I have to take some issue with Ezra Klein in his criticisms of Chris Rock. Ezra is upset with Rock's suggestion that Obama would have been best off letting the financial industry and the auto companies collapse, and then picking up the pieces. Rock argued that Obama would have gotten more credit from this path than he is getting now for having bailed out firms and effectively muddled along.

Ezra responds that Rock's plan is:

"morally odious: it would have meant putting millions of Americans through harrowing pain in order to help Obama out politically."

He then argues that it would have given us a second Great Depression.

On the first point, I completely agree that putting millions of people out of work for political ends is morally odious. However, if we flip this over for a moment and make the question one of putting millions of people temporarily out of work for the ostensible longer term benefit of the economy, it would be much more difficult to call the choice morally odious. At least if we did, then we would have to say that most of the central bankers in the last century and the politicians who appointed them were morally odious.

It is central banking 101 that you raise interest rates to slow the economy and throw millions of people out of work in order to head off inflation. Paul Volcker is a hero in elite Washington circles precisely because he raised interest rates and threw millions of people out of work in order to bring an end to the inflation of the 1970s. To his admirers (which do not include me), the longer term benefits to the economy were worth the pain suffered by the millions of unemployed and their families. So the idea of throwing millions out of work to advance important economic ends is widely accepted in policy circles, even if most of us may agree that it is unacceptable to deliberately throw large numbers of people out of work as a campaign strategy.

A Washington Post article on President Obama's efforts to secure fast-track trade authority in order to pass the Trans-Pacific Partnership (TPP) included an incredible comment from Obama:

"'It is somewhat challenging because of . . . Americans feeling as if their wages and incomes have stagnated' because of increasing global competition, Obama said. 'There’s a narrative there that makes for some tough politics.'"

Of course President Obama is correct that this "narrative," which most economists would say corresponds to the reality, makes it difficult to pass more trade deals that will further disadvantage workers in the United States. It's not clear why President Obama would be surprised that most of the public opposes trade deals that are likely to redistribute more income upward.

According to the article, the administration also inaccurately characterized the nature of the TPP.

"The administration has argued that the trade deals will boost U.S. exports and lower tariffs for American goods in the fast-growing Asia-Pacific region, where the United States has faced increasing economic competition from China."

The deal will have little impact on tariffs in most of the countries that are parties to the TPP, since they are already low. Furthermore, the deal includes a large amount of protectionism in the form of stronger patent and copyright protection. Higher licensing fees and royalties will make the drug and entertainment industry richer, but are likely to crowd out other exports.

It is also worth noting that jobs depend on net exports (exports minus imports), not exports. (If we increase exports, but imports rise by a larger amount, then we on net lose jobs.) If the administration doesn't understand that it is net exports that affect employment, and not just exports, then the media should be doing intense ridicule. This would be like Sarah Palin saying she could see Russia from her house, but much more serious. 

Eduardo Porter ends an interesting piece on declining income inequality in Latin America with a warning that the decline may not continue, insofar as exports of commodities was a major cause. The argument is that China's growth is slowing, and since China was a major market for exports, this means that growth in demand in the future might be much slower than growth in demand in the last decade.

The problem with this view, which is frequently repeated in the media, is that it ignores the fact that China is much larger now than it was a decade ago. China's economy has more than doubled in size over the last decade. This means from the standpoint of the world economy, 7.0 percent growth in China today has far more impact than 10.0 percent did a decade ago. It may well be the case that demand for commodities exported from Latin America is weakening, but if we are comparing the impact of growth in China on this demand, it is undoubtedly a larger factor in 2014 than it was in 2004.

Thomas Edsall used his column today to agree with Charles Schumer that the Democrats made a mistake by pushing through Obamacare and should have instead focused on the economy. As I've noted previously, this is wrong on both sides.

On the economy side, what does Schumer think the Democrats would have accomplished if they had never said a word about health care? Would they have gotten another $20 billion a year in stimulus spending, $30 billion, $40 billion? Plug in your number, but it doesn't have to get too high before it doesn't pass the laugh test. Of course any additional spending would have been good both for creating jobs and the longer term benefits, but if Schumer is claiming that barring a whole different political world (i.e. doing a lot more than skipping health care reform) we would have seen enough stimulus to make a qualitative difference in the state of economy, and the public's view of the economy, then he's been smoking something strong.

