The NYT devoted a lengthy piece to telling readers how bad things in Japan have been since its bubbles collapsed in 1990. It gets many things badly wrong.
First and most importantly, Japan is actually considerably wealthier on average today than it was in 1990, contrary to the implication of this article. According to the IMF, per capita income is 16.4 percent higher in Japan today than it was in 1990. This is considerably less than the 21.5 percent growth in the UK over this period or the 36.6 percent increase in the United States, but it is still a substantial gain in living standards. It is also worth noting that Japan's gain in per capita income was accompanied by a considerable shortening in the ratio of hours worked to population (shorter workweeks and more retirees).
However the biggest flaw in the piece is its obsession with deflation. Japan's has suffered from deflation in the last two decades, but the rate of price decline has always been very gradual. Only in 2009 did it even exceed 1.0 percent. (It is projected to be larger than 1.0 percent this year.)
It makes very little difference to an economy whether prices are falling by 0.5 percent or rising by 0.5 percent. The argument that people put off purchases because they see prices falling is just silly. If prices are declining at the rate of 0.5 percent a year, then someone considering the purchase of an $800 refrigerator can save $4 by waiting a year. It is unlikely that these sorts of savings would have much impact on even the purchase of a big ticket item; it's inconceivable that they would have any impact on the purchase of more every day items like food and clothing.
The real issue is simply that Japan's inflation rate has been too low. In this sense, a 0.5 percent deflation rate is worse than a 0.5 percent inflation rate. But a 0.5 percent inflation rate is also worse than a 1.5 percent inflation rate. A low inflation rate, whether positive or negative, keeps real interest rates higher than would be desirable in a severe downturn. It also prevents the economy from inflating away the debt burden left over from the housing bubble.
This point is important because many people wrongly believe that the United States will only be suffering from a problem of too low inflation if the inflation rate actually turns negative and we have deflation. This is not true. The inflation rate in the United States is already a level that is hampering growth. Any further drop in the inflation rate will make the situation worse but there is no importance to crossing zero.
One final point worth noting: this article implies that Japan's low birthrate is a bad thing. Actually, Japan is a very densely populated country. This is why house prices are so high. If its population declined then housing prices would fall. (This is a sophisticated economic concept known as "supply and demand.") A lower population would also mean less greenhouse gas emissions for those who care about the future of the planet. For these reasons, a low birthrate could help Japan in the future.
With private sector unionization down to 7 percent, the right-wing is turning its guns on public sector unions. Since workers generally can opt to join a union in the public sector without the risk of being fired, there has been no notable decline in public sector unionization rates over the last three decades. The unionization rate in the public sector is still above 35 percent, which means that public sector unions continue to be an important force on the political scene.
The Washington Examiner accommodated this attack with a piece from Diana Furchtgott-Roth, the chief economist at the Labor Department in the Bush Administration. The centerpiece of Ms. Furchtgott-Roth's piece is a complaint "insourcing," which means having work done by private contractors done instead by public employees.
Her first sentence has the bizarre complaint that:
Dan Balz gave Washington Post readers classic "he said, she said" reporting in his coverage in the debate in Nevada's Senate race. Balz reported that Sharon Angle, the Republican challenger, claimed that Social Security is facing a serious crisis. He then noted that: "Reid suggested that, with tiny fixes, the system would be good for the next four decades or beyond."
Actually, what Reid "suggested" is exactly what the projections from the Congressional Budget Office show as well as the projections from the Social Security trustees. The vast majority of Post readers don't have the time to investigate the truth of Reid's statement, Dan Balz does. He should have told readers that Senator Reid was right and Ms. Angle was wrong according to the standard projections used to evaluate this program.
NPR made this mistake in its top of the hour news segment on Morning Edition. Both parties might say that current budget deficits will cause problems, but they cannot "acknowledge" something that is not true. (If NPR knows this to be true, then it should share this information with its listeners.)
Since the economy has vast amounts of unused resources there is no reason that current deficits would pose any problem. And, the Fed could in principle buy and hold the debt used to finance the deficit so it places no interest burden on future generations.
