Archive for category Media Stupicity
On May 1, 2013, “Marketplace” aired a segment about inflation. The show extolled the many benefits of “a little more inflation.” This is a Marketplace MegaFail inflation edition. Titled “Should we bring inflation back from the dead?,” reporter David Gura listed these benefits from just a touch more inflation:
- Housing prices would rise and fewer homeowners would find their houses underwater.
- Those who have borrowed to, say, buy a car would get to pay back their loans with cheaper dollars.
- “Companies could raise prices, that could lead to higher salaries, ‘and assuming they can control their costs, that could be beneficial to their profit margins; that could be beneficial to them expanding their business, creating jobs; that could be beneficial to their shareholders.’ “
Frankly, these statements are incredibly stupid. Inflation means prices and incomes are rising at about the same rate. Any increase in salaries will just keep pace with inflation, leaving the consumer with unchanged purchasing power. The only way people who borrow can pay back with cheaper dollars is if the inflation is a complete surprise. If the inflation is expected, it will be part of the interest rate on the loan. Finally, higher housing prices? Give me a break. Even if housing prices rose, the real net wealth in your house wouldn’t change much because the higher price level would eat up the price increase.
This morning, Kai Ryssdal was a guest on KQED’s Forum program. He proudly declared that Marketplace did not employ any MBA’s or economics Ph.D.’s. After this embarrassment, perhaps Mr. Ryssdal should reconsider his hiring policy. Or at least talk to economists who know what they’re talking about. We’re not that hard to find.
(I suspect Marketplace will be removing this story from their website soon. As a public service, you can click here to get a pdf version of the transcript.)
 From the transcript, quoted from David Blanchflower, the Bruce V. Rauner Professor of Economics at Dartmouth College.
 From the transcript, quoted from Kevin Jacques, the Boynton D. Murch Chair in Finance at Baldwin Wallace University.
 Another priceless gem from Prof. Jacques, see footnote 2 above.
[Updated January 18, 2013 in response to some incredibly stupid comments here and elsewhere. Look down at the bottom for the added information. I have also added one comment re my Wikipedia entry.]
Yes, Tamara Keith, that’s you I’m talking about. Today on “All Things Considered” Ms. Keith ran a story on the debt ceiling negotiations. Here’s a snippet:
But earlier this week in the speaker’s lobby — a bustling room just off the House floor — a very different narrative could be heard.
“There is not going to be a default unless the president of the United States chooses,” said Republican Rep. Tim Huelskamp of Kansas. “He is threatening folks with a very empty threat.”
And here’s how Rep. Pat Tiberi, an Ohio Republican, put it: “Nobody is talking default except for the president. He doesn’t need to default.”
Need a translation? When Huelskamp and Tiberi talk about default, what they mean is missing debt payments — failing to pay the nation’s creditors. What they’re arguing is that the president and Treasury will have to set priorities.
Tiberi says the top priority would have to be paying interest on the national debt.
“Defaulting is something that we can’t do,” he says. “So, it’s got to be a priority.”
Under this theory, Social Security recipients, veterans, government employees, contractors and all the rest would get lower priority; though Tiberi says seniors and veterans should get paid first with whatever is left after interest payments.
“Under this theory?” Oh, yeah, wait, let’s Google the word “default.” The very first result is from Wikipedia:
In finance, default occurs when a debtor has not met his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is the failure to pay back a loan. Default may occur if the debtor is either unwilling or unable to pay his or her debt. This can occur with all debt obligations including bonds, mortgages, loans, and promissory notes.
Update Jan. 18: I have been criticized for using Wikipedia. But my point was simple. Even Wikipeda, defective as it is, still managed to get this definition correct.
If Ms. Keith had spent two minutes doing research instead of coming up with creative language to snipe at Republicans, she would not have embarrassed herself, her show, and NPR this way. Ms. Keith hereby wins the award for lazy NPR reporter can’t be bothered to check facts.
