I'm a big fan of nature and hiking, but that number doesn't sound quite right to me. The Washington Post had an article on the recreation business in which it told readers that the country spends $646 billion a year on outdoor recreation and related spending. This figures comes to a bit more than $2,000 per person. If we assume that half of the public doesn't really do anything that fits the bill, then this means the other half spend $4,000 per person per year on outdoor recreation. That comes to $16,000 per year for a family of four.
Let's see, you can a pretty nice tent for a few hundred dollars, hiking boots can cost $150-$200, a good sleeping bag in the same range. That could get us to $700, but of course you don't buy these things every year. If you assume they last an average of 3-4 years, these items will only get you about $200 per year, less than one twentieth of the way to our $4,000 target.
According to the article, the $646 billion figure came from an industry group. The link does not go to a report that could explain how they got the number, but rather a map showing a state by state breakdown. It's not clear how the industry group came up with its number, but it's virtually certain they included many items that most of us would not consider spending on outdoor recreation. The Post should be a bit more careful in uncritically accepting numbers from industry groups.
Robert Salzberg points me to a link later in the piece that goes to the study itself. The study shows that the bulk of its $646 billion in spending is based on food, entertainment, lodging, and travel related expenses. This presumably means that if someone flies across country to visit family members and also goes to a national park then the study would count the air fare and the money spent on lodging throughout their trip. The study does not describe the methodology in full, but it does give a non-working URL as the location of a technical report.
The Washington Post article on the August job report, which showed the economy adding 142,000 jobs in August, told readers:
"Economists, however, were quick to caution that the weak jobs number is an outlier at a time of several other stronger measures of economic activity, including auto sales — which soared in August — and exports. Markets were little-changed on the news and ended the day in positive territory.
'I don’t believe the numbers,' said Tim Hopper, chief economist at TIAA-CREF. 'Not only are they very weak, they just don’t match anything else that’s in the market right now.'"
Actually, the numbers match the market very well. The economy grew at a 1.1 percent annual rate in the first half of the year. Faster growth in the second half of the year might bring the rate for the whole year to 2.0 percent. If we assume that productivity growth is 1.5 percent, this would imply an increase in the demand for labor of 0.5 percent. That translates into 700,000 jobs for the year or roughly 60,000 a month.
Even if we assume productivity growth of just 1.0 percent (this is well below the rate we saw even in the slowdown years from 1973-1995), the implied rate of job creation would just be 1.4 million a year, or 120,000 a month.
The article gives no explanation of why any economist would expect a much faster rate of job growth when the economy is growing so slowly.
Federal Reserve Board Chair Janet Yellen is a serious scholar of economics. That means that she wants to hear a range of arguments and consider them carefully. Unfortunately we don't live in a political world where such concern with the truth is the norm.
For this reason it is unfortunate that Yellen speculated in her Jackson Hole speech last month that one reason for weak wage growth could be pent-up real wage declines. The argument is that if we think that firms would have lowered real wages, but could not because they did not want to impose nominal wage cuts, then there should be a number of workers whose real wages are higher than is justified by their productivity.
The implication of this story is that when labor markets tighten, these workers will initially see no nominal increase in wages since it will take some time for their real wages to fall to a level in line with productivity. But then we get a story where we end this pent-up wage decline and then these workers would again see nominal wage growth. This is then presented as a kicker to inflation.
It's reasonable for Yellen to consider such issues, but naturally the inflation hawks are seeing this story as yet another argument for slamming down brakes on the economy and job growth. Most of us would believe as a fairly simple story that in a tighter labor market there is more upward pressure on wages and therefore somewhat more risk of inflation. But how is this changed by the pent-up wage decline story?
What percent of the workforce do we think can be in this boat, 5 percent, 10 percent, 20 percent? It seems hard to imagine it would be much over 10 percent of the workforce that could conceivably be in this situation, especially when we consider that 4 million workers, roughly 3 percent of the workforce, leave their jobs every month.