We aren't supposed to use the word "lie" in Washington, probably because the practice is so common, but let's just use normal English for a moment. NYT Roger Cohen devotes his column to a tirade against the French for their opposition to raising the retirement age. This opposition has taken the form of a general strike that has seriously disrupted the economy.
Cohen is a huge proponent of the increase -- he calls it a "no-brainer." This is fine, he is a columnist and this is his opinion. But how about getting the basic facts right? The headline and discussion in the article focus on a raise in the retirement age from 60 to 62. Cohen argues that this is necessary because life expectancy has risen 15 years since 1950.
Age 60 is not in fact the age for getting full retirement benefits in the French Social Security system. It is age 65. Age 60 is an early retirement age at which it is possible to retire with reduced benefits. It is comparable to the age 62 early retirement age in the U.S. system. Cohen is not alone in failing to make this point clear, but he certainly does raise this distortion of the debate to a higher level.
The 15 year increase in life expectancy is also deceptive. The implication is that the French expect to be retired on average for 15 years more than in 1950. Actually, much of the increase is due to reduced infant mortality rates. This does not directly affect the arithmetic of the retirement system. Much of the increase is due to more people living until retirement. This improves the finances of the retirement system. Only a portion of the increase is due to people living longer post retirement. (I don't have the breakdown for France, but here's the U.S. story.)
Cohen also includes the bizarre assertion that France has to raise its retirement age because "the Chinese don’t get the notion of retirement." Unfortunately this sort of junk is often used in arguments for cutting wages and benefits for ordinary people.
Is Roger Cohen a Neanderthal protectionist? Does trade make the world poorer? That is not standard economic theory. If it would have been possible for people to enjoy early retirement benefits in France at age 60 without trade with China, then it should be even more possible now that the French have the benefit of low-cost goods made in China.
Unfortunately Cohen's misrepresentations (we're being polite again) are the norm in this debate. Billionaire investment banker Peter Peterson routinely goes around saying that there is no Social Security trust fund. This blatant untruth should put Peterson on the top pedestal of the Economics Flat Earth Society. Instead, he is treated reverentially in elite DC circles and even wins himself invitations to the White House.
The world is not getting poorer. Productivity is improving year by year. (France's productivity level is only slightly lower than the United States.) It is perfectly reasonable for a society to opt to take the benefit of higher productivity growth in the form of longer retirements.
This does have to be paid for, presumably primarily through taxes on wages -- in effect workers pay for their own retirement. In the United States, while Social Security cuts are talked about all the time in Washington's elite policy circles, polls routinely show that workers are actually willing to pay higher taxes to finance their retirement benefits, and that they prefer taxes to cuts. This is not a problem of people being childish. This is a problem where the elites have arbitrarily ruled out one of the key options.
Of course it is also possible to support a retirement system in part with more progressive taxation. In the United States, raising the cap (currently $106,000) on taxable wage income would go a long way to reduce the projected long-term shortfall in funding.
It is also possible to raise money from directly taxing those who have been the big winners in the current economy. A financial speculation tax could raise as much as 1 percent of GDP in the United States ($145 billion a year). This is twice the size of the projected shortfall in the Social Security benefits.
Financial speculation taxes are almost never discussed in the media even though they have been widely used. (The United Kingdom still raises 0.3 percent of GDP [$40 billion a year in the U.S.] from a tax that only applies to stock trades.) They are politically difficult because of the power of the financial industry in the United States and elsewhere.
But talking about cutting Social Security benefits, rather than raising financial speculation taxes, or other progressive taxes, cannot honestly be called making tough choices. It is making a cowardly choice. It is serving the interests of the rich and powerful at the expense of the vast majority of the population. That may be what politics is about, but it should be described accurately.
Politico told readers that: "On Friday, Social Security recipients will learn that they won’t receive higher benefits for the second year in a row because the economy isn’t growing fast enough." Actually, this is not true. The cost of living adjustment for Social Security has nothing to do with the economy's growth rate. It is based on the rate of inflation as measured by the consumer price index. The reason that beneficiaries will not receive higher benefits is because the CPI shows no inflation over the last year.
