Ross Douthat gave us a quick morality discussion about the growing numbers of children born out of wedlock. It might have helped to add some of the economic dimension to this story, both positive and negative. The positive is that economic opportunities for women have increased enormously over the last four decades. This means that many women who might have felt trapped in a bad or abusive marriage years ago now feel that they can survive on their own.
The negative side is that wages for most workers have stagnated for the last three decades as the bulk of the gains from productivity growth have gone to the most highly educated workers. Lower and insecure income places more stress on families and undoubtedly has been a factor in family breakups in many cases.
Okay, now we can go back to Douthat's morality story.
The NYT tells us that there is "heightened public concern over spending." How does the NYT know this? What does it mean? Has the public checked the amount that we are spending in Afghanistan? Has it noted the cost of government payments to first-time homebuyers?
Does the public know that -- according to the methodology used by President Obama's administration -- each billion reduction in spending will lead to the loss of roughly 10,000 jobs? Therefore, according to the Obama administration's assessment, when Democrats in Congress claim that they are cutting spending (as claimed by Representative Chris Van Hollen in this blog post) they are making plans to throw people out of work.
It would be helpful if the NYT devoted more space to the meaning of policies rather than gossip about who says what.
The folks who couldn't see an $8 trillion housing bubble are spouting off like crazy about what the Greek debt crisis means. The NYT told us that: "While the immediate causes for worry are Greece’s ballooning budget deficit and the risk that other fragile countries like Spain and Portugal might default, the turmoil also exposed deeper fears that government borrowing in bigger nations like Britain, Germany and even the United States is unsustainable."
Fears that government borrowing in the United States is unsustainable should manifest themselves in higher interest rates on long-term government bonds. Unfortunately for this story, the interest rate on long-term government bonds fell last week. So, the NYT wants us to believe that investors are more fearful about the status of U.S. debt, but they were willing to hold it at lower interest rates?
Umm, no, this is a "night is day" line. The NYT is telling us something that it 180 degrees at odds with what we see in the world. There are large numbers of wealthy and politically powerful people who want to scare the public about the U.S. debt in order to advance their agenda of cutting Social Security and Medicare, but the events of last week point in the opposite direction. Investors still have great confidence in the ability of the U.S. government to pay its bills.
The theme of deficit hawks was further reinforced in the next paragraph which told readers:
"'Greece may just be an early warning signal,' said Byron Wien, a prominent Wall Street strategist who is vice chairman of Blackstone Advisory Partners. 'The U.S. is a long way from being where Greece is, but the developed world has been living beyond its means and is now being called to account.'"
The savings for the developed world as a whole is determined by its trade deficit or surplus with the developing world. The latter is determined primarily by currency values of the level of output in various countries. As a result of conscious policy by the United States and the IMF, the dollar rose sharply in value against the currencies of most developing countries in the late 90s (following the East Asian financial crisis). This laid the basis for the huge imbalances associated with the stock bubble and the housing bubble.
The complaint about inadequate savings belongs at the door of the U.S. Treasury and IMF. It was the explicit and intended result of their policies. The moral haranguing about people not saving enough is utter nonsense that belongs in gossip pages, not in a serious newspaper.
You get paid a really big premium for ignorance at the NYT, just ask Thomas Friedman who undoubtedly gets paid more than 99 percent of his generation. Thomas Friedman likes to tout the fact that there are still good paying jobs for people without skills in every column he writes.
He's in top form today, getting just almost everything wrong about the current economic situation as he tells readers: "My generation, 'The Baby Boomers,' turned out to be what the writer Kurt Andersen called 'The Grasshopper Generation.' We’ve eaten through all that abundance like hungry locusts."
Of course those who know anything about the economy know that the vast majority of baby boomers have not fared especially well. In the years before the baby boomers entered the workforce wages for most workers rose consistently between 1-2 percent a year, after adjusting for inflation. However wages began to stagnate in the mid-70s, when the oldest baby boomers were in their mid-twenties and the youngest were not yet teenagers. Baby boomers entered this labor market and most saw very little gain in living standards relative to what their parents had. Many had to go heavily into debt to buy and hold a home, to send their kids through college or to cover the cost of a serious illness.
There were gains in living standards during the last three decades, but they overwhelmingly went to the people at the top. This included the Wall Street crew, corporate executives, highly educated professionals, like doctors and lawyers, and elite columnists like Mr. Friedman. This was not an accident. These people designed economic policies that were intended to redistribute income upward. The government became openly hostile to unions. It pushed trade policies that made our factory workers compete with low-paid workers in Mexico and China while leaving our doctors and lawyers largely protected from the same sort of competition. The government also deregulated sectors like airlines, telecommunications, and trucking that offered good paying jobs for millions of workers without college degrees. The result of these and other deliberate policies was to ensure that most of the gains from productive growth went to those at the top rather than the vast majority of baby boomers.
