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Weak Wage Growth Is Bigger Problem for Housing Market Than Student Debt Print
Tuesday, 18 February 2014 07:51

The Washington Post had a somewhat confused front page piece claiming that student debt burdens are a major obstacle to the recovery of the housing market. First, it should be noted that by most measures the housing market has already recovered. Prices are above their trend levels. Sales are also at or above trend levels. Construction has not yet recovered, but this will not happen until the inventory of vacant housing units is further reduced.

However, the piece is seriously misleading in implying that student loan debt is a main factor impeding home buying. (Bizarrely, it discusses the situation of someone looking to buy an $800,000 home, four times the median house price.) While student loan debt undoubtedly does make it more difficult for people to buy homes, so do low wages. This is a much bigger problem for people without college degrees who have historically accounted for the vast majority of homeowners.

According to a recent study by Pew, the median 25-32 year-old with an associate degree earned $30,000 in 2012. Those with only a high school degree earned $28,000. Both are less in real terms than what they would have earned in 1979. If we assume that their mortgage payments and taxes should not exceed 30 percent of their gross income, this means that they cannot afford a house that costs more than $153,500, roughly 75 percent of the median house price. This assumes a 4.5 percent interest rate, a 20 percent down payment, and no need for mortgage insurance. If this were to rise to 5.5 percent, either due to higher interest rates or a need to get mortgage insurance, then they would only be able to afford a home costing $139,500.

The study showed the median high school grad earned $28,000, which means that in these cases the most expensive house they could afford would be $143,300 in the case of a 4.5 percent interest rate and $130,200 in the case of 5.5 percent interest rate. As a result, most young people without college degrees will not be earning enough money to buy a house. It is worth noting that the Pew study showed that the median wage of college grads has barely risen for the typical college grad over the last three decades also. They have also been victims of the upward redistribution during this period, although not quite to the same extent as those with less education.

 
Larry Summers Is Half Right in Saying That Growth Would be Affected If We Reduced the Incomes of the Very Rich Print
Monday, 17 February 2014 08:36

Unfortunately he is wrong about the direction of change. Apparently Summers has missed the downturn in the last six years and the weak growth since the turn of the century. In his post column today he warns readers:

"If total income were independent of efforts at redistribution, there would be a compelling case for reducing incomes at the top and transferring the proceeds to those in the middle and at the bottom. Unfortunately, this is not the case. It is easy to conceive of policies that would have reduced the earning power of a Bill Gates or a Mark Zuckerberg by making it more difficult to start, grow and globalize businesses. But it is much harder to see how such policies would raise the incomes of the remaining 99.9 percent of the population, and such policies would surely hurt them as consumers."

It's interesting Summers picked Bill Gates. Back in the early 1990s Microsoft helped to lock in its monopoly on operating systems by contracting with major manufacturers so that they paid Microsoft for each computer they shipped that had a competitors' operating system. Needless to say, such deals strongly discouraged Dell, Hewlett-Packard and other major manufacturers from experimenting with niche operating systems that might have potentially had larger uses. Had the Justice Department taken anti-trust law seriously we might have better software today and Bill Gates would be considerably less wealthy.

We could also impose a modest sales tax on financial transactions as even the I.M.F. has advocated. This would both hit many of the fortunes being collected on Wall Street and also reduce the enormous amount of waste in a financial system that consumes five times as large a share of GDP as it did forty years ago.

We could cut back on the fortunes in the pharmaceutical industry and tech sector and get better drugs and technology by moving away from patent supported research. (Yes, there is such a thing as the National Institutes of Health and everyone agrees it does great work.) We could also make it more difficult to bring frivolous patent suits so that Apple, Samsung and the rest will have to compete to make the best products, not in the court rooms.

And we could cut back on the Walton family's fortunes by pushing China and other developing countries to raise the value of their currencies. This would reduce their profit margins on low cost imports. It would also have the great advantage of moving us toward more balanced trade creating millions of jobs and increasing growth. In addition, by getting us closer to full employment, tens of millions of workers would be in a position to get wage gains. 

So Summers is absolutely right. Total income is not independent of distribution and many of the steps we might want to take to equalize distribution would also foster growth.