The difference between inflation and growth is very important and fundamental. Reporters should be able to get it right.
Weekly unemployment claims jumped by 13,000 to 462,000 last week. The 4-week moving average is at 459,000. This suggests that the economy is still not generating jobs. Following the last downturn, the economy did not start generating jobs consistently until weekly claims had fallen to near 400,000.
It is also worth noting that the unemployment insurance filings may be lower relative to the number of layoffs each week than was true in the past. The reason is simple: because of prolonged high unemployment, many workers who are newly laid off are not eligible for benefits.
Requirements vary by state, but most look back at a workers history over either the prior 4 quarters or the 4 quarters prior to the most recent quarter. To qualify, workers need some minimum number of work hours (e.g. 500 to 600 hours) or minimum earnings (e.g. $2,500 to $3,000) over the relevant 4 quarters.
Either 4 quarter period is a time in which unemployment was quite high. Furthermore, while unemployment has hit everyone, it has hit some groups especially hard. The unemployment rate for workers with just a high school degree has averaged almost 10.5 percent for the last 12 months. For workers without a high school degree it has averaged almost 15 percent. For workers between the ages of 20-24 it has averaged almost 15 percent.
Many of the people who got laid off last week may have just recently been hired after an extended spell of unemployment. This means that they would not qualify for benefits. This is always true for some number of the newly unemployed, but that share would be much larger today than it had been in 2007 when the unemployment rate had been under 5.0 percent over much of the prior 12 months.
It is not clear how much this would affect unemployment claims, which is the number reported each month. This number gives the number of people filing, not the number who are determined to be eligible. It is likely that many ineligible workers go ahead and file, not realizing that they ineligible.
However, some workers undoubtedly understand the system and don't bother filing. We don't know how large this number is, but if it is 5 percent of the newly unemployed, that would correspond to nearly 25,000 additional claims a week. This implies that the 461,000 claims filed last week would correspond to roughly 485,000 claims filed three years ago, before the long period of high unemployment had set in.
In a confused column today, Steven Pearlstein touted the need for wages in the United States to fall. He focused on the wages of autoworkers, but implied that the wages of less-educated workers more generally must fall. At the end of the column Pearlstein told readers:
"I'm sure many of you are reading this and thinking that if anyone is forced to take a pay cut to rebalance the economy, surely it ought to be overpaid investment bankers, corporate executives and newspaper columnists. That's how things would work in a socialist paradise, but not in market economies, which are much better at producing efficiency than fairness."
Well no, it is not the case that a "market economy" led to the high salaries of investment bankers, corporate executives, and newspaper columnists, while forcing wage cuts on auto workers. In fact, there are a wide variety of government interventions that created this situation.
For example, there was the government bailout of the banks two years ago. By offering trillions of dollars in loans and guarantees the government kept Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and other Wall Street giants in business. In a market economy, the top executives of these companies would be walking the unemployment lines right now instead of getting bonus checks in the tens of millions of dollars.
The executives of these banks also benefit from the "too big to fail" subsidy. This means that creditors will lend to these banks at lower interest rates because they know the government will bail them out if the bank gets into trouble.
Corporate executives get ridiculously high pay in the United States (as opposed to Europe, Japan, or South Korea) because the government's rules of corporate governance allow corporate executives to essentially run companies in their own interest. The CEOs largely appoint the board of directors (a ridiculously plush sinecure) who in turn decide the CEOs' pay. In systems where the corporations are more directly subject to shareholder control, CEOs get paid far lower salaries.
Finally the pay of columnists and highly educated workers is inflated as a result of the fact that these workers are largely shielded from international competition. The laws make it difficult for companies to bring in foreign professionals to undercut the pay of doctors, lawyers, columnists, even if they are every bit as competent as the native born workers they would be replacing.
