Sorry, I usually find Matt's stuff interesting, but I couldn't resist the cheap shot. Anyhow, Matt seems to have gotten himself stuck in the mud of a silly debate between Obama haters and Obama apologists.

The haters are saying that all the jobs created under the Obama administration are part-time jobs -- pointing out that full-time employment is still below the pre-recession peak. Meanwhile the apologists are pointing out that most of the jobs created under Obama have been full-time jobs. With the wisdom of someone other than Solomon, Matt pronounces them both right.

Okay, let's step back for a moment and deal with two separate issues. The first is overall employment. We saw a huge fall in employment that began before Obama stepped into the White House and continued for his three months in office. Since that point the economy has gained back more jobs than it initially lost. However since part-time employment (both voluntary and involuntary, a distinction to which we return momentarily) is well above pre-recession levels, full-time employment is still below its pre-recession level.

How should this appear on the Obama scorecard? Well, it's pretty damn silly to blame Obama for the downturn. He walked into an economic disaster that was not of his doing. We can argue that the recovery should have been more robust. I know the Republicans blame Obamacare, taxes, regulations and the Redskins' defense, but none of these explanations can pass the laugh test.

The more obvious explanation, which some of us did say at the time, is that the stimulus was not large enough to fill the hole in demand created by the collapse of the housing bubble. There is a question as to whether Obama could have gotten more stimulus through Congress, either at the time or in subsequent efforts, but the main problem was congressional opposition, not the actions of President Obama.

In prior decades trade deals were largely about reducing tariffs and quotas that obstructed trade between countries. Due to the impact of these past deals, these barriers are now quite low or non-existent.

That is why the trade deals currently being negotiated by the Obama administration, the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP), are not really about reducing trade barriers. These deals are about locking in place a corporate friendly structure of regulation. This structure will limit the ability of elected governments to impose regulations on the environment, health and safety, and other areas.

Some of these regulations increase barriers to trade, such as increased patent and copyright protection. The Washington Post once again enthusiastically endorsed the TPP and TTIP in its lead editorial today. Since it is entirely possible that the increased protectionism in these trade deals will have a larger economic impact than any reduction in trade barriers, we should recognize that the Post may be an ardent supporter of protectionism for U.S. industries who find they can't make enough profit in a free market.

The paper also deserves some ridicule for touting the possibility that the Fed will raise interest rates:

"Indeed, if favorable trends such as low oil prices continue, the economy might achieve the long-awaited “escape velocity” that would enable the Federal Reserve to end its zero interest-rate policy without harming growth."

In fact, it will take about two and a half years of the job growth that we saw in November to restore the demographically adjusted employment to population ratio that we had before the recession. It is also striking how the Post seems to see it as an end in itself that the Fed raise interest rates. Low unemployment and income growth are standard economic goals, a federal funds rate is not typically viewed as a goal of economic policy.

Andrew Biggs had a column in the Wall Street Journal last week complaining that public pension funds were taking excessive risk by having 70 percent to 80 percent of their holdings in risky assets, such as stocks and various alternative investment vehicles. In a few cases, holdings of risky assets apparently cross 80 percent. Biggs argues that this is far too high and that underfunded pension plans are now taking big gambles in the hope of closing their funding gap.

Bigg's basic argument stems largely from an inappropriate comparison of pension investment patterns to individual investment. Biggs tells readers:

"Many individuals follow a rough '100 minus your age' rule to determine how much risk to take with their retirement savings. A 25-year-old might put 75% of his savings in stocks or other risky assets, the remaining 25% in bonds and other safer investments. A 45-year-old would hold 55% in stocks, and a 65-year-old 35%. Individuals take this risk knowing that the end balance of their IRA or 401(k) account will vary with market returns.

"Now consider the California Public Employees’ Retirement System (Calpers), the largest U.S. public plan and a trendsetter for others. The typical participant is around age 62, so a '100 minus age' rule would recommend that Calpers hold about 38% risky assets."

The logic of an individual following this rule is that some point individuals will retire and basically be dependent on their savings and Social Security for all their income. Retirement is usually a pretty sharp break. If the stock market happens to be down at that point, they will be in trouble if they hold lots ot stock, especially if their intention had been to buy an annuity to support themselves in retirement. They will be forced to sell their stock at a depressed value since they won't have the option to wait for the price to recover.

The NYT had an article which discussed the potential political implications of a better than expected economic picture. At one point the article comments:

"The White House’s push for fast-track trade negotiating powers — and eventually for a major Trans-Pacific Partnership trade pact — could be eased by growing confidence in the economy and the nation’s ability to compete internationally."

