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Article Artículo

Going Off the Deep End With David Walker

Yesterday the Associated Press fielded its entry in the classics in bad reporting on economic policy contest: a profile it did of David Walker, the former head of the Government Accountability Office and also former president of the Peter G. Peterson Foundation. The piece presented everything that Walker said at face value, making no effort to put his scare story in any context nor to verify his assertions.

The AP entry starts out strong with the third paragraph telling readers:

"Next month, he will present a major report for the nonprofit he founded, the Comeback America Initiative, whose purpose is to raise awareness about the federal government’s swelling debt. It’s a chasm that isn’t top of mind for most Americans, he knows. But Walker, 61, wants it to be."

Note the use of "swelling" instead of a more neutral term or maybe no adjective at all. Then we get the term "chasm" as opposed to a term like "issue."

Then we are told that Walker passes around fake trillion bills because, quoting Walker:

“Washington spends a trillion dollars like it’s nothing.”

Is that true? I recall big debates in the last few weeks over spending $40 billion on food stamps over the next decade. We've had big debates over the $250 million (1/4,000th of a trillion) [number corrected] spent each year on public broadcasting. In fact, John McCain made a big issue in his 2008 presidential campaign over spending $1 million (one millionth of a trillion) on a Woodstock museum. There seem to be lots of very big debates in Washington on spending sums that are way smaller than $1 trillion.

Dean Baker / August 22, 2013

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Human Rights Defenders Continue to Face Threats and Intimidation
Human rights defenders in Haiti are reporting new death threats, and seem to be openly persecuted by powerful individuals and groups, as Mark Snyder and Other Worlds describe today. In an article posted on Huffington Post, Snyder profiles the case of atto

CEPR / August 21, 2013

Article Artículo

When Loans Go Bad: Markets and Cartels

Phillip Swagel used an Economix post to discuss the ramifications of debtors not paying their debts. While his basic point is valid, that reducing payments to creditors will affect their willingness to lend in the future, some of the specifics are questionable.

His first example is the case of the auto bailouts, where the terms of the bailout put some commitments to the workers (most notably retiree health care benefits) ahead of bondholders, reversing the normal ordering of creditors in a bankruptcy. While Swagel refers to research that suggests that unionized firms paid a penalty in their borrowing in the period immediately following the bailout, the logic of the situation would not support this outcome.

As a result of the government's intervention, all creditors, including bondholders, almost certainly got more money than would have been the case if the government had let GM and Chrysler go into bankruptcy without assistance. What would matter to a creditor is their expected payback in the event of a bankruptcy, not whether another creditor may be placed ahead of them in line. If the bailout allowed a higher payback for creditors than would have otherwise been the case, then it should reduce interest rates for unionized firms that might be more likely to be bailed out, not increase them. This is the outcome that Swagel indicates was supported by other research.

Swagel also looks at the case of municipal bonds in the wake of the Detroit bankruptcy. He notes that creditors will likely have to take losses on general obligation bonds which are backed by tax revenues. He mentions that this appears to be leading to higher interest rates for other municipalities in Michigan. While this may be due to the fact that Detroit bondholders will be forced to take losses, it can also be attributed to the fact that creditors had not previously assessed risks accurately.

Dean Baker / August 21, 2013

Article Artículo

Globalization and Trade

Honduras

IMF

Latin America and the Caribbean

World

US Military Considers IMF-Mandated Policies to Be Dangerous for Honduras, Declassified Document Shows

A newly declassified intelligence estimate [large PDF] from the U.S. Southern Command (SOUTHCOM) reveals that the U.S. military considers International Monetary Fund (IMF) policy constraints on Honduras to be a factor that could lead to greater unrest. The memo is dated July 22, 2011 and was originally designated as “SECRET/ORCON/NOFORN” (meaning “Dissemination & Extraction of Information Controlled by Originator” and “Not Releasable to Foreign Nationals/Governments/Non-US Citizens”).