Several people have insisted that I must be wrong. Never mind that I’ve been teaching this stuff for 30+ years and reviewed many money and banking textbooks. Never mind the legal definition. They want to believe what they want to believe. Bad news, folks. The real world is not so forgiving. OK, folks, here it is, complete with full citations. Let me know if you have anything to say that uses actual facts.
http://www.nolo.com/dictionary/default-term.html (Nolo.com, formerly the Nolo PressZ)
“Failure to pay a debt or meet other obligations of a loan agreement. For example, a debtor may default on a car loan by failing to make required monthly payments or by failing to carry adequate insurance as required by the loan agreement.”
Money, Banking and Financial Markets, 2nd Edition
eText: ISBN-10 0-07-744594-5, ISBN-13 978-0-07-744594-2
Print: ISBN-10 0-07-337590-X, ISBN-13 978-0-07-337590-8
Author(s): Cecchetti, Stephen; Schoenholtz, Kermit
Publisher: McGraw-Hill Higher Education
Copyright year: © 2011 Pages: 704
“Default risk is the chance that the bond’s issuer may fail to make the promised payment.” (p. 142)
Money, Banking, and the Financial System, First Edition
R. Glenn Hubbard; Anthony Patrick O’Brien
Publisher: Prentice Hall
Copyright year: © 2012 Pages: 640
“For example, before mortgage loans were securitized, the risk that the borrower would default, or stop making payments on the loan, was borne by the bank or other lender. When a mortgage is bundled together with similar mortgages in mortgage-backed securities, the buyers of the securities jointly share the risk of a default. Because any individual mortgage represents only a small part of the value of the security in which it is included, the buyers of the securities will suffer only a small loss ifa borrower defaults on that individual mortgage.” (p. 14)
“In 2008 and early 2009 bond prices fell due to the fears of investors that the slumping U.S. economy raised the risk that some companies would default and cease to make interest payments on their bonds. As this chapter explained, one reason interest is charged on loans is to compensate for default risk. ” (p. 79)
Foundations of Financial Markets and Institutions, Fourth Edition
Frank J. Fabozzi; Franco Modigliani; Frank J. Jones
© 2010 Prentice Hall, 696 pages
0-13-613531-5, 978-0-13-613531-9, 0-13-611810-0, 978-0-13-611810-7
“The second is the risk that the issuer or borrower will default on the obligation. This is called credit risk, or default risk.” (p. 4)
“Credit risk, also called default risk, refers to the risk that a borrower will default on a loan obligation to the depository institution or that the issuer of a security that the depository institution holds will default on its obligation. Regulatory risk is the risk that regulators will change the rules so as to adversely impact the earnings of the institution.” (p. 40)
The Economics of Money, Banking, and Financial Markets, Tenth Edition
Author(s): Frederic S. Mishkin
eText: ISBN-10 0-13-277097-0, ISBN-13 978-0-13-277097-2
Print: ISBN-10 0-13-277024-5, ISBN-13 978-0-13-277024-8
Publisher: Prentice Hall
Copyright year: © 2013 Pages: 720
“They are also the safest money market instrument because there is almost no possibility of default, a situation in which the party issuing the debt instrument ( the federal government in this case) is unable to make interest payments or pay off the amount owed when the instrument matures.” (p. 31)
Today’s article is prompted by a story on NPR’s Morning Edition. The focus of the story was Champagne. There were so many inaccuracies and misstatements that I’m writing two pieces. This is the first, covering the economics of champagne with specific references to intellectual property issues. The second (What is Champagne?) is on CaliforniaWineFan.com, my wine and wine economics blog.
One point made in the NPR story is what can legally be called “Champagne.” Quoting from the NPR website [emphasis added].
And while we’re on the subject of French traditions, I should point out that if you listen to my story you’ll hear about the kerfuffle over the use of the term Champagne.
The French are keen to point out that the term Champagne should only be used on the bottles of sparkling wines produced in the Champagne region of France. Champagne producers have launched a campaign in the U.S. to raise awareness of this issue.
In deference to this, Frank, a few years back, took the word Champagne off his label. Instead he references the Champagne method. And he says he’s proud to promote his bottles of bubbly as sparkling wine from the Finger Lakes.
Bear with me — this is going to be a little dull. I promise it’s worth the effort.