Now the baby boom cohort is retiring. The vast majority have next to nothing to support themselves other than their Social Security. The vast majority of baby boomers do not have the defined benefit pensions that their parents did. They never had much money in 401(k) accounts and they lost much of what they did have in the stock crashes of 2000-2002 and 2008. More importantly, they lost most of their home equity, the major source of wealth for most families, with the collapse of the housing bubble.
We can blame the average auto worker, shoe salesperson and school teacher for not being smarter about the macroeconomy than Robert Rubin, Alan Greenspan, and other managers of economic policy, but the fact is that they made the mistake of listening to these people. They thought that stock prices and house prices would just keep rising forever. Sure, this was stupid, but Rubin, Greenspan and the rest were supposed to be really smart people, and it was their job to know the economy. Too bad Thomas Friedman was never smart enough to notice either the stock bubble or the housing bubble and to warn his readers.
Instead, Thomas Friedman wants to lecture us all about how we have been living too lavishly. We have to give up our Social Security and Medicare and accept lower living standards. This would be laughable except for the immense political power and the hundreds of billions of dollars that stand behind Friedman's agenda.
At the moment, the concern about deficits is painfully absurd. If only Friedman could learn the most elementary economics he would know that the economy's problem right now is too little spending, not too much. He probably hasn't noticed, but the unemployment rate is almost 10.0 percent. If we got frugal now, then the unemployment rate would go still higher -- of course that probably would not matter where Mr. Friedman lives.
Over the long-term we do face a problem with our broken health care system. This is the cause of our projected long-term budget problems. Of course fixing our health care system would hurt the health insurance industry, the pharmaceutical companies and highly paid medical specialists, so that is not on Mr. Friedman's agenda. Instead, he wants to tell school teachers and auto workers (both current and retired) that they have to tighten their belts. And, he gets paid big bucks for this.
Apparently our news stories are being written by people too young to remember the 90s and unable to find anyone with the competence to look up the data. The economy added 290,000 jobs in April. It is important to note that 66,000 of these jobs were temporary jobs associated with the 2010 census. There is nothing wrong with census jobs, but the point is that these are temporary and have nothing to do with the underlying strength of the economy. So, we can ignore that fact and boast about 290,000 jobs, but if we are then going to be consistent, we should be sure to ignore the loss of these temporary jobs in July and August.
Of course, ignoring that these are temporary jobs generated by the census would give us a poorer understanding of the economy, but would at least be consistent. What is not consistent is ignoring that these jobs are temporary now and then highlighting their loss in July and August. We'll see.
But, back to the fundamental issues. Is 290,000 jobs in a month (224,000 excluding the census jobs) strong job growth coming out of the worst downturn in 70 years. Well the economy created more than 250,000 jobs a month in the years from January 1996 to January 2000. If we adjust for the larger labor force, it generated 400,000 jobs a month for the year following the employment trough of the 74-75 recession and 420,000 jobs a month for the year following the 81-82 recession. Put another way, if we assume an underlying rate of growth of the labor force of 100,000 a month, then it will take 80 months (6 2/3 years) to make up the job deficit from the downturn at the current rate of job growth. Now, let's go celebrate!
The Washington Post (a.k.a. Fox on 15th Street) pulled out the stops in pushing its deficit reduction agenda today. Its news section includes a lengthy story on the euro crisis that makes things up in order advance the Post line about evil budget deficits.
It starts by misrepresenting the central problem: "and the currency that was designed to rival the U.S. dollar for power and influence is foundering because of a lack of fiscal discipline among its weakest members." While Greece's problems can be attributed in large part to a lack of fiscal discipline, this is clearly not the case with Spain and Ireland, both of whom had budget surpluses and low debt to GDP ratios prior to the downturn. Portugal is a more ambiguous case. The euro would not be facing a crisis if only Greece and Portugal, two relatively small economies, were facing difficulties.
The euro's problem stem from the fact that many economies across Europe were driven by a housing bubble. The European Central Bank (ECB), like the Fed, thought that bubbles were fun and opted to ignore the growth of dangerous housing bubbles in many countries.