 
Robert Samuelson Is In the Dark Print
Monday, 17 February 2014 08:17

It must be great to be a columnist for the Washington Post. You get to rewrite the same columns week after week. You never have to pay attention to facts and data or even make sure that you accurately present the arguments you criticize. Hence we have Robert Samuelson telling us this morning that "economists are in the dark."

Of course he is in large part right. Given its colossal failure in recognizing the risks of the housing bubble it would be reasonable for every university to shut down its economics program, recognizing that it has about as much use as a department of astrology. But Samuelson is shooting blanks when he tells us that Keynesian economics has been proven a failure by the downturn.

"This conclusion is surely controversial because many economists attribute the weak recovery to misguided austerity, especially in Europe. Just follow the advice of John Maynard Keynes (1883-1946), they say. When the economy suffers a massive drop in private spending, government should offset the loss by increasing its budget deficits. Europe’s budget cuts were too aggressive, they say, while U.S. 'stimulus' policies were not aggressive enough.

"Perhaps history will vindicate this appeal to Keynesianism. Or perhaps not. The fact is that the United States did respond aggressively under both George W. Bush and Barack Obama. It certainly didn’t embrace austerity. Federal budgets ran massive deficits — $6.2 trillion worth from 2008 to 2013, averaging 6.4 percent of the economy (gross domestic product). Nothing like this had occurred since World War II. Yet, the economy limped along. Why wasn’t this enough?"

Yes, well we have to keep Robert Samuelson away from the really big numbers, he might hurt himself. The reason it wasn't enough is because the shortfall in demand created by the collapse of the housing bubble was even bigger, as some of us yelled at the time. The loss in residential construction was around 4 percentage points of GDP. The loss in consumption due to the loss of housing bubble generated wealth was also around 4 percentage points of GDP. Throw in another 1 percentage point each for the reduction in state and local government spending and non-residential construction and you're up to 10 percentage points of GDP; that comes to almost 1.7 trillion in today's economy.

If we sum that over 6 years we get more than $10 trillion and that's before even factoring in any multiplier effects. So, $6.2 trillion is a really big number, but the actual shortfall in demand created by the collapse of the housing bubble was an even bigger number. And those of us who pay attention to the economy were saying this as loudly and clearly as we could at the time. 

There is no problem with understanding the economy and figuring out how to turn it around. The problem is that the debate is dominated by people like Robert Samuelson who refuse to look seriously at the data and to listen to what the people he criticizes are saying.

 
The Theory of Immaculate Trade Pact Conception Print
Monday, 17 February 2014 07:58

It's amazing what some folks will say to promote trade agreements. Today, John Harwood in the NYT gave us the theory of immaculate trade pact conception. In this view trade pacts are negotiated by members of the high priesthood who focus on promoting the overall national interest and economic growth. Unfortunately, these pacts must deal with the evils of everyday politics.

In this respect he tells of the urgent need for fast-track (a.k.a. "trade promotion") trade authority:

"Presidents value the Trade Promotion Authority because it forces Congress to vote up or down on trade deals, shielding them from House and Senate amendments at the behest of corporations, unions, environmental groups or other interests."

In reality these deals were being negotiated by corporate interests from day one. The U.S. trade negotiators are working hand in hand in with the pharmaceutical industry, the software industry, the financial industry, the oil and gas industry, and other major corporate interest groups to craft a deal that will increase their profits. Economic growth has nothing to do with it. Even the models used to tout the benefits of these deals show gains that are too small to be measured in annual GDP data. And these growth estimates don't even take account of the negative impact that stronger patent and copyright monopolies, and the resulting prices increases, would have on growth. The idea that these trade deals are about promoting growth is a story for little kids and reporters at major news outlets.

Of course it is possible to craft a trade deal that would promote real economic gains. Doctors in the United States earn salaries that are hugely out of line with those in other wealthy countries. The same is true for other highly paid professions. If a trade deal focused on reducing the barriers that prevent these professionals from providing their services in the United States the gains would be substantial. The savings on doctors alone could be close to $100 billion a year (0.6 percent of GDP).

The agreements could also focus on reducing the value of the dollar, which would make our goods and services more competitive internationally. This would lower our trade deficit and potentially create millions of jobs. And, we could reduce patent and copyright barriers, lowering prices and making markets more competitive.