This comment is essentially a non sequitur. The major pacts up for negotiation, the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP) will have almost no impact on traditional trade barriers in the form of tariffs or quotas. They are about imposing a regulatory structure on federal, state, and local governments that will be more business friendly.

For example, the deals are likely to limit the sorts of environmental and health and safety restrictions that can be put in place. They will also likely limit the ability of governments to put in place privacy restrictions on the use of personal data. And they will increase patent and copyright protections, likely putting in place rules similar to those that Congress tried to impose through the Stop Online Piracy Act (SOPA). There is almost nothing about the likely provisions of the TPP and TTIP that would become more acceptable to the public due to a stronger economy.

This article also includes the bizarre comment:

"The Republican Congress will again want to pursue a balanced budget while also cutting taxes."

If the republicans want to balance the budget and cut taxes, then they want to cut spending. It would have been simpler and more informative to just say Republicans want to cut spending to offset the revenue lost through tax cuts and lower the deficit. 

It is also important to note that economy is not really doing much better than expected. Through the first three quarters of 2014 the economy has grown at a 2.1 percent annual rate. At the start of the year, the Congressional Budget Office projected the economy would grow by 3.1 percent in 2014. Employment has grown more rapidly than projected and unemployment has fallen by more than projected. This is due to lower than expected productivity growth and people dropping out of the labor force.

Tax collections have been higher than expected largely as a result of the run-up in the stock market and the resulting capital gains. Part of the story of the strong stock market has been the redistribution from wages to profits. Unless the we see several more years of strong job growth like the 321,000 job gains in November, workers are not likely to see substantial wage gains. Untill workers start seeing wage growth, and thereby share in the benefits of economic growth, most people will not view the economy as strong.

The November jobs numbers were unambiguously good news. The economy is moving in the right direction and at a faster pace than we had seen in years. But we have to realize how far the labor market has to go before it makes up the ground lost in the recession.

The simplest and best measure is the employment to population ratio (EPOP), which gives the percentage of the adult population which is employed. This stood at 59.2 percent in November (unchanged from October). This is 1.0 percentage points above the low of 58.2 percent last hit in the summer of 2011, but it is still more than four full percentage points below the pre-recession peaks and more than five full percentage points below the all-time highs hit in 2000.

Many people have dismissed these comparisons by pointing to demographic changes, specifically the aging of the baby boomers. With much of the baby boom cohort now in their sixties, we would expect to see more people retiring, but if we look at prime age workers (ages 25-54) we get a similar story. The OECD reports that the EPOP for this group was 76.8 percent in the third quarter of this year, compared to 79.9 percent in 2007 and 81.5 percent in 2000. People in their thirties and forties have not just suddenly decided that they want to retire. This drop in employment is almost certainly due to the weakness of demand in the labor market.

Some other measures of slack are also useful to note. Some reports have noted the upturn in quit rates as reported in the Job Opening and Labor Turnover Survey. The most recent data puts the quit rate at 2.0 percent compared to a low of 1.3 percent at the trough of the recession. This means that more people are prepared to quit a job with which they are unhappy. But this figure is still down from 2.2 percent as a year-round average in 2006. (We should remember that even in the pre-recession period, the labor market was just getting tight enough to see some wage growth.) The quit rate at the end of 2000 and start of 2001, when the survey began, was as high as 2.6 percent. (When considering these numbers it is important to realize that the shift in employment over this period from low quit sectors like manufacturing to high quit sectors like restaurants would have added at least 0.1-0.2 percentage points to the quit rate.)

Okay boys and girls, today we learn about the erratic pattern of wage data. Ideally the Bureau of Labor Statistics (BLS) would tell us exactly how much hourly wages rose each month. Unfortunately, BLS doesn't have that ability. It has a very good survey of establishments that gives a reasonably close estimates of current hourly and weekly wages, but these numbers are not exact. And, since each month's wage estimate includes a component of error, the changes from one month can contain a very large component of error.

To see the logic, imagine that the 95% confidence interval is +/- 0.1 percent. (I haven't checked this, but 0.1 percent would be pretty good.) Suppose that one month it underestimates the average wage by 0.1 percent. Suppose the next month it overestimates the average wage by 0.1 percent. This would lead to a wage growth number from one month to the next that was 0.2 percentage points above the true number. In a context where monthly wage growth has been averaging less than 0.2 percent, this would be a very large error. That is why it is always advisable to take a longer period than a single month to assess wage growth. (My preferred measure is taking the rate of change for the most recent three months compared with the prior three months.)

