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Senate Budget Committee Chair Kent Conrad Only Pays Attention to Economists Who Could Not See an $8 Trillion Housing Bubble Print
Sunday, 17 July 2011 07:31

That's what the Washington Post told readers today in a front page article. It quotes Senator Conrad as saying:

“We cannot as a country fail to deal with the debt threat. .... Every serious economic analysis tells us we’ve reached the danger zone. And just kicking the can down the road? That can’t be. We’re better than that. We’ve got to be better than that.”

This is not true. Many economists, for example Nobel Laureate Paul Krugman, have argued that the country is nowhere near its debt limit. They point to the fact that both the United States and other countries have sustained much higher rates of debt to GDP than the United States does now or is projected to in the near future. For much of the 19th century the UK had a debt to GDP ratio of more than 100 percent. Japan currently has a debt to GDP ratio of more than 200 percent yet can still borrow long-term in financial markets at interest rates of less than 1.5 percent.

They also point to the fact that the markets do not seem concerned about the debt situation of the United States. If the financial markets were concerned about the ability of the U.S. government to pay off its debt then they would not be lending the country money for ten years at interest rates close to 3.0 percent. 

It seems that Mr. Conrad relies exclusively on economists who could not see the $8 trillion housing bubble, the collapse of which devastated the economy. This was obviously true before the collapse of the bubble. The fact that it is still true even after the collapse of the bubble should have been highlighted by the Post. This demonstrates a serious failure of judgment by a person in an important position of power.

It is also worth noting that the Post article bizarrely confuses financial markets with credit rating agencies, telling readers that

"the markets are demanding it [large-scale debt reduction]. The credit rating agency Standard & Poor’s says Washington must agree to reduce the debt by $4 trillion over 10 years to avert a downgrade."

Of course the credit rating agencies often have little to do with the market. They rated hundreds of billions of dollars of subprime mortgage-backed securities as investment grade. The value of these bonds subsequently collapsed, leading to the financial collapse in the fall of 2008. They were paid tens of millions of dollars for these investment-grade ratings. Financial markets have also often ignored the credit rating agencies. For example, Japan can still borrow at extremely low interest rates despite the fact that both Standard and Poor and Moody's downgraded its debt.

The Post should know the difference between the judgment of financial markets and credit rating agencies.

What's New About Politicians Saying They Care More About Principle Than Getting Re-elected? Print
Sunday, 17 July 2011 07:30

In a discussion of Republican opposition to raising the debt ceiling the NYT tells readers:

"This time is different .... some freshmen in both chambers say they worry more about changing the ways of Washington than about getting re-elected."

How is this "different"? Politicians always claim that they care more about their principles than getting re-elected. How many politicians proclaim that they will abandon every principle to get re-elected (even if it is true)? There is little in the description of the freshman Republicans discussed in the article that could not have been applied to hundreds of politicians over the last three decades. If these politicians are really different, the article does not explain how.
Baby Boomers Behaving Badly: Treating Thomas Friedman as a Serious Person Print
Sunday, 17 July 2011 00:23

Okay, I stole the line from Thomas Friedman, but if there is truth to baby boomers behaving badly it is that we treat people like Thomas Friedman as serious intellects who have real insights to give us about politics and society. In fact, Friedman is someone who has made a splendid career for himself opining on issues of which he knows nothing. In addition to being a New York Times columnist, he is the author of numerous best-sellers and a frequent guest on the Sunday morning talk shows.

The problem for which baby boomers share blame is that we allow people like Friedman to distract us from real concerns. For example, Friedman gives us a lecture today about living within in our means. In fact, the reason that so many people find themselves in bad financial shape today is that people like Friedman crowded out voices who saw real economic problems like the stock bubble, the housing bubble and the over-valued dollar.

The consumption of the 90s and 00s would have been entirely sustainable if the stock bubble and the housing bubble did not burst. And the country would not be borrowing from China or anyone else if the dollar fell to a level that was consistent with balanced trade. But the people who were warning of the collapse of the bubbles and who understand international trade did not have the same megaphone as Thomas Friedman. 