There is a plausible alternative economic story, but it has nothing to do with Obamacare. Instead of using Big Government to protect the Wall Street gang from their own greed and incompetence, Obama could have let the market work its magic and put most of the Wall Streeters out of business. (Left to the market, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup certainly would have gone bankrupt.) He could have used the Justice Department to put the Wall Street felons behind bars. (Knowingly putting fraudulent loans in a mortgage backed security is fraud. Selling an investment grade rating for a mortgage backed security is fraud.)  And, he could have tapped into populist sentiment to impose a Wall Street sales tax that would tax financial speculation. Even the I.M.F. has recommended increasing taxes on the financial industry, recognizing it as an undertaxed sector. 

In short, there is a populist economic path that Obama could have pursued that would have put the economy and the Democrats in a very different position. But nothing about the Affordable Care Act (ACA) prevented them from going this route. Furthermore, it's unlikely that Senator Schumer has any interest in following this path, unless the NYT neglected to cover his endorsement of a financial transaction tax and the jailing of Wall Street bankers.

Wow, some things are really hard for elite media types to understand. In his column in the Washington Post, Richard Cohen struggles with how we should punish bankers who commit crimes like manipulating foreign exchange rates (or Libor rates, or pass on fraudulent mortgages in mortgage backed securities, or don't follow the law in foreclosing on homes etc.). 

Cohen calmly tells readers that criminal prosecutions of public companies are not the answer, pointing out that the prosecution of Arthur Andersen over its role in perpetuating the Enron left 30,000 people on the street, most of whom had nothing to do with Enron. Cohen's understanding of economics is a bit weak (most of these people quickly found other jobs), but more importantly he is utterly clueless about the issue at hand.

Individuals are profiting by breaking the law. The point is make sure that these individuals pay a steep personal price. This is especially important for this sort of white collar crime because it is so difficult to detect and prosecute. For every case of price manipulation that gets exposed, there are almost certainly dozens that go undetected.

This means that when you get the goods on a perp, you go for the gold -- or the jail cell. We want bankers to know that if they break the law to make themselves even richer than they would otherwise be, they will spend lots of time behind bars if they get caught. This would be a real deterrent, unlike the risk that their employer might face some sort of penalty.

Why is it so hard for elite types to understand putting bankers in jail?

Andrew Ross Sorkin used his column today to complain about the AFL-CIO and others making an issue over Wall Street banks paying unearned deferred compensation to employees who take positions in government. He argues that the people leaving Wall Street for top level government positions are victims of a "populist shakedown."

Sorkins's complaint seems more than a bit bizarre given recent economic history. In the housing bubble years the Wall Street folks made themselves incredibly wealthy packaging and selling bad mortgage backed securities. When this practice threatened to put them all into bankruptcy, the Treasury and Fed stepped in with a bottomless pile of below market interest rate loans and loan guarantees to keep them afloat.

This was explicit policy as former Treasury Secretary Timothy Geithner makes very clear in his autobiography. He commented repeatedly that there would be "no more Lehmans," and he ridiculed the "old testament" types who thought that somehow the banks should be made to pay for their incompetence and left to the mercy of the market.

The result is that the Wall Street banks are bigger and more powerful than ever. By contrast, more than 10 million homeowners are still underwater, the cohort of middle income baby boomers are hitting retirement with virtually nothing but their Social Security and Medicare to support them, and most of the workforce is likely to go a decade without seeing wage growth. And Geithner is now making a fortune at a private equity company and gives every indication in his book of thinking that he had done a great job.

This state of affairs would probably not exist if the Treasury had been full of people without Wall Street connections. If we had more academics, union officials, and people with business backgrounds other than finance, it is likely that all the solutions to the economic crisis created by Wall Street would not have involved saving Wall Street as a first priority. (And, we would not have that silly second Great Depression myth as the guiding story for public policy. Getting out of the Great Depression only required spending money -- even Wall Street folks could figure that one out.) 

Anyhow, the AFL-CIO is right to raise questions about policies that further Wall Street's dominance of economic and financial policy. It's striking that Sorkin can't even see a problem. 

