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Amazing NYT Story on Obama Administration Pressure on NY AG Print
Monday, 22 August 2011 03:58

The NYT reported that the Obama administration is pressuring Eric Schneiderman, New York's attorney general, to agree to a settlement with the major banks over improper handling of foreclosures and mortgage servicing. The piece has this stunning statement:

"Mr. Donovan [housing secretary Shaun Donovan] defended his discussions with the attorney general, saying they were motivated by a desire to speed up help for troubled homeowners."

The NYT Gets It Seriously Wrong on Housing Print
Monday, 22 August 2011 03:37

The NYT's lead editorial told readers that:

"Congress and the White House have yet to figure out that the economy will not recover until housing recovers."

It's not clear what the paper means by this. The piece complains that "sales of existing homes fell in July by 3.5 percent, while prices were down 4.4 percent in July from a year earlier."

If it means that prices must recover then it is looking in the wrong direction. House prices are still about 10 percent above their long-term trend level. In other words, the bubble has not yet fully deflated. If it has any reason for believing that the fundamentals of the housing market justify this sort of divergence from trend it is not clear what this could be. Certainly the near record vacancy rates (down somewhat from the 2009-2010 peaks) do not support the notion that prices are too low.

Also, even with the decline in existing home sales, the recent sales rate is still more than 1 million higher (@30 percent) than the mid-90s pre-bubble rate. So it is not clear what aspects of the housing market the NYT expects to see fixed.

In its list of remedies for underwater homeowners facing foreclosure the editorial missed the simplest one, giving foreclosed homeowners the right to stay in their house as renters paying the market rent. This could be passed into law at the state or federal level or implemented uniltaerally by Fannie and Freddie which are now seeing half of all foreclosed properties. 

The right to rent plan involves no complex bureaucratic calculations, nor taxpayer dollars. There is no major moral hazard problem and no serious windfalls. In other words, it's the sort of policy that has no chance in Washington.

NPR Tells Us That There Is Nothing that Congress and the Fed Can Do About the Weak Economy Print
Sunday, 21 August 2011 20:09

Okay, that is just not true. Congress can do another big round of stimulus. It could mandate a reduction in the value of the dollar in order to boost net exports. Or it could push an aggressive work sharing program like the one that has led the unemployment rate to fall below pre-recession levels in Germany.

The Fed could target a long-term interest rate. For example it can set a 1.0 percent target for the 5-year Treasury rate. Or it could target a higher rate of inflation, committing itself to throw out enough reserves as necessary to raise the inflation rate to 4.0 percent, a policy that Bernanke advocated for Japan back when he was still a professor at Princeton.

It is simply wrong to claim, as NPR did in this piece, that there is nothing more than Congress and the Fed can do to boost the economy. If it wants to say that none of these measures are politically viable, that may well be a true statement. But then the problem is with the people who dominate politics in the country. It is a political problem, not an economic one and NPR should clearly identify it as such.

[Thanks to Jonathan Lundell.]

AP Gets It Right! The Recession Caused the Deficit Print
Saturday, 20 August 2011 08:51
AP did what news organizations are supposed to do; it checked the numbers and showed that politicians yelling about "out of control spending" don't know what they are talking about or are making things up. Its FACT CHECK, printed in the NYT, showed that the deficit exploded because of the recession. There was no issue of out of control spending prior to the increases for programs like unemployment insurance and other spending needed to counteract the effect of the downturn. AP gets an "A" for this one.
The Washington Post Wants You to Accept High Unemployment (and Social Security Cuts) Print
Saturday, 20 August 2011 07:53

The Washington Post ran a major article today telling readers that they should just get used to high unemployment. The article presented the view of some economists, that the economy can only recover from a financial crisis after a prolonged period of economic weakness, as somehow reflecting a consensus opinion within the economics profession.

For example, the subhead told readers that while presidential candidates promise a quick recovery, "analysts say this post-recession comeback may take longer." Since this pessimistic view is far from the consensus within the profession, a real newspaper would have said "some analysts." Similarly the sentence, "but because of the severity of this recession, and the accompanying crises hitting banks and other lenders, economists believe that recovering from it will be more difficult," would have the phrase "some economists" in a serious newspaper. (The article does include some dissenters, but it implies that their views are an exception.)

