CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press

Beat the Press

 facebook_logo  Subscribe by E-mail  

Poor Logic on Missing Mortgages Print
Wednesday, 10 September 2014 04:42

The NYT Magazine had a piece asking whether subprime mortgages are coming back. The gist of the argument is taken from an Urban Institute study arguing that if we had the same lending standards in place as in 2001, there would have been 1.2 million more purchase mortgages issued in 2012. It goes on to tell readers that reduced sales are holding back the housing market and the recovery. All of these claims are questionable.

First, asserting that 2001 is an appropriate base of comparison is rather dubious. House prices were already rising considerably faster than the rate of inflation, breaking with their long-term trend. Furthermore, the number of home sales had increased hugely from the mid-1990s, which were also years of relative prosperity. If the Urban Institute study had used the period 1993-1995 as its base, before the beginning of the bubble, it would have found few or no missing mortgages. It is a rather herioic assumption to pick a year of extraordinarily high home sales and treat this as the reference point for future policy.

The idea that we should expect more sales to be a big trigger for the economy is also dubious. The factor that determines building is house prices. House prices are already more than 20 percent above their trend levels. There is no reason that we should expect prices to go still higher or even that they would necessarily stay as high as they are now. One factor that is likely suppressing construction is the fact that vacancy rates are still above normal levels. It is understandable that builders would be reluctant to build new housing in a context where there are still many vacant units available.

Finally, it is worth noting that it is not clear that many people are being harmed by not being able to get a mortgage. As the piece notes, the benefits of homeownership are often overstated. With prices already at historically high levels, homebuyers have a substantial risk of price declines and little reason to expect that the price of their home will rise by more than the rate of inflation.

Furthermore, there are large transactions costs associated with buying and selling a home, with the combined buying and selling costs equal to roughly 10 percent of the purchase price. This means that people who move within 3-4 years of buying a home will likely lose on the deal. This is an especially important point if the marginal homebuyers are younger people who are likely to have less stable family and employment situations.

The latter point is especially important in a context where much of the elite is demanding that the Fed raise interest rates to slow job growth. If the labor market does not improve much further, then it is likely that many people will find themselves in a situation where they have to move to get a job. That is not a good situation for a homeowner to be in. 


Most People Are Not Doing Well in Today's Economy Print
Tuesday, 09 September 2014 04:41

That's not exactly news, but Neil Irwin does a nice job summarizing the data in the Fed's new Survey of Consumer Finance. The item that many may find surprising is that median wealth was lower in 2013 than it was in 2010 is spite of the boom in the stock market over this period. As Irwin explains, this is due to the fact that most middle income families own little or no stock, even indirectly through mutual funds in retirement accounts.

For people near the middle of the income distribution their wealth is their house. In 2010 house prices were still headed downward. The first-time homebuyers tax credit had temporarily pushed up prices. (The temporary price rise allowed banks and private mortgage pools to have loans paid off through sales or refinancing, almost all of which was done with government guaranteed loans.) After it ended in the spring of 2010, prices resumed their plunge, especially for homes in the bottom segment of the market.

Price began to turn around in 2013, but adjusting for inflation they were still about even with where they were in 2010. In many areas the prices of more moderate priced homes were still well below their 2010 levels. This would explain why wealth for families near the middle of the income distribution would be below its 2010 level. 

Is Microsoft Leading the European Backlash Against U.S. Technological Dominance? Print
Tuesday, 09 September 2014 04:13

The NYT tolds readers that Google is the victim of a European backlash against U.S. technological dominance. In addition to anti-trust and privacy issues being raised with regard to Google, the piece also notes that Apple and Amazon are being investigated for their tax practices, taxi drivers have protested against Uber, and Facebook is being investigated for anti-trust violations. 

It's not clear that any of this amounts to an anti-American backlash. Apple and Amazon constantly face tax issues in the United States as well. Taxi drivers in the United States have protested Uber. And it would not be surprising if both Facebook and Google face anti-trust issues here as well.

