Alternate Realities In The Media

Blaming the media for the problems in our nation can be a tiresome habit. Politicians and sports figures learn the trick when they enter public life, and cling to the tactic to the bitter end. But the media does have a negative effect on the world that is particularly evident when they restate talking points or opinion as fact. A recent article from MSNBC contains good examples of bad journalism on the economy, proving that all misinformation is not the fault of Fox News.

Taken as a whole, the article written by producer John Schoen is not terrible, but it does perpetuate (without supporting evidence) purely political themes on the economic issues of today. I will provide a brief deconstruction of those themes in this post, but I encourage respondents to debate my conclusions in the comment section. Economics is a social science; facts and experimentation are foundational, but supposition and opinion form a far larger component than one would find in other disciplines.

The article in question revolves around current speculation that the Fed is the only hope to keep the recovery moving. The basis of this is the very good point that Congress will be at a virtual standstill with elections just a few weeks away (although Congress has already been at a standstill due to Congressional Republican stalling tactics). The first problem with the article comes in the second paragraph:

But after exhausting its conventional policy arsenal, the central bank is considering measures of last resort never tried in its nearly 100-year history. No one knows whether they will work. But some Fed watchers argue that the central bank can no longer afford to wait for clearer signs the Great Recession is over.

The phrase “measures of last resort never tried…” implies some set of desperate unknowns as a foundation for recovery. As economist Dean Baker points out here, this is not necessarily the case. The Fed could raise its inflation target (to lower real interest rates), and it could buy and hold large amounts of government debt (to give the government flexibility to add further stimulus without engendering crippling long-term debt-service issues.) The problem with the economy is the loss of demand created by the bursting of the housing bubble. The bubble-driven demand concealed the lack of real, productive economic growth during the last decade, and that is the growth that is necessary for real recovery.

With the impact of massive government stimulus spending fading, the economy is slowing again, leaving nearly 15 million Americans stranded without a job. Those lost paychecks, in turn, are holding back growth.

The latest data from the Commerce Department show the nations economic growth slowed to a 2.4 percent pace in the second quarter, compared to 3.7 percent in the first three months of the year. Economists have been paring their growth estimates for the rest of the year; Goldman Sachs recently cut its forecast to just 1.5 percent GDP growth through the middle of next year.

The impact of the stimulus is not fading, because final demand (the demand that drives the baseline economy) is still expected to be around 1.3% for the next few quarters. What is fading is the inventory build-out that companies went through at the beginning of the recovery. Firms did two things to survive during the depths of the recession; they cut people and they cut inventory. Those inventories have now been rebuilt, but firms now flush with cash are finding it easier to operate with fewer workers than they did pre-recession. Goldman-Sachs’ estimate counts on growth to settle to the level of final demand.

More government stimulus might help give growth another lift, but with members of Congress about to face voters angry about runaway budget deficits, that isn’t likely.

More government stimulus would give growth a lift, a fact that has been repeatedly proved throughout history. Government spending has a well-documented multiplier effect in the economy, with infrastructure spending returning over $1.50 for every dollar spent to the economy. It should also have been noted by the author that voters, in poll after poll, are not nearly as angry about the deficit as they are about the unemployment rate.

With the Bush administration’s tax cuts set to expire next year, taxes will automatically rise unless Congress acts, creating a further drag on the economy.

This statement is pure Republican talking point, and contradicts the earlier themes about voter and Congressional concerns about the budget deficit. In fact, this is the hallmark of our entire political debate today: refuse to take action on jobs because of deficit fears, then allow the deficit to expand by fighting for tax cuts that have not proven to help the economy.

It isn’t immediately apparent that any firm would miss an opportunity to expand revenue and market share because they are soon to pay an additional two or three percentage points of marginal tax on their taxable income. A typical small business does well to pull 10% of its revenue to the bottom line, meaning that the expiration of these cuts might cost a business between 0.1% and 0.3% of its revenue. Businesses that avoid expansion opportunities on those terms do not long survive in any environment.

The article makes good points about lending in today’s economy; the banking industry saved from annihilation by the $700 billion Bush bailout are sitting on their stash now with their thumbs deeply buried. It is the lack of lending by banks, and the opportunism of large employers who refuse to rehire to previous levels that is setting this recovery back. The result of this stalled growth coming out of deep recession is deflation.

Deflation creates a serious drag on growth because consumers and businesses postpone spending, waiting for prices to fall further. The resulting decline in profits hurts stocks; falling house prices further erode home equity. Debts, repaid with money that has more and more buying power, become more burdensome. One of the few deflation refuges is cash, which prompts consumers and businesses to spend less, worsening the cycle.

Deflation is the opposite of growth, and is a consequence of decreased spending. Deflation is not some mysterious force that attacks the economy, it is the result of observed economic forces. In the case of home prices, deflation is a regression to the real values of those properties. That is the definition of a bubble; asset prices that are greater than the real value of the underlying assets. It isn’t clear that any long term value would arise from artificially re-inflating the housing bubble. We need to focus on real growth.

At no time in our history have tax cuts led to sustained economic growth in the absence of large government spending. The growth of the Reagan years was driven by spending that tripled the national debt, and accompanied by tax cuts of nearly 50% on top-marginal earners. There are no cuts now that could move the economic needle in any significant increment, and all tax cuts add money to the debt. The notion that “tightening the belt” has some resonant effect in the economy is pure fiction. The choice in our economy is simple, either we ask the government to engage in targeted spending to stimulate the economy while building educational and physical infrastructure, or we do nothing and wait this out. Honest politicians and reporters can suggest no other alternatives.

The Rational Middle is listening…

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