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Explaining the Housing Bubble to Robert Samuelson Print
Monday, 06 February 2012 06:19

Almost no one who wrote about the economy for a major news outlet was able to recognize the $8 trillion housing bubble that was driving the economy before it burst. Because people who write about the economy are not held responsible for the quality of their work, none of the people who missed this huge bubble were held accountable for this failure. Remarkably, many of them even now do not understand the bubble.

Robert Samuelson, the economic columnist for the Washington Post, is among this group. Today he writes that:

“some economists argue that China’s trade surpluses — converted into dollars and invested in U.S. bonds — fueled America’s financial crisis by driving down interest rates. Low rates then encouraged riskier mortgage loans.”

Actually, the problem was not low interest rates. Low interest rates are generally good for growth. The problem was that China’s trade surplus with the United States, along with the surplus of other countries, created a large gap in domestic demand. This gap in demand could only be filled by either government budget deficits or negative savings in the private sector. (This is a logical necessity – a trade deficit means negative national saving, there is no way around this story.)

Since folks who write for or get cited in the Washington Post were all yelling about budget deficits, there was no alternative to the housing bubble-type situation where ephemeral bubble wealth led to a consumption boom, while inflated house prices caused construction to surge.

Samuelson also concludes with a dire warning of a dollar crisis in which the value of the dollar plunges against other currencies. It is difficult to envision what this would look like. Right now, other countries are deliberately propping up the value of the dollar in order to preserve their export markets in the United States.

In order for this sort of crisis to come about, they would have to be prepared to give up not only their export markets but to also allow U.S. goods to become hyper-competitive in their home market. If the dollar were to fall to say, 3 yuan to a dollar (from close to 6 yuan to a dollar now) or 3 dollars to a euro, then U.S. exports would hugely undercut many domestically produced items in Europe, China and elsewhere. It is difficult to believe that these countries would allow this sort of disruption to their economies.

Bill Keller Does not Understand Free Speech, Copyright, and the Constitution Print
Monday, 06 February 2012 05:18

Bill Keller tells readers that Congress should pass laws that require intermediaries like Google and Wikipedia to take responsibility for helping to enforce copyrights. It is interesting to see how he thinks the wording of the Article 1, Section 8:

“To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries”

which gives Congress the power to grant copyright and patent monopolies, also authorizes Congress to require that individuals and companies assist others in enforcement of their copyrights. Can Congress require that people help me make a profit on my hotdog stand?

If the development of technology makes copyright and inefficient way to “promote the progress of science and useful arts,” then the constitutional route for dealing with the situation would be to find more efficient mechanisms to serve this purpose.

This might be difficult in the United States. There have been numerous news stories and columns decrying the shortage of workers with the necessary skills. In this case, the skill in short supply is the ability to think creatively about an effective response to developments in technology.

Anyhow, it is perverse response to the development of technology to grant the government ever greater powers of repression in order to ensure that an archaic social institution can still be used to generate profits for a small group of powerful corporations and individuals.
It Is Brazil's Bloated Financial Sector, not Its Growth, that Attracts Immigrants Print
Sunday, 05 February 2012 06:17

The Post ran a piece on the growing number of foreigners who are going to work in Brazil, especially in its financial sector. It attributed this in part to Brazil's rapid growth, which it reports as averaging 4.5 percent since 2004.

According to the IMF, Brazil's growth has averaged 4.1 percent over this period. That is not especially fast for a developing country. Chile averaged an almost identical 4.0 percent over this period while Venezuela grew at a 4.5 percent rate and Argentina grew at a 7.3 percent rate.

If Brazil is attracting a large number of skilled workers from abroad it is primarily because of the lack of domestic supply, not rapid economic growth.

Post Column Defending Europe Gets the Story Wrong Print
Sunday, 05 February 2012 05:00

An opinion column in the Post defending Europe against charges of being a continent of broken down socialist states, by Martin Klingst, the Washington bureau chief of the German newspaper Die Zeit, got the basic story of its economic crisis wrong. It told readers that Europe's fiscal calamities, "stem in part from the unaffordable benefits for its citizens," later adding, "it is also true that a number of E.U. countries have irresponsibly expanded their welfare systems and can no longer afford their bills."

In fact, the 5 crisis countries (Greece, Ireland, Italy, Portugal, and Spain) all rank near the bottom in terms of the generosity of their welfare states. The European countries with the most generous welfare states, Denmark, Norway, Sweden, the Netherlands, France and Germany, are mostly weathering the economic crisis relatively well.

The problems in the crisis countries stem in part from real estate bubbles that were allowed to grow unchecked by the European Central Bank (ECB), massive tax evasion (especially Greece and Italy), and the inflation fighting obsession of the ECB, coupled with its insistence that it would not act as a lender of last resort. The latter policy has caused the interest burden of these countries to soar. This has meant that a country like Spain faces a far higher interest rate than the U.K., which has a central bank that acts as a lender of last resort, even though the U.K. has a much higher debt burden.

Overstating the Decline in Wage Share Print
Friday, 03 February 2012 06:49

An NYT Economix blognote overstated the effective decline in the labor share of national income over the last three decades by using gross national income rather than net national income. The note shares the labor compensation share declining by 4-5 percentage points over this period. 

