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Robert Samuelson Tells Us We Need a High Stock Market to Rescue the Economy Print
Monday, 14 June 2010 06:44

There is a well-known stock wealth effect. Economists usually estimate that annual consumption increases by 3-4 cents for each additional dollar of stock wealth. This was the basis for the strong growth of the late 90s. The stock bubble created $10 trillion of wealth causing consumption to soar and savings to plummet.

Robert Samuelson notes this stock wealth effect in his column today and tells us that we have keep the stock market happy in order to have a recovery. Actually, he's missed most of the story. Consumption in the last decade was driven by the housing bubble, not the stock market. At its peak in 2007, the stock market had just reached the same nominal level that it had been at 7 years earlier at the peak of the bubble. Since the economy was more than 40 percent larger in 2007 (in nominal dollars) than it had been in 2000, the stock market was not a big factor in driving the extraordinary consumption boom that was in turn driving the economy.

This instead was explained by the housing bubble, that gets only passing mention in Samuelson't piece. The housing wealth effect is usually estimated at 5-7 cents on the dollar. At its peak in 2006, the bubble had created $8 trillion in housing wealth. This translates into $400 to $560 billion in additional consumption each year. If the bubble does not reinflate, this consumption is not coming back. (It's not clear that it would be desirable in any case, baby boomers need to save for retirement.)

By comparison, the wealth that will be generated by modest increases in stock prices will have relatively limited effect on consumption. The market was valued at close to $20 trillion at its peak in 2007. Its current valuation is around $14 trillion. If it were to rise by 10 percent, this would generate another $1.4 trillion in stock wealth, which would translate into $42 billion to $56 billion in annual demand, after a lag of 1-2 years. This will have a very limited impact on the economy, so the idea that we have to keep the stock market happy to sustain the economy has no basis in reality.

Samuelson also somehow has the saving rate having increased to 16 percent following the stock market's crash in 2008-2009. This is his invention, it does not show up in the data. The saving rate peaked at 5.4 percent in the second quarter of 2009. The main reason for the uptick that quarter was the distribution of tax rebates from the stimulus, much of which was not spent right away.

 
Has Anyone Heard of Immigration? Print
Monday, 14 June 2010 04:56

Apparently not at the Washington Post. It ran an article projecting a severe shortage of doctors due to the retirement of large numbers of baby boomers. The article never discussed the possibility of allowing more foreign doctors into the country.

The current rules on foreign doctors are highly protectionist to ensure that doctors can command high salaries. However, if shortages become too severe, the country could easily opt to relax these rules. There is no shortage of smart and ambitious kids in the developing world who would eagerly seize the opportunity to train to U.S. standards and work as doctors in the United States. This flow could easily meet any future demand for doctors in the United States.

It would also be a simple matter to attach a tax to the earnings of these doctors that would be paid to the home country. This tax could be used to train 2-3 doctors for every doctor that practices in the United States, thereby ensuring that the health care in developing countries improves by this arrangement as well.

Remarkably the Post does not discuss the possibility of increased use of foreign physicians even though it is almost fanatical in its support of free trade in other circumstances.

 
Marketplace Pushes Tripe on Social Security Print
Saturday, 12 June 2010 14:53

I often think it's too bad that Social Security isn't a private company. If it were, it could sue Marketplace Radio for libel for this sort of reporting. Does Marketplace's host have any idea what she is talking about when she says: "Social Security is in such a sorry state"? According to the Congressional Budget Office the program can pay all benefits for the next 34 years with no changes whatsoever and even after that can pay more than 75 percent of benefits indefinitely. The program is in much better shape in this respect that it was in the 40s, 50s, 60s, or 70s. So what on earth is this person talking about? Can Marketplace Radio pay all its expenses for the next 34 years?

Marketplace's expert then tells us that Social Security will probably be means-tested. This idea is extremely unpopular among both the public and policy experts, so it would be interesting to know the basis for this assessment. She also recommends raising the retirement age, apparently unaware of the fact that the retirement age has already been raised to 67. She also is apparently unaware of the fact that the vast majority of the huge baby boom cohort has almost nothing saved for retirement and therefore will be almost entirely dependent on Social Security.

 
Consumer Spending Follows Predictable Pattern, Surprising Economists Print
Saturday, 12 June 2010 07:17

It would be nice if the media didn't feel the need to rely almost exclusively on economists who are continually surprised by the economy. The Commerce Department's release of May data on retail spending surprised many economists by its weakness as noted by both the Post and the Times.

Economists who know economics were not surprised. Prior to the recession consumer spending was propelled by the $8 trillion in housing wealth created the bubble. This is the well-known housing wealth effect that economists were supposed to learn in their under-graduate training: annual consumption increases by 5-7 cents for every dollar of housing wealth. The bubble sent consumption soaring and pushed saving rates to record lows.

Now that most of the bubble wealth has disappeared, consumption is returning to more normal levels. Even now the savings rate , at around 4.0 percent, is well below its levels before the stock and housing bubbles, which averaged more than 8.0 percent. In fact, with most of the huge baby boom cohort in its 50s, with very little wealth accumulated for retirement, the demographics should be heavily tilted towards saving. This is why the small subgroup of economists who know economics are asking why consumption is so high, rather than so low.

Reporters should recognize that the economics profession doesn't have the same sort of internal controls as other occupations, like custodians or retail clerks, Therefore many economists are not good sources for information about the economy.