But the last two paragraphs go furthest to undermine the European backlash story:

"Then there is Microsoft, Google’s longtime nemesis, which spends three times as much in Europe on lobbying and similar efforts. ICOMP, a Microsoft-backed group, has long targeted Google.

"'Google is clearly in the cross hairs,' said David Wood, a London-based partner at Gibson, Dunn, one of Microsoft’s law firms, and legal counsel at ICOMP. 'A lot of the aura has faded, and the shine has come off, and people don’t think they’re the good guy anymore.'"

Companies often try to use government regulation to hamper their competitors. It is not clear that anything about the actions against Google reflect the "European backlash" promised in the headline as opposed to the sort of opposition that any large company would likely face regardless of the country in which its headquarters are located.

That Fracking Fueled Boom In Manufacturing in Youngstown Isn't Showing Up in the Data Print
Monday, 08 September 2014 15:12

The proponents of fracking have made many big claims about its economic benefits. In addition to lower cost electricity, we are also supposed to get energy independence and a boom in jobs. The NYT picked up this theme with an article that touted an "energy boom" that is lifting the heartland. The piece claims that fracking related jobs have revitalized Ohio's economy with Youngstown being at the center of the action.

The piece tells readers:

"Here in Ohio, in an arc stretching south from Youngstown past Canton and into the rural parts of the state where much of the natural gas is being drawn from shale deep underground, entire sectors like manufacturing, hotels, real estate and even law are being reshaped. A series of recent economic indicators, including factory hiring, shows momentum building nationally in the manufacturing sector."

"New energy production is 'a real game-changer in terms of the U.S. economy,' said Katy George, who leads the global manufacturing practice at McKinsey & Company, the consulting firm. 'It also creates an opportunity for regions of the country to renew themselves.'"

That sounds really impressive. Unfortunately the data do not seem to agree. The Bureau of Labor Statistics shows that manufacturing employment in Youngstown is still down by more than 12 percent from its pre-recession level as shown in the figure below. There is a comparable story with Canton.


                                   Manufacturing Employment in Youngstown

Youngstown jobs

                                  Source: Bureau of Labor Statistics.


While fracking jobs may have helped bring these areas up from the troughs they experienced at the bottom of the downturn, employment in both metropolitan areas is still far below 2007 levels. No one thought either city was booming at that time. In short, the data do not seem consistent with the story told in this article.

The Money Wall Street is Making Off Rhode Island's Pension Funds Is Also an Issue Print
Monday, 08 September 2014 04:58

The NYT gave readers only part of the story in an article on the Democratic primary race for governor of Rhode Island. It notes that state Treasurer Gina M. Raimondo is currently the frontrunner.

It then told readers in reference to Raimondo:

"The 'tough choice' was her overhaul of the state’s pension system in 2011. She marshaled the state’s Democratic political establishment to increase the retirement age, cut benefits and suspend annual cost-of-living adjustments for state employees until the finances of the underfunded system improved. The move was meant to save $4 billion over two decades and slow state property tax increases. ...

"The pension overhaul is now at the center of a primary race for governor that has become one of the most divisive in the country."

Raimondo did not just cut benefits. She also invested a large portion of the state pension fund with hedge funds and private equity companies under terms that were not disclosed to the public. (Raimondo formerly worked with a hedge fund.) The state's major newspaper has sued (unsuccessfully) to force disclosure of this information.

However the issue is not just cuts to the benefits promised public sector workers. There is also a question of whether the state's pension funds are being used to enrich Wall Street.


Would History Have Judged Us Harshly If We Hadn't Invaded Iraq in 2003? Print
Monday, 08 September 2014 04:16

Robert Samuelson apparently believes it would have based on his column today calling for more military spending. There are a few points worth noting about this piece.

