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The Housing Market is Recovering from a Bubble, It Is Not In a Slump Print
Friday, 10 February 2012 05:30

The Washington Post still seems to not have seen the housing bubble. A front page article refers to a housing "slump" and discusses the possibility that the states' settlement on foreclosure practices will heal the housing market.

These sorts of comments imply that it is plausible that the housing market will somehow bounce back to its bubble levels of prices and construction. It isn't.

The bubble led to house prices in many parts of the country that were completely out of line with the fundamentals of the housing market, just as was the case with stock prices at the peak of the stock bubble in 2000. It also led to enormous overbuilding of housing.

There is no reason to expect house prices to bounce back at all, as house prices nationwide are just now returning to trend levels. Housing construction will pick up gradually as the oversupply from the bubble era is gradually reduced through population growth, but there is no plausible story where we will see some sort of boom in housing construction at a time when vacancy rates remain near record highs.

Confidence Lags the Economy, It Doesn't Predict It Print
Thursday, 09 February 2012 22:50

A NYT Economix blognote told readers that confidence about the economy is up and that this should be reinforcing leading to a stronger economy, as firms invest more and consumers spend more. The chart accompanying the note shows the opposite.

The recent levels of the Gallup Economic Confidence Index are getting back or slightly exceeding the peaks hit at the end of 2010, just before the economy nearly ground to a halt, growing just 0.3 percent in the first quarter of 2011. After 6 months of very slow growth, the confidence measure cratered. It has been rising again following the stronger growth of the last two quarters.

In short, this confidence measure looks like a very good lagging indicator, one that tells us where the economy was.

A Competent Federal Reserve Board Would Help the White Working Class Print
Thursday, 09 February 2012 05:35

So would trade policy that was not designed to lower their living standards. Nicholas Kristof devoted his column to the worsening plight of white workers without college degrees over the last three decades. He notes that the share of prime age workers with only a high school degree who have dropped out of the labor force has quadrupled since 1968.

This can be explained in part by the Federal Reserve Board to pursue policies that promoted full employment. When the economy did achieve low rates of unemployment, as was the case in the late 90s, workers at all education levels were being pulled into the labor force. There were strong wage gains at all points along the income distribution. If the Fed was actually doings its job and promoting full employment, instead of ignoring asset bubbles, like the stock and housing bubbles, the late 90s would be the norm rather than the exception.

Trade policy has also worked to weaken the economic situation of these workers since it has been designed to put them in direct competition with low-paid workers in Mexico, China and other developing countries. By contrast, the protectionist barriers that make it difficult for lawyers, doctors and other highly educated professionals from these countries from competing with our professionals have generally been left in place. The theoretical and actual result of such policies is a redistribution from less educated workers to more educated workers. 


Does the NYT Really Not Know the Difference Between Nominal and Real GDP? Print
Thursday, 09 February 2012 05:28
It seems not, since a graph accompanying an article on Greece's debt negotiations still shows countries like Spain, Greece and Italy with modest growth since the downturn began in 2007. In fact, all three economies have shrunk in when growth is adjusted for inflation. It will be interesting to see how long it takes the NYT to correct this one.
Germany Cannot Prosper in the Long-Run by Lending Money to Countries That Can't Repay Their Debt Print
Thursday, 09 February 2012 05:14

A column by Norbert Walter in the NYT defended Germany against complaints over its trade surplus by pointing out that its export industry acts as an engine for Europe's economy. He accurately points that Germany's export industry boosts demand for supplier industries in Netherlands and France. He then inaccurately asserts that:

"unemployed workers in Madrid or Athens can easily move to Munich or Cologne for work."

We know that unemployed workers in Madrid and Athens cannot easily move to Munich or Cologne because in general they don't. Prior generations of workers from Spain and Greece did often move to Germany and other northern European countries in search of work, but this practice has become much rarer in the last two decades.

