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They are Just Trade Agreements, not "Free-Trade" Agreements Print
Tuesday, 01 March 2011 06:43

A NYT article on President Obama's trade agenda repeatedly referred to "free-trade" agreements. This is a term that politicians who back these pacts use to garner public support, however, it is not accurate. The deals generally do little or nothing to reduce barriers to trade in highly paid professional services, like physician and lawyer services. They also increase protectionism in some areas, most notably by strengthening copyright and patent protections.

It is understandable that the proponents of these trade pacts would want to dub them "free-trade" pacts to make them more politically appealing. However, the media should not be using such inaccurate terminology.

 
Uninformed Appraisals Should Lead to Inaccurate Appraisals, Not Low Appraisals Print
Tuesday, 01 March 2011 05:07

USA Today reported that many home sales are not going through because the appraisals are too low to support the mortgage. At one point it reports complaints from realtors that appraisers now often come from outside the area and make low appraisals because they don't know the housing market.

If appraisers are unfamiliar with an area then it would be expected that they would make inaccurate appraisals. This would mean that there might be mortgages that don't go through because an appraisal comes in too low, however some mortgages may end up being issued that should not be because the appraisals are too high. There is no obvious reason that the appraisals would be biased on the low side.

 
There Are No Rich and Poor In David Brooks' America Print
Tuesday, 01 March 2011 04:47

David Brooks told readers that it is very important that we redistribute money from the old to young. He argues that this is due to the government debt built up as a result of the downturn. This debt will put pressure to reduce government spending, which he argues should come primarily at the expense of the elderly.

It is impressive that Brooks could only think of redistribution by generation after the United States has just gone through the most massive upward redistribution in the history of the world over the last three decades. Other observers might have thought of dealing with unmet needs by adopting measures that partially reverse this upward redistribution.

For example, the government could raise more than $1.8 trillion by taxing financial speculation. This revenue would come almost entirely at the expense of speculators and the financial industry. It could save a comparable amount of money by adopting alternatives to patent monopolies for supporting prescription drug research. And it could substantially reduce the interest burden of the current debt by having the Federal Reserve Board buy and hold a substantial amount of the debt. This would mean that the interest paid on this debt would be refunded to the government, leading to no net interest burden on the bonds held by the Fed.

However, Brooks never considers any measures that could reverse the upward redistribution of the past three decades. He is only interested in taking away Social Security and Medicare benefits and reducing the pay of public sector workers.

 
Consumers Continue to Spend Rather Than Save Print
Tuesday, 01 March 2011 04:32

The Washington Post told readers that "consumers are sitting on their pocketbooks," in reference to the 5.8 percent savings rate reported for January. In fact, this savings rate is well below the average for the 50s, 60s, 70s, and 80s. The wealth effect from the stock bubble in the 90s and the housing bubble in the 00s depressed saving rates in these decades.

 

Book2_20820_image001

 

 

With the housing bubble now finishing its deflation we should expect the saving rate to rise back to its historical level. The alternative would imply that workers will have much less money for their retirement relative to their income in their working years.

 
USA Today's Government/Private Pay GAP Could be Eliminated by Hiring More Groundskeepers Print
Tuesday, 01 March 2011 03:46

USA Today ran an article highlighting a difference in pay between government workers and private sector workers in Wisconsin and 40 other states. The methodology used in the article simply takes average compensation per worker without adjusting for their education, experience or other factors that typically affect pay. (Most people expect a cardiologist with 25 years of experience to earn more than a 20-year old counter person at McDonalds.)

The gap in compensation (pay and benefits) highlighted in the USA Today article could be eliminated if governments made a point of replacing work that is often contracted to outside businesses (e.g. cafeterias in government buildings, custodial work in government buildings and groundskeeping on government properties) with government employees. By increasing the ratio of less educated workers to more highly educated workers (e.g. teachers, nurses, and doctors) state governments can eliminate the sort of pay gap that concerns USA Today.

Analyses that do control for education, experience and other factors in ways that are standard within economics consistently find that public sector workers receive somewhat lower compensation than comparable workers in the private sector. This article does cite Jeffrey Keefe, an economist who has done such analyses, pointing out this fact, but it is unlikely that many readers will pick up this point.

 
Mitch Daniels, Bush's OMB Director, Is Deluded About the Severity of the 2001 Recession Print
Monday, 28 February 2011 05:27

Morning Edition featured an interview with Mitch Daniels in which he was asked about whether he thought the Bush tax cuts were a good idea. Mr. Daniels, who was director of the Office of Management and Budget at the time, responded by saying that the tax cuts were widely credited (referring to the 2001 recession), "with the shallowness and the swiftness of recovery from that recession."

In fact, the recession was not short and mild. It led to what was at the time the longest period without job growth since the Great Depression. NPR should have pointed out Mr. Daniels' mistake.

[This is corrected from an earlier version, that confused Daniels' wording to wrongly imply that he said most people did not notice the recession. He had actually said that they did not see the recession coming.]

 

jobs-01-04

Source: Bureau of Labor Statistics.

 
Prosecuting Wall Street Fraud: Lessons for Joe Nocera Print
Monday, 28 February 2011 05:00

Joe Nocera used his column this weekend to comment on the fact that none of the Wall Street honchos who got rich pushing bad loans are being prosecuted. Nocera notes that Angelo Mozila, the former CEO of Countrywide, the huge subprime lender, still thinks that he did a great thing by getting moderate income people into homes. He concludes that this would have made it difficult to prosecute Mozila since "delusion is an iron-clad defense."

