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The White House KNOWS That a Foreclosure Moratorium Will Hurt Bank Profits, the NYT Doesn't Know What the White House Thinks Print
Monday, 18 October 2010 04:35

The mind readers at the NYT told readers that:

"The Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy [emphasis added]."

It is easy to see how a foreclosure moratorium might hurt bank profits. After all, the banks could be forced to follow the same laws on mortgages and property transfers as the rest of us. This would raise their costs and reduce their profits, which is why they had been taking short-cuts instead of following the law.

However it is not easy to see the chain of events whereby a foreclosure moratorium hurts the broader economy. Certainly Housing Secretary Shaun Donovan couldn't produce a credible story in the piece in the Huffington Post cited in this article.

Donovan uses the absurd story of a young woman who just bought a foreclosed property who he claims would have been unable to achieve her dream of homeownership if a foreclosure moratorium were in place.

Huh? Doesn't the housing secretary know that there is a huge inventory of foreclosed homes that banks are holding off the market waiting for better times? If the pipeline of newly foreclosed homes was temporarily stopped by a moratorium, this inventory would easily keep the market well-supplied with foreclosed properties for long into the future.

And, wasn't one of the main purposes of HAMP to slow the process of foreclosure? The argument was that this slowing was necessary to stabilize the market. Does the Obama administration want to slow or speed up the process of foreclosure, or both? And are both essential for the housing market?

This is what a reporter would be asking after seeing Secretary Donovan's piece. (Btw, yes both HAMP and blocking a foreclosure moratorium helps banks.)

 

 
Deflating the Japanese Horror Story Print
Sunday, 17 October 2010 07:40

The NYT devoted a lengthy piece to telling readers how bad things in Japan have been since its bubbles collapsed in 1990. It gets many things badly wrong.

First and most importantly, Japan is actually considerably wealthier on average today than it was in 1990, contrary to the implication of this article. According to the IMF, per capita income is 16.4 percent higher in Japan today than it was in 1990. This is considerably less than the 21.5 percent growth in the UK over this period or the 36.6 percent increase in the United States, but it is still a substantial gain in living standards. It is also worth noting that Japan's gain in per capita income was accompanied by a considerable shortening in the ratio of hours worked to population (shorter workweeks and more retirees).

However the biggest flaw in the piece is its obsession with deflation. Japan's has suffered from deflation in the last two decades, but the rate of price decline has always been very gradual. Only in 2009 did it even exceed 1.0 percent. (It is projected to be larger than 1.0 percent this year.)

It makes very little difference to an economy whether prices are falling by 0.5 percent or rising by 0.5 percent. The argument that people put off purchases because they see prices falling is just silly. If prices are declining at the rate of 0.5 percent a year, then someone considering the purchase of an $800 refrigerator can save $4 by waiting a year. It is unlikely that these sorts of savings would have much impact on even the purchase of a big ticket item; it's inconceivable that they would have any impact on the purchase of more every day items like food and clothing.

The real issue is simply that Japan's inflation rate has been too low. In this sense, a 0.5 percent deflation rate is worse than a 0.5 percent inflation rate. But a 0.5 percent inflation rate is also worse than a 1.5 percent inflation rate. A low inflation rate, whether positive or negative, keeps real interest rates higher than would be desirable in a severe downturn. It also prevents the economy from inflating away the debt burden left over from the housing bubble.

This point is important because many people wrongly believe that the United States will only be suffering from a problem of too low inflation if the inflation rate actually turns negative and we have deflation. This is not true. The inflation rate in the United States is already a level that is hampering growth. Any further drop in the inflation rate will make the situation worse but there is no importance to crossing zero.

One final point worth noting: this article implies that Japan's low birthrate is a bad thing. Actually, Japan is a very densely populated country. This is why house prices are so high. If its population declined then housing prices would fall. (This is a sophisticated economic concept known as "supply and demand.") A lower population would also mean less greenhouse gas emissions for those who care about the future of the planet. For these reasons, a low birthrate could help Japan in the future.

 
Public Employee Bashing on the Dark Side Print
Saturday, 16 October 2010 16:04

With private sector unionization down to 7 percent, the right-wing is turning its guns on public sector unions. Since workers generally can opt to join a union in the public sector without the risk of being fired, there has been no notable decline in public sector unionization rates over the last three decades. The unionization rate in the public sector is still above 35 percent, which means that public sector unions continue to be an important force on the political scene.