Walter's argument that Germany, with an aging population, should have a trade surplus is reasonable, except the surplus should not be with other countries with similar demographics. In standard economic theory we would expect to see Germany have large trade surpluses with rapidly growing developing countries like China and India that would be easily able to repay the debt incurred.

Slow growing countries like Greece and Italy will not. Germanys cannot both want a large trade surplus with these countries and then complain about their debts. When it makes such complaints, Germany is complaining about its own behavior as much as that of Greece and Italy, since there are no borrowers where there are no lenders.

The Comment Gremlin Print
Wednesday, 08 February 2012 22:07
The evil doers put CEPR's website out of commission this morning. We managed to get it back up and restore the posts on BTP this afternoon. Unfortunately, it seems that comments on several recent posts were lost in cyberspace. Sorry to lose these words of wisdom. Don't take it personally.
The Recording Industry Complains About Free Speech (Seriously) Print
Wednesday, 08 February 2012 15:49

Cary Sherman, the chief executive of the Recording Industry Association of America (RIAA), had a column in the NYT complaining about “how the democratic process functions in the digital age.” The gist of the complaint seems to be that the Internet allows for the widespread dispersion of views contrary to the interests of the RIAA through outlets that they cannot dominate. This apparently contrasts with traditional media outlets like the NYT which seems to have an open door for the industry to say almost anything it wants regardless of whether it is true.

For example the column absurdly claims that Congress had an obligation to pass legislation like SOPA because it has a “constitutional (and economic) imperative to protect American property from theft, to shield consumers from counterfeit products and fraud, and to combat foreign criminals who exploit technology to steal American ingenuity and jobs.”

Of course this it is absurd to argue that Congress is obligated to take steps to enforce every property claim to the extent that its owners would like. For example, it is standard practice for people to tear down political posters expressing views that they don’t like. Congress has never felt the need to pass special legislation that would prevent such destruction of property. According to Mr. Sherman’s logic, Congress has a constitutional obligation to pass stronger bills to ensure that such destruction of property does not take place.

Furthermore, to be analogous to SOPA, Congress would require third parties to take steps to ensure that destruction of political signs does not occur. This would mean that it could fine car companies for selling cars to people who use them to tear down political signs.

The jobs part of Mr. Sherman’s argument is even more ridiculous. The money that people save by not paying his clients doesn’t go under a mattress; it is spent on other products. This is the exact same argument as the gains from trade liberalization except instead of eliminating a tariff that might raise the price of a product by 10-20 percent, the availability of unauthorized copies can reduce the price of a product by 100 percent. This leaves consumers with more money to spend on cars, health care and a wide variety of other goods and services.

The real issue here is that copyright is an archaic property form that it is no longer practical to enforce in the Internet Age. Serious policy people should be looking to develop alternative mechanisms for financing creative and artistic work. Unfortunately, the organizations that ostensibly represent creative workers are not very creative.

It is impressive that the NYT allows a piece from the industry to appear with apparently no fact checking. Two days earlier it had a similar column complaining about the failure of SOPA. Given its dominance of the NYT’s opinion pages, it is understandable that the RIAA would be upset about the growth of independent voices on the Internet.
Asset Bubbles and the Gold Standard Print
Tuesday, 07 February 2012 20:29

There are plenty of books on economics that are written by people who are very confused on the topic. When a news outlet like NPR chooses to devote a major segment to one such book, it should at least make sure that the person interviewing the author has some understanding of economics. That does not seem to have been the case in its treatment of Philip Coggan, who just wrote the book, Paper Promises: Debt, Money and the New World Order

According to the segment, Coggan's thesis is that when the United States went off the gold standard in 1973, it opened to door to the creation of asset bubbles. There are two obvious problems with this story.

First, we had plenty of asset bubbles when the economy was on the gold standard. A knowledgeable reporter might have asked Coggan why the gold standard did not prevent the stock bubble of the 1920s or the land bubbles of that decade in many parts of the country. Other countries on the gold standard also had asset bubbles.