First Samuelson compares current spending at 3.4 percent to the post-World War II average of 5.5 percent of GDP. For most of the post-war period we were engaged in a military build-up to counter a rival super-power (the Soviet Union). The average also includes long periods of actual war (Korea, Vietnam, Iraq I and II, and Afghanistan). It should not be surprising that at a time when the country is not nearly as engaged in armed conflicts, and faces no major foe, it would spend less on its military.

Samuelson apparently wants the money for the military to come at least in part from spending on seniors, commenting at the end: "Democrats who will cut almost anything except retirement spending."

The cuts to retirement spending that Samuelson wants are problematic. Social Security taxes are designated for Social Security. Samuelson might not have a problem taxing people for Social Security and then using the money for the military, but the public might have a problem with that idea, as would the people who depend on their votes.

There are substantial potential savings in Medicare, but this is because the United States pays more than twice as much per person for its health care as other wealthy countries. However getting savings would require cutting the incomes of doctors, drug companies, and medical equipment suppliers. These are all very powerful lobbies which Congress is reluctant to challenge. While Samuelson implies that the issue is seniors getting benefits that are too generous, the cost issue to the government is that we pay too much for the same benefits that people get in all wealthy countries.

Does the Average Hiker Spend $4,000 a Year on Equipment and Hiking? Print
Sunday, 07 September 2014 04:21

I'm a big fan of nature and hiking, but that number doesn't sound quite right to me. The Washington Post had an article on the recreation business in which it told readers that the country spends $646 billion a year on outdoor recreation and related spending. This figures comes to a bit more than $2,000 per person. If we assume that half of the public doesn't really do anything that fits the bill, then this means the other half spend $4,000 per person per year on outdoor recreation. That comes to $16,000 per year for a family of four.

Let's see, you can a pretty nice tent for a few hundred dollars, hiking boots can cost $150-$200, a good sleeping bag in the same range. That could get us to $700, but of course you don't buy these things every year. If you assume they last an average of 3-4 years, these items will only get you about $200 per year, less than one twentieth of the way to our $4,000 target.

According to the article, the $646 billion figure came from an industry group. The link does not go to a report that could explain how they got the number, but rather a map showing a state by state breakdown. It's not clear how the industry group came up with its number, but it's virtually certain they included many items that most of us would not consider spending on outdoor recreation. The Post should be a bit more careful in uncritically accepting numbers from industry groups.



Robert Salzberg points me to a link later in the piece that goes to the study itself. The study shows that the bulk of its $646 billion in spending is based on food, entertainment, lodging, and travel related expenses. This presumably means that if someone flies across country to visit family members and also goes to a national park then the study would count the air fare and the money spent on lodging throughout their trip. The study does not describe the methodology in full, but it does give a non-working URL as the location of a technical report.

Economists Who Understand Economics Didn't See the August Jobs Report as an Outlier Print
Saturday, 06 September 2014 07:51

The Washington Post article on the August job report, which showed the economy adding 142,000 jobs in August, told readers:

"Economists, however, were quick to caution that the weak jobs number is an outlier at a time of several other stronger measures of economic activity, including auto sales — which soared in August — and exports. Markets were little-changed on the news and ended the day in positive territory.

'I don’t believe the numbers,' said Tim Hopper, chief economist at TIAA-CREF. 'Not only are they very weak, they just don’t match anything else that’s in the market right now.'"

Actually, the numbers match the market very well. The economy grew at a 1.1 percent annual rate in the first half of the year. Faster growth in the second half of the year might bring the rate for the whole year to 2.0 percent. If we assume that productivity growth is 1.5 percent, this would imply an increase in the demand for labor of 0.5 percent. That translates into 700,000 jobs for the year or roughly 60,000 a month.

Even if we assume productivity growth of just 1.0 percent (this is well below the rate we saw even in the slowdown years from 1973-1995), the implied rate of job creation would just be 1.4 million a year, or 120,000 a month.

The article gives no explanation of why any economist would expect a much faster rate of job growth when the economy is growing so slowly.

