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The Housing Bubble Was Visible in the National Data Print
Tuesday, 26 July 2011 12:20

Paul Krugman picks up on a blogpost by Mark Thoma, where the latter argues that academic economists should occasionally listen to those outside the temple. Thoma uses the example of the housing bubble as one case where those outside the temple got it right.

Krugman correctly notes that Robert Shiller, who as a Yale economics professor certainly qualifies as an academic economist, was one of the first (after me) to get the bubble right. He also reminds readers that he also had warned of the bubble. (As I recall, the first time was in 2002, after some other economist raised the issue.) However, he adds that it was necessary to look at local data focusing on areas where the bubble was concentrated.

Actually, it was easy to see the bubble in the national data. Local data could be helpful (obviously prices were more out of line in some areas than others), but there are cases of real house appreciation in locations that become more popular for whatever reason. In principle, an examination of the fundamentals of these markets should be able to reveal a bubble, but the national market provides a very useful anchor. When real house prices nationwide had risen by 30 percent in real terms, after a century of just tracking inflation (I could only trace this pattern for 43 years back in 2002), there was a very good reason to believe that there was a bubble.

Chris Matthews Wants to Make the Guy Who Gave Us the Stock Bubble, the Housing Bubble and the Huge Trade Deficit Treasury Secretary Print
Tuesday, 26 July 2011 11:04

Yeah, we're approaching the debt ceiling deadline, so folks are getting silly. And Chris Matthews is taking the lead. I guess he never heard about the bubbles or the massive trade deficit caused by the over-valued dollar. I suppose you don't have know much economics to be a news show host at MSNBC.

I suppose the know-nothing crowd might admire Bill Clinton's economic record, but I will always remember him as the guy who lectured the country on how enforcement of trade deals will create manufacturing jobs, apparently without bothering to check that we lost manufacturing jobs in each of the last three years of his administration. But hey, in Washington you just get to make it up.

Wealth Losses, Percentages Do Not Tell Everything Print
Tuesday, 26 July 2011 05:01

The NYT wrote a piece based on a new study from Pew that finds that Hispanic families were the ones hardest hit by the economic downturn. The basis for this assertion is that they experienced the largest percentage decline in median wealth. 

This is somewhat misleading. According to the study, the median wealth for Hispanics was just $18,400 prior to the downturn. The collapse of house prices led this to fall to just $6,200 in 2009, a 66 percent decline. However, it is possible to have such a large percentage decline because the median family had so little wealth to begin with. A family with $18,400 in wealth is not in a very different situation than a family with $6,200 in wealth. In both cases, such families are probably looking to a retirement where they are almost entirely dependent on Social Security or other pension programs. 

By comparison, the wealth of the median white family fell by almost $32,000 from $135,000 to $113,100. The median Asian family saw their wealth decline by more than $90,000, from $168,100 to $78,100. These declines are likely to have much larger impacts on living standards. The median wealth for African Americans fell from $12,100 to $5,700. This also is a large percentage decline, but one that is likely to have a limited impact on living standards since the initial wealth was already so low.

The New York Times Bemoans the Lost Opportunity to Cut Social Security and Raise the Age of Medicare Eligibility to 67 Print
Tuesday, 26 July 2011 04:26

That's right, you can read about the "unique opportunity" that was lost right here. The New York Times complains that the likely deficit deals to be produced in the days ahead will not feature:

"significant future savings from Medicare, Medicaid and Social Security — the entitlement programs whose growth as the population ages is driving long-term projections of unsustainable debt."

As every budget analyst knows, Social Security is not a major driver of the deficit. Under the law, it cannot contribute to the deficit. It can only spend money that was raised from its designated tax or from interest earned on the Treasury bonds bought with this revenue. If the trust fund lacks the money to pay benefits then full benefits will not be paid. Furthermore, the projected increase in Social Security benefits over the decades ahead is relatively modest.

The projected increase in the cost of the Medicare and Medicaid is much larger but this is attributable to the projected explosion in private sector health care costs. If the United States faced the same per person health care costs as any other wealth country we would be facing long-term budget surpluses, not deficits.

This fact is important, since it suggests that the more obvious way to reduce the costs of these programs is to fix the U.S. health care system. This would imply lower payments to drug companies, hospitals, doctors and other providers. Alternatively, Medicare beneficiaries could be given the option to buy into the more efficient health care systems in other countries. If these options were presented to the public it is likely that most would find it preferable to denying care to patients as the NYT advocates in this piece.

It is also worth noting how this "unique opportunity" came about. The deficits exploded due to the incredible incompetence of the Federal Reserve Board which allowed the $8 trillion housing bubble to grow unchecked. The collapse of this bubble gave the economy its worst downturn since the Great Depression. High levels of unemployment are projected to persist for a decade.

This economic collapse led to the large deficits that the government is currently running. While tens of millions of people are suffering from the effects of high unemployment and the wealth lost with the collapse of the housing bubble, the NYT views this crisis brought on by Wall Street greed and economic mismanagement as a unique opportunity to cut Social Security and Medicare. Of course, the vast majority of people from all demographic groups (including Tea Party Republicans) strongly oppose cuts to these programs.

President Obama Doesn't Understand the Origins of the Deficit Print
Tuesday, 26 July 2011 04:00

This fact should have been highlighted in the news reporting on President Obama's speech last night. President Obama asserted:

"For the last decade, we have spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug
program were simply added to our nation’s credit card.

As a result, the deficit was on track to top $1 trillion the year I took office."

This is seriously mistaken.