By contrast, trade policy was deliberately designed to put U.S. manufacturing workers in direct competition with the lowest paid workers in the world. Also, hotels, restaurant owners and other employers of low-skilled workers have no problem at all hiring undocumented workers at low wages to keep down pay in these sectors. This also is a policy decision -- the government has decided not to require these employers to obey employment law.
In short, the inequality that Pearlstein notes has nothing to do with the dictates of a market economy. It is the result of the people at the top rigging the rules to their benefit. They got the government to stack the deck in their favor and then hired people like Pearlstein to tell everyone that it was just the natural workings of the market.
It would have been useful to point this out in an article that presented the views of former Fed governor Robert Heller. Mr. Heller's views were presented as those of an inflation hawk who was worried that the Fed was going too easy in trying to boost the economy. He noted the inflation of the 70s and the recessions in 1980 and 81-82 that brought the inflation rate down.
It would have been worth reminding readers that these downturns were far less severe, measured in duration and increase in unemployment, than the current downturn. If the possible bad outcome is not as bad as the current situation, then there would appear to be little basis for concern about excessively easy monetary policy.
The NYT reported that state, local, and county governments in New York face a liability of $200 billion for retiree health insurance payments. These governments have not budgeted for this liability.
It would have been helpful to include a measure of future income so that readers could assess the importance of this cost. If New York State grows at roughly the same rate as the overall economy, then its total income (discounted at a 4.5 percent rate) would be over $37 trillion. This puts the unfunded liability for health care for New York's public sector employees at approximately 0.5 percent of income.
It is also worth noting that much of this cost is due to the projection that health care costs in the United States will continue to grow at a pace that is far out of line with growth in the rest of the world. If the country were to adopt free trade policies in health care, then this cost could be drastically reduced. In other words, if U.S. trade policy was not so protectionist in this area, state and local government retiree health care costs would be far more affordable.
The article also includes comments that retirees can get full health care benefits as early as age 55. It would have been worth mentioning that this only applies to workers who have worked 30 years or more, which is not most workers.
The NYT is a great newspaper with many outstanding reporters, but does it have access to the innermost thoughts of top administration officials? That seems unlikely, which is why readers should be wondering how it knows that "the administration fears it [a foreclosure moratorium] will only delay the inevitable and necessary process of forcing many Americans out of homes they cannot afford."
This particular explanation seems highly unlikely since its HAMP program seems designed to accomplish exactly this. The vast majority of homeowners who enter the HAMP program keep making payments on homes that they will eventually lose. While this does help the banks, it delays the inevitable and necessary process of forcing many Americans out of homes they cannot afford. It doesn't make sense that the administration would be spending tens of billions of dollars on a program whose main impact is to delay having homeowners forced out of their homes if it actually thinks it is important that people be forced out of their homes quickly.
There are other possible explanations for the Obama administrations opposition to a foreclosure moratorium. For example, it could be discovered that the fraud and procedural abuses are widespread. It would likely be very costly for many servicers to construct the proper paperwork to carry through foreclosures. The administration may not want to force banks to incur these costs. That is at least one alternative explanation for the administration's position.
According to the David Brooks methodology both are. Brooks points out that public sector workers get higher pay than the economy-wide average, which is the basis for his argument that they are overpaid. By this methodology, if Brooks get more than $22.67 an hour, the economy-wide average, then he is overpaid.
Economists usually approach this issue somewhat differently. They consider workers' education and experience. If we adjust for education and experience then we find that public sector workers get paid somewhat less on average than private sector workers. This is partially, but not completely, offset by the higher pensions that upset Brooks so much.
It is likely the case that many state and local governments did not adequately budget for workers' pensions, but this is more an issue of failed accounting and incompetent reporting (newspapers are supposed to be covering such issues) than excessive pensions. Brooks highlights an estimate that the amount of the average unfunded pension for all public sector workers is $87,000.
This does not seem particularly large. If we assume an average retirement of 20 years, this comes to $4,350 per worker pension year. Since many public sector workers do not have Social Security this hardly seems an excessive amount on the workers' part.