But these items don't come up at trade negotiations because the folks at the table would lose from these growth enhancing measures. Instead we get silly stories about trade pacts being negotiated by disinterested parties who are only looking out for the good of the country. Come on folks, you've got to do better than this.

 
Dan Balz and Phillip Rucker Insist the Democrats Cannot Abandon Clinton's Bubble Driven Growth Print
Saturday, 15 February 2014 23:35

I'm not kidding. They discuss the battle between the progressive and the Wall Street wings of the Democratic Party then tell readers;

"For Democrats who could lead the party in the future, the challenge will be to articulate a new populist direction without denigrating the Obama record or abandoning the contributions of Bill Clinton."

Of course the most important contribution of Bill Clinton was an over-valued dollar that led to a huge trade deficit. The demand gap that was created by the trade deficit (this is income that creates demand overseas rather than the United States) was filled by the stock bubble in the 1990s and the housing bubble in the last decade. The fallout from the collapse of these bubbles has been disastrous. In the case of the housing bubble, the changes in Congressional Budget Office projections from before the collapse to the present imply a cost to the country of $24 trillion ($80,000 per person) in lost output through 2024.

One might think this would be grounds to abandon the Clinton legacy, but hey, Balz and Rucker say they better not.

 
Thomas Friedman Escaped and Is Writing About Economics Again Print
Saturday, 15 February 2014 21:33

Thomas Friedman is loose in Silicon Valley, the economic hub best known for colluding to rip off its workers. He can't contain his enthusiasm for "start-up America," telling readers;

"What they all have in common is they wake up every day and ask: 'What are the biggest trends in the world, and how do I best invent/reinvent my business to thrive from them?' They’re fixated on creating abundance, not redividing scarcity, and they respect no limits on imagination. No idea here is 'off the table.'"

Yeah, it must have taken some brilliant Silicon Valley imagination for Apple to sue Samsung to get its competitor's cell phones off the market. In places that are behind the curve they would think that they have to produce a better cell phone, but in Silicon Valley they have the government just remove their competitor's products from the shelves. See, no idea is off the table.

Okay, but that's just cheap fun. The real story here is that Friedman is calling out Washington for not supporting the trade deals the corporations love. Just to be clear, Friedman makes no pretense of evaluating trade deals based on evidence. In fact, he boldly proclaimed the opposite:

"I was speaking out in Minnesota — my hometown, in fact — and a guy stood up in the audience, said, 'Mr. Friedman, is there any free trade agreement you’d oppose?' I said, 'No, absolutely not.' I said, 'You know what, sir? I wrote a column supporting the CAFTA, the Caribbean Free Trade initiative. I didn’t even know what was in it. I just knew two words: free trade.'"

Given his religious devotion to pacts labeled "free-trade" agreements, it is hardly surprising that Friedman would strongly support the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP). He begins by calling them "next generation" trade agreements:

"that even the playing field for us by requiring higher environmental and labor standards from our trading partners and more access for our software and services."

That's a great story. Obviously he hasn't heard about the leaked environmental chapter of the TPP that is universally recognized as a joke. No one, other than perhaps Thomas Friedman, thinks the labor chapter will be any more serious.

Then Friedman quotes the Economist:

"Studies suggest that proposed deals with Asia and Europe could generate global gains of $600 billion a year, with $200 billion of that going to America,"

His keepers were supposed to keep Friedman away from big numbers. Does Friedman think these numbers are for next year, ten years out, twenty years out? He doesn't tell us and probably doesn't have a clue himself. Hey, the world is flat, everyone is hyper-connected, why does it matter?

For those who actually like their numbers to mean something, these projections are for somewhere around the middle of the next decade when world GDP will be around $160 trillion and U.S. GDP will be close to $30 trillion. That puts the projected gains at a bit less than 0.4 percent of world GDP and 0.7 percent of U.S. GDP. That's not trivial, but hardly the difference between booming growth and a stagnant economy. In the case of the U.S. the boost to growth would be around 0.05 percentage points.