The article then includes a set of charts that show a number of countries in which it took more than a decade for the unemployment rate to return to its pre-crisis level following a financial crisis. It is possible to tell a very different story using a different set of countries as is shown below.

crisis-unemployment_23169_image001                             Source: International Monetary Fund.

As can be seen, the unemployment record of these five recent victims of financial crises is mixed. Four years after the crisis (which would be 2012 in the U.S. case) South Korea and Malaysia had unemployment rates that were above the pre-crisis level, although in both cases they were at or below 4.0 percent. Most people in the United States could probably live with this outcome. In the case of both Russia and Mexico the unemployment was below the pre-crisis level four years after the crisis. In Argentina the unemployment rate was 8 full percentage points below the pre-crisis level, although the country had already been in a severe recession prior to the onset of the financial crisis.

The point of this exercise is that it is easy to find countries that were able to recover from the effects of a financial crisis relatively quickly. It is not a pre-ordained fact given to us by God that workers must suffer for years afterward simply because the people who managed the economy were too incompetent to prevent a financial crisis. This is simply an effort by the same group of incompetent economists to excuse their ongoing failure to fix the economy after they wrecked it.

It is also worth noting that this article gets an important fact about the economy and the recovery fundamentally wrong. It told readers that:

"The economy cannot fully heal until consumers and other debtors shed their financial burdens and are able to spend more freely again."

Actually, the failure of consumers to spend freely is not the economy's problem, which can be easily seen by looking at the savings rate. Currently the savings rate is near 5 percent of disposable income. Its average over the years prior to the take-off of the stock bubble in 90s was over 8 percent. In other words, consumers are spending freely. The reason why demand remains weak is that over-building of the bubble years has left construction badly depressed. Also, a trade deficit that is close to 4 percent of GDP is effectively draining $600 billion a year out of the economy.

These simple facts would be evident to anyone who has knows the basic national income accounting that is taught in an intro economics class. The Post should be aware of them.

New Unemployment Claims Data Are Not a Sign of a Recession Print
Friday, 19 August 2011 05:12

The business media have become obsessed with the notion of a double dip recession in a context where the economic data we are now seeing is not very different from the data that we have been seeing for months. These data point to a picture of an economy that is growing weakly, however it is still growing. However reporters who are now obsessed with the "double dip" are reading numbers consistent with weak growth as implying a recession. 

For example, a Washington Post article that raised the prospect of a second recession in the 5th paragraph told readers:

"The latest figures on unemployment, considered another key piece in any recovery, also proved disconcerting. The Labor Department said Thursday that weekly unemployment benefits again rose above the 400,000 level last week, a benchmark figure that many economists take as a sign of a declining economic trajectory."

Actually, economists who are familiar with unemployment data would not consider 400,000 new unemployment claims "a benchmark figure that many economists take as a sign of a declining economic trajectory." The reason is that unemployment claims have been above 400,000 in every week since the beginning of April, except for two weeks ago when there were 399,000 claims. Weekly unemployment claims were also above 400,000 in every week of 2010, a year in which the economy grew 3.1 percent.

The misplaced obsession with a double-dip has consequences because it creates a situation in which the slow growth that the economy is now experiencing appears to be good. For example, the July jobs report, which showed 117,000 new jobs, was widely seen as good news. However, this pace of job growth is only slightly faster than the 90,000 rate needed just to keep pace with the growth of the labor force. At the July rate of job growth it would take close to 30 years to replace the jobs lost in the downturn.

It would be helpful if reporters would try to discuss what the data show and not frame their story on misplaced optimism or pessimism from ill-informed commentators.

What's the Moral Argument Against Shorting Stock? Print
Friday, 19 August 2011 04:51

The NYT featured an extraordinary comment by a Merrill Lynch strategist in an article on how the wealthy are often able to make money in a period of market volatility:

"There seems to be a moral argument against shorting, but from a purely practical point of view it leaves (hedge funds) in a better position to manage volatility."

It would have been interesting to know what the moral argument is against shorting. When an investor shorts a stock they are betting that it is over-valued, just as when they buy a stock they are betting that it is under-valued. In both cases, in principle the investor stands to lose their own money if they are wrong, but they are giving information to the markets and helping to appropriately direct capital if they are right.