Background: The WTO and TRIPS
The World Trade Organization (WTO) charter includes three main Annexes. Annex 1A is the Multilateral Agreement on Trade in Goods, 1B is the Multilateral Agreement on Trade in Services and 1C covers Trade-Related Aspects of Intellectual Property Rights (TRIPS). My concern is with TRIPS. There are eight specific areas mentioned in the TRIPS agreement:
- Copyright and Related Rights
- Geographical Indications
- Industrial Designs
- Layout-Designs (Topographies) of Integrated Circuits
- Protection of Undisclosed Information
- Control of Anti-Competitive Practices in Contractual Licences
Geographical Indications are the issue here. Quoting from Article 22,
1. Geographical indications are, for the purposes of this Agreement, indications which identify a good as originating in the territory of a Member, or a region or locality in that territory, where a given quality, reputation or other characteristic of the good is essentially attributable to its geographical origin.
Consider Parmesan Cheese. Technically any cheese labeled “Parmesan” must be made in the Parma region of Italy. Champagne is part of the same category. The area around Épernay (about 148 km northeast of Paris) carries the geographic indication “Champagne.” Under WTO rules, sparkling wine made anywhere else in the world cannot be called Champagne.
The U.S. has been slow to sign the treaties for geographic indications. Champagne is actually not the issue. But consider Parmesan cheese. Kraft Foods makes something they call Parmesan cheese. But it ain’t made in Parma, I promise.
Geographic Indications and Champagne
Rather than forcing you (and me) to wade through a bunch of legal documents, let me instead relate a story I heard several years ago during a tour of the Korbel Champagne Cellars in Guerneville (Sonoma County), California. The guide explained that U.S. sparkling wine producers were now prohibited from using “Champagne” on their labels, with one exception. Because Korbel was so old and used the méthode champenoise technique, they alone were allowed to keep Champagne on their labels. This was formalized in a bilateral treaty between the U.S. and the European Union in 2008. The NPR reporter completely misunderstood the legal ramifications of calling something “Champagne” when it was not made in Champagne, France.
NPR prides itself on not “dumbing down” their broadcasting. Sadly, they seem to spend too much time congratulating themselves and not enough time doing actual reporting.
Sometimes a self-appointed economist gets it so wrong that their statement fails the laugh-out-loud test. Today’s subject is the fascinating world of national income accounting and the most recent NPR fail. Along the way we’ll learn how gross domestic product is measured. Even if you’re a real economist, I suspect you can learn a thing or two from this.
Why is this important? Because gross domestic product is equal to national income. When GDP rises, so does national income. Even if you don’t think GDP is important, I’m pretty sure national income matters to you.
Writer Dave Barry once famously said, “gross domestic product would be an excellent name for a band.” While that may be true, we’re going in a different direction today.
Background: NPR Strikes Again
Today’s egregious error is from Public Radio International’s The World. The segment was titled “How Should We Judge Our Economy.” And the guest clown pseudo-economist was “Eric Zencey, a political economist with the Gund Institute for Ecological Economics at the University of Vermont.” Forthwith, Mr. Zencey’s argument (lifted straight from the PRI page for this story).
“I think GDP should re-named, so that we don’t mistake it for a measure of well-being. I think we should call it gross domestic transactions,” said Zencey. “That’s all it is, it totes up the monetary value of all the transactions. And if it had that name that would help break the association people have with the idea that more GDP is better. It’s like hmmm, more transactions are better? Well it depends on what you’re transacting.” [All quotation marks and other punctuation unchanged from original story.]
The easy criticism is that, even if GDP equaled spending, it would not equal the total volume of transactions in the economy. For starters, GDP excludes transactions involving assets. If you buy or sell shares in a mutual fund, that is not included in GDP. Also excluded are transactions involving previously-owned items. That antique pepper mill you bought at a garage sale? Not in GDP. That car you bought from a soon-to-be-ex-friend? Also not included. So the total volume of transactions in any economy would be a huge multiple of GDP.
The more subtle issue is a complete misunderstanding of what GDP measures. Most principles of economics texts get this pretty much: gross domestic product is the market value of all goods and services produced in a country during a calendar year. Read that again and see if you can find the words “spending” or “transactions.” You can’t because GDP measures neither of those. GDP measures production, not spending.
