A Wall Street protest in 2008, demanding that government ‘bail out the people.’ Instead, says Baker, ‘the same people who wrecked the economy are largely still running it.’ (AP photo)
Story ideas, from an expert
COMMENTARY | October 14, 2009
Economist Dean Baker becomes assignment editor for a day, and asks for stories on deficits, on the mathematical basis for figuring the right size of a stimulus program, and the set-up by which banks borrow money from the Federal Reserve at 0 percent and re-lend it to the Treasury at 3-1/2 percent.
(Part of our series on "Reporting the Economic Collapse.")
By John Hanrahan
Perhaps more than any other economist, Dean Baker closely monitors the mainstream news media through his blog “Beat the Press,” which offers lively press criticism on economic reporting on a daily basis.
In a recent interview, Nieman Watchdog asked Baker, the co-director of the Center for Economic and Policy Research (CEPR), to put on the hat of an assignment editor and recommend stories on the nation’s deep economic troubles that the news media either haven’t covered at all or haven’t explained adequately. (See also on this Web site other current articles from the Baker interview regarding press issues relating to health care, unemployment and the housing bubble.)
Baker obliged with the following suggestions for reporters and editors for future stories, as well as taking some shots at past reporting on the economy.
Deficits Need to Be Larger
Baker believes too much of the press reports uncritically that the issue of rising deficits in this time of hoped-for recovery is perhaps the most serious economic problem the country faces. Many reporters and editors (and editorial writers) covering the economy either don’t understand or fail to report that the deficits caused by stimulus spending are integral to lowering unemployment, he said.
“If we didn’t have deficits [from the stimulus], things would be horrible,” Baker told Nieman Watchdog. “Yes, the deficits do need to be larger because we need more stimulus spending.” Those politicians and editorial writers warning of deficits “always say we’re putting a burden on future generations,” yet to do nothing now “would put a huge burden on people today.” As he elaborated on recently in The Huffington Post,
“The basic story is that we need to have large deficits now for the next several years in order to boost the economy back to full employment. Forcing a large portion of our workforce to endure a prolonged period of unemployment will inflict an enormous cost on those workers and on their children (i.e., those future generations whom the deficit hawks claim as their main concern).”
Baker is concerned, though, about what government action and news media reporting will result from the August Congressional Budget Office (CBO) report projecting lower growth and higher unemployment (more than 10 percent through most of 2010 and not getting back to pre-recession levels until 2013 or 2014). That same report foresaw a cumulative deficit over the next 10 years that is $1.2 trillion higher than the deficit the CBO projected in January. In the wake of that CBO report, Senate minority leader Mitch McConnell (R-Kentucky) warned that the new deficit projection showed “that this burden on future generations is unsustainable...spending, borrowing and debt are out of control.”
This was typical of the deficit hawks’ reaction. As Baker noted in that same Huffington Post piece:
“The rational response to the news that the economy will be far worse than had previously been projected should be a demand for more stimulus. After all, why should millions of people lose their jobs, their homes, and their health just because the people who managed the country’s economic policy over the last decade were incompetent? Unfortunately, the same people who wrecked the economy are largely still running it and they still have the same set of economic priorities.”
Consequently, Baker said he was worried that, “instead of talking about the economic weaknesses implied by the new CBO projections, the discussion will focus almost entirely on the larger projected budget deficit. Instead of discussing ways in which we can reduce the unemployment rate and stimulate growth, the media will be highlighting calls for tax increases and spending cuts -- measures that will slow the economy and raise the unemployment rate further.”
“To be sure, these are big deficits,” Baker added, but, contrary to what the “deficit hawks” argue, “there is no reason to believe that the economy cannot support them.”
The mainstream news media should make sure that, in any discussion of the deficit, they make it clear that many economists regard the deficit as manageable and favor adding to the deficit by spending more, not less, federal stimulus to reduce unemployment and to bring about a true economic recovery.
Reporting on the Stimulus Numbers 'Horrible’
Baker said that the mainstream press "did a horrible job" of explaining the debate over President Obama's economic stimulus plan.
“The numbers that were tossed around in most news stories about the amount of stimulus needed were not put in any context of what they were based on,” Baker said. “The issue was generally reported as a debate over numbers” -- the amount the President was seeking, or the number that the Republicans or Democratic members of Congress felt was appropriate (or politically feasible), and not what the basis was for any of those numbers.
Baker pointed out that there is a rule-of-thumb formula (known as “Okun’s Law”) that pro-stimulus economists were using to determine approximately the amount of an appropriate stimulus program. The mainstream press, however, seldom explained that there was, in fact, a mathematical basis for the figures that stimulus advocates were putting forth, unlike the case of most of those in Congress who were calling for a lesser stimulus or no stimulus.
“In principle,” Baker said, economists using the Okun method, “ask how much stimulus you need to make the economy produce a certain amount. You want to put the economy back to its original [pre-recession] level. To reduce unemployment by 1 per cent, you need to raise the GDP (gross domestic product) by 2 percent.” So, he said, to cut the 9 per cent unemployment rate of recent past months to the 4.5 percent that the Congressional Budget Office views as the sustainable rate of unemployment, you would need to raise GDP by 9 percent (2 times 4.5).
