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Let's See, When Supply Drops, Prices Fall Print
Thursday, 28 October 2010 05:01

That's what NPR told listeners in its top of the hour news segment on Morning Edition (sorry, no link). The context was the possibility that a slowdown in foreclosures will reduce the supply of foreclosed homes being put on the market.

The Obama administration and other analysts have made this assertion, but it does defy basic economic logic and common sense. If a delay in the foreclosure process results in fewer homes being placed on the market then we should expect prices to rise, not fall. (This is compared to what would happen otherwise -- prices are falling now.) It is arguable whether such an increase would be good or bad, but reporters should try to get this one right even if the administration is having problems figuring out which way is up.

 
The Fallout from the Housing Bubble in Spain Print
Thursday, 28 October 2010 04:43

The NYT had an excellent piece reporting on the debt burdens created by the collapse of the housing bubble in Spain. In Spain, unlike the U.S., mortgage debt typically follows the borrower even after they have lost their house. It is also very difficult to eliminate this debt through bankruptcy which means that many foreclosed homeowners will be saddled with mortgage debt until they die.

This is part of the reason that competent economists were concerned about housing bubbles in places like Spain. The European Central Bank (ECB), like the Fed, was not concerned. No one at the ECB lost their job, or even missed a promotion, as a result of its failure to take steps to counter the housing bubble in many euro zone countries.

It is also worth noting that debt has an effect on labor supply that is comparable to taxes. If a former homeowner knows that they will have to pay 20 percent of their income to a creditor then it reduces their incentive to work in the same way as if they had a 20 percentage point increase in their tax rate. This provides a powerful disincentive to work or an incentive to work off the books. The negative economic impact of harsh bankruptcy rules on economic output is rarely discussed.

 
Private Prison Companies Round Up Business by Pushing Harsh Immigration Laws: NPR Does Its Homework Print
Thursday, 28 October 2010 04:29
Morning Edition had an outstanding piece reporting on the role that a private prison company played in promoting Arizona's new immigration law. This is what reporters are supposed to do.
 
How Did the NYT Decide That Social Security Is One of the Biggest Long-term Problems Facing the Country? Print
Thursday, 28 October 2010 04:18

It sure wouldn't be obvious that the cost of Social Security is one of the biggest problems facing the country. The program's projected shortfall over the next 75 years is equal to 0.5 percent of GDP, according to the Congressional Budget Office. This is less than one fourth of the increase in defense spending over the last decade. The share of health care spending in GDP is projected to rise by more than this every 3 years.

Dealing with global warming, a rapidly growing population of current and former prisoners, educating our children and maintaining our infrastructure all seem to pose much larger challenges than meeting the projected funding shortfall in Social Security. It is not clear why the NYT is telling readers that the growing costs of paying Social Security benefits are "one of the government’s biggest long-term challenges." The data do not appear to support this assertion.

 
Lower Cost Legal Services: Why Isn't That a Good Thing? Print
Wednesday, 27 October 2010 20:22

Low cost factory labor allows consumers to benefit from cheaper shoes, clothes, and toys. (These days it also means cheaper computers, aircraft parts, and windmill turbines.) Low paid immigrants from Latin America reduce the price of restaurant meals, hotel rooms, and child care.

The media routinely tout these benefits from globalization. The U.S. workers who may face cuts or unemployment as a consequence are told to get more training and learn to work harder.

This raises the question as why we don't see a similar celebration at the prospect of an increased supply of lawyers driving down the wages of lawyers and the price of legal services. In fact, a lengthy Slate piece on the increasing supply of lawyers never once mentioned the potential economic gains associated with lower prices to consumers. The prospect of too many lawyers driving down wages in the profession was presented as a problem that should trouble right-thinking right thinking people.

Well, the logic is the same. Those who celebrate the low cost imports from China and the benefits of cheap immigrant labor should also be celebrating the fact that legal services should be costing us less in the future, unless of course they are partial to the relatively affluent types who tend to up as lawyers.