The Washington Examiner accommodated this attack with a piece from Diana Furchtgott-Roth, the chief economist at the Labor Department in the Bush Administration. The centerpiece of Ms. Furchtgott-Roth's piece is a complaint "insourcing," which means having work done by private contractors done instead by public employees.

Her first sentence has the bizarre complaint that:

"Even though Americans face a 9.6 percent unemployment rate, with almost 15 million out of work, President Obama and Congress are trying to take more jobs from private businesses through 'insourcing,' which means taking contracts from private firms and giving the work to government employees."
The 9.6 percent unemployment rate is obviously awful, but what does that have to do with whether jobs should be done by workers in the public or private sector? For most people a job is a job. If some of the unemployed get re-employed in the public sector, what is the problem?
But the more fundamental point is that the policy that Furchtgott-Roth complains about does not in fact exist. She is upset about an insourcing policy that gives preference to the public sector over private contractors.
However, that is not the policy in place. The policy only gives preference to the public sector in cases where the work in question has an inherently governmental character (think of interrogating prisoners) or there had been a past history of abuse by private contractors (think of Halliburton).
The simple fact is that the role of private contractors in the federal government has exploded in the past decade. The real value of private contracts increased by more than 50 percent between 2000 and 2009. Many of these contracts have been associated with serious abuses. It is understandable that the recipients of these contracts would be concerned if some of this business ended up back in the public sector, but it is hard to see why the rest of us would be.
We might not expect the Washington Examiner to be "fair and balanced," but it would be nice if it stuck a little closer to the truth.
 
Harry Reid, the Social Security Trustees, and CBO Say Social Security Will be Solvent for Decades Print
Saturday, 16 October 2010 08:18

Dan Balz gave Washington Post readers classic "he said, she said" reporting in his coverage in the debate in Nevada's Senate race. Balz reported that Sharon Angle, the Republican challenger, claimed that Social Security is facing a serious crisis. He then noted that: "Reid suggested that, with tiny fixes, the system would be good for the next four decades or beyond."

Actually, what Reid "suggested" is exactly what the projections from the Congressional Budget Office show as well as the projections from the Social Security trustees. The vast majority of Post readers don't have the time to investigate the truth of Reid's statement, Dan Balz does. He should have told readers that Senator Reid was right and Ms. Angle was wrong according to the standard projections used to evaluate this program.

 
Both Parties Do Not "Acknowledge" That Budget Deficits Will Cause Problems Print
Friday, 15 October 2010 05:03

NPR made this mistake in its top of the hour news segment on Morning Edition. Both parties might say that current budget deficits will cause problems, but they cannot "acknowledge" something that is not true. (If NPR knows this to be true, then it should share this information with its listeners.)

Since the economy has vast amounts of unused resources there is no reason that current deficits would pose any problem. And, the Fed could in principle buy and hold the debt used to finance the deficit so it places no interest burden on future generations.

 
Why Is It So Acceptable to Lie to Cut Social Security Benefits? Print
Friday, 15 October 2010 03:52

We aren't supposed to use the word "lie" in Washington, probably because the practice is so common, but let's just use normal English for a moment. NYT Roger Cohen devotes his column to a tirade against the French for their opposition to raising the retirement age. This opposition has taken the form of a general strike that has seriously disrupted the economy.

Cohen is a huge proponent of the increase -- he calls it a "no-brainer." This is fine, he is a columnist and this is his opinion. But how about getting the basic facts right? The headline and discussion in the article focus on a raise in the retirement age from 60 to 62. Cohen argues that this is necessary because life expectancy has risen 15 years since 1950.

Age 60 is not in fact the age for getting full retirement benefits in the French Social Security system. It is age 65. Age 60 is an early retirement age at which it is possible to retire with reduced benefits. It is comparable to the age 62 early retirement age in the U.S. system. Cohen is not alone in failing to make this point clear, but he certainly does raise this distortion of the debate to a higher level.