Each stimulus dollar would be expected to have a multiplier effect of $1.50 as it goes through the economy, Baker said. (That is, $100 of stimulus would be expected to raise the GDP by $150.) Using the Okun method and factoring in the multiplier, Baker said he favored a stimulus of $900 billion for two consecutive years -- far more than the $780 billion package ultimately favored by President Obama and enacted by Congress.
In reporting on any future debate of a follow-up stimulus program, the news media need to explain the mathematics behind the stimulus advocates’ figures, as well as question those politicians and other economists who favor no stimulus or a more limited stimulus to explain the rationale and math -- if any -- behind their position. This would enable the public to see what the numbers actually mean and help citizens decide whether the figures put forth have a sound basis or -- as was the case with most opponents of a stimulus program -- were just pulled out of thin air as being more politically palatable. Without context, Baker said, the numbers make no sense -- “it’s like throwing money from Mars.”
New York Times columnist Paul Krugman, made much the same point in his January 6, 2009 blog, with a headline that told it all: “Stimulus arithmetic (wonkish but important).”
Can’t Have Strong Dollar and Lower Trade Deficits
Baker likewise sees those he terms the “no stimulus” crowd as being wrong from an economic standpoint when they issue dire warnings in the press about the trade deficit and the low value of the dollar, and simultaneously call for a stronger dollar and a lower trade deficit.
Rather, Baker said, “the higher the dollar, the higher the trade deficit. A high dollar makes U.S. goods expensive to foreigners and imported goods cheap for people in the U.S. Therefore, when the dollar is high, we buy more imports and export fewer goods,” thereby adding to the trade deficit we are supposedly trying to bring down.
As Baker wrote last month in London’s Guardian newspaper: “If the ‘no stimulus’ crowd was concerned about becoming indebted to China and other countries then it would be pushing for a lower-valued dollar. In fact, most of the ‘no stimulus’ crowd supports a high or ‘strong’ dollar. So they actually want the U.S. and our children to become more indebted to China and other foreign countries.”
Baker urged the press to be more diligent in questioning those advocates of a high dollar policy along with a lower trade deficit about the contradictory nature of their position.
Banks Borrow from Fed at 0%, Lend to Treasury at 3%
Baker observed that there have been a number of news articles recently about big banks returning to profitability, but most of those stories fail to make the point as to how those banks are becoming profitable -- namely, by borrowing money short-term from the Federal Reserve at near zero cost and then loaning that money back to the Treasury by buying U.S. government bonds that pay around 3.5 percent interest.
This, said Baker, means that “we lend the banks the money that they lend back to us, albeit at a considerably higher interest rate” -- which is "not exactly a boon for taxpayers.” On a trillion dollars of lending, “this will give the banks $33 billion a year in net interest or profit. This is the extra money that the government is paying the banks to borrow back the money that it lent them through the Fed.”
Baker would like to see more press attention to this aspect of bank profitability so that citizens can more fully understand how taxpayer largesse produces profits for the banks.
Next in the ‘Reporting the Collapse’ series:
Where’s the reporting on the fraud that led to the crash? The mortgage-related crash was the product of wide-scale criminal fraud, says James Galbraith, and people should be going to prison. Instead, he says, the press has pretty much ignored that aspect of it, treating the issue as boys-will-be boys.
Earlier in this series:
Doing a better job coping with economic disaster.Writer Henry Banta lays out what has gone wrong and why it is so important for the press to do a better job.
Rein in entitlements? No. Increase them, says James Galbraith. It’s time the press stopped falling for false, ongoing efforts to portray Social Security and Medicare as going broke, says Galbraith in the first installment of his interview with John Hanrahan.
As joblessness rises, reporters need to focus on calls for a second stimulus. Dean Baker sees a new, large stimulus as urgent. He has an alternate plan, also: Give companies tax credits to reduce workers’ hours (but not their pay) and put on new staff to take up the slack.
Galbraith: Deficits are the solution, not the problem. The University of Texas economist views aiding households, not banks, ia the key to recovery. He is highly critical of most coverage of deficits and fiscal policy and singles out the Washington Post editorial page as the worse offender.
John Hanrahan is a former executive director of The Fund for Investigative Journalism and reporter for The Washington Post, The Washington Star, UPI, and other news organizations. He is now on special assignment for Nieman Watchdog.
Spotting IEDs on The Road to Retirement
10/30/2009, 07:24 PM
In the Business Sections of leading daily newspapers I sense even now a strong undercurrent of cheerleading for stock street gangbangers. These are the guys who brought us the crash and they're still out there doing their thing, i.e., making billions through risky behavior. From here it looks like status quo for those guys and the government regulators who looked the other way. So may I humbly suggest that newspaper editors consider a new daily column. It would signpost for readers where suspected IEDs litter our financial highways still. I recall the consumer columns that debuted in the 1970s. They focused our collective consciousness on unsafe products and eventually manufacturers took heed. How to reign in the radical capitalists who care not about the people they trample? By instituting advocacy columns that point out inadequacies of the financial system. Such columns would help combat the huge lobbying effort by investment bankers to stall regulatory reform.