While Friedman insists these numbers are too low, the opposite is almost certainly true. These deals are focused to a substantial extent on increasing patent and copyright type protections. These government granted monopolies, restrict competition and raise prices. (This is likely to be an especially big issue in the case of prescription drugs.) The studies that show gains from these trade agreements don't make any effort to incorporate the higher prices that result from these protections.

These monopolies will be a drag on growth and will quite likely more than offset any projected gains from the trade liberalization portions of the deals. They also have the effect of redistributing income upward. That is why serious people have serious reservations about the TPP and the TTIP.

But such issues don't trouble Thomas Friedman, after all he "just knew two words: free trade."

 

Note: Typos corrected, thanks Fairleft and Robert Salzberg.

 
Inequality By Design: It's Not Just Talent and Hard Work Print
Saturday, 15 February 2014 14:54

Greg Mankiw is out there defending the 1 percent again. He put forward the argument that the big bucks are simply their just desserts; the rewards for exceptional skill and hard work.

His opening act is Robert Downey Jr. who apparently got $50 million for his starring role in a single movie. This is a great place to start. There's no doubt that Robert Downey is an extremely talented actor, but of course there have been many actors over the years who have put in great performances for much less money. How is it that Downey could earn so much more than a great actor from the 50s, 60s, or 70s?

We could give a simple answer and say something like globalization and technology, but that would be at best half right. Certainly many more people will be able to see the films that Downey acts in than would have had the opportunity to see the stars from a half century ago, but that doesn't mean that Downey would get money from the broader exposure. In fact, a big part of the reason that Downey can collect huge paychecks is the extension and strengthening of copyrights. The United States has lengthened the period of copyrights from 28 years, with an option for a 28 year renewal, to 75 years in the 1976, and then to 95 years in 1998. 

It also has stepped up copyright enforcement, imposing stiff fines on people who use the Internet to make unauthorized copies of copyrighted material. This is important, since the technology itself would let everyone quickly see Robert Downey Jr.'s new movies at no cost. It is only because of government intervention in the form of copyright monopolies that he is able to collect $50 million.

It is also worth noting that this intervention also has an indirect effect. If there was a large amount of high quality and recent material that everyone could obtain for free on the web (and show in theaters if they like), then no one would be willing to pay big bucks to see Downey's latest feature. So is Downey worth his $50 million, perhaps given the structure we have, but we could easily have a different structure which could quite possibly be a more efficient way to support and distribute creative work. (Here's my scheme.) FWIW, a similar story would apply to the writers and athletes in Mankiw's 1 percent defense.

Then we get to the CEOs who Mankiw tells us get high pay because of what they contribute to their companies and the economy. If this is the case, how do we explain CEO's of companies like Lehman, Bear Stearns, and AIG walking away with hundreds of millions of dollars even though they drove their firms into bankruptcy? When the CEO of Exxon-Mobil gets hundreds of millions because soaring worldwide oil prices sent Exxon's profits through the roof, do we really think the pay is a function of hard work? How do we explain the fact that CEOs of incredibly successful companies in Europe, Japan, and South Korea make on average around a tenth as much as our crew does?

That one doesn't seem to fit the just desserts story. The more likely explanation is the Pay Pals story, where the company's board of directors are paid off by CEOs to look the other way as they pilfer the company.  (See CEPR's new Director Watch, which will feature your favorite directors in the months and years ahead.) Unlike the case in Europe, Japan, and South Korea, there is no force to effectively limit the CEO's pay. Needless to say, the directors never ask if they could get a comparably skilled CEO for less money from Germany, Japan, or China.

And then there is the financial sector where Mankiw tells us that the extraordinary pay is compensation for the volatility of paychecks. That's interesting, except the vast majority of comparably talented and hardworking people would be happy to get the pay the finance folks get in the bad years. Much of the big money on Wall Street stems from highly leveraged bets that beat the market by seconds or even milliseconds. This provides as much value to the economy as insider trading, which it in fact resembles closely.

It would be interesting to see what would happen to the big fortunes in the financial sector if it had to pay a small transaction fee, effectively subjecting it to the same sort of sales tax that is paid in almost every other sector of the economy. It would also be interesting to see what would happen to the private equity folks if they lost the opportunity for the tax gaming that is their bread and butter.