The 15 year increase in life expectancy is also deceptive. The implication is that the French expect to be retired on average for 15 years more than in 1950. Actually, much of the increase is due to reduced infant mortality rates. This does not directly affect the arithmetic of the retirement system. Much of the increase is due to more people living until retirement. This improves the finances of the retirement system. Only a portion of the increase is due to people living longer post retirement. (I don't have the breakdown for France, but here's the U.S. story.)

Cohen also includes the bizarre assertion that France has to raise its retirement age because "the Chinese don’t get the notion of retirement." Unfortunately this sort of junk is often used in arguments for cutting wages and benefits for ordinary people.

Is Roger Cohen a Neanderthal protectionist? Does trade make the world poorer? That is not standard economic theory. If it would have been possible for people to enjoy early retirement benefits in France at age 60 without trade with China, then it should be even more possible now that the French have the benefit of low-cost goods made in China.

Unfortunately Cohen's misrepresentations (we're being polite again) are the norm in this debate. Billionaire investment banker Peter Peterson routinely goes around saying that there is no Social Security trust fund. This blatant untruth should put Peterson on the top pedestal of the Economics Flat Earth Society. Instead, he is treated reverentially in elite DC circles and even wins himself invitations to the White House. 

The world is not getting poorer. Productivity is improving year by year. (France's productivity level is only slightly lower than the United States.) It is perfectly reasonable for a society to opt to take the benefit of higher productivity growth in the form of longer retirements.

This does have to be paid for, presumably primarily through taxes on wages -- in effect workers pay for their own retirement. In the United States, while Social Security cuts are talked about all the time in Washington's elite policy circles, polls routinely show that workers are actually willing to pay higher taxes to finance their retirement benefits, and that they prefer taxes to cuts. This is not a problem of people being childish. This is a problem where the elites have arbitrarily ruled out one of the key options.

Of course it is also possible to support a retirement system in part with more progressive taxation. In the United States, raising the cap (currently $106,000) on taxable wage income would go a long way to reduce the projected long-term shortfall in funding.

It is also possible to raise money from directly taxing those who have been the big winners in the current economy. A financial speculation tax could raise as much as 1 percent of GDP in the United States ($145 billion a year). This is twice the size of the projected shortfall in the Social Security benefits.

Financial speculation taxes are almost never discussed in the media even though they have been widely used. (The United Kingdom still raises 0.3 percent of GDP [$40 billion a year in the U.S.] from a tax that only applies to stock trades.) They are politically difficult because of the power of the financial industry in the United States and elsewhere.

But talking about cutting Social Security benefits, rather than raising financial speculation taxes, or other progressive taxes, cannot honestly be called making tough choices. It is making a cowardly choice. It is serving the interests of the rich and powerful at the expense of the vast majority of the population. That may be what politics is about, but it should be described accurately.

 

 

 

 
Politico Confuses Inflation With Growth Print
Thursday, 14 October 2010 08:43

Politico told readers that: "On Friday, Social Security recipients will learn that they won’t receive higher benefits for the second year in a row because the economy isn’t growing fast enough." Actually, this is not true. The cost of living adjustment for Social Security has nothing to do with the economy's growth rate. It is based on the rate of inflation as measured by the consumer price index. The reason that beneficiaries will not receive higher benefits is because the CPI shows no inflation over the last year.

The difference between inflation and growth is very important and fundamental. Reporters should be able to get it right.


 
Unemployment Claim Numbers: What Do They Mean? Print
Thursday, 14 October 2010 08:19

Weekly unemployment claims jumped by 13,000 to 462,000 last week. The 4-week moving average is at 459,000. This suggests that the economy is still not generating jobs. Following the last downturn, the economy did not start generating jobs consistently until weekly claims had fallen to near 400,000.

It is also worth noting that the unemployment insurance filings may be lower relative to the number of layoffs each week than was true in the past. The reason is simple: because of prolonged high unemployment, many workers who are newly laid off are not eligible for benefits.

Requirements vary by state, but most look back at a workers history over either the prior 4 quarters or the 4 quarters prior to the most recent quarter. To qualify, workers need some minimum number of work hours (e.g. 500 to 600 hours) or minimum earnings (e.g. $2,500 to $3,000) over the relevant 4 quarters.