Yep, that's right, just as it did over the last fifty years. Nonetheless, the NYT thinks we should be very worried telling us:

"The population shift will be a major problem by 2060, when there will only be 1.3 workers per retiree, against 2.3 now."

Of course if we go back 50 years it would have been almost 5.0 workers to retiree. (The OECD puts the ratio at 4.9 in 1964, compared with 2.9 today and a projection of 1.5 in 2064.) So basically we will see the sort of demographic crisis going forward as we have seen in the past.

But the hard to get good help crowd is very worried. Remarkably, the piece never once mentions wages. The traditional way in which employers dealt with shortages of labor is to raise wages. The employers that can't afford to pay the going wage go out of business. It's called "capitalism." This is the reason that most people don't still work on farms. Wages are not rising especially rapidly in Germany, which seems to contradict the headline of the piece, "German population drop spells skills shortage in Europe's powerhouse."

The piece also gives readers Germany's official unemployment rate of 6.6 percent, as opposed to OECD harmonized rate of 5.0 percent. This is likely to mislead readers since almost no one will know that Germany counts part-time workers in their unemployment rate. By contrast, the OECD harmonized rate essentially uses the same methodology as the United States. (This is a piece from Reuters, but presumably the NYT's editors can make edits so that it is understandable to its readers.)

Finally, an entry in the great typos on the month contest:

"There is a particular deficit of workers with adequate qualifications in maths, computing, science and technology."

Brad DeLong tells us that he is moving away from the cult of the financial crisis (the weakness of the economy in 2014 is somehow due to Lehman having collapsed in 2008 -- economists can believe lots of mystical claims about the world) and to the debt theory of the downturn. Being a big fan of simplicity and a foe of unnecessary complexity in economics, I have always thought that the story was the lost of housing wealth pure and simple. (And yes folks, this was foreseeable before the collapse. Your favorite economists just didn't want to look.) 

Just to be clear on the distinction, the loss of wealth story says it really would not have mattered much if everyone's housing wealth went from $100k to zero, as opposed to going from plus $50k to minus $50k. The really story was that people lost $100k in housing wealth (roughly the average loss per house), not that they ended up in debt. Just to be clear, the wealth effect almost certainly differs across individuals. Bill Gates would never even know if his house rises or falls in value by $100k. On the other hand, for folks whose only asset is their home, a $100k loss of wealth is a really big deal.

The debt story never made much sense to me for two reasons. First, the housing wealth effect story fit the basic picture very well. Are we supposed to believe that the housing wealth effect that we all grew up to love stopped working in the bubble years? The data showed the predicted consumption boom during the bubble years, followed by a fallback to more normal levels when the bubble burst.

The other reason is that the debt story would imply truly heroic levels of consumption by the indebted homeowners in the counter-factual. Currently just over 9 million families are seriously underwater (more than 25 percent negative equity), down from a peak of just under 13 million in 2012. Let's assume that if we include the marginally underwater homeowners we double these numbers to 18 million and 26 million.

How much more money do we think these people would be spending each year, if we just snapped our fingers and made their debt zero? (Each is emphasized, because the issue is not if some people buy a car in a given year, the point is they would have buy a car every year.) An increase of $5,000 a year would be quite large, given that the median income of homeowners is around $70,000. In this case, we would see an additional $90 billion in consumption this year and would have seen an additional $130 billion in consumption in 2012.

Would this have gotten us out of the downturn? It wouldn't where I do my arithmetic. For example, compare it to a $500 billion trade deficit than no one talks about. Furthermore, the finger snapping also would have a wealth effect. In 2012 we would have added roughly $1 trillion in wealth to these homeowners by eliminating their negative equity. Assuming a housing wealth effect of 5 to 7 cents on the dollar, that would imply additional consumption of between $50 billion to $70 billion a year, eliminating close to half of the debt story. So how is the downturn a debt story? (You're welcome to put in a higher average boost to consumption for formerly negative equity households, but you have to do it with a straight face.)

Finally, getting to the question in my headline, the current saving rate out of disposable income is 5 percent. This is lower than we ever saw until the stock wealth effect in the late 1990s pushed it down to 4.4 percent in 1999, it hit 4.2 percent in 2000. The saving rate rose again following the collapse of the stock bubble, but then fell to 3.0 percent in 2007. The question then for our debt fans is what they think the saving rate would be absent another bubble, if we eliminated all the negative equity.