The Pent-Up Wage Growth Story: Why Does Janet Yellen Say These Things? Print
Friday, 05 September 2014 09:45

Federal Reserve Board Chair Janet Yellen is a serious scholar of economics. That means that she wants to hear a range of arguments and consider them carefully. Unfortunately we don't live in a political world where such concern with the truth is the norm. 

For this reason it is unfortunate that Yellen speculated in her Jackson Hole speech last month that one reason for weak wage growth could be pent-up real wage declines. The argument is that if we think that firms would have lowered real wages, but could not because they did not want to impose nominal wage cuts, then there should be a number of workers whose real wages are higher than is justified by their productivity.

The implication of this story is that when labor markets tighten, these workers will initially see no nominal increase in wages since it will take some time for their real wages to fall to a level in line with productivity. But then we get a story where we end this pent-up wage decline and then these workers would again see nominal wage growth. This is then presented as a kicker to inflation.

It's reasonable for Yellen to consider such issues, but naturally the inflation hawks are seeing this story as yet another argument for slamming  down brakes on the economy and job growth. Most of us would believe as a fairly simple story that in a tighter labor market there is more upward pressure on wages and therefore somewhat more risk of inflation. But how is this changed by the pent-up wage decline story?

What percent of the workforce do we think can be in this boat, 5 percent, 10 percent, 20 percent? It seems hard to imagine it would be much over 10 percent of the workforce that could conceivably be in this situation, especially when we consider that 4 million workers, roughly 3 percent of the workforce, leave their jobs every month.

But let's say that we have 10 percent of the workforce who have some degree of pent-up wage declines. The issue is what happens when this ends? The first thing we have to remember is that the pent-up declines won't end all at once. Workers would have different degrees of pent-up wage declines.

Let's say that the pent-up declines end over 3 years. This means that in each of those three years, if we start from our 10 percent number, 3.3 percent of the workforce suddenly goes from seing zero nominal wage increases to seeing 2.0 percent pay hikes in order to have their wages keep pace with inflation. And this raises the overall rate of inflation by 0.07 percentage points. Get out the wheelbarrows of money, hyperinflation is just around the corner.

The Mythical Downward Spiral of Deflation Print
Friday, 05 September 2014 05:08

A useful NYT article on the latest moves by the European Central Bank's to try to prop up the euro zone economy included a comment near the end:

"Thursday’s moves signaled that at least one European institution is doing all it can to avert the threat of deflation — the pernicious downward spiral of prices that often leads to high unemployment."

Actually there is no basis for the fears of this sort of downward spiral. As the piece correctly points out, the euro zone economy is already suffering from very low inflation. With many long-term loans contracted with the expectation of much higher rates of inflation, the current near zero rate of inflation is imposing serious burdens on debtors. The low rate of inflation also means a higher real interest rate for firms considering investments for the future.

Crossing zero from low rates of inflation to low rates of deflation doesn't change this story. Having a lower rate of inflation makes matters worse, but there is no particular importance to crossing zero. (At low rates of inflation, the prices of many goods and services are already falling.)

There could be a problem if there was a downward spiral with deflation leading to more unemployment, leading to more deflation, but we have not seen anything like this in a wealthy country since the Great Depression. Even Japan never really saw anything along these lines. It's inflation rate fell to -1.0 percent in 1999, was -0.7 percent in 2000, and peaked at -1.5 percent in 2001. It became positive again in 2004 and remained positive, with the exception of 2005 until the economic crisis in 2009.

There was no tendency for the rate of deflation to continue to get more rapid during this period. In other words, there is zero reason to think that anything qualitatively different happens to an economy if the inflation rate turns negative, except that in a weak economy a lower inflation rate is worse than a higher one.

<< Start < Prev 1 2 3 4 5 6 7 8 9 10 Next > End >>

Page 10 of 397

Support this blog, donate
Combined Federal Campaign #79613

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.