Either 4 quarter period is a time in which unemployment was quite high. Furthermore, while unemployment has hit everyone, it has hit some groups especially hard. The unemployment rate for workers with just a high school degree has averaged almost 10.5 percent for the last 12 months. For workers without a high school degree it has averaged almost 15 percent. For workers between the ages of 20-24 it has averaged almost 15 percent.

Many of the people who got laid off last week may have just recently been hired after an extended spell of unemployment. This means that they would not qualify for benefits. This is always true for some number of the newly unemployed, but that share would be much larger today than it had been in 2007 when the unemployment rate had been under 5.0 percent over much of the prior 12 months.

It is not clear how much this would affect unemployment claims, which is the number reported each month. This number gives the number of people filing, not the number who are determined to be eligible. It is likely that many ineligible workers go ahead and file, not realizing that they ineligible. 

However, some workers undoubtedly understand the system and don't bother filing. We don't know how large this number is, but if it is 5 percent of the newly unemployed, that would correspond to nearly 25,000 additional claims a week. This implies that the 461,000 claims filed last week would correspond to roughly 485,000 claims filed three years ago, before the long period of high unemployment had set in.

 

 
Steven Pearlstein Doesn't Understand Market Economies Print
Wednesday, 13 October 2010 07:11

In a confused column today, Steven Pearlstein touted the need for wages in the United States to fall. He focused on the wages of autoworkers, but implied that the wages of less-educated workers more generally must fall. At the end of the column Pearlstein told readers:

"I'm sure many of you are reading this and thinking that if anyone is forced to take a pay cut to rebalance the economy, surely it ought to be overpaid investment bankers, corporate executives and newspaper columnists. That's how things would work in a socialist paradise, but not in market economies, which are much better at producing efficiency than fairness."

Well no, it is not the case that a "market economy" led to the high salaries of investment bankers, corporate executives, and newspaper columnists, while forcing wage cuts on auto workers. In fact, there are a wide variety of government interventions that created this situation.

For example, there was the government bailout of the banks two years ago. By offering trillions of dollars in loans and guarantees the government kept Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and other Wall Street giants in business. In a market economy, the top executives of these companies would be walking the unemployment lines right now instead of getting bonus checks in the tens of millions of dollars.

The executives of these banks also benefit from the "too big to fail" subsidy. This means that creditors will lend to these banks at lower interest rates because they know the government will bail them out if the bank gets into trouble.

Corporate executives get ridiculously high pay in the United States (as opposed to Europe, Japan, or South Korea) because the government's rules of corporate governance allow corporate executives to essentially run companies in their own interest. The CEOs largely appoint the board of directors (a ridiculously plush sinecure) who in turn decide the CEOs' pay. In systems where the corporations are more directly subject to shareholder control, CEOs get paid far lower salaries.

Finally the pay of columnists and highly educated workers is inflated as a result of the fact that these workers are largely shielded from international competition. The laws make it difficult for companies to bring in foreign professionals to undercut the pay of doctors, lawyers, columnists, even if they are every bit as competent as the native born workers they would be replacing.

By contrast, trade policy was deliberately designed to put U.S. manufacturing workers in direct competition with the lowest paid workers in the world. Also, hotels, restaurant owners and other employers of low-skilled workers have no problem at all hiring undocumented workers at low wages to keep down pay in these sectors. This also is a policy decision -- the government has decided not to require these employers to obey employment law.

In short, the inequality that Pearlstein notes has nothing to do with the dictates of a market economy. It is the result of the people at the top rigging the rules to their benefit. They got the government to stack the deck in their favor and then hired people like Pearlstein to tell everyone that it was just the natural workings of the market.

 
Former Fed Governor Warns That If Monetary Policy Is Too Loose, We Could Get a Recession That Is Not as Severe as the Current One Print
Wednesday, 13 October 2010 04:41

It would have been useful to point this out in an article that presented the views of former Fed governor Robert Heller. Mr. Heller's views were presented as those of an inflation hawk who was worried that the Fed was going too easy in trying to boost the economy. He noted the inflation of the 70s and the recessions in 1980 and 81-82 that brought the inflation rate down.

It would have been worth reminding readers that these downturns were far less severe, measured in duration and increase in unemployment, than the current downturn. If the possible bad outcome is not as bad as the current situation, then there would appear to be little basis for concern about excessively easy monetary policy.

 
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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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