No, I'm not talking about the people who show up at the townhalls yelling about "death panels." I'm talking about folks who are a step down on the evolutionary ladder the people who run the Washington Post. They were out in full force today spreading misinformation in every direction. In both the lead editorial and a David Broder column we got stern lectures about how the government will soon have to get its fiscal house in order now that the worst of the recession is over. Remarkably, neither piece mentioned the fact that nearly all economic forecasts project the unemployment rate to be near 10 percent through 2010 and to only fall back to normal levels in 2014. In other words, we are talking about more than 7 million people being needlessly unemployed next year, many of whom will have exhausted their benefits. There will be another 5-6 million people underemployed -- people who want full-time work, but can only get part-time employment. And both the Post's editors and David Broder think that the main goal of policy should be to reduce the budget deficit, an act that will lower demand in the economy, slow growth, and make the unemployment rate even higher. The lack of concern for the unemployment of others is especially pernicious because the Post and other media outlets did so much to contribute to the disaster that got us here. It was easy for any competent economic analyst to recognize the housing bubble and its dangers as early as 2002. But the Post, like most of the media, almost completely ignored an unprecedented run-up in U.S. house prices. Instead, it just repeated the "everything is fine" line from Alan Greenspan and the rest of its clique of supposedly knowledgeable policymakers. Its main and often only source on the housing market prices was David Lereah, the chief economist with the National Association of Realtors and the author of the 2006 bestseller, Why the Real Estate Boom Will Not Bust and How You Can Profit From It. To push their line, the Post and Broder use inventions that are almost as fantastic as Sarah Palin's "death panels." At one point, when David Broder referred to the stimulus spending he said that "all of it [is] borrowed from overseas creditors." The editorial warned us that foreigners might stop warned us that foreigners might stop wanting to hold dollars. It's not clear what Broder thinks his source is. Our foreign borrowing in 2009 is not $1.8 trillion, much of lending did come from domestic sources, including the Fed. But the more fundamental point is that the key determinant of foreign borrowing is the trade deficit, not the budget deficit. Hence, we were borrowing an amount from foreigners that was close to 4.0 percent of GDP in 2000 ($600 billion in today's economy) when the government had a huge budget surplus. Anyone concerned about borrowing from foreigners should be talking about the trade deficit, not the budget deficit, which gets us back to the ominous warning from the editorial that: "it's alarmist to underestimate foreigners' willingness to keep holding dollars; it's foolish to count on it forever." Okay, class what happens when China, Japan, and other foreign central banks stop buying U.S. dollars? That's right, those of you who have heard about supply and demand (advanced economic concepts) know that the dollar will fall in value. This is exactly what both the Bush and Obama administration supposedly want, at least in reference to China's currency. We have made official complaints that China has been "manipulating" its currency, which means raising the value of the dollar against its currency by buying up huge amounts of dollars. So, the Post is warning us that China may do exactly what we have been asking them to do, and stop buying up dollars and letting the dollar fall relative to the yuan. This would have the effect of making Chinese and other country's imports more expensive for consumers in the United States. Therefore we would buy more domestically produced goods. There would be more jobs in U.S. manufacturing. The lower valued dollar would also make U.S. exports cheaper for people living in other countries. Therefore we would sell more exports. This would also increase the number of manufacturing jobs in the U.S.. Oh yes, there would be somewhat more inflation. We can get a rough estimate of the amount of additional inflation through applying another concept unknown at the Post: arithmetic. Imports account for about 16 percent of GDP. Suppose that the dollar falls by an average of 25 percent against the currencies of our trading partners. Presumably it will fall by much more against China's currency and considerably less against the euro and the currencies of some other major trading partners. If the decline in currency values is translated one to one into higher prices (almost certainly a gross over-estimate of the impact), this would result in an increase in the inflation rate of 4.0 percentage points. If the decline in the dollar and rise in import prices took place over 3 years, then it would imply a boost to inflation of 1.3 percentage points a year. This is a serious impact but hardly unmanageable. More importantly, it is also unavoidable for precisely the reason mentioned in the Post's editorial: we cannot count on foreigners to buy up dollars forever. In a policy move strongly endorsed by the Post's irresponsible and short-sighted editorial board, the Clinton administration actively promoted a high dollar. This led to the large and unsustainable trade deficit the country has experienced over the last decade. The only way to get the deficit down is to bring the dollar down. The high dollar was a policy that brought some short-term benefits in the form of cheap imports and lower inflation, but comes with an inevitable long-term price. Maybe one day the Post's editors will understand this fact.
--Dean Baker
