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House Prices and Income Print
Wednesday, 08 September 2010 04:47

David Leonhardt has an interesting piece on house prices but ends up making a serious logical error. He argues that house prices typically keep pace with income, meaning that they have risen more rapidly than inflation. He bases this assessment on the fact that the portion of income that has been devoted to to housing has remained constant over roughly the last 80 years.

There is a logical problem in this analysis. In principle, the issue is the movement of a the price of a house of the same quality, not the amount that people actually spend on housing. If the price of a house of the same quality rises in step with income, and the share of income devoted to housing remains constant, then this logically implies (i.e. there is no way around the conclusion), that the quality of housing has not increased over this period.

This would mean that the homes that people are buying today are no bigger or better than the homes that people bought 80 years ago. This contradicts an enormous amount of data and common sense. It is unlikely that anyone would seriously argue this case. Therefore, we can conclude that house prices have not kept pace with income growth. 

 
Real Interest Rates Please Print
Thursday, 09 September 2010 04:10

The NYT has a front page piece on how low interest rates are hurting people who live on their saving. While interest rates are low, it would have been worth noting that the inflation rate is also very low. This is important to take into account in this sort of discussion, since the inflation rate had typically been higher in prior decades.

The real interest rate, the interest rate minus the inflation rate is the true return to savers. If the interest rate is 3 percent and the inflation rate is 3 percent, then the real value of a person's savings would erode by by 3 percent a year, if they spent all of their interest. Currently the inflation rate is close to 1 percent, which means that the real value of savings is only be reduced by 1 percent annually if a person spends their interest.

Real interest rates are low at present, which is a deliberate policy, but just reporting on the nominal rates presents a distorted picture of the situation facing savers.

 

 
Are Tax Cuts to Business a Jobs Program? Print
Wednesday, 08 September 2010 04:34

NPR told its listeners that they are this morning in its top of the hour news segment. It described President Obama's proposal to allow businesses to have 100 percent expensing of new investment as a "jobs program." In fact, the vast majority of the investment that will qualify for this credit would have taken place in any case. 

I am petitioning NPR to have my plan for tax cuts to Dean Baker labeled as a jobs program.

 
Is a 1.7 Percentage Point Decline in the Unemployment Rate Substantial? Print
Wednesday, 08 September 2010 04:26

The NYT says it isn't. The context is a discussion of President Obama's new stimulus program. The article tells readers that the word "stimulus,"

"has taken on negative political connotations since the original roughly $800 billion recovery plan and subsequent additions have failed to push unemployment down substantially."

According to the Congressional Budget Office the stimulus has reduced the unemployment rate by between 0.8 and 1.7 percentage points. This clearly was not enough to get the economy back to full employment, but arguably it was still substantial. People would likely view the economy very differently today if the unemployment rate was over 11 percent.

Arguably, the major cause for disenchantment with the stimulus was the fact that it was hugely oversold. The Obama administration badly underestimated the severity of the downturn and claimed that the stimulus would be sufficient to bring about a recovery.

 
$50 Billion in Infrastructure Spending Is Equal to 1.4 Percent of the Federal Budget Print
Tuesday, 07 September 2010 04:19
It is also equal to about 4 percent of the $1.2 drop in annual demand (@ $600 billion in lost consumption and $600 billion in reduced construction) due to the collapse of the housing bubble. These would be items worth including in discussions of President Obama's latest infrastructure proposal for those wanting to know the impact it will have on the budget and the economy.
 
Japan's Declining Population Means a Smaller Supply of Labor Print
Tuesday, 07 September 2010 04:07

It appears to be a standard ritual to cite Japan's declining population as an evil in all discussions of things Japanese. Today the NYT refers to the declining population as one of the factors making life bad for young workers.

Actually, a declining population is likely a plus for young workers. It means less competition for employment than would otherwise be the case. Falling population should also lead to improvements in the quality of life that will not be picked up in conventional economic measures. For example, its transportation system will be less heavily utilized, allowing people to reduce the time spent traveling to work and for other purposes.

 
Who's On First? The NYT's Mangled Reporting on EU Farm Subsidies Print
Monday, 06 September 2010 19:50

The NYT had an article on a coming dispute over EU farm subsidies in its next budget. It told readers:

"Agriculture subsidies account for more than 40 percent of the E.U. budget — worth more than €130 billion, or $167 billion, each year."

Readers probably assumed that this sentence was saying that the E.U.'s agricultural subsides are 130 billion euros each year. In fact, that number was referring to the total E.U. budget. Agricultural subsidies come to a bit over 50 billion euros each year. 

 
Donald Kohn Doesn't Think the Fed Did Anything Wrong Print
Sunday, 05 September 2010 22:24

That should have been the headline of an article about Donald Kohn who is leaving the Fed's board of governors. Kohn said that he doesn't think the Fed could have done anything different to prevent the worst downturn in 70 years because:

"Everybody — but certainly the regulators and the markets — became complacent about the housing market and whether housing prices could ever decline across a broad front.”