Of course the baby boomers didn't give Friedman his columns, nor did they promote his books, but many did get suckered. If they continue to take Friedman and his ilk seriously, then they will have badly failed future generations.

Economists and Economics Reporters Continue to Be Surprised by the Economy Print
Sunday, 17 July 2011 00:07

[see note at bottom.]

David Leonhardt tells us that consumer demand is still surprisingly weak. This should have drawn a big "huh?"

The savings rate through most of the post-war period was around 8.0 percent. This began to fall at the end of the 80s and more rapidly in the 90s as the stock bubble generated trillions of dollars of bubble wealth. The wealth effect, which economists have known about for a century, predicts that consumers would spend 3-4 cents more for additional dollar of stock wealth. By the peak of the bubble in 2000, we had close to $10 trillion in stock bubble wealth, which implies $300-$400 billion in additional consumption. This would correspond to a drop in the savings rate of 4-5 percentage points, which is what we in fact saw.

In the last decade, the housing wealth effect became more important. At the peak of the bubble in 2006, there was close to $8 trillion in housing wealth. The housing wealth effect is usually estimated at 5-7 cents on the dollar. This implies an increase in annual consumption of between $400-$560 billion a year.

Now that these bubbles have largely deflated, how could anyone who knows any economics be surprised by the weakness of consumption? This is 100 percent predictable based on the knowledge that most students should get from an intro econ class. In fact, if anything consumption is surprisingly high. The savings rate is still close to 5 percent, somewhat below the pre-bubble average. With most of the huge baby boom cohort still in their peak saving years, we should expect to see somewhat higher than normal savings, even if we were not recovering from the collapse of the housing bubble.

It would have been helpful if this piece relied more on economists familiar with basic economic relationships.



On a second read this headline should have really been "economists continue to be surprised by the economy." Leonhardt gets it largely right, although the article would have benefited from an explicit reference to the wealth effect. If the bubble wealth was real, then there was no sense in which people were over-spending in the 90s and 00s. Perhaps they should have known better to listen to Alan Greenspan and other leading economists, but the problem was in the assessment of the economy that they were getting from on high, not their personal savings habits based on this assessment being true.

Also, the article is wrong in implying that the United States need fear a rush of foreign investors to the door. The result of such a rush would be a sharp decline in the value of the dollar. This would make imports to the United States far more expensive and make our exports much cheaper for people living in other countries. That would lead to a surge in exports and reduction in imports, which is exactly the rebalancing the U.S. economy desperately needs. In fact, because other countries do not want to see their trade balance with the United States deteriorate, their governments would almost certainly intervene to prevent their currencies from rising too much against the dollar.

Romney Staffs His Campaign With Economists Who Could Not See an $8 Trillion Housing Bubble Print
Saturday, 16 July 2011 07:49

That's right, the Washington Post told readers that the front-runner for the Republican presidential nomination is relying on two economists, Greg Mankiw and Glenn Hubbard, who completely missed the $8 trillion housing bubble whose collapse wrecked the economy. Unfortunately the Post neglected to mention this fact to readers.

Since Romney is making his ability to manage the economy the centerpiece of his campaign it would have been worth noting that his two top economic advisers were unable to see the largest asset bubble in the history of the world. This might raise some questions about Mr. Romney's competence.

The Ratings Agencies Who Rated Subprime MBS Investment Grade are Trying to Dictate Budget Policy Print
Saturday, 16 July 2011 06:32

The Washington Post told readers that the credit rating agencies are threatening the United States with a downgrade if there is not a deal to reduce projected deficits in the near future. The article rightly pointed out that these credit rating agencies rated hundreds of billions of dollars' worth of subprime mortgage-backed securities as investment grade, although it attributes this inaccurate rate to misjudgment rather than deliberate corruption. Since the credit rating agencies received tens of millions of dollars for their ratings, and people within the organizations did raise questions about the mortgage-backed securities to which they were assigning investment-grade ratings, it is difficult to see how corruption can be ruled out as a possibility.