 

Robert Samuelson apparently didn't know that all sorts of good Keynesian types, starting with Paul Krugman, predicted that the recovery would be weak due to inadequate stimulus. (Here, here, and here are a few of my own contributions along these lines.)

The basic story is pretty damn simple. When the housing bubble collapsed we lost well over $1 trillion in annual demand. Housing construction fell from a record share of GDP to near record lows, as the boom had led to enormous overbuiilding. In addition, consumption fell as the $8 trillion in ephemeral housing equity created by the bubble disappeared. When this massive amount of housing wealth vanished so did the consumption that it supported.

As all good Keynesians tried to explain, there is no easy way to replace this loss of demand in the private sector, hence the need for government stimulus. And, we said at the time, we needed a larger and longer one than the stimulus package approved by Congress.

Apparently Samuelson is unaware of this history. He pushes his idea of leaving everything to the free market telling readers, harkening back to the recovery to the downturn following World War I:

"The recent financial crisis and the (unpredicted) weak recovery have exposed economists’ fragile grasp of reality. There has been a massive destruction of intellectual capital: Old ideas of how the economy functions and can be improved have been found wanting. Since the Great Depression, governments are expected to react to economic slumps with countercyclical policies that reverse the downturn and relieve personal suffering. These understandable impulses may compromise the economy’s recuperative rhythms. That’s a troubling possibility that echoes from the 1920s."

It's truly amazing to find something like this comment in a major newspaper.

 

Note: Typo corrected and link added.

The NYT tells us that we should still be pushing people to be homeowners, based largely on a report by the Joint Center for Housing Studies at Harvard, which gets much of its funding from industry groups. The editorial is in many ways a classic exercise in bad logic.

The basic point seems to be that homeowners accumulate more money on average than renters. While this is true, the relevant question is not whether homeowners accumulate more money, but rather whether homebuyers accumulate more money. The group of people who remain homeowners are a subset of the former group. A study of low income homebuyers in the 1980s and 1990s (i.e. before the bubble) found that the median period of homeownership was less than five years. While the people who remain homeowners for long periods of time were likely successful in accumulating wealth in their home, the half that left their home in less than five years almost certainly were losers due to the transactions costs (which are income to banks and realtors).

The other point worth noting is that the ability to accumulate equity in a home depends to a substantial extent on price movements. While real house prices are well below bubble peaks, they are high relative to longer term trends or rents. This raises a risk that they will decline if interest rates rise in the years ahead, as is predicted by the Congressional Budget Office and other official forecasters.

The study cited by the NYT seems almost designed to misrepresent the impact of the bubble on wealth accumulation. It finds that the median household who started in 1999 as renters and then switched to be homeowners ended up with more wealth in 2009, even if they had switched back to being renters. There are two obvious problems with this analysis. First, most of the people who bought in this period and then sold would have sold before 2007, meaning they would have sold in years when the bubble was sending prices soaring. It would be surprising if homeowners were not able to accumulate wealth if they sold near the peak of the bubble.

Furthermore, 2009 was still far from the trough of house prices. Prices did not bottom out until 2012. While this is presented as a test of the impact of homeownership under extraordinarily adverse conditions, the opposite is the case. More of the people who bought and sold in these years would be expected to be gainers than would typically be true. A better test would have included more years following the bursting of the bubble to prevent the impact of the bubble year prices from dominating the results.

The Joint Center continued to push homeownership on low and moderate income families during the bubble years. It doesn't seem as though its pattern of behavior has changed.

Nicholas Gage uses a NYT column to tell us that Greece is on the path to recovery and that the main risk to its prosperity is the rise of the left-wing political party Syriza. Both claims are dubious.

In terms of the recovery, Gage points to the country's strong third quarter growth, increased tourism, an improved budget situation and a decline in the unemployment rate. While the lower deficits would be good news, if the European Union was prepared to allow Greece to have a substantial stimulus, this does not seem likely anywhere in the foreseeable future. Therefore it is simply a bookkeeping entry from the standpoint of the economy. The third quarter growth, spurred in part by tourism, is a positive, but quarterly data are erratic so it will be necessary to see several more quarters before the trend is clear.

