Folks in Washington like to think that their silly dramas have much more impact on the world than they in fact do. The battle over extending the debt ceiling last year is a case in point, with its sequel, the 2013 Fiscal Cliff, providing another example.

"Early in the year, the recovery seemed to be proceeding smoothly. In February, the economy added 220,000 jobs. In March, it added 246,000 jobs. And in April, 251,000 jobs. But as summer approached, and as markets shuddered over the Republican threat to breach the debt ceiling, the economy sputtered. Between May and August, the nation never added more than 100,000 jobs a month. And then, in September, the month after the debt ceiling was resolved, the economy sped back

It's a tough job, but someone's got to do it. Today, Thomas Friedman tells us about the squandered opportunities around the world.

Someone else can straighten him out on China and the Arab world (the U.S. government's fondness for hereditary monarchies and autocratic regimes clearly is part of this story), but I'll pick up Europe and the United States. In the case of the former, Friedman joins German Chancellor Angela Merkel in lecturing the peripheral countries on their failure to take advantage of low interest rates in the last decade to modernize their economies.

While there is considerable truth to the complaint about the failure to modernize their economies, there is an important piece missing in the chain of causation here. The housing bubbles in Spain and Ireland and the excessive spending in Greece were financed by banks in the core countries, most notably Germany.

While these banks were

First, he notes that this bet did not threaten either the banking system or JPMorgan. He points out that JPMorgan is a huge and highly profitable bank. Its books look to be in reasonably good shape. A $2 billion loss will be felt, but this is less than the normal profit in a quarter. It does not come close to threatening the bank's survival and certainly poses no risk to the financial system.

This is all true, but it misses the point that even in the post Dodd-Frank era, a large financial institution is still effectively able to take big risks with the taxpayers' money. If this bet, or a bigger one, had gone bad

The NYT had an article that reports on the high level of corporate debt and indebtedness in general in Spain. The article gives a measure of the total debt to GDP in Spain and then compares it to the ratios in other countries.

This is a confused way to assess the issue. Debt by itself will reveal nothing about the state of an economy. Debt is also an asset.

Suppose every household in the United States lent $300,000 to the household on its left. (We are going to make the United States a circle for purposes of this analysis.) With roughly 130 million households, the United States now has $39 trillion (@ 2.6 times GDP) more debt than it did previously.

However, as a country it is no poorer than it had been previously. In fact, every household is just as well off as it had been previously. It owes

Robert Samuelson had a serious discussion of Paul Krugman's idea (and in his professor days, Ben Bernanke's) that the Fed could boost demand by deliberately targeting a higher rate of inflation. The idea is that this would lead to a lower real interest rate.

If businesses expected inflation to be 4.0 percent over the next five years, rather than 2.0 percent, it would give them more incentive to invest. They would be able to sell everything for 20 percent more money in five years. Higher inflation would also erode the debt burden of homeowners and others with large debts. This could free up additional money for consumption.

While Samuelson acknowledges the potential benefits from higher inflation in boosting growth he still opposes the policy. He cites Bernanke's own objection as Fed chair, that it could undermine the inflation-fighting credibility of the Fed in the future. He also adds

Eduardo Porter told readers in his Economic Scene column that because China's trade surplus overall has fallen, Treasury Secretary Timothy Geithner: "will have a harder time making the case that America’s trade deficit is somehow China’s fault."

Actually, he will have no problem at all making the case that the U.S. trade deficit is the result of an over-valued dollar, which China helps to sustain by buying hundreds of billions of dollars of government bonds.

In a system of floating exchange rates, like the one we are supposed to have, trade imbalances are corrected through a decline in the value of the currencies of deficit nations, like the United States. The mechanism is that more dollars are being supplied to buy imports than are needed to purchase imports from the United States. This leads to an excess supply of dollars, which then causes the dollar to fall in value

The Washington Post has a practice of running a story every month or so about Japan facing a demographic nightmare because its population is living longer. The idea is that this will impoverish the nation's youth, imposing a crushing burden of caring for the elderly. Of course, those who know arithmetic know better.

This month's feature began by telling readers:

The ominous demographics of this aging nation have long been seen by Japanese as a distant concern, not a present-day one. But that mind-set is being called into question by a prime minister who says that a crisis requiring immediate sacrifices has already begun.