However, the depreciation share of gross domestic product rose by roughly 2 percentage points over this period. If we assume that this increase came proportionately from the capital and labor share of income, then the rise in the depreciation share would lead to a 1.2 percentage point reduction in the labor compensation share of gross national income.

Much of the loss of income by ordinary workers has been due to increased pay of CEOs, doctors, and other highly paid workers. This is still included as part of labor income.

The Post Hopes for Job Loss in San Francisco, May be Disappointed Print
Friday, 03 February 2012 06:37

A Washington Post editorial on indexing the minimum wage told readers:

"at the margins, minimum-wage increases probably destroy jobs in small restaurants, landscaping and janitorial firms."

It then added:

"as the city of San Francisco, which has just imposed a highest-in-the-nation $10.24 minimum, may soon find out."

Whether or not the first claim is accurate, the warning to San Francisco clearly is not. San Francisco first put its city-wide minimum wage in place in 2004. Since that time, it has risen in step with inflation. If the minimum wage was going to cost jobs the city should have seen the job loss already. Research on this issue failed to find any evidence of job loss -- but the Post can still hope.

Unless We Stop Consuming Manufacturing Goods, or Other Countries Give Us Stuff for Free, Manufacturing Jobs Will Increase Print
Friday, 03 February 2012 06:14

It would have been worth including an explicit discussion of the trade deficit in the context of an assessment of employment prospects in manufacturing. At the moment, China and other developing countries are deliberately running large trade surpluses as a way to boost domestic demand. To do so, they are buying up huge amounts of dollars assets that essentially give them no real return. It is likely that at some point they will figure out how to generate demand domestically (e.g. hand out money to their citizens) and therefore will not have to pay people in the United States to buy their goods.

At that point we will either have to make our manufacturing goods ourselves or find a way to pay for the goods we import. The people who think that we will be able to pay for imported manufacturing goods with service exports have not examined the data. There is not a plausible story where increased U.S. exports of tourism (this is an export in national accounts), financial services or other components of the service sector will pay for our imports of manufactured goods.

Housing Is Not a Drag on the Recovery Print
Thursday, 02 February 2012 06:11

The Morning Edition piece on President Obama's new mortgage refinancing proposal implied that the housing market is a major drag on the economy. This is misleading.

The housing bubble was the motor of the economy during the last business cycle. It did this both by leading to a construction boom and by propelling consumption through the creation of $8 trillion of ephemeral equity. Now that the bubble has burst it can no longer play this role, however it is inaccurate to describe it as a drag on the economy.



Since the comments suggest some confusion, let me be clear on what I mean by housing is not a drag on the recovery. The graph below shows real expenditures on residential construction over the last two years.


                                 Source: Bureau of Economic Analysis.

Note the direction that spending on residential construction (sorry, mislabeled the graph) has been going. That's right, it has been going up! This is why some of us say that housing is not a drag on the recovery.

Now will housing be the force that leads out of the recovery? No, and it would be extremely foolish to expect otherwise, as I have written about endlessly. We got into this downturn because of the housing bubble. This led to a huge amount of overbuilding of housing. It will take years to wind this down to a more normal level.

This is exact opposite of a typical recovery which is led by housing. That is because a typical recession is caused by the Fed raising rates to slow the economy. That has the effect of slowing housing construction. When the Fed decides to take its foot off the break and lower interest rates to boost the economy, there is major pent up demand, which leads to a boom in housing. That is not the story here.

The wealth created by the housing bubble also led to a consumption boom. This is the long-known and widely forgotten housing wealth effect. This consumption boom is also not coming back for the simple reason that the housing bubble is not coming back.

Okay, so the collapse of the housing bubble caused the recession, which I probably have said more than any other person on the planet. But, at the moment housing is not a drag on the economy, it is adding to growth, even if it is not adding as much as we might like.

Can't the Washington Post Talk to Anyone Who Understands the Housing Market? Print
Thursday, 02 February 2012 05:40

The Washington Post distinguished itself during the run-up of the housing bubble by relying on David Lereah, the chief economist with the National Association of Realtors, and author of Why the Real Estate Boom Will Not Bust and How You Can Profit from It, as its main source on the real estate market. It seems that it is continuing its policy of not using anyone knowledgeable about the housing market as a source for its articles on housing.

Its piece on President Obama's new plan for mortgage refinancing implies that house prices will somehow rise back to their bubble levels. People who know about the housing market would tell readers that this would be like expecting the Nasdaq to bounce back to 5000 following its crash in 2000-2002. Unfortunately such voices continue to be excluded from the Post's coverage of the housing market.

NYT Gets Germany's Unemployment Rate Wrong, Again Print
Wednesday, 01 February 2012 06:06

People who report on Germany's economy should know that the unemployment rate reported by the government is not calculated the same way as the U.S. unemployment rate. It includes people who are working part-time but would like full-time jobs as being unemployed. This means that the rate reported by the government is not directly comparable to the U.S. rate. This means that the NYT misled readers when it told them that Germany's unemployment rate fell to 6.7 percent in January.

However, the OECD does publish unemployment rates for Germany that are calculated in a similar manner to the U.S. unemployment rate. By this measure, Germany's unemployment rate was 5.5 percent in November. Assuming that the OECD rate followed the same path as the German government rate, German's unemployment rate would be 5.3-5.4 percent today if calculated on a comparable basis to the U.S. rate.

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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.