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Economist Who Could Not See $8 Trillion Housing Bubble Warns of the Need to Reduce Deficits Print
Tuesday, 08 June 2010 04:14

That could have been the headline of an NYT article that reported on Federal Reserve Board Chairman Ben Bernanke's warning that the government had to reduce its budget deficit. The article quotes Mr. Bernanke as saying:

“We can see what problems can arise in a country if investors lose confidence in the fiscal position of that country, so it is very important that we address this problem.”

This might have been a good place to point out that Mr. Bernanke could not see the $8 trillion housing bubble whose collapse gave us the worst economic crisis since the Great Depression. It could have also pointed out that it is not clear what he meant, since Greece his presumed point of reference, has very little in common with the United States. Greece is a small economy that is far more dependent on international trade than the United States. It also does not have its own currency.

For these reasons, economists who can see an $8 trillion housing bubble do not think that the experience of Greece tells us: "what problems can arise in a country if investors lose confidence in the fiscal position of that country." The NYT erred badly in not noting Mr. Bernanke's poor track record in discussing his latest pontifications on economic policy.

 
Impossible German Debt Target Print
Monday, 07 June 2010 05:17

The NYT told readers that Germany has to make big cuts in its budget because:

"Germany has its own reason for introducing cuts: It is legally bound by the “Schuldenbremse,” or debt brake, that Parliament passed last year. This means the national debt has to be limited to a maximum of 0.35 percent of gross domestic product by 2016, thus putting immense pressure on the government to find savings now. Net borrowing, which will rise to about €86 billion this year, or about €48 billion more than in 2009, is the largest since World War II, according to the Finance Ministry."

I can't tell what is intended here, but clearly not what the article says. Debt of course is a stock, but the subsequent discussion refers to annual deficits, which are flows. Furthermore, a debt limit of 0.35 percent of GDP is ridiculously low, the euro zone is supposed to set a cap of 60 percent for the debt to GDP ratio, although almost every member state is now above this cap.

Anyhow, something is clearly wrong here, hopefully an editor will get it straightened out.

 
One Nuclear Bomb Can Ruin Your Whole Day Print
Monday, 07 June 2010 04:35

Robert Samuelson tells us that the problem behind the Gulf oil spill and the housing bubble meltdown is not the corruption of industry and regulators, but rather complacency born of success. In the case of the oil industry, Samuelson noted that the industry has been drilling close to 1.6 million barrels a day, with only a few hundred barrels a year being spilled. He makes a similar argument about the financial sector, noting the sharp decline in daily stock market volatility.

It is worth noting that the sort of bad events that one expects in these sectors are almost by definition going to be very rare (we will not have huge spills or financial collapses on a weekly basis) and very costly. Any regulator must understand this fact and if they are competent would not allow their judgment to be affected by the absence of a bad event for a long period of time. The cost of the economic meltdown will be at least $5 trillion in lost output in the United States alone. By contrast, the benefits from reduced daily volatility are trivial. (How much do you care if you risk buying a stock at a price that is 0.2 percent too high, when you have an equal probability of getting it at a price that is 0.2 percent too low?)

So, if our regulators cannot understand the potential harm from extremely rare, but extremely costly, disasters, then the country has a very serious problem.

 

 
NPR Hypes Economic Impact of Deep Water Drilling Ban Print
Monday, 07 June 2010 04:21

NPR had a segment on Morning Edition which badly misled listeners about the potential economic impact of a temporary ban on deepwater drilling. The piece focused on the impact of oil on the economy of Louisiana and the Gulf region. In doing so, it highlighted the total impact of the oil industry, not the marginal impact of additional drilling.

For example, it told listeners that oil accounts for 16 percent of Louisiana's state GDP compared to 1 percent for fishing and 4 percent for tourism. This is an interesting set of numbers but it has nothing to do with the impact of a ban on new deepwater drilling. No one is proposing that existing wells be shut down. This means that the vast majority of this 16 percent of GDP will not be affected by the ban. (It is also worth noting that the vast majority of this 16 percent accrues to BP and quickly leaves the state.)

The piece does later give an estimate from the state's development department that the bad on drilling could lead to a loss of 20,000 jobs (this presumably includes indirect effects). By comparison, Louisiana has approximately 120,000 construction jobs. If we assume that each construction job indirectly generates 0.5 jobs elsewhere then the ban on drilling would have roughly the same impact as a ten percent decline in construction employment.

 
Long-Term Unemployment: It's the Benefits (in part), Stupid Print
Sunday, 06 June 2010 01:26

There is no doubt that this is the steepest and longest downturn of the post-World War II period. However, the number of the long-term unemployed (more than 6 months) is not a good measure of its severity.

The reason is simple, benefits are available for a much longer period of time than has been the case in prior downturns. In some states benefits are available for as long as 99 weeks. This gives unemployed workers the opportunity to spend more time looking for work than would otherwise be the case. Therefore, they are less likely to take a job that means a large pay cut and/or does not fully utilize their skills. Also, some people who may otherwise drop out of the labor force continue to search for work (and get counted as unemployed) because looking for work is a condition for receiving benefits.