In assessing Honduras’ “social environment,” the memo states:

Economic conditions in Honduras will have a tremendous impact on the social environment over the mid to long term. Efforts to combat rampant poverty, inequality, and unemployment will continue to be hindered by budgetary pressures. Over the medium term, IMF-established targets aimed at boosting Honduran macroeconomic stability will continue to reign in public expenditures. Should key social programs remain under- or unfunded, preexisting socio-economic cleavages between the poor and elite business sectors may be further aggravated and lead to an escalation in protests.

The document comes back to this theme in its conclusion, with the last two sentences reading:

Honduras' progress towards compliance with IMF guidelines and recent full reintegration into the international community increase the likelihood of the country receiving expanded international aid. However, as Honduras continues to reign in its domestic fiscal policy to remain in compliance with IMF mandates, the nation will continually struggle to effectively respond to growing security and socio-economic concerns. [Emphasis added.]

CEPR / August 19, 2013

Article Artículo

'Structural Unemployment?' Why Not Throw Money at the Problem?

In a post for PBS NewsHour's The Business Desk, Dean Baker takes on Paul Solman on what the government can do to address unemployment. Solman responded to Dean here, and Dean responded this morning on Beat the Press.

Paul Solman takes me and my grumpy friend Paul Krugman to task for insisting that there is a growing consensus within the economics profession that we are not suffering from structural unemployment. Krugman and I used our blogs to complain about Aug. 2's segment in which Brooks suggested structural unemployment was the economy's main problem and that there was little that could be done about it.

The United States currently has about 9 million fewer people working than if it had continued on its trend of growth from 2002 to 2007.

The question is whether the unemployment problem is a lack of demand due to a loss of $8 trillion in housing bubble wealth, or whether there are structural problems that would prevent most of these 9 million people from being re-employed even if the demand were there. Krugman and I support the former idea; those who see unemployment as structural are in the latter camp. Here's another way to think about the problem. Imagine someone found a $1 trillion bill in the street and decided that, as a public service, she would spend the money over the next 12 months to boost the economy. For simplicity, let's assume that she decides to divide her $1 trillion so that it is spent in exactly the same way that the economy's current $16 trillion in annual spending is spent.

In my view, this $1 trillion of new spending would cause output to increase by roughly 6 percent. (I'm ignoring multiplier effects to keep things simple.) Employment would also rise by roughly the same amount, filling the bulk of the 9-million-jobs hole. In other words, this would be great news for the country.

Dean Baker / August 19, 2013

Article Artículo

Steven Pearlstein Has Been to Ireland, Therefore He Is An Expert on Its Economy

It's always fun to have conversations with people who will proclaim themselves great experts on a country about which they may know very little because they have been there. I have encountered people who tell me poor countries are rich because they saw opulent homes and expensive restaurants on a visit, or that there is no unemployment in the middle of a downturn because every business owner they talked to couldn't find enough workers.

Steven Pearlstein gives us a wonderful example of such arguments in his piece on Ireland's economy in the Post. Pearlstein tells readers:

"In the world beyond its emerald shores, meanwhile, another simple narrative about Ireland’s economy has found a receptive audience, this one about the Draconian spending cuts and tax increases that have been forced on Ireland by its creditors in order to reduce an annual government budget deficit that had reached 32 percent of the country’s annual economic output. The Irish themselves have long since accepted the urgent necessity of belt-tightening. But to Keynesian critics who believe in the healing power of fiscal stimulus, the country’s recent slide back into recession is offered as proof of the futility of austerity.

"Neither of these fables — the one about the bank bailout, the other about austerity — is adequate to explain the rise and fall of the Celtic Tiger. You don’t have to spend much time here before discovering that the real story turns out to be both more complicated and more interesting.

"In fact, you might say that what’s holding back Ireland’s economy is the same thing that is now holding back the once-fast growing economies of Brazil, Russia, India and China. It is the same thing that afflicts Greece, Italy, France and the other struggling economies of Europe. And, to a somewhat lesser degree, it is the same problem bedeviling the U.S. economy.

"In each, it is the inability to make fundamental reforms to political and economic institutions that now prevents them from rebalancing their economy, from taking next leap in terms of their productivity and efficiency, from creating a new, more sustainable model for economic growth."

Wow, Ireland and all these other countries need to make adjustments to adapt to a changing world! Who could have guessed?

Dean Baker / August 18, 2013