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Bill Keller Missed the Housing Bubble Print
Monday, 28 November 2011 05:04

NYT columnist Bill Keller decries a political process in which the consensus of mainstream economists is not according the respect it deserves. He failed to note one obvious reason why these experts' views might not be getting much respect: almost none of the experts noticed the huge housing bubbles whose collapse led to severe recessions in the United States and Europe.

In this case, the process of credentialing ensured that evidence would be ignored rather than examined. Those who raised concerns about the bubbles were dismissed as cranks. Even after the collapse, the economists who managed to overlook the largest asset bubbles in the history of the world have suffered almost no consequences in terms of their employment or professional standing. Clearly the economics profession does not have a structure where performance is rewarded and failure is punished. Given this fact, it is certainly understandable that the pubic would be suspicious of pronouncements by economists.

It is also worth noting that Keller's takeaway about the profession's consensus of what needs to be done is in fact wrong, or at least seriously misleading. He says that there is a need to reduce "entitlements." In fact, there is no obvious need to reduce Social Security. Its cost is projected to increase only modestly in coming decades as a share of GDP and is fully paid by its designated tax through the year 2038. Even after that date, the tax is projected to cover more than 80 percent of scheduled benefits through the rest of the century.

The real story is Medicare and Medicaid, the cost of which is in turn driven by the broken U.S. health care system. If the United States paid the same amount per person for health care as people in other wealthy countries we would be looking at long-term budget surpluses, not deficits. It is misleading to describe the problem of a broken health care system as a problem of "entitlements."

This is especially important because it conceals the main choice in containing Medicare and Medicaid costs. On the one hand, we can look to reduce the quality of care provided by these programs, as advocated by politicians of both parties. Alternatively, we can look to reduce the waste and excessive fees charged by providers.

There are enormous distribution implications to how this issue is resolved. However most people will not even be aware of these issues if the media hides them under the problem of "entitlements."

 

 
Is David Gregory a Vegetable? Senator Schumer and the Budget Deficit Print
Sunday, 27 November 2011 11:10

Thirty years ago, the Reagan administration told us that ketchup is vegetable. More recently Fox News told us that pepper spray is essentially a food product. So inevitably people must be asking whether David Gregory is a vegetable.

Gregory, who is the host of Meet the Press, had Senator Chuck Schumer on the show speaking about the failure of the supercommittee to come up with a deficit reduction plan. Schumer listed the causes of the deficit as the Bush tax cuts, the increase in military spending and the increasing cost of Social Security and Medicare (referred to as "entitlements). Remarkably, Schumer did not mention the recession, which is by far the most important cause of the large deficits of the last few years.

An anchor who was not a vegetable would have jumped on Senator Schumer and asked him if he is really unaware of the recession and its contribution to the deficit. Gregory simply went on to the next question as though Schumer had said something that made sense. So what exactly does Gregory do for his pay?

 
The Double Taxation of Corporate Profits and Other Fairy Tales Print
Sunday, 27 November 2011 10:17

The usually insightful Steven Pearlstein swallowed a big one today in pushing the line that the taxation of corporate profits when they are paid out as dividends amounts to "double taxation." The problem with this story is that the corporation really is a distinct entity from the individual who receives dividends. In fact, according to the Supreme Court, they are actually distinct persons.

This is not a philosophical question; it is a very concrete economic one. No one is forced to organize a business as a corporation. Anyone can operate any business as a partnership. Partnerships do not pay a separate tax, the partners only pay tax on the profits as individuals.

In this sense, the corporate income tax is 100 percent a voluntary tax. It is paid only because people consider the benefits of corporate status to be worth more than the taxes that they must pay.

This removes any logical possibility of double taxation. The corporate income tax is effectively the fee that stockholders pay for the benefits of corporate status. By holding stock, they have voted with their feet to pay this tax. Their income, and the tax on it, should be treated as distinct from the corporate income. If individuals are not paying tax on their dividends and capital gains then it is not taxed.  

[Stuart Levine offers well-taken correction below. Only closely held partnerships avoid taxation. Any partnership that had publicly traded share would be subject to taxation. Of course, this is still a choice made by owners of the partnership.]