But let's say that we have 10 percent of the workforce who have some degree of pent-up wage declines. The issue is what happens when this ends? The first thing we have to remember is that the pent-up declines won't end all at once. Workers would have different degrees of pent-up wage declines.
Let's say that the pent-up declines end over 3 years. This means that in each of those three years, if we start from our 10 percent number, 3.3 percent of the workforce suddenly goes from seing zero nominal wage increases to seeing 2.0 percent pay hikes in order to have their wages keep pace with inflation. And this raises the overall rate of inflation by 0.07 percentage points. Get out the wheelbarrows of money, hyperinflation is just around the corner.
A useful NYT article on the latest moves by the European Central Bank's to try to prop up the euro zone economy included a comment near the end:
"Thursday’s moves signaled that at least one European institution is doing all it can to avert the threat of deflation — the pernicious downward spiral of prices that often leads to high unemployment."
Actually there is no basis for the fears of this sort of downward spiral. As the piece correctly points out, the euro zone economy is already suffering from very low inflation. With many long-term loans contracted with the expectation of much higher rates of inflation, the current near zero rate of inflation is imposing serious burdens on debtors. The low rate of inflation also means a higher real interest rate for firms considering investments for the future.
Crossing zero from low rates of inflation to low rates of deflation doesn't change this story. Having a lower rate of inflation makes matters worse, but there is no particular importance to crossing zero. (At low rates of inflation, the prices of many goods and services are already falling.)
There could be a problem if there was a downward spiral with deflation leading to more unemployment, leading to more deflation, but we have not seen anything like this in a wealthy country since the Great Depression. Even Japan never really saw anything along these lines. It's inflation rate fell to -1.0 percent in 1999, was -0.7 percent in 2000, and peaked at -1.5 percent in 2001. It became positive again in 2004 and remained positive, with the exception of 2005 until the economic crisis in 2009.
There was no tendency for the rate of deflation to continue to get more rapid during this period. In other words, there is zero reason to think that anything qualitatively different happens to an economy if the inflation rate turns negative, except that in a weak economy a lower inflation rate is worse than a higher one.
That's the question millions are asking after seeing the NYT article on the debate between California governor Jerry Brown and Neel T. Kaskari. The piece told readers:
"Again and again, Mr. Kashkari criticized the ambitious high-speed rail project from San Francisco to Los Angeles that Mr. Brown has pushed even as it has lost popularity with voters and some lawmakers, and even as Republicans in Washington have said they would refuse to fund it."
Other than giving us the NYT's assessment of the project it is not clear what information the word "ambitious" provides to readers.
An interview on Morning Edition with Edward Lucas, senior editor at The Economist and author of The New Cold War, likely mislead listeners about the path of the Russian economy and corruption under President Putin's period in power. Lucas implied that Russians are likely to be very unhappy about the current state of the economy and public services and angered over the extent of corruption in the country.
While undoubtedly there is much corruption in Russia under Putin, corruption did not begin with Putin. According to the World Bank (Table 4.3A), Russia got $8.3 billion for all the assets it privatized in the 1990s. This was a period in which it sold off the vast majority of the industry built up during the Soviet years, as well as much of its oil and natural resources. By comparison, Snapchat currently has a market value of $10 billion. During this period well-connected people were able to become billionaires by buying assets at prices far below the market level.
This was also a period in which Russia's economy collapsed. According to data from the International Monetary Fund, Russia's economy shrank by almost 30 percent during President Yeltsin's tenure. (This is about six times the drop in GDP the U.S. saw in the Great Recession.) Since Putin came to power in 1999 it has more than doubled in size. This economic performance likely explains much of the support shown for Putin in public opinion polls.
Source: International Monetary Fund.
Note: Name of president corrected -- the decline took place under Yeltsin, not Putin. Thanks Daniel. Also, Putin came to power in 1999, not 1998 as previously written.
