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Low Down Payment Mortgages Have Much Higher Default Rates Print
Saturday, 18 October 2014 08:14

That is a fact that would have been worth mentioning in a Washington Post article on plans by Fannie Mae and Freddie Mac to lower the down payment requirements on the mortgages they purchase. The delinquency rate, which closely follows the default rate, is several times higher for people who put 5 percent or less down on a house than for people who put 20 percent or more down.

Contrary to what some folks seem to believe, getting moderate income people into a home that they subsequently lose to foreclosure or a distressed sale is not an effective way for them to build wealth, even if it does help build the wealth of the banks.

What Percent of Retail Workers are Full-Time? Print
Saturday, 18 October 2014 07:48

News reporting should not be a he said, she said affair when it comes to factual matters. In principle, reporters have the time to determine the truth, readers do not.

For this reason, it was disappointing to read in an otherwise good NYT article on the push for higher wages at Walmart:

"Retail workers ages 25 to 54 who work full time for at least three consecutive months make an average of $38,376 a year, slightly more than full-time workers in nonretail jobs, the group [the National Retail Federation] said."

This was the effort by the retailers to claim that they actually pay good wages. The problem with letting this claim appear with no context is that readers have no idea what percent of the industry's workers are classified as "full-time" and work for more than three months at the same store. The classification of full-time is central here.

The report does shed some additional light on this issue. It tells readers that 23.3 percent of the workers in the industry are between the ages of 16-24. It estimates that 30.5 percent are part-time and 32.2 percent are classified as unstable, meaning that they aren't employed for three consecutive months. While there is substantial overlap in these three categories, it is also important to realize that employees over age 55 are not included in the industry group's $38,376 average annual wage either. In other words, this average is among workers who comprise a minority, and likely a relatively small minority, of industry employees. It would have been helpful if the NYT article had pointed this fact out to readers.

Arthur Brooks Argues We Should be Soft on Rich Criminals in Sharing Economy Print
Saturday, 18 October 2014 06:57

We all know how hard is to get rich these days, so it's understandable that Arthur Brooks wants to give the young men and women making fortunes in the "sharing economy" a hand. (He even dubs it the "helping industry," which apparently is to distinguish it from sectors like health care and education.) Anyhow, the gist of his piece is that companies like Airbnb are actually about helping people -- allowing people with unused rooms to make a bit of extra money, while people from out of town get to find a room at a lower cost than a traditional hotel. He is upset that governments around the country are trying to apply the same regulations to his friends in the helping industry as they do their competition in the hotel industry, taxi industry, or other sectors where the helpers compete.

First, we all understand that the Airbnb billionaires just want to help people (Brooks assures us that getting rich was beside the point), but sometimes the government does get in the way. Let's take a simple example that even conservative types might understand. The Hepatitis C drug Sovaldi is being sold in the United States for $84,000 for a 3-month course of treatment. This high price is due to a government granted patent monopoly. Indian producers can profitably sell generic Sovaldi for $1,000 a treatment.

Suppose I set up a helping industry company that bought up generic Sovaldi in large quantities in India and sold it to patients in the United States for $10,000 a treatment. Brooks would undoubtedly defend Baker's Cheap Drugs Inc., since we are just allowing people to get needed health care at an affordable price. And, we are creating jobs in India for people working in the drug industry. Why would big bad government interfere?

Okay, we all know the story about needing patents to provide an incentive for research (which happens not to be true). But the key point is that there are all sorts of situations in which the government doesn't just let "helpers" go about their business because third parties get hurt in important ways.



The Deflationary Trap: Europe Has Already Fallen Print
Friday, 17 October 2014 06:55

The NYT had an interesting piece about growing opposition to Germany's creationist economics. The piece reports that France and Italy are leading the opposition to German's insistence that austerity is the key to economic growth, in the face of massive amounts of evidence showing that the euro zone needs stimulus to boost growth. 

At one point the piece points to worries over "the prospect of falling into a deflationary trap." It is difficult to see what anyone would be worried about. The euro zone already has an inflation rate that is far too low. The latest data show inflation to be 0.4 percent over the last year, well below its 2.0 percent target, which is itself almost certainly too low to allow for effective monetary policy given the severity of the downturn.

Lower inflation will make matters worse, but nothing happens when the number turns negative. In other words, whatever concerns people have about a future of negative inflation they should already have now about a current inflation rate that is far too low.


More Handouts to the Financial Industry Print
Friday, 17 October 2014 04:38

We all know that the Wall Street types find it hard to get by without a helping hand from the government (like the bailouts), but many people don't realize all the different ways in which the financial industry manages to siphon away income from the productive economy. Floyd Norris has an interesting piece about a lawsuit coming before the Supreme Court in which an employer (Edison International) is being sued by its workers for deliberately picking a 401(k) plan with high administrative costs.