 
George Will Is Confused by Numbers at the Post Office Print
Sunday, 27 November 2011 08:39

I know, everyone is saying that "George Will" and "confused by numbers" is repetitive, but it is nonetheless necessary to say in reference to his latest piece calling for privatization of the United States Postal Service (USPS). The point is supposed to be that the USPS is hopelessly inefficient compared to its private sector competitors and that if it were required to be run at a profit it would soon be out of business.

Actually, the data don't really make this case. In 2006 Congress required the USPS to advance-fund retiree health benefits. While this may be advisable, this is not the normal practice among private businesses. Furthermore, it required that it build up the advance funding at a rapid pace (over 10 years), using health care cost growth assumptions that are way out of line with those used in the private sector.

The result was an added expense of roughly $5.5 billion a year that shifted the USPS from profits to losses in 2007 and 2008 and made its losses considerably larger in each of the last two years. Even accepting the pre-funding requirement, if the shortfall was made up over 30 years, and the USPS was allowed to use the same health care cost growth assumptions as those heroic job creators in the private sector, the USPS would have been profitable in the years 2007 and 2008 and had considerably smaller losses the last two years.

The USPS also suffers by virtue of the fact that it is required to invest its pension fund exclusively in government bonds. If it were allowed to invest in the same mix of assets as the heroic job creators in the private sector, the return on the fund would be 1-2 percentage points higher, saving the USPS roughly $1 to $2 billion in annual pension expenses.

These two changes, which would involve treating the government-run USPS in the same way as heroic job creators in the private sector, would restore the USPS to profitability over the course of a business cycle, even if they could not guarantee profitability even at the bottom of the worst downturn since the Great Depression. Apparently Will has not heard of the recession since it is not mentioned anywhere in his piece. (It's hard to get news at the Washington Post.) The profitability of the USPS has always been highly cyclical. 

It is reasonable to consider privatization of any government service, as well as the opposite. The decision should be made based on whether the private sector can accomplish the task more efficiently. The numbers are certainly not as clear cut as Will seems to believe.

In addition, the USPS carries a mandate to ensure that everyone in the country has access to low-cost mail service. It is obligated to deliver a letter from the most remote island in the Florida keys to Nome Alaska for the same cost as sending a letter across the street in Manhattan. We know that the letters can be delivered across the street in Manhattan at a lower cost, but no private delivery service will ship letters between small towns across the country for 44 cents. We may not care about this implicit subsidy to small town America, but anyone who talks about privatizing the USPS without dealing with the issue of guaranteed universal service is pushing an agenda, not discussing the issues involved with privatization. 

 
The Philanthropy of the Rich Does Have a Cost to Taxpayers Print
Saturday, 26 November 2011 17:04

The NYT reported on a new philanthropic trend among the wealthy, where rich people try to use their money to deliberately influence public policy in part by funding pilot programs that can serve as a model for larger public programs. At one point the article refers to funding for various education projects in New York and Newark and told readers:

"Officials in New York and Newark say the money from private sources will not replace existing public programs, but will instead allow rapid experimentation with new approaches to old and seemingly intractable problems, at no cost to taxpayers."

Actually, the money that wealthy people donate to philanthropies does carry a cost to taxpayers. It is deducted from their taxable income or the estates that they would pass on to their heirs. Depending on the relevant tax rate, the dollars contributed to philanthropies by the wealthy could lead to losses of government revenue of as much as 50 percent of the money contributed.

It is entirely possible that most charitable organizations promote the public good to a sufficient extent to warrant this sort of revenue loss, however it is inaccurate to imply that these contributions are costless to taxpayers. Everyone else faces a higher tax burden as a result of the tax savings that the wealthy receive from their charitable contributions.

 
Matt Miller on the Decadence of the Western Intellectual Class Print
Saturday, 26 November 2011 08:07

Actually Matt Miller was ostensibly writing in the Washington Post about the "decadence of the Western governing class," but he was inadvertently telling readers much more about the failure of people who pass for intellectuals in public debate. Miller passes for somewhat of an expert on economic and budget policy, yet this column posed two amazing questions for readers:

"According to the IMF, China’s GDP per capita is about $8,400. The United States’ is about $48,000. How can it be that a country nearly six times richer is relying on a country so poor to help finance its current consumption?"