 
Kill the Myth About Uncertainty Slowing Hiring and Investment Print
Wednesday, 27 October 2010 12:48

Peter Orszag, President Obama's former budget director, complained about the current antagonism between business and government commenting that "even if [it is] not the primary explanation for slow hiring and sluggish investment, does seem to be affecting hiring and other business behavior."

First, let's just get some things in perspective. The profit share of domestic income is at a record high. The banks that were central to the economic carnage we are now experiencing have seen their profits and bonuses return to their housing bubble peaks?

What do these little boys and girls have to complain about? Are the politicians saying nasty things about them?

I suspect most people would be pretty damn happy if they still had a job after messing up as bad as these people did. Instead, the Goldman, Citi, Morgan Stanley Wall Street gang are earning tens of millions a year -- thanks to the taxpayer bailouts. And, they are upset about their relationship with government?

Okay, but let's get to the substance. Is there any evidence whatsoever that this antagonism is "affecting hiring and other business behavior?"

If the antagonism was affecting hiring, then we would expect to see firms increase the length of the average workweek as they worked their existing workforce longer hours rather than take on new workers. There is zero evidence of this. The average workweek is up slightly from the low-point of the downturn, but it has been flat in recent months. It is still far shorter than it was before the downturn.

If businesses were deferring hiring then we would also expect to see them make more use of temps. Again, the data will not cooperate. Temp hiring is also up some from the low-point of the recession, but it still down more than 20 percent from pre-recession levels.

As far as the "other business behavior," investment, which is the one we most care about, has actually been pretty healthy in the last few quarters. Investment in equipment and software has grown at nearly a 20 percent annual rate over this period. Investment in structures has been plummeting, but this is to be expected given the huge overbuilding in most categories of non-residential structures.

So, businesses are unhappy but it doesn't seem to be affecting their economic behavior, even though it may affect their pattern of campaign contributions. The obvious answer is buy them all lollipops and move on to more serious issues.

 

 
The Post Prints More Nonsense on Social Security Print
Wednesday, 27 October 2010 05:26

If a member of Congress shows that he doesn't know the basics of the government's most important social program then this makes a good news story, with a headline like "Congressman Ignorant of Basic Facts on Social Security." However, in the Washington Post, a member of Congress can say any loon tune thing they want about Social Security and have it treated as a reasonable comment.

Hence we are given without comment a quote from Republican Representative Tom Price:

"The American people know that the current Social Security program will not survive based upon current rules."

This is a larger gaffe than almost anything the Post has written on from a politician. It would be comparable a politician insisting on his commitment to ending the war in Vietnam, thereby demonstrating his failure to recognize that the war had been over for 35 years.

Of course Social Security will survive just fine based on its current rules. According to the Congressional Budget Office the program can pay scheduled benefits for the next 29 years with no changes whatsoever. It could always pay a far higher benefit than what current retirees receive even if no changes are ever made. If changes comparable to those put in place by the 1983 Greenspan Commission are put in place it would be able to pay full scheduled benefits well in the 22nd century.

At one point the article refers to the interest of President Obama's deficit commission in "reducing benefits for wealthier retirees." It would have been worth reminding readers that "wealthier" in this sentence refers to people like school teachers and firefighters, not the sort of people who are generally viewed as wealthy.

The article also reports the view of Erskine Bowles, the co-director of the commission and a board member of Morgan Stanley, that the size of government should be limited to 21 percent of GDP. It would have been useful to point out to readers that Mr. Bowles apparently believes that we should slow growth and kill jobs to keep government to some arbitrary size cap. By contrast, most other people believe that the services that can be provided most efficiently by the government should be provided by the government.

 
The Washington Post Does Not Know Which Way Is Up: Housing Prices Fell in August Print
Wednesday, 27 October 2010 05:14

The Washington Post headlined an article on the release of the Case-Shiller 20-City house price index for August: "house prices up less than projected." Actually house prices fell by 0.2 percent in August, with prices dropping in 15 of the 20 cities in the index.