There is a procedural issue which the court must decide about how far back in time plaintiffs can go for bringing a suit. However there is also an important substantive issue. The workers are claiming that the company deliberately chose a higher cost plan, with the fees coming out of workers' accounts, because the fund manager gave Edison a kickback.

There is a considerable amount of money at stake with this issue. Norris puts the gap in costs at roughly one-third of a percentage point. If this were applied to the more $8 trillion currently held in 401(k) type accounts, it would come to more than $25 billion a year. This is effectively money taken away from workers and given to the financial industry. This is a bit more than 30 percent of what the government is projected to spend on food stamps this year.

China is Bigger Than the U.S., but Roger Cohen Thinks Jacking Up Drug Prices Will Restore U.S. Power in Asia Print
Friday, 17 October 2014 04:06

Some of the ideas of elite pundit types are truly amazing. Roger Cohen's NYT column today was about the fact that China's influence in Asia is rising at the expense of the United States. He tells readers:

"A new Chinese assertiveness in the South China Sea and elsewhere is palpable. By contrast, the United States seems less focused on the region since former Secretary of State Hillary Clinton left office."

The reality is that China has a larger economy than the United States. Its economy is already about 4 percent larger (adding in Hong Kong) and in five years it will be more than 25 percent larger and the gap is projected to continue to grow rapidly. Cohen apparently thinks that the personal interests of the secretary of state can overcome these differences in relative size.

Incredibly, among the specific policies that ranks high on his list for restoring U.S. influence in Asia is the Trans-Pacific Partnership (TPP), which Cohen describes as an ambitious free-trade agreement for the region. He blames President Obama for his "underwhelming" commitment to the pact.

In fact the TPP is very far from being a free trade deal. It's mostly about imposing a business friendly regulatory structure on the parties to the agreement. High on the list are a series of measures that would strengthen patent monopolies and related protections, especially in the case of prescription drugs. Of course protectionism is the opposite of free trade. It means higher prices to consumers and slower growth. But apparently to Cohen, forcing consumers throughout the region (and the United States) to pay higher prices for Pfizer's drugs is the key to restoring U.S. influence in Asia.

Debt Is Hitting Its Limits: That Is Why Interest Rates Are Plummeting Print
Thursday, 16 October 2014 21:08

Yes, Robert Samuelson is warning about debt again. Apparently the sharp drop in interest rates around the world leads him to believe that investors are about to lose confidence in the ability of countries to repay their debt.

It's great that we have Samuelson to give us these warnings, otherwise people might think that low interest rates (i.e. high bond prices) meant the markets were telling us that there is not enough debt. After all, high prices usually means demand exceeds supply.

Thankfully Jeff Bezos and the Washington Post give us Robert Samuelson to tell us to ignore textbook economics, don't get any ideas about boosting the economy by building up infrastructure and other public investments.

"Can we avoid a global debt trap and regain faster economic growth rates that foster stability and human well-being? Whatever debt’s virtues as a first response to deep slumps, it has its limits. We cannot promote prosperity simply by piling new debts atop the old. We need to build a stronger economic foundation."

Instead we should just be really worried because Robert Samuelson apparently has no clue what is going on.



It is perhaps worth reminding folks that interest payments in many cases are quite low at present, even though debt might be high. For example, even though Japan has a debt to GDP ratio of close 250 percent, its interest payments are less than 0.8 percent of GDP. In the U.S. interest payments on publicly held debt are a bit over 1.0 percent of GDP, well below the levels hit in the early 1990s. While many people raise the alarm that interest rates might rise and suddenly increase this burden, they ignore the fact that if interest rates rise, the market value of debt falls. In other words, if the interest rate on long-term debt issued by Japan were to jump to 2.0 percent from the current level of around 0.6 percent, the price of its debt would fall. Depending on the exact issue price and maturity, the drop could easily be more than 50 percent. This would go a long way toward making the current debt burdens appear much less dramatic. In short, there isn't much of a scare story here.

Quick Note on Heavy Babies and GDP Accounting Print
Thursday, 16 October 2014 06:52

David Leonhardt and Amanda Cox had an interesting Upshot piece about new research showing that heavier babies do better in school. One implication is that many of the induced births that doctors have performed in recent decades have actually been counterproductive from the standpoint of the health of the child. (Obviously the health of the mother must also be considered.)

This is an interesting finding, although I'll leave it to medical professionals to assess the strength of the evidence here. But it does raise an interesting issue from the standpoint of GDP accounting and measurements of living standards.

Let's assume that this finding is accurate and that many of the c-sections and other methods to hasten child birth have actually been a net negative from the standpoint of the child's health and neutral with respect to the mother's health. All of these procedures get counted in GDP as part of the economy's output. This means that we were counting services that were making us worse off as part of GDP. If we didn't have these procedures, other things equal, our GDP would be lower.