"Related surreal question: What does it say when Europe, where most nations have per-capita incomes ranging from $35,000 to $45,000, is also passing the tin cup to much poorer China in an attempt to backstop its recklessly leveraged banks and governments?"

Of course these questions both have very simple answers that are 180 degrees at odd with Miller's austerity prescriptions. In the first case, those who took intro econ know that if any country, no matter how poor, decides to deliberately depress the value of its currency against the dollar, then it will run a trade surplus with the United States. In other words, the answer to Miller's question is that it is a deliberate policy of the Chinese government to support the consumption of the United States.

Miller apparently doesn't know that China pegs its currency against the dollar. In order to keep the yuan from rising against the dollar, it has purchased over $1 trillion of U.S. assets over the last decade. The United States is in fact not "relying" on China to finance its current consumption. In fact, the official policy of both the Bush and Obama administrations was that we wanted China's government to stop buying up dollars and thereby depressing the value of the yuan. [While this is the public policy, this may not be the actual policy, since many powerful interests like Wall Street banks and major retailers benefit from the over-valued dollar.]

This would allow the dollar to fall. That would make Chinese imports more expensive to U.S. consumers and U.S. exports cheaper for people in China. That would cause the U.S. trade deficit with China to fall, and possibly turn to a surplus, which is the textbook relationship between rich countries and poor countries. 

In the case of Europe, the problem is that the German government and the European Central Bank (ECB) are trying to impose austerity across Europe. The ECB has all the euros it could possibly need to bail out Greece, Italy and anyone else in sight. However, rather than use its ability to print euros to save Europe's economy, the ECB is trying to force cutbacks in social spending and protections for workers across Europe. The trip to China to seek support for a bailout was a silly diversion from the real issue.

The fact that Miller would be posing questions like these in the Washington Post shows the incredible decadence of the Western intellectual class. At least when it comes to economic policy, it is largely comprised of people who are either so ignorant of basic economics or so dishonest that they primarily act to confuse their audience and distort reality.

It says a huge amount about intellectual debate in the United States that almost no one lost any standing for failing to notice the housing bubble, the largest asset bubble in the history of the world. It is almost impossible to understand how an analyst who paid attention to basic economic data could fail to see the bubble and the distortions it created.

Yet, the experts who were completely surprised by the collapse of the bubble and its impact on the economy continue to dominate policy debate in both the United States and Europe. Now that is some serious decadence.

 
Washington Post Helps Senator Corker Spread the Big Lie on Fannie and Freddie Print
Friday, 25 November 2011 09:16

When a newspaper abandons journalistic standards in its news pages one hardly expects to find much commitment to truth on its opinion pages. Therefore it is not surprising that the Washington Post opened its pages to Tennessee Senator Bob Corker to spread the story that government support for homeownership through Fannie Mae and Freddie Mac was the cause of the housing bubble.

Corker tells readers:

"During the boom years, the GSEs’ affordable housing goals were coupled with a Congress and an administration that saw only the bright side of rapidly increasing homeownership rates. That meant that as housing prices began to spike, it was impossible to make credit slightly more expensive. Without countercyclical market mechanisms able to operate naturally, as housing prices went higher, the GSEs simply raced each other to lower guarantee fees, out of fear that they might lose business from mortgage originators such as Countrywide and Washington Mutual. The result, we now know, was a government-induced bubble followed by a painful collapse."

Okay, maybe Senator Corker really never heard of Citigroup, Goldman Sachs, Lehman Brothers, Bears Stearns, and the other Wall Street investment banks. He may not know that they were making tens of billions of dollars during these years securitizing the worst of the sub-prime mortgages, without any government guarantees except their implicit too-big-to-fail insurance. News may take a long time to reach Tennessee.

But surely the Post knows about privately issued mortgage-backed securities and their role in the bubble. It even published a very good column by Barry Ritholz a couple of weeks back outlining the story. So why does it allow Corker to publish something that it knows is not true? Would it print an opinion column blaming President Bush for actually doing the World Trade Center bombing?