Brooks also complains that AFSCME, the public employee's union, was the largest single contributor to political campaigns between 1989 and 2004. While this may be true in the sense that AFSCME gave more money than Robert Rubin or Rupert Murdoch, AFSCME represents more than a million workers. Certainly the million richest Wall Streeters, oil tycoons, or tech entrepreneurs gave far more money to candidates than AFSCME. It is likely that politicians responded to their concerns roughly in proportion to their contributions.
Robert Samuelson insists that the bond markets are forcing countries to adopt austerity in the middle of a downturn. This is not true. Bad economic policy, by the same people who gave us the Great Recession (how badly do economists have to mess up to get fired?) is forcing countries to adopt austerity in the middle of a downturn.
In fact the bond markets are making money available to countries like Germany, Japan, and the United States at very low interest rates, the exact opposite of the scenario that Samuelson describes. (Samuelson notes these low rates in passing, but doesn't seem to understand their importance.) It is true that countries like Greece, Ireland, and Spain are paying much higher interest rates, but this has little to due with the generosity of their welfare states as Samuelson claims. It is due to the deliberate decision from the Great Recession makers at the European Central Bank (ECB) to squeeze these countries.
The situation of these countries is similar to that of individual states in the United States. They do not print their own currency and therefore are constrained in their ability to spend in a period of a downturn. The ECB does print money and could easily extend support to these countries during the downturn, but it has made a conscious choice to only do so insofar as they cut back on their welfare state benefits. Note this will not create inflation in the current situation; the economy's problem is inadequate demand, not too much demand.
It is not the downturn that is forcing cutbacks, it is the people controlling policy at the ECB. These policymakers do not like to be publicly associated with their policy decisions so they no doubt appreciate columns like Samuelson's that hide their role.
As a basic principle, there is no reason for general cutbacks in the welfare state. Societies are getting richer because of something called "productivity growth." The cutbacks in the welfare state are simply part of the upward redistribution that policymakers in the U.S. and elsewhere have been pushing for the last three decades.
Mankiw explains in his piece that the various tax increases (income, capital gains, and estate taxes) would substantially reduce the percentage of any additional income that he could pass onto his children, which he says is his main motivation in earning money. Therefore higher taxes will give him less incentive to write. His point being that many other high-income workers will be in the same boat.
Brad DeLong ably dealt with the basic issue as to whether taxes can be separated from spending over the long-term, as Mankiw’s discussion seems to imply. (They can certainly be separated in periods of high unemployment like the present.) But, there are several other issues to raise.
First, the relevant factor determining work effort is after-tax income, not tax rates. As a result of a number of policy decisions (e.g. protecting highly educated workers from unrestricted international competition, strengthened patent and copyright protection), Mankiw is likely to enjoy a higher after-tax wage even with the repeal of the tax cuts than he would have earned 30 years ago if Bush era tax rates were in place.
If taxes on gambling were applied to gambling on Wall Street, in the form of a modest financial speculation tax, it would drastically reduce the volume of trading. This would substantially reduce the demand for workers with advanced degrees in the financial sector.
Since the financial sector employs a high percentage of the workers with advanced degrees, a financial speculation tax would likely put downward pressure on the wages of people with advanced degrees across the board. An unfortunate aspect of the debate on tax policy is that it leads the public debate to focus on tax rates while ignoring the much more important policy decisions that determine the distribution of pre-tax income.
The second point is that the income/wealth effect of lower taxes may cause Greg and/or his children to work less. This effect is difficult to measure. In any given year, a lower tax rate may cause people like Greg to work more, but this could be different if they accumulate substantial additional wealth as a result of lower tax rates. Greg tells us that his main motivation is to accumulate enough wealth to ensure that his three children can enjoy a comfortable standard of living.
Suppose that he had already accumulated enough wealth for this purpose because the tax rates had been low for a long time. How many columns would Greg be writing then? Alternatively, can we expect as much work out of Greg’s well-educated kids if he provides them with a substantial inheritance as opposed to a situation where they had to work to make ends meet like the rest of us? Or, taken the other way, would Greg be writing as many columns today if his parents had handed him enough money so that he did not have to work to ensure a comfortable standard of living for himself and his children? We don’t know the answer to this one, but Greg certainly gives the issue short shrift in his discussion.