The Washington Post thinks it has found a fatal flaw in the argument that fast food workers should have higher wages:
"The problem: Fast food is a low-profit margin business. How low? According to Yahoo Finance, 2.4 percent. Just look at the headline: 'Fast-Food Chains Aren’t as Rich as Protesters Think.'"
It is likely that most of the people organizing the push for higher wages in the industry are fully aware of "the problem." If workers got higher wages they would presumably be offset to some extent by lower profits, lower pay for top management, increases in productivity, but there would also be some increase in higher prices.
This would reverse a process whereby fast food prices would have dropped relative to the price of other goods as the wages of workers in the industry fell relative to the economy-wide average. There is no obvious "problem" with this reversal. It essentially means that those on the bottom would enjoy higher real wages and living standards, while those on top would see a relative decline in their living standards. It would only be a relative decline, except for those at the very top, since if the economy is growing normally, higher paid workers could still get a share of productivity gains.
Wonkblog had a post telling readers that the U.S. labor market is doing better in the recovery than the labor market in most other wealthy countries. While this is true if we look at unemployment rates, is far less clear if the focus is employment rates (EPOP), the percentage of the population who is working.
This is true even we control for demographics. The EPOP for prime age men (ages 25-54) in the United States is still down 3.7 percentage points from its pre-recession level. By comparison, in Japan the EPOP for prime age men is up by 2.0 percentage points and in Germany it's up by 3.3 percentage points.
France has seen a drop in its EPOP from pre-recession levels, but only 0.7 percentage points -- still much better than the U.S. In fact, with a drop of in its EPOP for prime age men of 2.7 percentage points, the euro zone as a whole is doing better than the United States, in spite of the inclusion of crisis countries like Spain and Greece with double-digit drops in EPOPS.
In short, the case that the U.S. labor market has fared better than the labor markets in most other wealthy countries is much weaker than this piece indicates.
Thanks to Seth Ackerman for calling this one to my attention.
Joe Nocera had a good piece discussing the plight of factory workers in the United States subjected to low cost competition from China and other developing countries. He argues that the government has done too little to help the workers and the communities that have suffered from such competition. However his prescription, that workers should get more skills, is somewhat misleading.
While it is always better to have a more skilled workforce, one of the main reasons that more skilled workers have done better in the era of globalization is that they have been largely protected from the same sort of competition faced by less-educated workers. While trade agreements were explicitly designed to put manufacturing workers in direct competition with the low-paid workers in the developing world, there has been no similar effort to subject our doctors, dentists, lawyers and other highly paid professionals to the same sort of competition.
Trade agreements could have focused on reducing barriers that make it difficult for qualified professionals from the developing world to work in the United States. For example, we could have fully transparent sets of standards to become a doctor or lawyer in the United States, with tests administered in other countries (by U.S. certified test givers). Anyone from Mexico, India, or China who passed these tests would have the same ability to work in the United States as someone who grew up in Kansas.
The potential benefits to consumers and the economy would run into the hundreds of billions of dollars annually. And this would have the effect of shifting income downward rather than upward. (Yes folks, we can design a mechanism to reimburse developing countries for the professionals they educated who come here, which would ensure they gain as well.)
Trade agreements did not put professionals into competition because they are a powerful enough lobby to block such actions. However it is important to be clear in our understanding. It was not "globalization" that redistributed income upward. It was a pattern of trade that was intended to put downward pressure on the wages of the bulk of the population while protecting those at the top.
Just a few quick points - doctors and lawyers (especially doctors) are not members of the middle class in the normal usage of the term. About 25 percent of doctors are in the one percent and the vast majority are in the top two percent. If the rest of us are going to get more, they must be among the group that gets less.
Second, lower wages for manufacturing workers have translated into lower prices. Part of it has gone to profits, but shirts and cars are cheaper than they would be if we didn't have low-paid labor doing much of the work.