Gage touts the drop in the unemployment rate to 25.9 percent from 28.0 percent last year. However, most of this drop is due to people leaving the labor force. The employment rate, the percentage of people employed, is up by just 0.6 percentage points from its low. It is still down by 12.2 percentage points from its peak in 2008. This would be equivalent to 30 million people losing employment in the United States.

According to the most recent projections from the I.M.F, even in 2019 (the last year in the projection period) Greece's GDP will still be almost 10 percent less than its 2007 level. This is far worse than the Great Depression in the United States. And, the I.M.F.'s projections for Greece have consistently proven to be overly optimistic.

By contrast, Gage warns of the bad scenario for Greece's future:

"While the €23 billion shortfall in that year was covered by the E.C.B., today a much weaker eurozone would hardly be in a position to transfer over €100 billion to Greece if another huge run were to occur.

"In this scenario, the vacuum of currency would bring Greece to technical bankruptcy. The hard-won gains of the past two years would vanish. Access to loans would disappear. The faltering economy would come to a standstill, and the only recourse for Greece would be to return to the drachma, a disastrous move for a country that imports much of the goods it consumes."

Almost every part of this is wrong. First, the European Central Bank (ECB) has no shortage of euros. It can make as many of them it wants. (Is Gage worried about inflation?) If a flight of capital means that Greece needs 100 billion euros, the ECB would have no problem providing them.

Gage is also wrong with the bad story about Greece leaving the euro. The drop in the value of its currency would instantly make its goods and services more competitive in the euro zone and elsewhere. The country already has a current account surplus. If Greece renegotiated its debts and increased its exports with a lower valued currency, it should have no problem at all paying for its imports.

The basic facts of the situation show that any plausible stay the course route for Greece implies a level of pain that exceeds that experienced by the U.S. in the Great Depression long into the future. The alternative path of leaving the euro holds out the possibility of a much quicker return to normal growth and potential GDP.

Paul Krugman tells us that "Keynes is Slowly Winning." The immediate cause for celebration is Catherine Mann, the new chief economist at the OECD, calls for stimulus. By contrast, her predecessors in 2011 were calling for rapid increases in interest rates to normalize the economic situation.

This is indeed good news, but as a practical matter the flat-earth crowd is still calling the shots outside of Japan. There is little hope for real stimulus any time soon. The Austerians in power in the EU and to a lesser extent the U.S. are inflicting the sort of damage that our enemies could only dream about. Keynes might be winning slowly, but it is "very slowly."

Much of the public remains badly confused about the Affordable Care Act (ACA). This shouldn't be a surprise. It is a complicated bill. Also, there has been much effort to deliberately create confusion. For example, Republicans invented stories of ACA death panels and massive job loss. Major media outlets, in their commitment to neutral reporting, treated such claims seriously, along with the assertion that the earth is flat.

While the public's confusion is understandable, if regrettable, the confusion among elite types is far more disturbing. Earlier in the week, New York Senator Charles Schumer, the third ranking Democrat in the Senate, admonished his party for pursuing Obamacare rather than promoting stronger measures for the economy. Schumer didn't explain why he thinks not pursuing health care reform would have increased support for bigger budget deficits or a lower valued dollar to reduce the trade deficit, the necessary steps for fixing the economy.

But the really striking part of Schumer's comments was his confusion about the status of the uninsured. He asserted that they were a small part of the electorate and most don't even vote. Washington Post columnist Charles Lane chimes in today, largely agreeing with Schumer on this point.

Contrary to what Senator Schumer and Mr. Lane seem to believe, being uninsured is not a permanent state. People move in and out of jobs and marriages, and their insurance moves with them. (More than 4.5 million people lose or leave their jobs every month.) The number of people who are uninsured at some point in a year is more than 50 percent larger than the number who are uninsured at a point in time.

This means that if 50 million people are uninsured on any given day, it is likely that more than 75 million people will be uninsured at some point over a year. This would likely increase to 100 million over the course of two years. If we add in the close friends and immediate family of these uninsured individuals, it would almost certainly be a substantial majority of the voting age population.