There is a ton of data showing that the blame-Fannie-and-Freddie story is nonsense, but my favorite entry in this debate is a contemporaneous assessment from that well-known promulgator of left-wing propaganda, Moody's:

"Freddie Mac has long played a central role (shared with Fannie Mae) in the secondary mortgage market. In recent years, both housing GSEs [Government Sponsored Enterprises] have been losing share within the overall market due to the shifting nature of consumer preferences towards adjustable-rate loans and other hybrid products. For the first half of 2006, Fannie Mae and Freddie Mac captured about 44 percent of total origination volume – up from a 41 percent share in 2005, but down from a 59 percent share in 2003. Moody’s would be concerned if Freddie Mac’s market share (i.e., mortgage portfolio plus securities as a percentage of conforming and non-conforming origination), which ranged between 18 and 23 percent between 1999 and the first half of 2006, declined below 15 percent. To buttress its market share, Freddie Mac has increased its purchases of private label securities. Moody’s notes that these purchases contribute to profitability, affordable housing goals, and market share in the short-term, but offer minimal benefit from a franchise building perspective."  (Moody’s, “Federal Home Loan Mortgage Corporation, Analysis,” December 2006, p.8)

So here we have Moody's expressing concern about the ongoing viability of Freddie Mac because they are losing out in the subprime and Alt-A market to the investment bank. This is its assessment at the time, before it was apparent (to them) that this market was a disaster in the works.

When someone claims that the bubble was the fault of Fannie and Freddie, they are either ignorant or lying. And, I am saying this as someone who was harshly critical of both at the time and would happy to see the euthanasia of these mortgage giants -- at least if the alternative is to see them returned to some sort of public-private hybrid.

Both companies deserve tons of blame, they could have possibly stopped the bubble cold if either of them had done something radical like announcing that they would require appraisals of rental values and only buy mortgages with a purchase price below some prce to rent ratio (e.g. 18 to 1). However, their failure to be heros does not make them the prime villians. That would be the Wall Street boys, end of story. 

Btw, if anyone is interested in knowing what happens to a public agency committed to homeownership in the middle of a housing bubble, that is not run for profit, then they should look to the Federal Housing Authority (FHA). While far from perfect, the FHA did not get caught up in the irrational exuberance of the bubble years. Its market share fell from around 10 percent in the late 1990s to 2 percent in 2005. 

 
NYT Claims Increasing Bipartisan Support for Plans that Could Raise the Cost of Medicare Policies by $34 Trillion Print
Thursday, 24 November 2011 22:50

The NYT claims that plans that could raise the cost of Medicare equivalent policies for seniors by $34 trillion are gaining increasing support in Congress. These plans involve replacing Medicare with a voucher. This leads to higher costs both because the administrative costs of private plans are far higher than Medicare and they are likely to be less effective in controlling costs.

The Congressional Budget Official projected that a Republican plan along these lines, that was approved by House earlier in this year, would raise the cost of Medicare equivalent polices by $34 trillion over the program's 75-year planning horizon. While this plan would save the government money by reducing its payments for Medicare, it would mean that future generations of workers would pay far more for health care in their retirement. The cost of Medicare equivalent policies would far exceed the typical retiree's income by 2050.

It would have been helpful if this article had pointed out that these proposals imply both a huge increase in health care costs to beneficiaries and an increase in costs to the country as whole. Virtually all research shows that these sorts of plans will make the country's health care system considerably less efficient.

 
Washington Post Tries to Ruin Thanksgiving With News Section Editorial on Supercommittee Print
Thursday, 24 November 2011 08:36

The Washington Post is continuing its habit of ignoring journalistic standards by carrying its Social Security and Medicare cutting crusade to its news pages. A Thanksgiving day piece began by ominously warning readers:

"Will the “supercommittee” turn out to be a useful failure?

"Two days after its death, this idea is the committee’s last chance to matter. There is hope that its debacle could pave the way for some deal — by clarifying the issues and suggesting new areas of common ground."