Finally, there is no way that a lower valued dollar is going to bring us to developing country living standards as fans of arithmetic everywhere can verify. Imports are equal to roughly 20 percent of our GDP. Suppose a 30 percent drop in the dollar leads to a 20 percent rise in import prices (both very large changes). This implies that we can buy 4 percent less than we did previously. That still leaves us far ahead of Mexico and China. And for debt-phobia fans, we are saving this amount today by borrowing.
That's what a Reuters story on the NYT website said Japanese leaders are troubled by. The piece told readers:
"Policymakers are also pledging to draft a vision of how to keep Japan's ageing population from shrinking into oblivion, holding the line at 100 million in 2060, a 20 percent drop from now."
And what bad thing happens if Japan continues to become a less crowded island through the rest of the century and beyond, more room at the beach and less pollution?
Austin Frakt had an interesting piece in the Upshot section of the NYT reporting research finding that show substantial reduction in health care premiums when there is more competition in the market. The implication is that prices could fall substantially in the exchanges where there are a small numbers of insurers and especially in states like New Hampshire or West Virginia where there is only a single insurer in the market.
At the end of the piece Frakt notes that more insurers appear to be entering the exchanges in 2015 than in their first year of operation. He also suggests some policies that the federal government could pursue to encourage more competition. In addition to the policies Frakt listed, in principle the federal government could also allow Medicare and/or Medicaid to offer plans for purchase in the market in areas with less than a specified number of insurers. This should ensure people the option to have a reasonably priced plan.
At the start of the piece Frakt refers to President Obama's pledge that his health care plan would lower family premiums by as much as $2,500 a year. It is worth noting that per person health care costs in the United States in 2014 are around 15 percent less than had been projected in 2008. This would be a savings in the neighborhood of more than $2,000 a year for a typical family plan. Clearly not all of these savings can be attributed to the Affordable Care Act, but people are paying considerably less for health care in 2014 than had been expected in 2008.
Folks who are not DC insiders might think it would take courage to stand up to the rich people who have done so well (and caused so much harm) over the last three decades. Or, we might think it would take courage to standup to nonsense about budget deficits to point out that we need larger deficits now to create the demand necessary to bring the economy back to full employment. (Yes, we all love the private sector, but the private sector doesn't create jobs for love.) Taking those positions might seem to require courage, but in DC insider circles real courage is demanding that we cut Social Security and Medicare; and that is independent of any of the facts.
Hence we see Dana Milbank telling us that new CBO projections, showing that deficits will be lower over the next decade than in the prior set of projections,"threw cold water on my tranquility." He went on to say the new report was "downright bone-chilling" and that the "top-line conclusions were grim enough, if not catastrophic." It's scary to think what his reaction would have been if the new projections showed a worsening picture.
But his real horror story is that the debt to GDP ratio will be over 77 percent in a decade. Wow, and this means what? Milbank was on vacation so he probably missed the collapse of the housing bubble and the worst downturn since the Great Depression. That really was (and is) bone-chilling and catastrophic, but apparently not the sort of thing that worries DC insider types.
Just for purposes of comparison, just about every country in the euro zone has debt to GDP ratios well above 77 percent and many are borrowing at lower interest rates than the United States. Japan has a debt to GDP ratio more than three times as high and borrows long-term at less than a one percent interest rate. So, these debt numbers might make good scare stories for the DC insider crowd, but they have nothing to do with real world economics.
There are of course things we should be worried about, like continued slow growth and high unemployment, but the best remedy for that would be a higher budget deficit or a lower valued dollar that would reduce the trade deficit. We should also worry about the fact that we pay twice as much for our health care per person than people in other wealthy countries with nothing to show for it in terms of outcomes. If we fixed health care that would also take care of the budget deficit, shifting the projected deficits to surpluses.
But fixing health care would mean taking money away from drug companies, doctors, medical equipment suppliers and insurers. The Post doesn't pay people to push taking away money from those interest groups,, just seniors.