It is reasonable to believe that these people who face and fear periods without insurance would value the security provided by the ACA, since it means that they can still get insurance during these periods. However this security will not affect the popularity of the bill if people are not aware of it. Since Senator Schumer and Charles Lane apparently do not understand this essential aspect of the ACA, it is likely that the tens of millions of people who have day jobs (unlike Schumer and Lane) also don't understand the security provided to them under the law.

The ignorance of this and other aspects of the law likely helps explain much of the law's unpopularity. Opinion polls consistently show overwhelming public support for most of the key features of the bill when asked separately.

It is also worth calling attention to a bizarre assertion in Lane's piece. Schumer notes that the economy has been very weak leading to stagnant incomes for most of the population. He then comments:

"In theory, at least, this should be a time of electoral triumph for the party of government."

This is bizarre because both parties are the party of government, the question is what the government is used for. The Democrats have not distinguished themselves in a big way from Republicans in this area. The top leaders of the party all supported the bailout measures that largely kept Wall Street intact by shoveling the big banks trillions of dollars of below market interest rate loans and guarantees at a time when liquidity carried an enormous premium. The Obama administration has also gone to bat for them by blocking a European tax on the financial transactions of their European subsidiaries.

The Democrats have also used the power of government to make the patent monopolies of the drug companies stronger and longer and spreading them around the globe in trade agreements. In the latter case the profits for the drug companies come at the expense of other exports. The same story applies with stronger and longer copyright protection for the entertainment industry.

They have also constructed trade agreements that are explicitly designed to put U.S. manufacturing workers in direct competition with low paid workers in the developing world. At the same time the Democrats use the power of government to protect the most highly paid professionals (e.g. doctors, lawyers, and dentists) from the same competition.

In short, most of the public sees the Democrats as one of the parties of government that uses the power of the government against most of the public, because it happens to be true.

Of course it had no evidence, but hey, if you don't like the 35-hour work week, who needs evidence. The comment came in an article discussing the debate over changing the 35-hour work week, which requires that employers pay an overtime premium for additional hours.

The piece told readers:

"The law has not improved an unemployment rate that, at 10.2 percent, hovers near a high."

It would be fascinating to know how the NYT reached this conclusion. If people worked more hours, and the unemployment rate remained the same, the implication is that considerably more goods and services would be produced. (If the average workweek increased by just one hour, and there was no decline in productivity, it would imply a 2.9 percent increase in output.)

Incredibly, this piece only presents assertions from experts who claim that France is suffering from the short workweek, although it did make a passengers' assistant at Orly airport, into an expert, telling readers:

"For wage earners like Ms. Ahlem, political resistance to change seems out of touch with economic reality." It then quotes her as saying that the laws should be encouraging people to work, which of course ignores the fact that France is suffering from a lack of demand, not a lack of people who want to work. (See, unemployment means people want to work but can't find jobs.) It's not clear that Ms. Ahlem is typical of most wage earners in thinking that people don't want to work -- even if the NYT assures us that she is.

The piece also includes the bizarre complaint that the short work week has made France too productive:

"But in reality, France’s 35-hour week has become largely symbolic, as employees across the country pull longer hours and work more intensely, with productivity per hour about 13 percent higher than the eurozone average."

Economists attach enormous importance to productivity. If the short workweek has helped to make the productivity of French workers 13 percent higher than the euro zone average this would be a strong argument in its favor.

In short, this is a very confused article. The NYT obviously doesn't like to see workers putting in short workweeks. But if it wants to maintain its status as a serious newspaper it should get its argument straight and move it to the opinion page.

The Wall Street Journal applauded Senator Charles Schumer for saying that the Democrats made a mistake by pursuing health care reform rather than promoting economic recovery. This of course raises the obvious question, what policies exactly would Senator Schumer have put forward to promote economic recovery had the Democrats not pursued health care reform? Would there have been a much bigger stimulus with much larger deficits? Would we have had a more serious financial reform that broke up the large banks and thrown many of Schumer's biggest campaign contributors in jail? Obviously the Democrats should have done more to promote a recovery, but it is difficult to see how anything connected with the Affordable Care Act (ACA) prevented it.

Perhaps the more serious problem with Schumer's logic, as presented by the WSJ, is the claim that the politics on the ACA were inherently bad.