The other major problem with Coggan's thesis is that the United States was not really on the gold standard after 1933. Usually the gold standard is taken to mean that the currency can be redeemed for gold at a fixed rate. This was not true for individuals and businesses after 1933. In fact, they were prohibited from owning gold. Only foreign central banks could redeem dollars for gold and this practice was strongly discouraged as a matter of policy.

Other parts of his story also don't correspond well to reality. The United States went completely off the gold standard in 1973. The first notable bubble did not arise until the mid-90s, more than 20 years later. That seems a pretty weak link.

The piece then quotes Coggan:

"'The result of all that [central banks supporting the economy after bubbles burst] was that it was kind of a one-way bet for speculators: Keep borrowing money to keep buying assets; central banks will always bail you out,' Coggan says. 'And that's why we ended up in this mess that we are in ... with lots of debts and central banks creating money to try and prop the whole system up.'"

Coggan may have missed it, but the Fed did not prop up the stock market when the bubble burst in the years 2000-2002. The Nasdaq fell from a peak of more than 5000 to a low of less than 1200 in the summer of 2002. It never came close to recovering even half of these losses. If the issue is supposed to be that the Fed prevented investors from losing money, this is clearly not true. Plenty of people lost lots of money in the collapse of the stock bubble, why would they think the Fed would bail them out if the housing market collapsed?

In short, nothing presented in this segment makes any sense. If the segment accurately represents the main points of this book then it is one that richly deserves to be ignored.

Lessons on Economics and Politics for the Post: Democracies Have Unions Print
Tuesday, 07 February 2012 07:28

Washington Post columnist Charles Lane has decided that public sector unions are undemocratic. This will be a surprise to every democracy in the world, since all of them have public sector unions.

The basic argument seems to be that since unions prevent elected officials from paying as little as they miight want to their workers, they interfere with democracy. This is a bit hard to follow. If a pension fund manager refuses to manage the state's pension fund for a $100 an hour wage, or a doctor refuses to work for $50 an hour for Medicaid, are these people interfering with democracy because they are not accepting the pay offered by an elected official?

Lane then complains that public sector unions make campaign contributions to the state officials with whom they negotiate. This is a reasonable complaint for someone who knows nothing about U.S. politics. It is standard for all sorts of people who do business with the government (e.g. defense contractors, construction companies, pension fund managers) to make campaign contributions to the people with whom they negotiate. It might not be pretty, but this is a problem that goes well beyond unions.

Lane then complains about the "rubber rooms" demanded by NYC in its negotiations with the teacher unions. The city required that teachers awaiting hearings on discipline charges come to school and sit for 8 hours a day. This may be stupid, as Lane suggests, but his complaint is with the city, not the union.

If Lane thinks that unions are an obstacle to good education then he needs to do more homework. Nordic countries like Finland, that rank at the top in most education measures, have much higher unionization rates among their teachers than the U.S. This suggests that the problem is more likely to lie with the Lane's friends on the other side of the negotiating table.

Lane is also confused about basic economics. He complains that the clout of public sector unions allow their members:

"to enjoy retirement and health-care benefits that are often better than those available to the middle-class citizens whose tax dollars support them" adding "even after Walker’s bill, Wisconsin public employees pay just 5.8 percent of their salary toward their pensions and a modest 12.6 percent of their health-care premiums."

In economics, we look at a workers' total compensation packages. It is understood that benefits that are ostensibly paid by employers are a trade-off for higher wages. When the total compensation packages of public sector workers are compared to those with comparable education and experience in the private sector, they actually get somewhat lower pay.

NYT Gets Real and Nominal GDP Mixed Up Print
Tuesday, 07 February 2012 16:34

chart that accompanied an article about negotiations on Greece's debt showed that GDP had risen since 2007 in all the crisis countries except Ireland. This is not true. GDP is down in all of the crisis countries,


Source: IMF.

It appears that the chart in the NYT is showing nominal GDP. This has risen since 2007 but only as a result of higher prices. Real GDP has fallen in all five crisis countries. (Sorry, I left off Portugal.)

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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.