Of course any deal, as the article points out, is likely to include cuts to Social Security and Medicare. With the vast majority of older workers approaching retirement with little other than these programs to support them (thanks to the disastrous failure of the polices supported by the Washington Post and the economists it views as experts), there is no obvious policy reason to want to see large cuts to these programs. And cuts to these programs are hugely unpopular across the political spectrum, including among Republicans and self-identified conservatives.

For these reasons, the prospect that the supercommittee's failure might ultimate lead to a deal that involves cuts to Social Security and Medicare would not be viewed as grounds for "hope" for the vast majority of the American public. This is only the basis for hope for a small group of wealthy people and Washington pundits. Such cuts would be a disaster for almost everyone else.

 

 
 
Thomas Friedman Goes Big Getting It Wrong, Again Print
Wednesday, 23 November 2011 08:01

There are many people in the country that have very little understanding of economics. As an economist, I would like to see everyone be at least somewhat literate in the area, but this is the way of the world. It's not really that big of a problem in most cases, but it is when they write pieces on economic policy for the New York Times.

Yes, Thomas Friedman is at it again, bemoaning the fact that President Obama hasn't embraced the big cuts to Social Security and Medicare proposed by former senator Alan Simpson and Morgan Stanley director Erskine Bowles. (Friedman wrongly attributes the proposals to the commission that they co-chaired. The commission did not produce a report, Friedman is referring to the proposals of the co-chairs.)

The Simpson-Bowles plan is great if you think the country's biggest problem is high-living seniors. Of course very few people from any political perspective accept this view. Even large majorities of Republicans and self-identified conservatives oppose cuts to Social Security and Medicare. In fact, almost no one other than the Wall Street gang and people who write columns for the New York Times and Washington Post support cuts to these programs. This probably explains why President Obama did not follow Friedman's advice and embrace the Simpson-Bowles plan.

This is a matter of personal taste: some folks think that the best way to address whatever budget problems we might have is to fix the broken health care system, tax Wall Street, and place the burden on the big winners in the economy over the last three decades (i.e. the one percent). Then you have people like Thomas Friedman who think it's better to take money from seniors with a median income of $31,400.

But once we get beyond the questions of taste, we have Friedman's economics. He quotes Maya MacGuineas, the president of the Committee for a Responsible Federal Budget:

"'a free-standing stimulus that is not combined with a credible multiyear plan that truly stabilizes our fiscal imbalances would not solve our problems, .... because if nobody knows what is waiting around the corner, after the stimulus runs out,' many people will just take that money and stuff it in a mattress 'rather than in investments or spending.'"

Okay, so the argument here is that we will see high savings rates and low investment spending as long as we don't have a credible deficit plan. Let's think about this one for a moment. How many people are basing their decision on whether to take a vacation or buy a car on the government's deficit prospects for 2020?

I don't know many people who think this way, but let's suppose that my friends are atypical. Suppose that people are worried that come 2020 we will have some big tax increase because something really bad happens in the world due to our runaway deficits. Wouldn't it make sense for people to invest and make money now, since the future could be bad news?

Or, to take the other side of the coin, suppose that we all knew that our Social Security benefits will be lower 10 years from now due to the Bowles-Simpson cuts and that we will have to pay more for our health care because of cuts to Medicare. Wouldn't we then decide that we better save more (i.e. spend less) so that we would have more money to support ourselves in retirement? Doesn't that go the wrong way if the point is stimulus?

Maybe logic isn't Friedman's strong suit. Let's just look at the evidence. If we buy the Friedman story, then investment and consumption should be low today since people are worried about the deficits ten years out. Unfortunately the data do not support Friedman's story. Investment in equipment and software is nearly back to its pre-recession level measured as a share of GDP. This is pretty impressive, since there are huge amounts of excess capacity in large sectors on the economy. (Firms tend not to invest much when they already have more capacity than they need.)

The saving rate in the most recent quarter was under 5.0 percent. This compares with a post-war, pre-bubble, average of more than 8 percent. This suggests that, contrary to Freidman's economics, people are not putting money under their mattress, they are actually spending at a pretty good rate.

But so what if Friedman's got no theory and no evidence? That is no excuse not to be cutting Social Security and Medicare.

 
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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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