"Mr. Schumer put the problem to Democrats in terms crass enough for them to understand—'only a third of the uninsured are even registered to vote,' he said, and only 'about 5% of the electorate' benefits from the entitlement. 'To aim a huge change in mandate at such a small percentage of the electorate made no political sense.'"

While the uninsured at any point in time are a relatively small share of the electorate, tens of millions of people experience stretches of being uninsured over the course of a year and tens of millions more worry about this possibility. Of course many of them may not realize how they can benefit from the ACA and even many of those who do benefit (e.g. by getting insurance on the exchanges) may not know it is due to the ACA. In this respect, it is important to note that more than 4 million people leave or lose their job every month.

In a situation where one of the leading Democrats in the Senate apparently does not understand how the ACA affects a very large share of the currently insured population, it would not be surprising that the average voter does not understand either.

 

The gods of national income accounting gave us some good news for Thanksgiving but it seems no one noticed. The data on corporate profits released in yesterday's GDP report showed that the slight downward trend in shares in recent quarters is continuing. The profit share of net corporate income was 20.5 percent in the third quarter, down from a peak of 21.2 percent in the second quarter of 2013. Quarterly data are erratic but if we take a four quarter moving average we get the share was 20.2 percent in the four quarters ending with the third quarter, down from 21.0 percent in the four quarter average ending in the fourth quarter of 2013. That still up considerably from the 16.7 percent average since 1950, but clearly a step in the right direction. (Most of the drop is on the financial side, the profit share in the non-financial sector is still close to its peak.)

The shift away from profits could mean that workers will finally start to see some of the benefits of growth. However, there are two important cautions. First, most of the upward redistribution from 1980 to the present was not from wages to profits but rather from wages to high end workers. CEOs and hedge fund managers are getting labor income, or at least it is classified that way in the national income accounts.

The other point is that the economy is still not growing especially fast, in spite of what you read in the newspaper. GDP is up just 2.4 percent from the third quarter of last year. That is better than nothing, but with the labor force growing by close to 2.0 percent over this period, that doesn't leave much room for wage growth even without upward redistribution.

The Post ran a piece today discussing the agenda of Julian Castro, the new secretary of the Department of Housing and Urban Development Secretary. At one point the piece discusses affordable housing. It then refers to the Johnson-Crapo bill for privatizing Fannie Mae and Freddie Mac. This bill has a provision for a fund that would support affordable housing.

It would have been worth noting the size of the fund. It would get its revenue from a 0.1 percent tax on mortgages issued through the system. If an average of $1.5 trillion a year in mortgages are issued, this tax would raise $1.5 billion annually.

If it costs $150,000 to build an average unit of affordable housing, this fund will be able to support construction of roughly 10,000 units a year, an amount equal to roughly 0.007 percent of the housing stock. Alternatively, if this money was used to subsidize rent, it would provide a subsidy of $1,500 a year ($125 a month) to 1 million households.

Both of these routes may be very helpful to the people who benefit, but they are not of a scale necessary to ensure affordable housing to low and moderate income families. It is worth noting in this respect that there is no dispute that the Johnson-Crapo bill proposal would raise the cost of mortgages. The range of estimates are in the neighborhood of 0.5 percentage points to over 2.0 percentage points.

If we assume that the actual impact is close to a 0.5 percentage point increase, this would imply that a family with a $200,000 mortgage would pay an extra $1,000 a year in interest due to Johnson-Crapo. This is likely to have far more impact in making housing less affordable than the subsidies funded through the bill's tax to promote affordable housing. 

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One of the factors that made it easy for the housing bubble to be inflated to ever more dangerous levels was the conduct of the credit rating agencies. They gave every subprime mortgage backed security (MBS) in sight top investment grade ratings. This made it easy for Citigroup, Goldman Sachs and the rest to sell their junk bonds all over the world.

There was a simple reason the credit rating agencies rated subprime MBS as AAA: money. The banks issuing the MBS pay the rating agency. If the big three rating agencies (Moody's, Standard and Poor's, and Fitch) wanted more business, they knew they had to give favorable ratings. The banks weren't paying for an honest assessment, they were paying for an investment grade rating.

There is a simple way around this conflict of interest. Have a neutral party select the rating agency. The issuer would still pay for the review, but would have no voice in selecting who got the job.