For this reason, the sentence: "The euro, created 11 years ago, has always stood upon two unequal legs: a disciplined European Central Bank that has set interest rates for the entire monetary union and a wide variety of national budgets and economic policies ranging from prudent to profligate," could perhaps be more accurately written: "The euro, created 11 years ago, has always stood upon two unequal legs: an incompetent European Central Bank that has set interest rates for the entire monetary union and a wide variety of national budgets and economic policies ranging from prudent to profligate." Had the ECB done the proper job of a central bank it would have taken steps to pierce the bubble (which could have involved many measures other than raising interest rates) before it grew to such dangerous proportions.
It is worth noting that the Post consistently ignored the economists who warned of the dangers of the housing bubble in the build up to the crisis. It is continuing to ignore the bubble even after its collapse led to the worst economic crisis in 70 years.
The Post also gets the necessary remedies confused. It tells readers: "If Greece still had its own currency instead of being tethered to the euro zone, a sudden devaluation would have already slashed the value of the country's wages and benefits." Actually, the important point is not the absolute fall in Greece's wages and benefits, but rather their decline in value relative to those of other countries in Europe.
This is the key point, the issue is less the budget problems, but rather that the fixed exchange rate precludes and effective process of economic adjustment to a period of lower budget deficits. Because Greece and the other troubled countries are stuck in the euro zone, they can neither lower interest rates nor decrease the value of their currency to offset the contractionary impact of deficit reduction. As a result, deficit reduction can lead to a downward spiral in which lower output leads to a higher budget deficit, requiring further cuts, and therefore causing a further drop in output.
The Washington Post devoted a whole article to the views of a delegation of "senior U.S. executives " selected by the American Chamber of Commerce in Beijing. These executives told readers that China's industrial policy was a far bigger concern than the value of its currency.
It is understandable that executives of U.S. corporations operating in China would argue this case. A drop in the dollar relative to the yuan will improve the U.S. trade situation for two reasons. First, it will make U.S. exports cheaper for buyers in China, leading them to buy more. Second, it will make Chinese imports more expensive for people in the United States, leading the U.S. to consume fewer goods from China and more domestically made goods.
The U.S. executives in China only care about the former effect. The latter effect -- the impact of a lower dollar on imports from China -- is likely to be the far more important one, since we import far more than we export. Rather than presenting the views of these executives as the simple truth about U.S. trade with China, the Post should have presented them as the views of a narrow interest group. It should have presented the views of independent experts or representatives of other groups to put these views in context.
In an article on the Greek crisis, the Post noted that the European Central Bank (ECB) could: "use its essentially limitless ability to create money to stanch the crisis." It then added: "though doing so could hurt the long-term credibility of the central bank as an inflation fighter that does not yield to politics."
It is not clear how rescuing Europe's economy implies that the ECB had decided to "yield to politics." This is an invention by the Washington Post. Central banks are supposed to intervene to help economies in this sort of crisis, that is why governments create them. If the ECB fails to act to stem this crisis, when it obviously has the power, its reputation and Europe's economy will suffer serious consequences.
Morning Edition ran a segment this morning telling us about the tragic plight of the poor doctors who don't know how much their reimbursements will be from Medicare next month. It gave us the doctors' perspective and also the perspective of a Medicare beneficiary who complained that she could not find doctors who are willing to work for Medicare's pay rate.
It would have been helpful to include the perspective of an economist who could have told listeners that physicians are the most highly paid profession. An economist also could have told listeners that our physicians are paid far more than doctors in countries like Germany and Canada, which is one reason that the U.S. health care system is so uncompetitive. An economist also could have discussed the protectionist measures that keep the pay of U.S. physicians so far above world levels.
Finally, an economist could have ridiculed the idea that physicians will en masse stop accepting Medicare patients. The logic is very simple. There is no large group of wealthy potential patients that is underserved now. In other words, wealthy people already have all the doctors that they need. This means that if the nations' physicians decide that they will not accept the 40 million Medicare beneficiaries then they will have no way to make up this lost income. They will have to get by on a lower income. The threat to just serve higher paying patients is nonsense.
The Washington Post told readers that Freddie Mac needed an additional $10.6 billion from the government to cover its losses. The article never discusses the extent to which these losses are due to loans purchased before Freddie Mac was taken over by the government in September of 2008 or losses on loans purchased after this date.
This distinction is important because when Fannie and Freddie lose money, it means that they paid banks too much for the loans they purchased. If they paid too much for loans before they were taken over then this was presumably the result of bad business decisions. However, if they lose money on loans purchased after September of 2008, then the government is effectively subsidizing banks by paying too much money for their loans. This was the original intention of the TARP program.
Taxpayers have a right to know if Fannie and Freddie are being used to subsidize banks by overpaying for their loans. The Post and other news outlets should be trying to answer this question.