It is important to realize that this does not necessarily mean that extended benefits are raising the unemployment rate. If the long-term unemployed took low-paying jobs they would mostly be replacing other workers. However, the unusually long duration of benefits prevent a direct comparison of the number of long-term unemployed across recessions.

[Addendum: From some of the comments I realize that I may not have been very clear. I think that extended benefits are a good thing. We have a very severe problem of unemployment; the worst since the Great Depression. In this context, it makes sense to give unemployed workers more time to look for new jobs. That increases the probability of finding a job that fully utilizes their skills. (To take an extreme example, it would not only be bad for the worker, but a loss of skills for the economy if a brain surgeon was forced to take a job as a checkout clerk.)

However, if we extend the period of benefits to allow workers to take more time to find an appropriate job, then it should not be surprising that workers take more time to find an appropriate job. The duration of unemployment is no longer a consistent measure of the severity of the unemployment problem. This is just a measurement issue that reporters (and many economists) have been getting wrong.]

 
At Last, We No Longer Have to Worry About Productivity Growth Print
Friday, 04 June 2010 05:30

Many economists had complained about rapid productivity growth as main factor in preventing the economy from generating more jobs. In this context, the downward revision of the first quarter number to 2.8 percent yesterday should have been good news. We know longer need to worry about rapid productivity preventing job growth. The 6.1 percent growth rate from the first quarter of 2009 to the first quarter of 2010 is only slightly faster than the 5.4 percent increase from the third quarter of 2002 to the third quarter of 2003 and the 5.3 percent growth from the first quarter of 1970 to the first quarter of 1971. It is the same as the rate from the first quarter of 2001 to the first quarter of 2002. In short, the rapid rate of productivity growth coming out of the recession should not have been a surprise.

It is also worth noting that better than expected productivity reflects directly on the intergenerational issues that the deficit hawks constantly rise. If productivity grows more rapidly than expected, then future generations will be wealthier on average than our projections show. This suggests that deficits are not having a negative impact on their well-being.

 
Training Doesn't Help Much When There are no Jobs Print
Friday, 04 June 2010 05:12
Good piece in USA Today discussing the usefulness of job training in the middle of a downturn.
 
David Brooks Has Never Heard of the Economics Profession Print
Friday, 04 June 2010 04:27

Probably not the medical profession either. In discussing school reform today he applauded the fact that the Obama administration was making it easier to fire teachers, telling readers: "in every other job in this country, people are measured by whether they produce results." How many economists suffered any career consequences after failing to foresee the largest economic crisis in 70 years? You can't mess up more than Chairman Bernanke and company. Yet, they all still have high-paying jobs -- they probably didn't even miss a scheduled promotion.

The same obviously applies to many of those Wall Street high-rollers who would have sank their companies had it not been for the bailout from the nanny state. (I will refrain from commenting on reporters and columnists.) So, insofar as teachers are not evaluated based on their performance, they are clearly not alone.

It is also worth noting that it is not as easy to measure teacher quality as Brooks and many others seem to believe. Berkeley economist Jesse Rothstein found that "good" 5th grade teachers improved the scores of their students in 4th grade. The issue here is obviously one of selection. Parents who are very involved in their kids education make sure that their kids are taught by a teacher who is considered to be good. This means that part of the explanation for their better student test scores is that they are getting better students.

 

 
Small Business Loans Are Down in a Recession: Why Should We Be Surprised? Print
Thursday, 03 June 2010 16:10

USA Today told readers that, "small businesses usually help drive job creation during recoveries but credit clogs have hurt hiring," in the context of covering a speech by Federal Reserve Board Chair Ben Bernanke. Mr. Bernanke did not actually say that credit clogs are hurting small businesses in his speech, noting the possibility that banks have reduced lending because they see fewer good lending opportunities.

If it is the case that banks have reduced lending because of inadequate capital then we should be seeing two things:

1) Banks that do not have weak capital conditions should be lending aggressively, since there are many good loan opportunities that are not being met by their competitors; and

2) Larger firms, who can raise capital directly on capital markets (e.g. by issuing bonds or commercial paper) should be expanding rapidly to take advantage of opportunities that are closed to their capital constrained competitors.

There is no obvious evidence of either #1 or #2, suggesting that the issue is not a problem of capital constraints by weak banks, but rather a situation where firms weakened by the recession are less creditworthy than they were formerly.

 
Plunge in Mortgage Applications Goes Unnoticed Print
Thursday, 03 June 2010 03:35
In the weeks since the end of the extended first time homebuyers tax credit purchase mortgage applications have fallen sharply. They dropped another 4.1 percent last week reaching their lowest level since April of 1997. This deserved some attention since it implies that home sales are falling sharply. This suggests that the price declines seen in recent months are likely to accelerate in the summer.
 
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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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