 
The Post Still Takes the Realtors at Face Value Print
Friday, 11 June 2010 07:24

The Washington Post is famous for relying on David Lereah, the chief economist for the National Association of Realtors (NAR) and the author of Why the Housing Boom Will Not Bust and How You can Profit from It, as its main source for information on the housing market during the bubble. It apparently still has not learned that the NAR is not a neutral source of information on the housing market.

It printed without question an assertion from Lawrence Yun, Mr. Lereah's successor, that as many 180,000 people who qualify for the first-time homebuyers credit (which also applied to some existing owners), may have signed a contract by April 30th (meeting one deadline), but be unable to close by June 30th, a second requirement for the credit.

Let's look at this one. The number of existing homes sold in April was about 470,000. Since it generally takes 6-8 weeks between contracts and closings, this implies there were about 470,000 homes contracted in February. The pending sales index rose by about 13.5 percent between February and April, which means that there were about 540,000 existing homes placed under contract in April. The Commerce Department reports that there were 48,000 new homes put under contract April for a total of 590,000 homes.

Many of these homes would not qualify for the credit either because the buyer previously owned a home (but not long enough to qualify for the move-up credit) or due to the income caps. If we assume that 75 percent of the homes contracted in April qualify for the credit, this would mean that roughly 440,000 people signed contracts in April who qualify for the credit.

Mr. Yun's claim that 180,000 people who signed contracts before the deadline may not be able to close by June 30th would mean that more than 40 percent of these buyers are in this situation. While there was somewhat of a surge in buying in April, it did not approach the levels reached at the peak of the bubble in 2005-2006. It is therefore difficult to believe that it could have created too much of a backlog of paperwork. Furthermore, the mortgage applications index indicates that sales plummeted after the end of the month, so there would be few new sales for mortgage processors to deal with.

In short, there is little reason to believe that the vast majority of sales qualifying for the credit could not be completed within two months of the contract date. (Remember also, sales were spread over the month. Someone who signed on April 15th has more almost 11 weeks to meet the deadline.) Mr. Yun's estimate likely exaggerates the number of people in this situation by an order of magnitude. The Post should learn that people who work for trade associations are not good sources for unbiased information.

 
David Brooks and the Power of Magical Thinking at the NYT Print
Friday, 11 June 2010 04:32

David Brooks doesn't like the stimulus, as readers of his columns know. Today he engages in a bit of magical thinking in putting out his case for deficit reduction.

His first invention is telling us: "deficit spending in the middle of a debt crisis has different psychological effects than deficit spending at other times." This is very interesting, what "debt crisis" is Brooks referring to? We can point to a debt crisis in Greece, and arguably Portugal and Spain, but it is not clear what that has to do with the argument for stimulus in the United States. There were debt crises in Latin America in the 80s, no one ever raised these in the context of the Reagan era budget deficits.

In the real world we would look to things like the ratio of debt to GDP in the United States (@60 percent) and compare it to the ratios in other countries and to the U.S. at other points in time. There are several countries with debt to GDP ratios of far more than 100 percent who are able to borrow money with no difficulty. For example, Japan has a debt to GDP ratio of more than 110 percent yet it pays less than 1.5 percent interest on its long-term debt. Right after World War II the debt to GDP ratio in the United States was also over 110 percent, yet interest rates were low and the economy had decades of solid growth.

The next thing we would do in the real world is look at the interest rates that the United States is currently paying. At present the interest rate on 10-year Treasury bonds is about 3.2 percent, near a post-World War II low. In short, the debt crisis is magic -- an invention of David Brooks -- not something that exists in the world.

Read more...

 

 
How Could BP Be So Far Off? Print
Friday, 11 June 2010 04:28

For more than a month BP was telling the world that the rate of leakage from its well was just 5,000 barrels a day. It now appears that the size of the leak is actually an order of magnitude greater. How could BP be so far off the mark? Did they really not have a clue? (What do people get paid for at this company?) Or, where they deliberately not telling the truth?

And the question that we ask here at BP, why aren't the media asking this obvious question?

 
Is It Politically "Pragmatic" to Protect the Big Banks? Print
Thursday, 10 June 2010 05:19
That's a question that NPR listeners might ask after being told that the differences between organized labor and President Obama were due to the President's political pragmatism. Many of the differences stem from President Obama's willingness to serve the interests of powerful business groups such as the pharmaceutical industry, the insurance industry, and the big banks. President Obama's positions may be viewed as politically "pragmatic" in that these are very powerful interests who can badly hurt politicians who cross them, but they are not politically pragmatic in terms of being responses to public sentiment. It would have been useful if this report had made that distinction.
 
The Post Tells Readers That Small Banks Have More Power Than Big Banks Print
Thursday, 10 June 2010 04:36

It's great that the Post is able to find the truth in such matters. It told readers:

"For all of Wall Street's money and power, it has been a different army of lobbyists that has proven most effective over the past year in shaping the financial overhaul legislation on Capitol Hill. Again and again, big banks have been outpaced by small-town interests, proving that even when it comes to overhauling financial regulation, politics really is local."

Let's see, two years ago the big banks were rescued from bankruptcy by the helping hand of Big Government. Today, they are again making record profits and awarding record bonuses to top executives. Congress never seriously considered breaking them up and taking away the implicit government security blanket of "too big to fail," a subsidy that could be as much as $36 billion a year. It also is unlikely to impose the sort of Glass-Steagall separations that would prevent the big banks from speculating with taxpayer insured dollars.

Some people might think that this outcome suggests that the big banks are calling the shots. Thankfully we have the Post to tell us otherwise.

 
Correcting David Leonhardt on SS is Outsourced to Greg Anrig at the Century Foundation Print
Wednesday, 09 June 2010 11:23
Read it here.
 
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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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