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

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

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

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

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

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

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

 

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

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

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

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

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

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

 

Note: Typo corrected and link added.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The piece told readers:

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

 

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

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

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

At its peak in 2006, the housing bubble had caused nationwide house prices to rise more than 70 percent above their trend level. This run-up occurred in spite of the fact that rents had not outpaced inflation and there was a record nationwide vacancy rate.

The dangers of the bubble also should have been clear. Residential construction peaked at almost 6.5 percent of GDP compared to long period average of close to 4.0 percent. The housing wealth effect had led to a consumption boom that pushed the saving rate to near zero.

Also, the flood of dubious loans was hardly a secret. The National Association of Realtors reported that nearly half of first-time homebuyers had put down zero or less on their homes in 2005. The spread of NINJA (no income, no job, and no assets) loans was a common joke in the industry.

These points are worth noting in reference to an article discussing the Fed's efforts to increase its ability to detect dangerous asset bubbles. An asset that actually poses a major threat to the economy is not hard to find. It kind of stands out, sort of like an invasion by a foreign army. The failure of the Fed to recognize the housing bubble and the dangers it posed was due to an extraordinary level of incompetence, not the inherent difficulty of the mission.

A NYT article reporting on the economic and political situation in Michigan noted that in spite of the improvement in its economy since the recession, manufacturing employment is still far below prior peaks. It told readers:

"Manufacturing has come back, with payrolls rising to 567,900 this June from 440,600 in June 2009, bringing manufacturing payrolls back to July 2008 levels, but short of the peak of 906,900 in September 1999."

Actually Michigan's experience is not very different from the situation for the country as a whole. Manufacturing employment hit 17,640,000 in 1998. In the most recent data it was at 12,160,000 a drop of 31.2 percent. The 37.4 percent drop in Michigan is obviously larger, but not qualitatively different. The drop did matter more for Michigan because manufacturing was a larger share of employment in Michigan than in the nation as a whole.

The Wall Street Journal devoted a major article to the efforts by President Obama and several governors to address the skills gap. According to the piece, employers in manufacturing can't hire workers with the right skills. If employers can't get enough workers then we would expect to see wages rising in manufacturing.

They aren't. Over the last year the average hourly wage rose by just 2.1 percent, only a little higher than the inflation rate and slightly less than the average for all workers. This follows several years where wages in manufacturing rose less than the economy-wide average.

              Change in Average Hourly Wage in Manufacturing Over Prior 12 Months

        

manu-wages

                                                    Source: Bureau of Labor Statistics.

There are workers who have the skills employers need. They work for their competitors. If an employer wants to hire people she can get them away from competitors by offering a higher wage. It seems that employers in the manufacturing sector may need this simple lesson in market economic to solve their skills shortage problem.

Are you scared? How will we pay for that? This is the context that was missing from the discussion of a bill from Utah Senator Orin Hatch which would encourage state and local governments to replace traditional defined benefit pension plans with cash balance type plans tied to an annuity which would be run by the insurance industry.

The piece told readers:

"For local governments and states, the unfunded liabilities are huge, ranging anywhere from $1.4 trillion to more than $4 trillion, depending on the assumptions plugged in by actuaries."

These shortfalls are calculated over the pension plans' thirty year planning horizon, a period in which the discounted value of GDP will be in the neighborhood of $500 trillion. It is unlikely that many readers have a clear sense of the projected size of the economy over this period, so they have little basis for assessing these projected shortfalls. If they did know the projected size of the economy they may disagree with the characterization of the shortfall as "huge." (The difference between the two numbers is based on whether the pension funds calculate their shortfalls assuming that their assets earn their projected rate of return or whether they calculate their shortfall assuming their assets earn the return available on a completely safe asset like government bonds.)

There are a few other points worth noting about this picture. First, the shortfalls are likely to be considerably less next year. Most pensions calculate their current assets using a five year average. Next year 2014 will replace 2009. Unless the stock market plunges in the last three and a half months of the year, this change will lead to a substantial improvement in the funding situation of most pensions.

The second point is that the averages conceal sharp divergences across funds. Most pension funds are reasonably well-funded, with some having funding ratios of over 100 percent. There are a number of outliers, like Illinois, Ohio, and New Jersey, that have badly underfunded plans. This is not due to their investment patterns, but rather their repeated failure to make required contributions.