The exchange I had with Jared Bernstein and subsequent comments by others have led to me do more thinking on the corporate income tax. First, just to respond to various notes and comments, I was not all upset that Jared and I disagreed. Jared is an old friend and a very good economist. I value his views, which is why I write books with him. I learned from his comments and I appreciate his concern for losing revenue even if it doesn't over-ride my my reasons for thinking that eliminating the corporate income tax (CIT) is a good idea.
I think the most useful way to think of the CIT is an optional levy placed on corporate income. We tell corporations that they have to pay 35 percent of their income in taxes to the government. It's optional in the sense that we allow them to cut this amount by two-thirds, if they instead pay one-third of this levy to Wall Street investment banks, accounting firms, and tax lawyers. (Using 2014 numbers nominal corporate tax liability would be roughly 6 percent of GDP or $1,050 billion, with actual tax collections around 2.0 percent of GDP or $350 billion.) This is roughly how the tax boils down, with the Government Accountability Office estimating that companies pay about 13.0 percent of their income in taxes to the government, compared to the 35 percent nominal tax rate. This means that 22 percentage points of the profits, that in principle are owed as taxes, are escaping taxation by the government.
In fairness, I don't know how much corporate America is actually paying to escape its taxes. (Someone have a good study to send me?) Essentially, I am just assuming that they spend half of their tax savings on avoidance costs.
These avoidance costs have real economic consequences. We are paying people lots of money to do activities that have zero value to the economy even though they are hugely valuable to their corporate employers. The people working on tax scams at the major accounting firms, or working out inversion mergers at Goldman Sachs, or creating new tax shelters at private equity companies could all be employed doing something productive. This is like giving companies a tax credit to pay people to dig holes and fill them up again. The difference is that these are highly educated people and they are getting paid really big bucks for the pointless hole-digging.
The NYT had a piece on the upward revision of second quarter GDP data to a growth rate of 4.2 percent from 4.0 percent in the advance report. It would have been worth reminding readers that the jump was a reversal from a weather induced plunge of 2.1 percent in the first quarter. This leaves the economy growing at annual rate of just 1.1 percent for the first half of the year. Even if the growth rate is 3.0 percent for the second half that would still leave year-round growth at just 2.0 percent. This is below almost all estimates of the economy's potential which means that rather than making up ground lost during the recession, the economy is falling further below its potential level of output.
The piece also is a bit off in a couple of other areas. It noted the upward revision to investment and told readers:
"Since the economy emerged from the recession five years ago, companies have been hesitant to spend heavily on new capacity, but these figures and other recent data indicate that is finally changing."
Actually the revised 8.4 percent growth rate for investment is not especially impressive. There have been many previous quarters in the recovery where investment grew more rapidly. For example, in the second, third, and fourth quarters of 2011 investment grew at 8.8 percent, 19.4 percent, and 9.5 percent annual rates, respectively. As recenly as the fourth quarter of last year it grew at a 10.4 percent annual rate, so the most recent quarterly rate is not impressive, especially since it follows growth of just 1.6 percent in the first quarter.
One area where it paints an overly pessimistic picture is in reporting the split between wages and profits:
"Despite the faster overall growth rate, businesses still seem to be benefiting more from the economy’s upward trajectory than many individual consumers are.
"The revision on Thursday, for example, lowered the estimate of workers’ wage and salary growth slightly in the first half of 2014, with income rising 5.8 percent in the second quarter. Corporate profits, on the other hand, jumped 8 percent in the second quarter, the Commerce Department said."
The comparison with the first quarter is misleading. The profit data are always erratic and the first quarter showed a surprisingly large drop in profits. If the comparison is made with the second quarter of 2013 nominal before-tax profits are actually down by 0.3 percent. By contrast, labor compensation is up by 4.4 percent. These data are too erratic to make much of this shift, but the numbers actually suggest some redistribution from capital to labor over the last year.