A front page Washington Post article told readers that: "The basic problem in Greece, and in the other struggling European countries, is that the government debts have grown as large, or nearly as large, as the gross domestic product, making the government's repayment difficult, if not impossible. The countries' imperiled finances, meanwhile, push up the rates at which they can borrow. (emphasis added)"
This is the sort of assertion that belongs on the editorial pages, not in a news story. There have been and are many countries with considerably higher ratios of debt to GDP than Greece than manage to borrow in financial markets without major problems. The more obvious problem with Greece is that it is in the euro.
This means that when it make budget cutbacks to reduce its deficit, it leads to large falls in domestic output. It has no ability to counteract these declines with expansionary monetary policy or a devaluation that will increase its net exports by making Greece more competitive. Greece's budget austerity therefore risks putting it in a downward spiral, where budget cutbacks further depress GDP, leading to a larger budget shortfall, requiring further cutbacks. Washington Post reporters should understand this situation.
That is what readers of this election eve article must assume. The bubble and its collapse are not mentioned once in an article that tells readers how the citizens of the UK will have to sacrifice in the years ahead. Remarkably, one of the people who is cited as an authority on this topic is Mervyn King. Mr. King, as the head of the Bank of England is the person who is most responsible for the country's economic devastation. Like Alan Greenspan in the United States, King just sat back as the housing bubble in the UK grew to ever more dangerous levels. While the collapse and the resulting economic damage were totally predictable, Mr. King chose to do nothing to prevent this catastrophe.
The economic collapse following in the wake of the housing crash is the main source of the country's current fiscal problems, not profligate spending, as the piece implies.
The NYT told readers that the White House is opposed to an amendment to the financial reform bill by Senator Bernie Sanders that calls for an audit of the Federal Reserve Board because they: " view it as an encroachment on the central bank’s traditional independence." While this may be the real reason that the White House opposes the bill, there may also be other motives. For example, it is possible that the Fed disbursed funds from its emergency facilities in ways that would be embarrassing if more widely known.
The NYT only knows that the White House says. It does not know its true motives. It should have simply told readers that the White House "claims" that it views an audit as interfering with the Fed's independence.
Casey Mulligan is on the loose again. The notorious University of Chicago economist is arguing that there was no housing bubble in the NYT Economix section. The centerpiece of his argument is that inflation-adjusted house prices have not returned to their pre-bubble level. This means that the price rise must be driven by the fundamentals of the housing market rather than an irrational bubble.
It's hard to know where to begin on this one. I guess the first point would be that he is using the wrong series to find anything about the bubble. He is using the new house price series from the Census Bureau. This series controls for neither quality nor location. If the price of all homes doubled, but the price of new homes built further from city centers remained the same, this index would show no increase in prices. This is why almost everyone in this debate uses one of the repeat sales indices, such as the FHFA House Price Index or the Case Shiller national housing index.
Of course the good part of the story is that Mulligan's case would hold even more strongly with these indices (they are further above their pre-bubble level), but it is important that we at least look at the right picture. The NY Fed put out a paper back in 2004 claiming that there was no bubble, the only problem was that people like me were using the wrong price index.
But, let's get back to the issue at hand. House prices have certainly not deflated to their pre-bubble level. They are about 15-20 percent higher in real terms. Why is this the case?
I would point out three factors that may have escaped Professor Mulligan's attention. First, until last Friday the government had an $8,000 first time homebuyers tax credit. This is a bit less than 5 percent of the median house price. Even at the University of Chicago an $8,000 tax credit would be expected to have an upward effect on house prices.
The second factor is that we have had extraordinarily low mortgage interest rates. The weakness of the economy and the Fed's policy of buying $1.25 trillion in mortgage-backed securities pushed the 30-year mortgage rate below 5.0 percent. Interest rates are at their lowest levels since the early 50s. Again, even at the University of Chicago, low interest rates would be expected to have a positive effect on house prices. We might see a different picture if interest rates creep up to near 6.0 percent over the next year, as they are widely expected to do.
The third factor unusual affecting house prices in the last year was the expanded role of the Federal Housing Authority (FHA). The FHA guaranteed almost 30 percent of purchase mortgages in 2009. Many of these homebuyers would not have been able to get a mortgage without the government's support. Again, even at the University of Chicago they probably think that government guarantees for mortgages will have a positive effect on house prices. It is worth noting that the FHA is rapidly cutting back its role because it lost lots of money and is now below its minimum capital requirement.
Finally, real house prices are falling -- currently at a rate of between 0.5-1.0 percent a month. Economists generally do not expect to see instantaneous price adjustments, so it should not be surprising if it takes another year or two for house prices to get to a stable level, once the bubble has fully deflated. (Over-correction is a real risk.)