The reason that Post reported prices as rising is that it was referring to the year over year change. This measure focuses on old information. We already had data on 11 of the 12 months over the last year. The new information is the August data, which is clearly most relevant for the future direction of house prices.

The article also includes the strange comment that: "In addition to unemployment, concern over deteriorating property values may also be weighing on Americans' psyche." Falling house prices affect Americans' wealth, not just their psyche. As a result of the plunge in house prices since the partial collapse of the bubble, households have seen a decline of close to $6 trillion in their wealth. This means that they have less ability to spend.

It is also surprising to see that the Post believes that the August data was more negative than "projected." The paper should stop relying exclusively on experts who failed to see an $8 trillion housing bubble.

 
A Really Really Stupid Health Care Tax Break Doesn't Cover Breast Pumps Print
Wednesday, 27 October 2010 04:40

The NYT devoted a major article to tell readers that flexible health spending accounts, the stupidest tax break anyone has ever been able to design, do not cover breast pumps. This is kind of like devoting an article to the fact that the rapidly growing Flat Earth Society holds meetings on the Jewish holidays.

Of course the real story would be the fact that a nutball organization is rapidly growing and the real story here is that an incredibly poorly designed tax break is continuing in this era of health care reform. Flexible spending accounts are wasteful from almost any perspective.

First the cost of administering the credit for companies is almost as large as the amount of the savings. Many organizations pay close to $100 per worker to administer the accounts. If a person puts $1000 a year into the account and is in the 15 percent bracket, like most workers, the tax savings are $150. If a worker puts the maximum $2,500 in an account and is in the 25 percent bracket, then the savings are $625. In this case, the administrative costs are still more than 15 percent of the tax savings.

This of course does not count the time spent by beneficiaries dealing with their accounts. There is often considerable paper work associated with these accounts. Often companies refuse to make payments, requiring participants to spend hours going back and forth with clerical workers in order to get reimbursements. 

Flexible spending accounts also have an absurd use it or lose it provision. Extra money in an account at the end of the year is lost to the participant. This causes many participants to stock up on items like prescription glasses or over the counter medicines in order to avoid losing their money. Much of this spending is wasteful, since these are items that are not really needed.

Finally the credit is very regressive, since the largest benefits go the highest income individuals. It also is small business unfriendly since the administrative costs make it uneconomical for many small businesses. This puts small businesses at a disadvantage in trying to attract workers who might care about this benefit.

It is remarkable that such an incredibly poorly designed tax credit survived health care reform. (This is probably explained by the fact that most of the people who worked on designing the bill benefit from it.) It leads to more economic distortions that most of the forms of protectionism that get major news attention and cause columnists and editorial writers to hyperventilate (e.g. the "buy America" provision in the stimulus). The continued existence of these accounts merit attention, since it is a major scandal.

 

[Addendum: Several comments correctly point out that contributions to FSAs are also exempted from payroll taxes. This would add another 15.35 percent to the tax savings. So a person in the 15 percent bracket who puts $1,000 into an account would be saving herself and her employer a combined total of 30.35 percent of this amount or $303.50.]

 
President Obama Underestimated the Severity of the Downturn Print
Wednesday, 27 October 2010 04:28

David Leonhardt has an interesting discussion of public attitudes towards President Obama and the Democrats on the eve of the elections. He notes that the stimulus helped, but the economy is not where President Obama's advisers expected it to be right now.

It is worth noting that President Obama's advisers seriously underestimated the severity of the downturn. They had projected that even without any stimulus package the unemployment rate would peak at just over 9.0 percent. In fact, the unemployment rate peaked at 10.1 percent last fall, even with the stimulus in effect. It had already reached 9.4 percent in May, just as the first effects of the stimulus were being felt. A major reason for the inadequacy of the stimulus was this failure to fully appreciate the severity of the downturn.

 
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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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