Finally, it is worth noting that turning over the pension plan to insurance companies will almost certainly raise the fees collected by the financial industry. This means that the same amount of taxpayer dollars will translate into lower benefits on average for retirees. That's obviously good news for the insurance industry, but bad news for taxpayers and public sector workers.

There is one possible policy justification for throwing this money in the garbage. If an insurance company was an intermediary, it might be more difficult for politicians like New Jersey Governor Chris Christie to avoid making required contributions. As it stands now, the refusal to make these contributions appears to be part of Mr. Christie's political shtick, allowing him to portray himself as a tough guy standing up to the state's workers.

If there was an insurance company acting as an intermediary then perhaps the situation may be clearer to the public. Mr. Christie is simply trying to avoid paying bills that he has accrued, effectively stealing money from the state's workers. 

 

Allan Sloan raises an important point about winners and losers from corporate inversions, the process through which a U.S. company arranges to be taken over by a foreign company to lower its tax bill. He points out that many shareholders will be hit with a large individual tax bill because as an accounting matter they will have sold their stock and thereby realized a capital gain.

This isn't a question of shedding tears for these shareholders, who will mostly be in the top tenth or even the top one percent of the income distribution. The point is that this tax scam is not in their interest. While the company may benefit over time from paying lower corporate taxes, this is unlikely to result in a net gain for those current shareholders who have to pay capital gains taxes because of the inversion.

Sloan points out that the big gainers are the financial firms that arrange the deals, who can count on hundreds of millions in fees from a major deal. The corporate insiders (top management) may also stand to gain since they are unlikely to be faced with the problem of having to pay taxes on large amounts of unrealized capital gains.

If the point is to change practices such as corporate inversions, rather than just complain about them, it is important to recognize these distinctions. The financial sector and the corporate insiders are incredibly powerful interest groups. If some number of wealthy shareholders can be brought into a coalition to restrict this sort of tax gaming, it would have a far greater chance of succeeding. (The same story applies to bloated CEO pay, which most immediately is money out of shareholders' pockets.)

When countries went into recessions in the past they usually came out with a year or two of rapid growth that more than made up the ground lost in the recession and then resumed a normal growth path until the next recession. That hasn't been the case in any major wealthy country following the 2008 downturn, although some countries, notably those in the euro zone, have done markedly worse than others.

Perhaps it is this comparison to the weak performance of the euro zone countries that led a piece in the NYT Dealbook section to tell readers:

"Britons also see a Continent that is plagued by deflation and stagnation while their economy has staged a fiery comeback from the financial crisis."

According to the I.M.F. the U.K. economy will be 1.5 percent larger in 2014 than it was in 2007. This would be equal to a bit more than a half year of growth in normal times.

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                               Source: International Monetary Fund.

It is also worth noting that this piece seems to imply that the loss of part of its financial sector would be a big hit to the U.K. economy. This is not clear. Economists usually assume that economies tend to be at their full employment level of output in the long-run. If this is the case, then the loss of banks in the U.K. and/or Scotland would lead the people currently employed in finance to move to other sectors where their labor could be employed productively.

The Washington Post thinks its fantastic that Rhode Island broke its contract with its workers. It applauded State Treasurer and now Democratic gubernatorial nominee Gina Raimondo for not only cutting pension benefits for new hires and younger workers, but also:

"suspending annual cost-of-living increases for retirees and shifting workers to a hybrid system combining traditional pensions with 401(k)-style accounts."

In other words, Ms. Raimondo pushed legislation that broke the state's contract with its public employees. The Post's argument is that these pensions were expensive and the state couldn't afford them. This is not clear. (The Post again played the Really Big Number game telling readers about the $1 trillion projected shortfall in state pensions. That is a really big number and is supposed to scare readers. If it was interested in informing readers it would have told them the shortfall is equal to about 0.2 percent of projected GDP over the thirty year planning horizon of public pensions.)

Anyhow, if the state of Rhode Island really can't afford to pay its bills, why should public sector workers be the only ones to pay the price. The state has hundreds or even thousands of contractors. Why not short them all 10 or 20 percent of their payments? That would be the fairest way to deal with the situation if the state really can't pay its bills or raise the taxes needed to do so. Obviously the Post doesn't believe that contracts with workers are real contracts.


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