The issue of Mr. Mozila's beliefs about the good he was doing is beside the point in terms of bringing successful prosecution. The immediate issue is that Countrywide was issuing and selling large numbers of fraudulent mortgages. The fraud in these mortgages involved mortgage agents deliberately putting down false financial information about the borrowers (at their own initiative, not the borrower's) to allow them to qualify for loans for which they would not otherwise be eligible. These loans were then resold in the secondary market. This was a widespread practice at Countrywide and other subprime lenders.

A prosecutor would typically proceed by getting clear documentation about a large number of fraudulent mortgages being issued from a particular office. This would include depositions from the mortgage agents themselves as to whether they knew that they were putting down false information. Presumably some would answer "yes," especially if they were being offered a deal in exchange for cooperating. They would then be questioned as to whether their bosses knew that they were issuing fraudulent mortgages.

With enough low level people saying that issuing fraudulent mortgages was in fact a company policy, the prosecutor would then go after an office manager. The plan would be to threaten several office managers with long prison sentences for fraud, unless they talked about Countrywide's overall policy.

There are two possible stories. One is that the higher-ups somehow did not know what many outside observers knew about their own company (i.e. they were issuing fraudulent mortgages on a large scale) or that Mozila and other top executives were not idiots and in fact knew exactly what was taking place at their company. By threatening those lower down in the corporate hierarchy with long jail sentences, a prosecutor would be more likely to be in a position to put Mr. Mozila behind bars. This would be true whether or not he thought his fraud was ultimately a good thing because it promoted home ownership.

There would be a similar chain in connection with people like Richard Fuld, the CEO of Lehman and other top executives. The point would be to establish that these companies were securitizing fraudulent loans on a large scale. The people putting together the mortgage backed securities were either unbelievably negligent, by not knowing anything about the mortgages they were buying, or criminals who resold mortgages they knew to be fraudulent. Whether they thought this was a good thing is besides the point.

 
Doesn't Anyone Have Anything Bad to Say About Jacob Lew? Print
Saturday, 26 February 2011 08:46

Not in the Washington Post they don't. The paper ran a lengthy fluff piece that did not present a single critical comment about Mr. Lew.

One item that the Post could have mentioned is that Lew and his colleagues in the Clinton administration, who it notes are all back in top positions in the Obama administration, ignored the growth of the stock bubble and stood by as the over-valued dollar led to an enormous trade deficit. The collapse of the bubble in 2000-2002 gave the country what was at the time the longest period without job growth since the Great Depression. The economy only recovered from that slump as a result of the growth generated by the housing bubble. 

 
The Washington Post STILL Has Not Heard About the Housing Bubble Print
Saturday, 26 February 2011 08:27

The Washington Post had a front page article on the downward revision to 4th quarter GDP reported by the Commerce Department yesterday. The article cited higher oil prices and state and local budget cuts as the two major threats to growth in the immediate future.

Remarkably, the article did not mention falling house prices. Since their peak last summer when the first time buyers tax credit expired, house prices have fallen by more than 4.0 percent. They are currently falling at the rate of 1.0 percent a month. This would imply a drop of more than 15 percent by the end of 2011, which would correspond to a loss $2.4 trillion in housing wealth. A loss of wealth of this magnitude would reduce annual consumption by $120-$140 billion.

This loss of consumption due to a drop in housing prices would be a considerably larger blow to the economy than either the budget cuts and tax increases attributable to the state budget shortfalls or a rise in the price of oil that is twice as large as what we have seen to date. It is amazing that the Post is oblivious to the situation in the housing market even after the collapse of the bubble threw the economy into the worst downturn in 70 years.  

 
The Post Wants YOU to Lose Your Job to Ease Its Concern About Inflation Print
Friday, 25 February 2011 08:04

It seems as though the Washington Post's editorial board is losing sleep over inflation. Its lead editorial notes the recent rise in commodity prices and then warns that:

"Core inflation does indeed remain well within the Fed's safety range, but it has nevertheless begun trending upward, and one leading forecaster, Deutsche Bank Economic Research, says it could hit 2.1 percent, the upper limit of the Fed's usual target range, by the end of 2011. That could force the Fed to raise interest rates, slowing growth before unemployment has returned to pre-recession levels, in order to preserve its inflation-fighting credibility."

Actually, 2.1 percent inflation is not "the upper limit of the Fed's usual target range." The Fed never explicitly set a target range and there are a range of views among the Fed's open market committee (the body that sets interest rates) as to how high inflation can go before it poses any problem to the economy. For example, back in 1999 Chairman Ben Bernanke argued that in comparable circumstances Japan's central bank should deliberately target a higher rate of inflation in the range of 3-4 percent to lower real interest rates.

As a practical matter, the inflation rate has rarely been below 2.1 percent. As can be seen, there was only one year in the decades of both the 80s and the 90s when the inflation rate was below the level that the Post wants the Fed to have as the top end of its target range.

annual_inflation_5504_image001
Source: Bureau of Labor Statistics.

 

There is no obvious reason that the Fed should feel "forced" to raise interest rates if the core inflation rate happens to edge above 2.0 percent to preserve its credibility. Such an increase in interest rates would mean throwing more people out of work.

There are already tens of millions of people who have lost their jobs and/or their homes because of the Fed's mismanagement of the economy. There is no reason that the Fed should deliberately put more people out of work just because the Post editors and their friends have irrational fears about inflation.

 
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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.

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