This issue arises in health care all the time for the simple reason that most of us are not in a position to assess the best medical treatment and must rely on the wisdom of our doctors and the medical profession. This differs from something like clothes, where we might think we are the best judges of the clothes that we should wear. (Okay, can the snide comments about my wardrobe.) At the end of the day what we value is our health, not the number of tests, procedures, and drugs we get. 

This is why I have always thought that for purposes like constructing cost-of-living indexes, we are best off just pulling out the money we spend on health care and measuring the price increases of non-health care consumption against the income we have left over after paying for health care expenses. This would treat spending on health care like a tax. If we want to then incorporate changes in our health into our assessment of living standards then we look directly at outcome measures (e.g. life expectancy, morbidity rates, self-rated health conditions), not the volume of health services we are consuming.

It Doesn't Matter That Oil Is Priced in Dollars Print
Thursday, 16 October 2014 04:57

Morning Edition committed one of the seven deadly sins of economic reporting when it told listeners that Europe is hurt and we are helped because oil is priced in dollars and the dollar is rising. (The biggest sin is reporting large budget numbers without any context -- which will result in an unpleasant afterlife for most budget reporters.) It actually doesn't matter that oil is priced in dollars, as some simple arithmetic quickly shows.

Let's imagine that oil is priced in wheat. Assume the price of a barrel of oil is 20 bushels of wheat. That would translate into roughly $130 a barrel. Now suppose the dollar rises in value against the euro by 25 percent, so that instead of a euro being worth $1.35, it is only worth $1.08. If the price of oil is unchanged in wheat and the price of wheat in unchanged in dollar terms, people in the United States will now be able to buy oil for 25 percent fewer dollars than before, or roughly $104 a barrel. This means we have to give up fewer dollars to get a barrel of oil.

However is Europe hurt in this story? Under the assumptions of a constant dollar price of wheat and a constant wheat price of oil, people living in the euro zone would be paying the same number of euros for a barrel of oil as before. (It would be priced at just over 96 euros a barrel in both cases.)

Now suppose we changed everything and said that instead of being priced in wheat oil really is priced in dollars and the dollar price fell from $130 a barrel to $104 a barrel and the dollar rose by 25 percent against the euro. How is this switch from wheat pricing to dollar pricing any different from the standpoint of people living in the euro zone?

If you answered not at all, you get a free tank of gas. (Bring your copy of BTP to your favorite gas station.)

There is a very minor point that the transactions generally (but not always) take place in dollars. This means that for one millisecond it is necessary for euro zone residents and others to get dollars to buy their oil. This trivially increases the demand for dollars. (You only need the dollar for the millisecond when the transaction occurs.) Also, there is no law that requires oil to be sold for dollars. If a Russian oil company feels like contracting for oil with euro zone customers where the payment takes place in euros, there is nothing to stop them and such transactions do sometimes take place.

Long and short, a higher valued dollar means cheaper oil for people living in the United States. It doesn't matter that oil is priced in dollars.

David Leonhardt and the Bubble Bath Scenario Print
Thursday, 16 October 2014 04:25

I have a pretty good track record in warning about bubbles and the damage their collapse will cause. I warned frequently and as loudly as I could about the stock bubble in the late 1990s. I quite explicitly predicted that its collapse would lead to a recession (e.g here and here). (This recession was far more serious than generally recognized -- 4 years with zero net job creation). I also  predicted that the collapse would cause troubles for the pension funds whose projections effectively assumed that the stock bubble would grow ever larger.

I was the earliest and clearest warner of the housing bubble. Also pointing out as early as 2002 that it would likely lead to serious trouble for Fannie and Freddie (that was easy), as well as many banks who would be stuck holding the bag at the time of the bust.

Given my past concern about bubbles, I am quite open to the view expressed by David Leonhardt in his Upshot piece that the stock market is over-valued. Leonhardt is right that price to earnings ratios are somewhat higher than their historic average. (I make comparisons of the current market valuation against average profit shares of GDP -- that gets rid of the impact of the extraordinarily high profit share of recent years and the lows of the downturn.) However the key item left out of Leonhardt's analysis is that interest rates are extraordinary low.

The decision to hold stock depends on what alternatives are available. If someone is considering buying a 10-year Treasury bond they would be looking at a nominal return of just over 2.0 percent and a real return of around 0.5 percent. By comparison, in 2000, when price-to-earnings ratios were around 30 percent higher, the nominal return on 10-year Treasury bonds was around 6.0 percent, for a real return of around 3.5 percent. To most folks those numbers would make bonds look considerably more attractive back in 2000, and therefore make stocks less attractive.

The takeaway for fans of arithmetic everywhere is that stock prices are indeed high. If you are expecting the market to give its historic 7.0 percent real returns, contact me immediately so I can sell you some swamp land in Florida. But if you are expecting a collapse like we saw in 2000-2002 or in the housing market from 2007-2011, you are going to be seriously disappointed.


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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.