It also would have been worth mentioning that markets have not always responded to the downgrading by the rating agencies. In particular, Japan continues to be able to borrow in capital markets at extremely low interest rates (1.1 percent on 10-year bonds) in spite of having been downgraded by both major credit rating agencies.

Also, it would have been helpful if the Post had more clearly sourced the article. Specifically, the article tells readers:

"On Thursday night, S&P insisted that Washington must conclude an agreement to cut the deficit by $4 trillion or face the consequences of a potential downgrade."

The source of this threat is not clearly identified.

NYT Tells Readers that Governors are Fools or Liars Print
Saturday, 16 July 2011 06:10

Okay, the article by Michael Cooper didn't use exactly those words, but it did say that:

"Governors from around the country — including Christine O. Gregoire of Washington, a Democrat, and Scott Walker of Wisconsin, a Republican — said that employers in their states had been reluctant to hire new workers because of the uncertainty [over the debt ceiling]."

If there are employers who are seeing enough demand for labor that they would ordinarily be hiring new workers, but are not doing so because of uncertainty stemming from the debt ceiling, then we would expect that they are working their existing workforce additional hours. This one is easy to check.

Here's what average weekly hours looks like according to the Bureau of Labor Statistics.


Source: Bureau of Labor Statistics.


See the jump in hours due to the uncertainty? That's right, it's not there. This means Governors Gregoire and Walker and the rest either do not have a clue about what is going in the labor markets in their state or they are making things up. This is one that readers will have to judge for themselves.

The NYT's False Symmetry Between Republicans and Democrats Print
Friday, 15 July 2011 04:25

The NYT had an article on budget negotiations in which it implied a false symmetry on key issues in the debate:

"On Thursday, the leaders grappled with the most difficult issues politically for each party: cuts to Medicare and Medicaid, entitlement programs long defended by Democrats; and new revenues from the tax code, anathema to Republicans, who say they will not vote for anything resembling a tax increase."

This symmetry is misplaced because the Democrats' base actually wants to see the rich pay more in taxes. By contrast, the Republicans' base actually strongly supports Medicare and to a lesser extent Medicaid. The Democrats need the Republicans to get a tax increase passed through Congress. The Republicans need the Democrats to give them cover for cuts that are unpopular across the board.

Charles Krauthammer Doesn't Know The Deficit Commission Did Not Issue a Report Print
Friday, 15 July 2011 05:08
Who could blame him? After all, it is hard to get news in Washington, D.C. Yes, yet again someone has referred to a deficit commission report that does not exist. Krauthammer is referring to the report of the commission's co-chairs, Morgan Stanley director Erskine Bowles and former Wyoming senator Alan Simpson. The commission did not vote on this package by the President's deadline and the co-chairs report would not have gotten the necessary majority in any case. Therefore there is no commission report. This one shouldn't be hard, even for people who write columns for the Washington Post.
Credit Rating Agencies that Were Paid to Rate Subprime MBS as Investment Grade Threated to Downgrade U.S. Debt Print
Friday, 15 July 2011 04:33

Forgiveness is wonderful, but forgetfulness has no place in policy debates. The idea that the Moody's and Standard and Poors should be seen as impartial arbiters of the creditworthiness of the U.S. government, whose integrity and judgement is beyond question, does not pass the laugh test.

Their warnings over possible debt downgrades associated with delays in raising the debt ceiling may be made in good faith. Certainly the failure to raise the ceiling by August 2 would be very bad news for the creditworthiness of U.S. debt. But, their recent history suggests that any statement from these companies must be viewed with a bit of skepticism.

It is also worth noting that the markets have often not agreed with the rating agencies' assessments. Both have downgraded Japan's debt, yet the country can still sell 10-year bonds at interest rates of less than 1.5 percent.

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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.