A Morning Edition report on French President Francois Hollande's decision to reshuffle his cabinet and eliminate members who complained about the cutbacks in government spending that are slowing growth and destroying jobs, treated him as a potential hero for trying to restructure France's labor market. This coverage directly contradicts economics, since there is no plausible story whereby the economic gains from whatever restructuring Mr. Hollande is able to engineer will be more than a small fraction of the losses it is incurring due to austerity being imposed by Germany on the whole euro zone. This austerity will have cost France several trillion dollars in lost output by the end of the decade.
The NYT noted that gas prices remain relatively low in spite of the fighting taking place in or near several major oil producers. In an article entitled "a new American oil bonanza, it told readers:
"The reason for the improved economics of road travel can be found 10,000 feet below the ground here, where the South Texas Eagle Ford shale is providing more than a million new barrels of oil supplies to the world market every day. United States refinery production in recent weeks reached record highs and left supply depots flush, cushioning the impact of all the instability surrounding traditional global oil fields."
The piece also includes a chart showing daily production at around 2.5 million barrels more than its pre-recession level. While this increased production has undoubtedly had an impact on world prices (it is world prices that matter -- oil is bought and sold in the global market), so has declines in demand. There has been a sharp drop in vehicle miles driven compared with projected travel.
Vehicle Miles Traveled: Total and Per Capita
Figure 1. VMT trends for the United States through 2013. Source: FHWA and Census Bureau.
If per person consumption had risen in line with the projected trend, it would be around 15 percent higher than it is today. Since U.S. oil consumption is around 19.0 million barrels a day (not all of it is for gasoline), this means that the reduction in driving below its trend path is saving us around 2.5 million barrels of oil a day, roughly the same amount as the increase in production.
In other words, this article could have been dedicated to the bonanza from conservation and told readers how all the happy people interviewed are enjoying lower gas prices because many people across the country (and the world) are now driving less than was projected based on prior trends. The piece then could have focused on mass transit or other factors that are leading people to drive less. (unfortunately, one of these would be the weak economy.)
In an article discussing the drop in the year over year inflation rate in the euro zone to 0.4 percent, the New York Times told readers that the inflation rate could fall further, turning into deflation, which it told readers:
"causes consumers to delay purchases and undercuts corporate profits and jobs."
That is true of deflation, but it is also true of very low inflation. The reported inflation rate is an average of the inflation rate seen in millions of different goods and services being sold at millions of different outlets. At any point in time roughly half of these inflation rates are more rapid than the average inflation rate and half are less. This means that the prices of a large number of goods and services are already falling. Insofar as this is a factor causing a delay in the purchase of goods, we would already be seeing it. A further drop in the overall rate of inflation to make it negative would change the picture little.
In terms of the impact on corporate profits and jobs, the issue here is the real interest rate, which is the nominal interest rate minus the inflation rate. Any drop in the inflation rate means a higher real interest rate and therefore provides a disincentive for investment. Whether the inflation rate crosses zero and turns negative really has no consequence in this story.
The point here is important. The euro zone is already suffering from an inflation rate that is way too low, causing real interest rates to be far higher than would be desired given the weakness of its economy. The problems of deflation are not something that it may have to worry about in the future. Those problems are here now. The situation worsens anytime the inflation rate falls further, but crossing zero and turning negative has no particular economic significance.
I should probably also mention that there is huge error in measurement. The Boskin Commission, to the widespread applause of most elite economists, said that our consumer price index overstated the annual inflation rate by 1.1 percentage point. After some changes in the index were made, they said it still overstated inflation by 0.8 percentage points. There is no reason to think the euro zone measure is more accurate than the U.S. measure, which means if people follow our elite economists then they should believe that the euro zone already is facing deflation.