In recent months, Prime Minister Yoshihiko Noda has staked his job and bet his support on a tax increase designed to fund Japan’s soaring social security costs.

And the potential tax hike is only a sneak preview of the burdens to come as

Since folks have asked my thoughts (you had to ask?) on the Krugman-Bernanke debate, I will throw in my two cents. The question at hand is whether the Fed can plausibly generate more inflation, and thereby lower real interest rates and reduce the unemployment rate by announcing a commitment to higher inflation rate over the near future. This could mean, for example, committing itself to 4 percent inflation over the next 5 years.

If this policy was successful, it would lead to lower real interest rates, which would in turn lead to more consumption and investment. Ideally we would also see a decline in the real value of the dollar, leading to more net exports, the essential long-term path to full employment.

My view is that this path would likely be successful, if the Fed were really committed to it. That means continually buying up vast amounts of assets

A NYT article that reported on the declining importance of manufacturing to Japan's economy at one point referred to:

the crushing deflation that has burdened Japan's domestic economy for nearly two decades.

Actually, Japan has experienced modest inflation rather than deflation for most of the last two decades. Even when prices did fall, the rate of decline has been slow, exceeding 1.0 percent only in 2009, in the wake of the world financial crisis.

Japan, like other countries, suffers from having an inflation rate that is too low. This is a problem because nominal interest rates cannot fall below zero. It would be desirable to have a large negative real interest rate at present (the real interest rate is the interest rate minus the inflation rate), but this is not possible when inflation is a low positive number or a negative number.

The fact that the inflation

James Kwak responded in Baseline Scenario to some of the points that I raised in the review of the new book he co-authored with Simon Johnson, White House Burning. I want to focus on one issue in particular because it is really central to how we understand the economy.

I argued in my review that the fundamental imbalance in the U.S. economy is the trade deficit. This deficit is in turn caused by the over-valued dollar. The latter is a direct result of the decision of developing countries to accumulate massive amounts of foreign exchange reserves (i.e. dollars) in the wake of the East Asian financial crisis.

Developing countries saw the harsh treatment of the East Asian countries following the crisis and decided that they did not want to be in the same situation. Their protection against this event was the stockpiling of huge amounts of reserves.

The main thing that careful observers know from watching housing data over the years is that the monthly data should be largely ignored when assessing the housing market. The point here is that random factors have a large impact on monthly sales and price numbers so that the noise often overwhelms the actual information about the housing market in a single month's release.

To see the point, let's start with existing home sales. The Realtors reported a small drop in February from an upwardly revised January number. This touched off a round of news stories about the weak state of the housing market. (The February sales number was higher than the unrevised number, meaning that it was higher than the level of sales that we had thought actually took place in January prior to the release.)

Source: National Association of Realtors.

Note that months where we see big changes

A front page Washington Post article touted the 1.1 percent jump in retail sales reported for February. The piece said that the jump came in spite of the increase in the price of gas. This is only partly true, since more than a third of the increase in spending was due to increased spending on gas.

In the short term, higher gas prices are likely to be associated with increased spending, since people find it difficult to reduce their gas purchases. Over a longer period of time, they are likely to change their driving habits to save money.

More importantly, the February retail sales data follows three months in which the Commerce Department consumption expenditures data showed no real gain in spending. While the February retail sales detail indicate that the January data on consumption expenditures may be revised upward, when placed against the prior three

Robert Samuelson rightly calls attention to the decision of Japan's central bank to target a 1.0 percent inflation rate, although he doesn't get a few of the key points right. First, this decision, if accurately described, will provide a huge test of an economic policy first proposed by Paul Krugman and later endorsed by Federal Reserve Board Chairman Ben Bernanke when he was still a professor at Princeton.

The question is whether by setting a higher inflation target, a central bank can bring about a set of self-fulfilling expectations that actually produce this higher rate of inflation. If Japan's central bank is actually committed to this policy, and it proves successful, it would have enormous implications for the conduct of monetary policy elsewhere.