So, if anyone thought that the housing bubble would immediately deflate and bring prices back to their fundamental level -- in spite of massive efforts by the government to prop up prices -- then Professor Mulligan has the evidence to show that they were wrong. But for everyone else, this piece is probably not very enlightening.
And they said it was impossible. The Post followed the NYT in calling for an independent agent to pick which credit rating agency will rate a company's issues. This is the obvious and simple way to fix the basic conflict of interest involved when the company pays the rater. If the company has no control over who gets hired, then the rating agency has no incentive to lie in its assessment.
Congress was running around in circles genuflecting over various non-solutions to this problem. However, in the last couple of weeks there seems to have been an outbreak of commonsense, no doubt fueled by a Krugman column pushing the idea. I also have been pushing this one for a while, although my megaphone is not as big.
That is a question that the Post should have asked in an article that reported on the Obama administration's plan to set aside $5 billion to help cover the cost of employer provided health care benefits for retirees who are not yet 65 and eligible for Medicare. The article tells readers that there are 2 million retirees under age 65 who are currently receiving benefits from their employer.
Since this $5 billion is the total amount available for the three years from 2011 until 2014, it means that there will be just under $1.7 billion available per year, or less than $900 per retiree per year. Health care costs for people in this age group average well over $10,000 a year, which means that this money will cover on average less than 9 percent of costs.
The NYT somehow thinks that when President Obama insists that he is going to “keep our boot on the throat of BP” that he is going against free market principles. This is 180 degrees at odds with reality. BP caused damage to hundreds of thousands of people, possibly millions, living in the gulf states. Under free market principles, they are supposed to compensate people for the damage that they have caused by their irresponsible conduct.
However, the "socialists" in Congress passed legislation that limited BP's damages to $75 million. This means that they ignored market principles and had the government step in and seize property from individuals and hand it to BP.
It would be good if the NYT and the rest of the media got the issues straight here. No one is arguing about a free market. We are arguing about whether a huge oil company can wreck people's lives with impunity. Conservatives are claiming that they can, but this reflects their belief that the government exists to redistribute wealth income upward, not out of any commitment to the free market.
It is painful to see the ongoing coverage of the bank bailouts and the extent to which the government is being reimbursed. It is true that the banks have repaid the vast majority of the money that was lent. However, this is almost irrelevant to anything.
At the time the government made money available to the banks through TARP and even more so through the Fed, liquidity carried an enormous premium. The major banks charged each other 5 percent interest on 90 day loans because they did not have confidence in their ability to survive.
In this environment, the government stepped in and providing banks with huge amounts of money (we don't know exactly who got how much because the Fed refuses to tell us what it did with our money), at a cost far below what they would have been forced to pay in private markets. The banks could lend this money at enormous premiums or use it to just buy government bonds and pocket the difference in interest rates. As a result, most banks have been able to get back on their feet.
As a bookkeeping matter we can say that the government "profited" from these deals in the sense that it got interest on its loans. (It also received warrants from banks that it sold at a profit.) However, as a practical matter, these profits no more benefit the government's accounts than if the Federal Reserve Board just printed the same amount of money and handed it to the Treasury by purchasing government bonds. Unfortunately, few reporters covering the economy and the bailout understand this point, so they end up writing pieces that imply the country was somehow benefited by the fact that the banks repaid their loans with interest.
The Washington Post devoted a major article to telling readers that banking industry lobbyists, most of whom are unnamed, are not happy with the financial reform bills being debated in Congress. At one point it tells readers they describe aspects of the legislation as "Draconian," "Crazy," and "Insanely unproductive," although it provides no information as to which lobbyists describe which components with these terms.
One unnamed lobbyist told readers that: "I think the worry is the stuff coming out of left field, the whack-job amendments,... It's limited only to the imagination of the senators." Again, it would have been helpful to have examples of what is considered a whack job amendment and by whom. It's good to know that at least some industry lobbyists are at unhappy with at least some parts of these bills, but without some specific content, this article really is not giving readers much information.
The NYT reports on the difficulties that Spain is facing in the wake of the collapse of its housing bubble. Its unemployment rate has crossed 20 percent and is likely to head higher. Its budget deficit exceeds 8 percent of GDP and its credit rating has recently been downgraded by Standard & Poor's.
It would have been worth noting that the credit rating agencies and the speculators who now believe that Spain is facing severe financial stress thought that Spain's economy was in solid shape as its housing bubble was growing ever more out of line with fundamentals. It is also would have been worth mentioning that Spain was running budget surpluses prior to the collapse of its housing bubble. At the time, it was often held up as a success story by the people now criticizing its institutional structure.