I should probably also mention that the Boskin Commission's estimates were pushed as part of an effort at the time to cut the annual cost of living adjustment to Social Security benefits. For some reason no one seems to mention their work anymore, even though the Bureau of Labor Statistics has not addressed most the sources of bias they identified.
Note: Typo corrected, "inflation" changed to "deflation." Thanks kea.
It's always nice when a prominent economist and the NYT pick up on a line of work that we started at CEPR. That is why we are all happy to see David Leonhardt's piece on a new paper by Alan Krueger, the former head of President Obama's Council of Economic Advisers.
The gist of the piece is that Krueger has discovered that many people do not respond to the Current Population Survey (CPS), the main survey used to measure the unemployment rate. Krueger discovered that the unemployment rates are higher for people the first month that they are in the survey than in later months. (People are in the survey for four months, then out for eight months and then back for four months.) The implication is that people who are not responding may be more likely to be unemployed than people who are responding.
This fits well with analysis done by John Schmitt and me nine years ago. That work noted a sharp gap between the employment rates reported in the 2000 Census and the employment rates reported in the CPS for the overlapping months, with the CPS rates being much higher. (The Census has a response rate close to 99 percent, whereas the coverage rate for the CPS is under 90 percent overall. It is under 70 percent for young black men.) The analysis focused on employment rates because employment is much more well-defined than unemployment.
The analysis also noted that the gap was largest for the groups with the lowest coverage rates. In particular the gap was largest for young black men, with the CPS showing an employment rate that was 8.0 percentage points higher than the Census data for the same month. Our conclusion was that the people who respond to the survey are more likely to be employed than the people who don't respond. It's good to see that Krueger appears to have concurred in this finding nine years later.
Note: Link and president corrected.
The headline of the Washington Post piece on the new budget projections from the Congressional Budget Office (CBO) told readers, "CBO: Deficit falls to $506 billion in 2014, but debt continues to rise."
Both parts of this are wrong if the comparison is the most recent prior set of projections. The deficit projected for 2014 is actually somewhat higher in the most recent projections, $506 billion compared to $492 billion in the projections made in April. Both figures are below last year's deficit of $680 billion. Measured as a share of GDP the deficit fell from 4.1 percent in 2013 to 2.9 percent in the most recent projections for 2014.
However the debt numbers in the new projections are lower than the debt numbers in the prior set. CBO now projects that the debt will be 77.2 percent of GDP at the end of the projection period in 2024. It previous had projected a debt to GDP ratio of 78.1 percent.
The article got both of these points right.
Neil Irwin had a good post on the latest Case-Shiller house price data. he argued that the flat, or even modestly declining house prices are good news. This means that prices are now more or less following a normal pattern where they move pretty much in step with the economy.
This is right, with one important qualification. The Case-Shiller tiered price indexes show some worrying numbers in some cities for the bottom third of the housing market. Prices for the bottom tier fell by 0.7 percent in San Francisco in June. In Atlanta, the index showed a drop of 1.3 percent and in Minneapolis the decline was 4.0 percent. This may just be a monthly blip, but there is a real risk that in some areas this could be the beginning of another plunge in low-end house prices.
House prices for the bottom tier have been on a real roller coaster ride for some time. They were inflated in the bubble years by subprime loans and then plummeted when this source of lending collapsed. Then they were propped up by one of the most hare-brained policies of all-time, the first-time homebuyers tax credit. Predictably, prices in the bottom tier plummeted again when the credit ended. (Typical of the honesty people came to expect from Timothy Geithner, his book had a chart (p 304) which showed the uptick in house prices caused by the credit, but ends before the subsequent fall.)
Price recovered again and began to rise rapidly through the first half of 2013. There was a real danger of a new bubble forming, but then Bernanke's famous taper talk took the wind out of the market. The concern now is that with investors leaving the market prices in the bottom tier in some cities will take another major hit. This is not likely to have much of an effect on the national economy but could be bad news for moderate income homeowners that bought in near a temporary peak.