“Wait,” says the knowledgeable reader. “In macroeconomics I learned that GDP was the sum of consumption spending, investment spending, and government spending. Why isn’t GDP the same as total spending? What about C + I + G?”
Read on. The answer is far simpler than you can imagine.
GDP and Spending
Think carefully about what you learned in that economics course. In the definition of GDP wasn’t there something about exports and imports? And if you memory is better than mine, you may recall something about the net change in business inventories being part of gross private domestic investment (“investment spending”). Each of these three items is important in its own way. Let’s begin with a basic fact: C + I + G measures total domestic spending on newly-produced goods and services. Asset transactions and purchases of previously-owned goods are still excluded.
GDP, Domestic Spending, and Domestic Production
Let’s first discuss a country that operates in complete autarky. This lovely word autarky describes a country that does not interact economically with the rest of the world. In such a country, total domestic spending on domestically produced goods is, in fact, total spending. What happens if there is a difference between spending and production in such an economy?
This is actually pretty simple. John Maynard Keynes discussed it at length in his General Theory of Employment, Interest, and Money. When spending is less than production, business inventories rise. The unsold goods flow into inventories. And when spending is greater than production, business inventories fall. The only way businesses can sell goods they have not produced is to draw them from inventory.
A simple example may help. Consider a company that makes ordinary wooden pencils. They try to produce to meet demand. When thinking about how many pencils to produce in July (for example), they consult their economist who assures them that there will be demand for 5 million pencils in July. The company produces 5 million pencils in July. But the forecast was incorrect. Only 4.8 million pencils were actually sold. What happens to the remaining 200,000 pencils? They end up in inventory for the beginning of August.
Note the relationship here: output – sales = inventory change. We can rewrite this simply as output = sales + inventory change.
But wait – we’re trying to measure output (GDP). We start by adding up total spending: consumption plus government plus business fixed investment. We then correct for any output that was not sold by adding the net change in business inventories. Adding inventory change converts total spending into total output.
That was pretty easy. Believe it or not, the next section is even easier.
GDP, Domestic Spending, and Domestic Production in an Open Economy
Now let’s open our economy to international trade. Our GDP equation now becomes C + I + G + (X − M). Exports are X, imports are M. Together, X − M is called net exports.
If you read several principles textbooks you will find many convoluted explanations of why exports are added and imports are subtracted. That’s unfortunate because the explanation is very easy. Exports are goods and services produced in our country and sold elsewhere. We add exports to domestic spending because those goods and services are not included in domestic spending but they are included in domestic production. Workers producing those exports earn income even though the products they are producing are not sold within the country where they are produced.
What about imports? Goods and services that are produced in other countries but sold in our country fall into this category. Therefore, those goods and services are part of domestic spending. But they are not part of domestic production. Imports are subtracted to correct domestic spending into domestic production.
Consider a couple of examples. Suppose you buy a new BMW for $50,000. The car was produced in Germany. But it’s sold here, which means domestic spending rises by $50,000. But domestic production has not changed. We need to subtract that $50,000 from domestic spending to move the total in the direction of domestic production.
Similarly, consider German tourists visiting the U.S. They are buying tourism services from the U.S. which count as exports. The services are produced here but sold (in effect) in another country. Therefore we must add the value of those exported services to total spending to move the total in the direction of domestic production.
So here’s the story. We begin with domestic spending (roughly C + I + G ignoring the fact that inventory change is included in I). We then add the net change in business inventories to this total to correct for any difference between domestic spending on domestically produced goods and domestically produced goods sold within the country. Next we add exports, products that are produced here but sold in other countries. Finally we subtract imports, products that are produced in other countries but sold here. Remember, the central idea is to convert domestic spending into domestic production.
At its most basic, this stuff is not difficult. It’s always been a mystery to me why economists insist on making it difficult. I hope this explanation has been helpful. Please feel free to ask questions in the comments.
 Please don’t quibble. I know there are differences between GDP and national income. This is a blog, not the American Economic Review.