Many foolish comments about the November employment report could have been avoided if reporters recognized the erratic nature of the monthly data. The 9 cent gain (0.4 percent) reported in the average hourly wage for November was widely touted. Unfortunately, reporters did not bother to note that BLS reported a gain of just 0.1 percent in October and 0.0 percent in September. As a result of the weak wage growth the prior two months, the average wage for these three months grew at just a 1.8 percent annual rate compared with the average of the prior three months. That is somewhat below the 2.1 percent increase over the last year.

When we look at these numbers we have two choices. One is to take the monthly data at face value, as almost all the reports on the November report did, and believe that wage growth virtually stopped in September and October and then surged in November. Alternatively, we can believe that the slowdown in September and October and the surge in November were both driven by measurement error.

It looks like individual choice is not supposed to get in the way of corporate profits in the world of Michael Froman and U.S. trade policy. In a Washington Post article on the Trans-Atlantic Trade and Investment Pact (TTIP), U.S. Trade Representative Michael Froman is quoted as saying:

"We’re not trying to force anybody to eat anything ... we do feel like the decision as to what is safe should be made by science."

While it is not entirely clear what Froman means by this comment, most people would probably think that individuals have the right to determine for themselves what is safe, since "science" or scientists sometimes makes mistakes, just like economists. This would mean that food should be clearly labeled, so that people can know what chemicals it contains and how it was produced. Froman's comment could be interpreted as objecting to this position.

It is also worth noting that the TTIP is not a "free trade" agreement as asserted in the article. The increased protections in the pact, in the form of stronger patent and copyright protections, are likely to do more to raise prices and block trade than any tariff reductions that are included. the pact is mostly about putting in place a set of regulations that are likely to be very friendly to the corporate interests involved in negotiating the deal, but which would face difficulty if put to a vote of democratically elected parliaments individually.

 

I have complained at length about news stories that give us really big numbers with no context, which they should know are absolutely meaningless to almost all their listeners. Marketplace Radio did exactly this early in the week when it told listeners in a short segment:

"Here's a big number: $18 trillion. 

"That's the national debt of the United States of America. Yesterday, we surpassed the $18 trillion mark for the first time.

"Partisan and or political inferences will not be entertained."

There you go. Do you feel informed now?

It's hard to see what information anyone could get from this comment other than the U.S. debt is a really big number and presumably someone at Marketplace radio thinks its too big. (The latter information is ordinary reserved for designated commentaries and opinion pieces.)

Last year, the NYT committed itself to trying to put numbers like this in some context that would make them meaningful to their audience. David Leonhardt, who was then the Washington bureau chief, even joked about how the sort of reporting in this Marketplace segment is the same as telling their audience "really big number."

It would not have been difficult to put the $18 trillion figure in a context that would be more meaningful. Economists usually measure debt relative to GDP. That's a pretty simple calculation. If it wanted to give us the economic impact of the debt, it could have told us that the interest rate on long-term debt is a bit over 2.2 percent, well below normal levels. If it wanted to report on the burden to taxpayers, it could have told us that interest payments are equal to roughly 1.3 percent of GDP, less than half the burden in the early 1990s.

This information, all of which can be obtained in seconds from the Congressional Budget Office, would have allowed listeners to better understand the importance of the $18 trillion debt figure.

Floyd Norris (who unfortunately has accepted a buyout and will be leaving the paper) had an interesting piece on the disappearance of traditional defined benefit pensions. He notes that millions of workers in multi-employer plans are at risk of sharp reductions in benefits. Detroit city workers and retirees have already seen sharp declines in benefits.

After pointing out that few workers now have secure pensions, he then refers to a new book by Alicia Munnell, Charles D. Ellis and Andrew D. Eschtruth, which he cites as saying that the typical household near retirement has only $110,000 in a 401(k). Actually this figure refers to the roughly half of near retirees that have a 401(k). The median near retirement household has considerably less money in a retirement account.

According to our recent analysis of the Fed's 2013 Survey of Consumer Finance, the average net worth outside of housing wealth for families in the middle quintile of households between the age of 55-64 was just $89,300. This figure includes all assets in 401(k)s, plus any money held in checking and saving accounts and any non-housing tangible assets, like a car or boat. it would subtract non-mortgage debt like credit cards, car loans, and student loans.

The average home equity stake for households in the middle quintile in this age cohort was $76,400, this accounted for 54.6 percent of the home's value. In 1989, households in the middle quintile in this age group had more than 81 percent of their home paid off on average.

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."


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