Finally, there is the issue of quality that Brad raises in his blognote, but doesn’t pursue sufficiently. If we pay writers by the word, then we would expect writers to write long books and articles. That’s great if we want long books and articles, but it is not necessarily a way to get good books and articles.
If economists, and others like them, are motivated primarily by money then they will do work that gets them money. This does not necessarily correspond to good economics. Many of the most creative workers received very little if anything in compensation for their work. Think of Vincent van Gogh, Charlie Parker, and Franz Kafka. Suppose we offered these great artists large sums of money for each piece they produced. Would they have produced better work?
I don’t know the answer to that one. I am not arguing that creative workers should live in poverty, only that many of the most creative people in history were motivated first and foremost by a commitment to their work, not by money. It certainly is not obvious that they would have been more creative if they thought there was more money at stake.
The TARP is one of those issues like Social Security, where the Washington Post has displayed considerably less diversity in opinions than Pravda back in the days of the Soviet Union. Just in case you hadn't seen their TARP is great line enough, the Post invited Treasury Secretary Timothy Geithner to invent some myths that he could attack in the Outlook section.
Readers were no doubt looking for the line about how TARP and related bailouts used trillions of dollars of loans and loan guarantees from the Treasury, Fed, and FDIC to keep the largest financial institutions from going into bankruptcy, protecting the wealth of their shareholders, many of their creditors and top executives. But of course that is not a myth.
Black teens were already taking it on the chin in this downturn. The August employment rate was down by more than 10 percentage points from the pre-recession level. It was down by 20 percentage points from the peak employment rate for black teens during the boom in 2000.
Remarkably, this fact seems to have gotten virtually no attention in the media. While everyone noted the weakness of September data, none of the major outlets seems to have commented on the incredibly dismal job prospects for black teens.
No doubt this stems in part from a new political correctness where powerbrokers don’t note the devastation that their policies have inflicted on disadvantaged groups. Undoubtedly many of these people would attribute the low employment rates to inadequate motivation to work or a lack of the necessary skills.
These explanations run into the problem that black teens seem to have been plenty motivated to work just a few years ago. Just a decade ago, the percentage of black teens who had the motivation and skills to gain employment was almost three times as high as it is today.
We can believe that the necessary skills for employment changed at an incredibly rapid rate to produce this plunge in employment rates or we can we believe that a collapse in aggregate demand led to a sharp reduction in employment opportunities. The latter explanation seems far more likely, which puts the blame on the policymakers, not black teens.
In either case, the reporters covering the September employment report should have noticed.
According to the Washington Post, if the answer is not many, then we need to bring in immigrant reporters. That is exactly the logic it used in a discussion of the fact that most native born American citizens are unwilling to do farmwork for this wage.
Economists would ordinarily say that the lack of a labor supply at a given price suggests that the wage is too low. However, the Post only considers this fundamental economic principle in passing. It is likely that if farmworkers received $60,000 a year, with health care benefits, there would be no shortage of U.S. citizens willing to do this work.
Of course this would raise the price of farm products, but it would be much cheaper to advertise in the Washington Post if its reporters worked for $10.25 an hour. The lower cost of advertising would be passed on in lower prices for groceries, cars and other items advertised in the paper. At least this is what people who believe in economics would say.
The top article in the Sunday Washington Post is an entirely invented piece that tells readers in the first sentence: "If there is an overarching theme of election 2010, it is the question of how big the government should be and how far it should reach into people's lives." There is absolutely nothing in this article that supports this assertion.
The article notes in the fourth paragraph that even most people who complain about the size of government consider Social Security and Medicare, by far the largest social programs, very important. It is not clear what being opposed to "big government" means in a context where nearly everyone supports its main pillars.
There are no candidates anywhere in the country who are running in support of "big government," there are candidates who are running in support of programs which have varying degrees of support. There are many candidates (virtually all Republicans) who are running against "big government." While this position has nothing to do with the world (we all oppose waste, fraud, and abuse, the question is always the status of specific programs), it is certainly helpful to the Republicans to have the election framed in this way.