For example, it would mean that if the United States wanted to run 3-4 percent inflation to reduce debt burdens and raise real

One of the main reasons that the housing bubble grew unchecked is that major media outlets like the Washington Post (WPO) refused to present the views of those trying to call attention to the unprecedented run-up in house prices and the disaster that would inevitably follow its collapse. Instead the Washington Post was obsessed with reporting on the budget deficit, following the lead of billionaire investment banker Peter Peterson and his dependents, even though the deficits at the time were very modest by any reasonable measure.

The Washington Post refuses to allow its catastrophic failure in its non-coverage of the housing bubble affect its reporting in the least. It continues to obsess on the budget deficit, relying almost exclusively for sources on "experts" who were unable to recognize the $8 trillion housing bubble.

It also continues to view the beneficiaries of Peter Peterson's largesse as valuable sources.

The link between job growth and economic growth is one of the most solid relationships that you will find in economics. The reason is that it is almost definitional.

If we hold the length of the average work year constant (it doesn't change quickly -- although perhaps it should), then the rate of economic growth is equal to the rate of productivity growth plus the rate of job growth. (Yes, there is a multiplicative element here for serious nerds, but it doesn't matter for what we are talking about.) This means that if the economy grows more rapidly, then we will see more rapid job growth, unless productivity just surges for some reason.

Faster productivity growth is in general good news. This means that we are getting richer, producing more in each hour of work. We can adjust to this either by further boosting demand or by shortening workweeks or

Complete Story »]]> Dean Baker http://seekingalpha.com/article/384501-unemployment-insurance-and-spending-bond-purchases-are-reallocations-from-other-saving?source=feed 384501 In his Economix piece this week, Casey Mulligan picks up on his theme from last week that unemployment insurance (UI) benefits may not boost spending in aggregate, since the money needed to pay benefits is withdrawn from other spending. He agrees with my earlier point that the money is not coming from current tax revenue, but rather from deficit financing, then says that:

"But that 'financing channel' still does not make the payments free from the perspective of today’s economy.

Suppose the government has been borrowing the money to pay for unemployment benefits. It borrows money by selling bonds. The purchasers of those bonds have less to spend on something else."

Actually, most or all of the money that would be used to buy the bonds is a reallocation from other savings, at least at a time like the present when the economy is in a serious downturn. In effect,

]]> Wed, 22 Feb 2012 16:09:12 -0500 Dean Baker By Dean Baker:

In his Economix piece this week, Casey Mulligan picks up on his theme from last week that unemployment insurance (UI) benefits may not boost spending in aggregate, since the money needed to pay benefits is withdrawn from other spending. He agrees with my earlier point that the money is not coming from current tax revenue, but rather from deficit financing, then says that:

"But that 'financing channel' still does not make the payments free from the perspective of today’s economy.

Suppose the government has been borrowing the money to pay for unemployment benefits. It borrows money by selling bonds. The purchasers of those bonds have less to spend on something else."

Actually, most or all of the money that would be used to buy the bonds is a reallocation from other savings, at least at a time like the present when the economy is in a serious downturn. In effect,

Complete Story »]]> Dean Baker http://seekingalpha.com/article/360121-nyt-on-future-of-government-safety-net-misses-growth-health-care-stories?source=feed 360121 The NYT had a thoughtful piece on the public's greater reliance on Social Security, Medicare and other benefits. While the piece provides many useful insights into the increasing importance of these programs in people's lives and their attitudes toward them, it does miss a few key points.

First, it implies that the growth of government programs, rather than the economic downturn, is the main factor behind the current deficit:

Politicians have expanded the safety net without a commensurate increase in revenues, a primary reason for the government’s annual deficits and mushrooming debt.

In fact, the country would be facing very small deficits at present had it not been for the recession. Part of the rise in the deficit in the last four years has been due to the expansion of unemployment benefits, food stamps and other government programs, but this was a response to the recession, not a

]]> Sun, 12 Feb 2012 09:06:19 -0500 Dean Baker By Dean Baker:

The NYT had a thoughtful piece on the public's greater reliance on Social Security, Medicare and other benefits. While the piece provides many useful insights into the increasing importance of these programs in people's lives and their attitudes toward them, it does miss a few key points.

First, it implies that the growth of government programs, rather than the economic downturn, is the main factor behind the current deficit:

Politicians have expanded the safety net without a commensurate increase in revenues, a primary reason for the government’s annual deficits and mushrooming debt.