He still doesn't know that the housing crash was entirely predictable? Why are the taxpayers paying for this guy's pension?

 
Danger, Danger, Thomas Friedman Is Writing on Economics Again Print
Sunday, 05 September 2010 21:59

That mammoth waterfall of ignorance, Thomas Friedman, is at it again. The NYT allowed him to show his ignorance on economics in his Sunday column.

Friedman tells readers that the United States will be in bad financial shape because of all the money needed to bail ourselves out of the recession and also due to the growth in cost of Medicare, Medicaid, and Social Security.

The first point requires a knowledge of intro econ. It actually costs us zero to bail ourselves out the recession. The government can simply run deficits to boost demand. (Friedman apparently does not understand the problem is too little demand right now -- we can produce more goods and services than people are buying.)

The government can sell the bonds needed to finance the debt to the Fed (which it is already doing to some extent). The Fed then simply holds the bonds indefinitely. This creates zero burden on the government, since the Fed refunds the interest earned on these bonds to the Treasury. My intro econ students all used to understand this -- I guess Friedman never took econ 101 or didn't have a very good teacher.

Friedman then repeats what his "tutor and friend Michael Mandelbaum" told him:

"'In 2008', Mandelbaum notes 'all forms of government-supplied pensions and health care (including Medicaid) constituted about 4 percent of total American output.' At present rates, and with the baby boomers soon starting to draw on Social Security and Medicare, by 2050 'they will account for a full 18 percent of everything the United States produces.'"

Wow -- did Mandelbaum really say this? Did the NYT really allow Friedman to repeat it in its pages? Okay, in the real world, Social Security, Medicare, and Medicaid accounted for 9.4 percent of GDP in 2008. The projections show that the vast majority of the projected increase in costs in these programs is due to health care costs. However, people who want to cut Social Security lump the program in with the health care programs to advance their agenda.

The post health care reform projections actually show a much slower rate of growth for Medicare and Medicaid. Apparently, Mr. Friedman was not aware of the reform. If the U.S. paid per person health care costs that were comparable to those in any other wealthy country, then the country would be looking at huge long-term budget surpluses.

 
Front Page Post Editorial Tells Readers that Dems Would Face Better Prospects With 11 Percent Unemployment Print
Saturday, 04 September 2010 05:21

Most political experts believe that a strong economy favors incumbents, but the Post told readers the opposite in a front page piece that urged Democrats to embrace deficit reduction. The piece noted comments from several Democratic senatorial candidates urging budget cuts, then told readers:

"The new push for austerity could prove too little, too late for Democrats, who fear losing their majorities in both chambers of Congress. In dozens of House and Senate races, incumbent Democrats are struggling in polls, leading political analysts to raise the serious prospect of Republican takeovers in the House and even the Senate."

Of course the deficits that the country is now running are sustaining the economy. If the deficits were lower, then output would be lower and unemployment would be higher. The Congressional Budget Office (CBO) recently estimated that the stimulus has reduced the unemployment rate by between 0.7 and 1.8 percentage points.

The CBO estimates imply that if the Democrats had been earlier in their push for fiscal austerity and not pushed through the stimulus, then the current unemployment rate would be between 10.3 percent and 11.4 percent. This Post piece asserts that this situation would have improved their electoral prospects in November, although it cites no one who backs up this position.

The editorial, which is not labeled as such, includes several other unsupported assertions. At one point it told readers that government spending is out of control, commenting that "Democrats vow to bring spending under control," which of course is only possible if spending is already out of control.

It also implies that the Democrats have spent recklessly commenting about their "conversion to fiscal restraint" and the difficulty of convincing voters that they are serious. Of course the only budget surpluses in the last 40 years were run with Democrats in the White House, and the largest structural deficits were run under Republican administrations, so it is a bit bizarre that the article would imply that Democrats need to convert to "fiscal restraint."

The article also told readers the country's fiscal health is in danger and that the changes need to restore it are unpopular:

"Some fiscal hawks are skeptical that either party is willing to make the unpopular decisions necessary to restore the country to fiscal health."

The financial markets do not believe that the country's fiscal health is in danger, otherwise they would not make long term loans to the government at interest rates below 3.0 percent. It is also not clear that the steps needed to ensure that long-term budget deficits do not become a problem are unpopular.

While one source cited in the story (Robert Bixby, the director of the Concord Coalition) wants to cut Social Security, Medicare and Medicaid, it is only necessary to fix the U.S. health care system to ensure stable budgets into the indefinite future. If the United States paid the same per person health care costs as people in any other wealthy country we would face huge long-term budget surpluses rather than deficits.

The piece should have also pointed out Colorado Senator Michael Bennet's error when he asserted that we are borrowing from China because of our budget deficit. The United States is borrowing from China because of its trade deficit, which is in turn the result of an over-valued dollar. This is an embarrassing gaffe from a senator.

It is also worth noting that this editorial did not once mention the unemployment rate. This is remarkable for a piece discussing the Democrats' election prospects.

 

 

 
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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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