Politico wrongly told readers that: "voters tells pollsters they’re worried about all the red ink in the federal budget, and Democratic centrists have grown more urgent in telling Obama it’s time to rein in federal spending." This is not true.
A recent NYT-CBS poll found that just 9 percent of respondents said that the deficit was something that they were angry about. It is also inaccurate to identify Democrats who raise concerns about the deficit as "centrist." They can more accurately be identified as Democrats with close ties to corporate interests. Their financing base is a far more obvious way to distinguish their ideological leanings.
The article also includes the bizarre assertion that: "liberals argue that it’s OK for the federal government to run up big deficits at a time of economic slowdown — $1.3 trillion this year — because it’s much more important to use government spending to inject some life into the economy, to help struggling families stay afloat."
This is like saying that: "liberals argue that the earth is round." While it is true, so do the vast majority of conservatives. The same is the case of deficit spending in the current downturn. Prominent conservatives such as Martin Feldstein and David Walker have also called for increased deficits in the face of 9.6 percent unemployment.
It is also bizarre that this article mentions cuts to Social Security repeatedly but never once discussed the possibility of raising the cap on the payroll tax or raising the payroll tax rate itself. Polls have consistently shown both policies to be far more popular with the public than cutting benefits. Serious news outlets are not supposed to just report on the policies they support.
The NYT argued for having Fannie and Freddie refinance homeowners who are far underwater. It makes the case with bad arithmetic and poor logic.
On the bad arithmetic part it tells readers that "up to eight million" homeowners would be able to refinance if Fannie and Freddie allowed underwater homeowners to refinance. This is true in the sense that 1000 would be "up to eight million." There are roughly 45 million homeowners with mortgages, more than half of whom are with Fannie and Freddie. Let's put it at 24 million. A very high percentage of the F&F mortgages were issued in the last two years at rates that were not very different from the current ones.
F&F are largely the market now. There were roughly 5 million homes purchases each year and a considerably larger number of refinancings, so let's say conservatively that 14 million of their mortgages were issued since January 2009, leaving 10 million older mortgages. All of the pre-2009 mortgages are not underwater, which makes one wonder which planet the 8 million figure came from.
Beyond this point, the NYT tells us that refinancing could free up as much as $24 billion in spending. Really? Suppose someone owes $300,000 on a home that today would rent for $10,000 a year. Let's say the politicians arrange for refinancing so that this homeowner only pays 4.5 percent on their mortgage. Throwing in taxes, insurance, and other ownership related expenses, this person will be paying around $20,000 a year for a house in which they can never plausibly be expected to have equity.
In other words, if the NYT program persuades this person to refinance and stay in their home rather than walk away and rent a comparable unit, it will cost them an extra $10,000 a year. This is money pulled out of the economy. If 1 million people are in this position then this is a formula to pull $10 billion out of the economy. If 2 million people are in this position then persuading people to refinance rather than walk would pull $20 billion out of the economy.
Both the homeowner and the economy would be much better off if this person just walked away. It is incredible that we still cannot get serious discussions of people walking away from homes even when they are heavily underwater.
Standard & Poor's, which is probably best known for giving investment grade rating to mortgage backed securities backed by junk mortgages at the peak of the bubble, warned that demographic changes would pose severe budget burdens and urged the United States to begin to begin cutting back programs for the elderly now. In an article presenting Standard & Poor's view on this issue, it would have been worth reminding readers of the company's track record. It probably would also have been appropriate to remind readers that it was paid large amounts of money for the investment grade ratings it gave to these mortgage backed securities.
This background would allow readers to better assess the nature of Standard and Poor's advice to the American people. Economists who are not paid by Wall Street banks have used the exact same data to point out that the projected budget problems are due to the incredible inefficiency of the U.S. health care system. If the United States paid the same per person costs as any other wealthy country the long-term projections would show huge budget surpluses, not deficits.