If a company's stock is over-valued, then it benefits the economy to drive the price down so that it will be more difficult for it to raise capital in the future. In the standard economic story, this would mean that more capital will be available for corporations that have more growth potential. The loss of wealth by the company's shareholders would also free up resources to be used elsewhere in the economy.

In short, there is symmetry between buying and shorting a stock. There is no obvious reason that one act would be viewed as more or less moral than the other.

NPR Exposes Structural Unemployment: Managers Who Don't Have a Clue Print
Thursday, 18 August 2011 16:31

National Public Radio reporters need to do a bit more homework before they do pieces on the economy. Today they had a piece on a Precision Iron Works, a specialty steel company. The piece told listeners that Precision relies on highly skilled workers. It also told us that it has a hard time finding new workers.

"finding workers like him [the experienced worker interviewed in the piece] is difficult. For months, the company has been advertising several job openings without much success. The company says there's not much interest in gritty, physically demanding work."

But the main point of the story is to tell listeners how government regulations are impeding the growth of business. The piece continues:

"And staffing is just one of many challenges facing Precision Iron Works as it tries to double its revenues from about $10 million to $20 million a year.

A state law that's been on the books for more than a half-century requires Washington companies to pay their workers a prevailing wage — or an hourly rate set by the government — on state-funded projects.

But as Precision's Leighton explains, companies in states like Idaho and Utah, which don't have prevailing wage laws, can pay their workers less.

'It puts us at such a disadvantage,' he says. 'There could be a project right out on our backdoor out here that I can't get because a company in Utah gets such a competitive advantage by not having to pay these rates.'"

Okay, now let's just review what we have been told. Precision Iron Works "has been advertising several job openings without much success." This would imply that the wage it is offering is too low. Higher wages attract more workers [econ 101]. If Precision Iron Works can't get workers, then it needs to offer higher wages.

But then the piece tells us that the real problem is that an outdated Washington state law requires Precision Iron to pay higher wages than its competitors. Okay, but the piece just told us that the market is telling Precision Iron that it has to pay higher wages than it is already paying.

This means that it is not the law that is requiring Precision Iron to pay higher wages, it is the market. If the piece's assertion that Precision Iron can't attract workers is true, then it's claim that the government regulation is hurting business is false. 

[Thanks to Jonathan Lundell.]

Good News, There are Federal Limits on Greenhouse Gas Emissions! Print
Thursday, 18 August 2011 09:08

Those who are concerned about global warming will be happy to discover when they read the Washington Post that the federal government has limits on greenhouse gas emissions. The Post had a page two article that told readers how the world would be different if the Tea Party folks, as personified by the House Republicans, ran the country.

The second item in the Post's list of differences is:

"It would no longer have federal limits on greenhouse gases."

Yes, that would be a big difference if the country actually did have limits on greenhouse gas emissions. The bill cited in the article would prohibit the Environment Protection Agency from using its regulatory powers to restrict emissions of greenhouse gases. However, there is no current statute that actually limits greenhouse gases, so the Tea Party folks don't have very much that they could change in this area. 

Health Care Will Only Crowd Out Other Employers If We Don't Need Health Care Jobs Print
Thursday, 18 August 2011 08:29

The NYT had an interesting, if somewhat confused, piece on whether the health care sector will continue to be a reliable source of job creation. The piece notes that the health care sector has been the one major sector that has consistently added jobs since the beginning of the downturn, however it notes that cost pressures are likely to slow the rate of employment growth in the future.

The article concludes with the comments of Joshua Shapiro, chief United States economist at MFR Inc.:

"If spending on health care continues at its current pace, it will choke out other vital sectors and end up hurting the rest of the economy, ... I think the path that we’re on now is clearly unsustainable.”

This statement is somewhat misplaced in the article. As long as we are in a period of high unemployment, then the health care industry's growth will not be constraining growth elsewhere in the economy. This would only be an issue if we have returned to something close to normal levels of employment. Of course if we have returned to normal levels of employment, then we won't be dependent on the health care sector to provide jobs.

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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.