be helpful if reporters tried to evaluate the assertion of the...

How Will the Country Survive a Hike in Bank Fees Equal to 0.06 Percent of GDP?

That's the nightmare scenario raised by the big banks in response to President Obama's proposal to impose a tax on the largest banks equal to 9.0 billion a year. The banks argued that this would be really bad news for the economy since they would pass on the fee to their customers. It would have been helpful to point out to readers the modest impact that this possibility would actually have on the economy. It is also worth noting the implication of this claim for the nature of competition in the banking industry. The proposed fee would only apply to banks with assets of more than $50 billion, a relatively small number of banks. If these banks really can pass on higher costs to consumers, then it implies an extraordinary level of monopoly power in the industry, with the large number of small and mid-size banks not providing effective competition to the largest banks. btw, in reporting on the cost to the public of the TARP it is probably worth adding in the losses of Fannie Mae and...

The Really Remarkable Story: Goldman Could Buy Insurance on the CDOs It Sold

Apparently both the Angelides Commission and the NYT missed the really remarkable part of the story of Goldman Sachs buying credit default swaps (CDS) against the collaterized debt obligations (CDO) that it was issuing. The incredible part is not that Goldman bet against its own issues, but rather that they found a sucker (AIG, and eventually U.S. taxpayers) who was willing to take the bet. The basic story is that a CDO is a pile of assets of different types. It can include parts of mortgage backed securities, parts of other types of securities and just about anything else that the issuer chooses. Goldman knows exactly what it threw into the CDO, the insurer (AIG in this case) only knows the information that is publicly available and what Goldman might chose to tell them. When Goldman offers to buy a CDS from AIG on its CDO, it is either throwing its money away, in the event the CDO is good or it is expecting to make money because it knows the CDO is bad. If you were AIG, what would...

Warning! Commercial Announcement, New Book

Yes, I have another book. In False Profits: Recovering from the Bubble Economy , I try to correct all the ignorant experts (redundant?) who could not see the housing bubble before it burst and still cannot understand it even after the fact. It was amazing to me that so many economists, all of whom presumably learned arithmetic somewhere in their training, could not recognize an $8 trillion housing bubble as it was growing. It is even more remarkable, that they still can't seem to understand what happened after it burst. We have people running around all over DC trying to figure out what was wrong with the burglar alarm after their house burnt down. We will not set the economy right until we understand why it fell off the track. At this point, that process is not going very well. --Dean Baker

The Fed Makes Money the Old-Fashioned Way: By Printing It

The Washington Post and USA Today both seem very excited by record profits at the Fed. If you print a lot of money, you make a lot of money. I'm not sure if that is how they want the government to deal with its debt. --Dean Baker

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