In fact, the country would be facing very small deficits at present had it not been for the recession. Part of the rise in the deficit in the last four years has been due to the expansion of unemployment benefits, food stamps and other government programs, but this was a response to the recession, not a

Complete Story »]]> Dean Baker http://seekingalpha.com/article/324582-getting-the-fourth-quarter-gdp-right?source=feed 324582 When the Mets were an expansion team in 1962 and on their way to losing a record 120 games, their manager Casey Stengel reportedly cried out in frustration after a Mets error, "Can't anybody here play this game?" Readers of the coverage of the 4th quarter GDP report must have felt the same way.

Most of the coverage was along the same lines as the Washington Post headline, "U.S. GDP grew at fastest pace in 1.5 years in fourth quarter." At the most basic level, this is true. GDP grew at a 2.8 percent annual rate, up from 1.8 percent in the third quarter and its strongest showing since the second quarter of 2010. However a closer examination of the data indicated that there was little cause for celebration.

There are always a number of random factors that will affect measured GDP in any given quarter. Often they average

]]> Mon, 30 Jan 2012 07:20:08 -0500 Dean Baker By Dean Baker:

When the Mets were an expansion team in 1962 and on their way to losing a record 120 games, their manager Casey Stengel reportedly cried out in frustration after a Mets error, "Can't anybody here play this game?" Readers of the coverage of the 4th quarter GDP report must have felt the same way.

Most of the coverage was along the same lines as the Washington Post headline, "U.S. GDP grew at fastest pace in 1.5 years in fourth quarter." At the most basic level, this is true. GDP grew at a 2.8 percent annual rate, up from 1.8 percent in the third quarter and its strongest showing since the second quarter of 2010. However a closer examination of the data indicated that there was little cause for celebration.

There are always a number of random factors that will affect measured GDP in any given quarter. Often they average

Complete Story »]]> Dean Baker http://seekingalpha.com/article/318125-a-serious-look-at-the-december-jobs-report?source=feed 318125 Economists tend not to be very good at economics. We know this because almost none of them were able to see the $8 trillion housing bubble that was driving the economy from 2002 to 2007. This was an oversight of astonishing importance, sort of like a physicist not noticing gravity.

Their failure to understand the economy has led to enormous misreporting of the December jobs data. There are two basic problems. They fail to accurately put the job growth numbers in the context of the economic downturn and they badly misread the December data leading them to overstate the true growth path we are now on.

Taking the two in turn, the reports were full of the good news that the economy had created 200,000 jobs and the unemployment rate had dropped to 8.5 percent. Creating 200,000 jobs is undoubtedly better than creating 100,000 jobs and much better than creating

]]> Sun, 08 Jan 2012 14:27:49 -0500 Dean Baker By Dean Baker:

Economists tend not to be very good at economics. We know this because almost none of them were able to see the $8 trillion housing bubble that was driving the economy from 2002 to 2007. This was an oversight of astonishing importance, sort of like a physicist not noticing gravity.

Their failure to understand the economy has led to enormous misreporting of the December jobs data. There are two basic problems. They fail to accurately put the job growth numbers in the context of the economic downturn and they badly misread the December data leading them to overstate the true growth path we are now on.

Taking the two in turn, the reports were full of the good news that the economy had created 200,000 jobs and the unemployment rate had dropped to 8.5 percent. Creating 200,000 jobs is undoubtedly better than creating 100,000 jobs and much better than creating

Complete Story »]]> Dean Baker http://seekingalpha.com/article/316989-robert-samuelson-oversells-the-case-for-economic-optimism?source=feed 316989

Last summer news reports were filled with ill-informed predictions of a double-dip recession. Now there seem to be many accounts that misrepresent recent economic data to make a case for substantially stronger growth.

Robert Samuelson makes some of the standard errors in outlining a case for optimism. (In fairness, the column also presents a case for pessimism.) For example, he touts the jump in housing starts reported for November, saying, "Housing construction was up 9.3 percent in November over October and 24.3 percent over November 2010."

The increase in starts reported in November was almost entirely attributable to a jump in starts reported for multi-family units. Starts of single-family homes were actually 1.5 below their November, 2010 level.

The piece also refers to a jump in pending home sales reported for November. This is a measure of contracts signed. The National Association of Realtors reports that