Senator Al Franken proposed an amendment to Dodd-Frank that would have gone exactly this route. (I worked with his staff on the amendment.) The amendment would have had the Securities and Exchange Commission pick the rating agency. This common sense proposal passed the Senate overwhelmingly with bi-partisan support.

Naturally something this simple and easy couldn't be allowed to pass into law. The amendment was taken out in conference committee and replaced with a requirement for the SEC to study the issue. After being inundated with comments from the industry, the SEC said Franken's proposal would not work because it wouldn't be able to do a good job assigning rating agencies. They might assign a rating agency that wasn't competent to rate an issue. (Think about that one for a moment. What would it mean about the structure of an MBS if professional analysts at Moody's or one of the other agencies didn't understand it?)

Anyhow, as is generally the case in Washington, the industry got its way so the cesspool was left in place. Timothy Geithner apparently is proud of the role he played in protecting the rating agencies since he touted this issue in his autobiography. Geithner is of course making lots of money now as a top figure at the private equity company Warburg Pincus, so everybody is happy.

This is all relevant now because it seems that the rating agencies are back to their old tricks, or so Matt O'Brien tells us in Wonkblog. There has been a flood of new bonds backed by subprime car loans. Apparently Fitch is getting almost none of this rating business because it refuses to rate garbage as AAA.

O'Brien does a good job in calling attention to what is going on in this market, but it would be good to remind everyone of why it is still going on. We do know how to fix the problem. It's just that Timothy Geithner and his friends don't want the problem fixed.

 

Emily Badger in Wonkblog had an interesting discussion of the issues around state tax incentives to lure or keep businesses. The piece notes that many economists believe that it would be good to ban these incentives since it ends up being a zero sum game. It then includes many comments implying that any bans would be difficult to enforce.

While it is certainly true that enforcement would be difficult, it is worth noting that parallel issues arise in international trade all the time. A major goal of many trade deals is to prevent countries from subsidizing their own industries to give them an advantage in international competition. There are often major disputes over what constitutes a subsidy. For example, Boeing and Airbus frequently end up in suits before the WTO over allegations of unfair subsidies. Nonetheless, few people dispute the desirability of trade agreements attempt to restrict subsidies.

The situation at the state level is comparable. There will always be grey areas as states try to push the limits of acceptable subsidies, but that doesn't mean it is not desirable to outlaw the general practice. Just as with international trade, such an agreement can be expected to substantially reduce the amount of money committed to firm specific subsidies.

The NYT engaged in some mind reading on Gina Raimondo, the Democratic nominee for governor of Rhode Island. In reference to Raimondo it told readers:

"Growing up in a Democratic household, she believed in activist government. (Her father had gone to college on the G.I. Bill.) She also thought pension benefits needed to be curbed to save other government services, not to mention the pension system itself."

It's great that the NYT is able to tell us what Raimondo actually believes about activist government and cutting pension benefits. Most newspapers would just have to report what Raimondo said about her views.

As long as the NYT was doing mind reading it might have been helpful if it told readers whether Raimondo thinks that Rhode Island can break contracts with anyone or whether she only thinks the state has the right to break contracts with its workers. It could also have told readers whether she believes the state has the obligation to respect the law in other areas.

For example, if she wants to provide government services but doesn't want to raise the taxes to pay for them, does she think the state should just seize property to cover the cost, and if so, whose property?

Instead of spending so much effort on mind reading, it might have been more useful to readers if the paper had spent more time examining the specifics of Raimondo's pension proposal. In addition to taking back part of the money the state had committed to pay workers, Raimondo's pension plan also will mean giving hundreds of millions of dollars in fees to Wall Street hedge funds. These fees could easily reduce the pension fund's return by more than a full percentage point.

 

The Washington Post's Wonkblog had an interesting piece on efforts by San Francisco and other cities to set up rules for short-term rental services like Airbnb. At one point it tells readers:

"critics of any new regulation will likely argue that it imposes onerous bureaucracy on would-be hosts, while setting up a complex system that the city can't maintain."

Actually, it should be fairly easy to enforce regulations by simply holding Airbnb responsible for people who rent through its service. This would leave the enforcement problem with Airbnb. If Airbnb lacks the competence to ensure that its rental units comply with the law, then it will replaced by a more competent business. That is the way markets are supposed to work.


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