The Congressional Budget Office's projections from January of 2008, the last ones made before it recognized the housing bubble and the implications of its collapse, showed a deficit of just $198 billion for 2009, the year President Obama took office. In other words, the deficit was absolutely not "on track to top $1 trillion."

This is what is known as a "gaffe" of enormous proportions. It indicates that President Obama does not have the most basic understanding of the nature of the budget problems the country faces. He apparently believes that there was a huge deficit on an ongoing basis as a result of the policies in place prior to the downturn. In fact, the deficits were relatively modest. The huge deficits came about entirely as a result of the economic downturn brought about by the collapse of the housing bubble. This misunderstanding of the origins of the budget deficit could explain President Obama's willingness to make large cuts to core social welfare programs, like Social Security, Medicare, and Medicaid.

It is incredible that no major news outlet noted this enormous gaffe on the fundamentals of the most important issue facing the country today.

Conventional Economics Works Fine, the Problem is That Robert Samuelson Doesn't Know Conventional Economics Print
Monday, 25 July 2011 05:18

Robert Samuelson gave one of his standard diatribes against the welfare state today. He told readers:

"They [economists] seem to have exhausted conventional policy approaches. Central banks such as the Federal Reserve have held interest rates low. Budget deficits are high."

Let's see, we had about $300 billion in annual stimulus to offset a $1.3 trillion drop in annual demand due to the collapse of the housing bubble. Conventional policy approaches say that this is nowhere near enough to bring the economy back to full employment. The best analysis of the stimulus concluded that the impact was actually slightly larger than predicted. (This requires adjusting the in-state multipliers measured in the study for the fact that there is inevitably spillover. For example, spending in New York will create jobs in New Jersey.)

Central banks certainly have not done all they could to boost the economy. The European Central Bank never lowered its overnight rate below 1.0 percent and has recently raised it to 1.5 percent. The Fed could have tried targeting a long-term interest rate or even a higher inflation rate.

Given the limited policy response to the collapse of the housing bubble, it is not clear why Samuelson would have expected more of an impact on growth and employment. His view certainly is not based in conventional economics.

Marketplace Radio Warns That the U.S. Economy Will Be Harmed If China Agrees to Raise the Value of Its Currency Print
Monday, 25 July 2011 05:10

In its morning segment, Marketplace Radio told listeners that China's response to the standoff over the debt ceiling may be to shift some of its dollar holdings into the euro and other currencies. It then said that this would be bad news for the U.S. economy.

Marketplace better tell President Obama about this. The official policy of the Obama administration is that it wants China to raise the value of its currency against the dollar. This would mean selling its dollar assets and instead buying the assets of other countries.

The reason for wanting the dollar to fall (i.e. the yuan to rise) is that it would reduce the trade deficit by making imports from China more expensive in the United States and making U.S. goods cheaper for people in the China. The Obama administration says this would be good for the U.S. economy; it would be interesting to hear why Marketplace Radio thinks it will be bad.

Does the Post Have Polls Showing Centrists Want Cuts to Social Security and Medicare? Print
Monday, 25 July 2011 04:52

If so, they really should share them with readers. The Post told readers that Obama's decision to propose raising the age of Medicare eligibility to 67 and to cut Social Security is a way to appeal to centrist voters. This is difficult to understand since every poll done on this issue shows that people across the political spectrum, including Tea Party Republicans, overwhelmingly oppose cuts to Social Security and Medicare. The Post either has some polls that no one else knows about or it's just making things up. (BTP reports, you decide.)

It is certainly true that many Wall Street types (e.g. Peter Peterson and Erskine Bowles) would like to see cuts to Social Security and Medicare. However, these people are important because of the money that they can give to President Obama's re-election campaign, not the voters they represent.

This piece also identifies Third Way as a "left-leaning group." Third way has been prominent in pushing for large cuts to the budget, including cuts to Social Security and Medicare. This is not a position that would ordinarily be identified as left-leaning.

Why Is Europe Less Concerned About U.S. Default Than Asia? Print
Monday, 25 July 2011 04:31

Could it be hidden anti-Americanism from those snotty French? The reason for asking is that Europe's markets were largely flat as NPR was telling listeners that Asia's markets were down sharply on concerns over default. If there is genuine concern among international investors over the likelihood of default, then we should be expecting to see similar reactions among investors in Europe and Asia. If Asian markets fell while European markets remain nearly flat, it would imply that something other than concerns about U.S. default was depressing Asian markets.

Addendum: The Post had the same story, although this was likely written before the opening of European markets.

Credit Default Swaps Do Not Insure U.S. Debt Print
Sunday, 24 July 2011 21:21

Suppose an insurer in New York sold insurance against a nuclear bomb being dropped on the city. Is this insurance against nuclear war?

As a practical matter, only a fool would think that this covered his financial bases. If there were actually a nuclear bomb dropped on New York, this New York based insurer would almost certainly be destroyed along with whatever it had insured.

This is the same deal as with credit default swaps on U.S. debt. If it turns out that the United States defaults on its debt (meaning a true default,  where bonds are not paid, not a technical default where there is a brief delay in payment), then it is very questionable whether any financial institution issuing the CDS will be around to pay it off. That is the case not only with U.S.-based financial institutions. Even banks in Europe and Asia would be badly shaken by a default on U.S. debt.

Therefore the NYT is misleading its readers in a chart accompanying this article that presents the price of CDS on U.S. debt as a measure of the price of buying insurance against default. Since this is not real insurance, this can more accurately be viewed as the price of a bet on some sort of default event that could allow someone to get into court with a claim. If a holder of CDS can get through the door on arguing for a claim, the issuer may pay them to just go away.  

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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.