 No one has yet figured out how to sell previously-owned services, so we don’t have to worry about that.
 From the ancient Greek autarkeia: self-sufficiency, or nonattachment. See this page from Britannica online for more details.
 Consistent with national income accounting assumptions, I continue to exclude spending on assets and previously-owned goods.
KQED fail. This morning the San Francisco NPR outlet aired a five-minute segment on the problems people have finding apartments in San Francisco. The segment contained two lengthy personal profiles. But there was not one mention of rent control which has been in effect in San Francisco for about 30 years.
This morning the Nobel Prize committee awarded the Nobel Peace Prize for 2012 to the European Union. Media confusion abounds, Nobel Peace Prize edition. What is the European Union, anyway? Many newsreaders seemed to think the prize was awarded to the European Monetary Union, commonly called the Eurozone. These are the 17 countries that use the euro as a currency. However, the Nobel committee made it clear that the award was to the European Economic Union. There are 27 countries in the economic union. Major countries that do not use the euro include the United Kingdom, Denmark, and Sweden. (Interestingly, Norway, the country that hosts the Nobel awards, is not a member of either European union.)
The exact language used by the Nobel committee in making the award referred to the “60 year history” of the European Union. That would be 1962, the beginning of the European Coal and Steel Community. In 1958 the countries decided to change to a more compact name, the European Economic Community (called the Common Market). In 1993 the name was changed to the European Union. Therefore, the Nobel prize must be shared among 27 countries of the EU instead of the 17 countries in the eurozone. (According to one comment, that works out to about €0.10 per capita. The reporter asked that her share be deposited directly into her checking account.)
More media humor: “Good thing the EU got the Peace Prize. There was no chance of them winning the prize for economics.”
This information is incredibly easy to find. The European Central Bank website has two maps of the respective zones. The European Economic Union map includes the list of member countries:
And the European Monetary Union:
Remember when reporters actually reported and did research?
This morning’s lesson is venture capitalism for dummies. I was prompted to write about this by a story on KQED’s California Report this morning. Here’s the summary from the KQED website:
“Recent successes in raising money on the Internet are making “crowdfunding” look like a real alternative to the old ways of bringing in startup money. Entrepreneurs are now promising products not even made yet in exchange for financial backing. But it’s not clear what happens to the money if, and when, entrepreneurs fail to deliver.Reporter: Aarti Shahani”
The report specifically mentioned kickstarter.com, but also discussed recent legislation that would allow crowdfunding for new projects.
Here’s a clue: the money is gone. It was spent supporting the developer while the product was being developed. Some may also have gone to buying software, hardware, and/or a host of other “parts.” Kickstarter makes this quite clear on their FAQ pages
:Got that? You ain’t getting any money back. Venture capitalists understand that they are in a high-risk business. They make profits by carefully analyzing proposals and funding those that they believe have a reasonable probability of success. People who don’t understand this (including, apparently, the entire staff of KQED radio) should stay away.
As an added note, KQED is San Francisco’s public radio station. For a city that hosts companies like Twitter and Foursquare, reporting like this is a disgrace.
Today NPR’s “All Things Considered” provided yet another example of media innumeracy, time version. The story was about various scientists on the Mars Curiosity project adjusting their activities to conform to the Martian day (about 40 minutes longer than Earth’s). Host Melissa Block interviewed David and Bryn Oh about this. She noted that the interview was being taped at 10 am. Bryn replied that in their house it was 10 pm. David added that the family would be heading for bed immediately after the interview. Ms. Block then responded, “If I’ve figured this right for about the last three weeks you’ve added nearly 40 minutes to your clock every day, so you’re now, oh, just about half a day off, right? You’re at the peak of your upside-downness.”
Let’s see. 10 am – 10 pm. Ms. Block is sure no rocket scientist.
Rounding error? More likely stupidity.
“Looking inside the numbers, Obama continues to lead Romney among key parts of his political base, including African Americans (94 percent to 0 percent), Latinos (by a 2-to-1 margin), voters under 35-years-old (52 percent to 41 percent) and women (51 percent to 41 percent).”
Wonder what happened to the missing 6 percent of African Americans?