I could go on (read my non-copyright protected book on the topic), but the point should be clear. If the 1 percent are able to extract vast sums from the economy it is because we have structured the economy for this purpose. It could easily be structured differently, but the 1 percent and its defenders aren't interested in changing things. And the 1 percent and its defenders have a great deal of influence on the direction of economic policy.

 

 
The Scary Robot Story Stems from Confusion by the Story Tellers Print
Saturday, 15 February 2014 06:42

Joe Nocera uses his column today to discuss the scary robot story. This is the story that none of us will have jobs because we will all be displaced by robots. (Incredibly, this story exists side by side with its direct opposite, the view that we won't have any workers because so many people are retiring and living forever.) Anyhow, the deal is that the owners of the robots are very rich and the rest of us are left begging for pennies.

The reason this story makes no sense is that the ability to get rich from owning robots will not depend on physically owning a robot. Robots will be cheap to produce; they will be made by other robots. If robots are expensive it will be because we give strong and long patent monopolies.

Without strong patent protection we will all be able to buy robots for a few dollars that will cook our food, clean our homes, install cheap solar panels and insulation, provide us medical care, grow our vegetables, and teach our children. How could we be poor in this world?

In short, the scary story is a story of patent policy designed to redistribute income upward. It has nothing to do with technology.

 
Casey Mulligan, the ACA, and the Marginal Tax Rate Story Print
Friday, 14 February 2014 09:54

Paul Krugman and Jonathan Gruber have been responding to Casey Mulligan's complaints about how the high implicit marginal tax rates created by the Affordable Care Act will discourage work. They both insist that they are concerned about disincentives, but find them less of an issue than Mulligan. I confess to being less concerned than Krugman and Gruber.

The reason is that many low and moderate income people already faced very high marginal tax rates in the form of the loss of benefits. For the most part, the ACA just shifts the breakpoints a bit and has the disincentives apply to a somewhat different group of people. The most obvious example is the cutoff for Medicaid eligibility. In the states that accepted the expansion, this goes from 100 percent of the poverty line to 135 percent of the poverty line.

That's a cutoff, not a phase out, so the extra dollar of income could be bad news. Except now with the subsidies in the exchanges, families don't end up with zero once they have crossed the threshold.

Anyhow, whenever you make a mean-tested benefit more generous, you can't avoid creating high marginal test rates. (Why do so many conservatives want to create high marginal tax rates by applying means tests for Social Security and Medicare.) The only alternative for reducing the marginal tax rates is to have the benefit go to people further up the income ladder which costs more money. That requires more tax dollars and, you guessed it, raising marginal tax rates.

CEPR had a project a few years back run by Heather Boushey, called Bridging the Gaps. This project looked at the various forms of support for low and moderate income families that existed across states, in addition to federal programs like food stamps and the EITC. I was struck in looking at this work by how often low and moderate income families would face implicit tax rates (in the form of lost benefits) in the range of 60-80 percent. Remarkably, most of them worked.

My take away from this is that high marginal tax rates for moderate income people are a bad thing, but they don't seem to discourage work as much as we might imagine. That is why I have never been terribly concerned about the disincentives that might come from the ACA. There certainly are some kinks that it would be good to iron out (places where the lost subsidy per additional dollar earned is way too high), but in the scheme of things this is a relatively minor concern. It is also one that could be addressed if both parties had an interest in making the system work.

 

 

 
Are English Conservatives Threatening War Against an Independent Scotland? Print
Friday, 14 February 2014 08:56

That's what people must be wondering after reading a Post piece reporting Chancellor of the Exchequer George Osborne's threat that an independent Scotland would not be able to use the pound. The Post quotes Osborne as saying that the pound is not something that you can divide like a CD collection.

It is difficult to understand the possible meaning of this threat. It could mean that England would not negotiate the terms of a monetary union with an independent Scotland, however it is hard to see why an independent Scotland would want to have a monetary union with an England run by the conservatives. Their policies have helped to give the UK a downturn that is worse than what it experienced in the Great Depression. Presumably breaking free from these policies is one of the main motivations for seeking independence.

Of course if Scotland chose to use the pound as its national currency, as countries like Panama and Ecuador have adopted the dollar as their currencies, it is difficult to see what England could do to stop them, short of going to war. In other words, it's not clear what Osborne was threatening.

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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