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NYT Says Homeownership Advocate Doesn't Realize House Prices Are High Print
Wednesday, 26 February 2014 05:53

The NYT had an article on Bruce Marks, a housing advocate, and his push to extend credit for home buying to moderate income households who are now being excluded because of bad credit ratings. At one point the piece tells readers;

"He [Marks] says low interest rates and housing prices have created a second chance — an opportunity to help lower-income families buy homes, but this time on terms they can afford."

Actually, house prices are not low. While they have not returned to bubble peaks, they are well above trend levels. This means that people buying into the current market have a substantial risk of losing money on a home. This risk will be especially high if interest rates rise in the years ahead, as is almost universally predicted. 

 
For Fred Hiatt, the Point of "Entitlement" Reform Is to Hurt Middle Income and Moderate Income People Print
Tuesday, 25 February 2014 02:32

That's what readers of his column attacking President Obama for failing to cut Medicare and Social Security would conclude. The piece includes several quotes from Obama in 2009 and 2010 about the need to slow the growth in the cost of Social Security, Medicare, and Medicaid. He then complains that Obama has not followed through by pushing for cuts in these programs.

In fact, Obama did actually propose cuts repeatedly for these programs as part of a deal with Republicans that would include more tax revenue. The Republicans have consistently rejected such a deal. However if the point was to reduce the cost growth in these programs, that has happened. In 2009 the Congressional Budget Office projected that the Medicare and Medicaid together would cost 7.0 percent of GDP in 2024. Their most recent projections show these programs costing just 6.2 percent of GDP in 2024 even with the higher Medicaid costs due to the Affordable Care Act. The savings of 0.8 percentage point of GDP would be more than $200 billion in 2024.

If the point was to save money, this would look a pretty big deal. Of course since most of these savings came from lower health care cost growth rather than reduced benefits, then it wouldn't make anyone happy whose goal was to inflict pain.

Hiatt gets a couple of other items wrong in passing. He complains:

"In 2011, Obama cold-shouldered the fiscal commission he himself had appointed; Democrats feared that embracing its recommendations could hurt in 2012."

Actually the commission made no recommendations since no report captured the necessary majority to be adopted by the commission. What is widely referred to as a report of the commission is actually the report of its co-chairs Alan Simpson and Erskine Bowles.

The piece also refers to former Senator Max Baucus as "pro-trade." This is inaccurate. Baucus has been a consistent supporter of trade agreements. This has been true even when the deals involved increased patent and copyright right protections which reduce trade.

 
NYT Continues Its War on Public Sector Pensions Print
Monday, 24 February 2014 08:07

The NYT has devoted considerable print space to the problems of public sector pensions, often seriously exaggerating the size of the problems. It has also often overstated the generosity of the benefits, for example by failing to note that many public sector workers do not get Social Security, which means that their pensions will be their entire retirement income.

Today it went long on the exaggerating problems side of the picture telling readers that:

"The difference, $63 billion, is Nycers’s [New York City's main public employee pension fund] shortfall. That money has to be made up before today’s city workers retire — within 14 years, on average. As a result, New York’s contributions to Nycers are rising every year, squeezing the city budget and making it harder for the city to provide public services."

This is not true. There is no legal requirement that city make up this shortfall over the next 14 years. Also, as the article itself points out, this calculation of liabilities is based on the use of risk-free discount rate. The pension fund is of course free to use whatever discount rate it likes to calculate its liabilities. But if the fund gets the return as would be expected from the mix of assets it holds, it would need roughly $23 billion today to make up its shortfall, just over one third of the amount advertised in the article.

 
Did Political Considerations Affect the Fed's International Bailouts? Print
Monday, 24 February 2014 06:09

The NYT's article on the Fed's decision to enter dollar swap agreements with other central banks at the peak of the financial crisis in 2008 strangely did not ask this question. The piece notes that swap lines of credit had been extended to Mexico, Brazil, South Korea, and Singapore. It also points out that several countries applied for lines of credit but were turned down.

The article asserts that these decisions were made exclusively over concerns about the impact of these countries' problems on the U.S. economy. While this could be true, it is also possible that political considerations played a role. It would have been interesting to know if the State Department played any role in the decision on the countries to which the Fed extended credit. It's strange that this question is not raised.  

 
Robert Samuelson's Arithmetic Challenged Economics Print
Sunday, 23 February 2014 20:55

Yes, it's Monday and Robert Samuelson is badly confused about economics again. Today he complains about the White House's "fairy-tale economics."

Robert Samuelson is upset because the Obama administration has been arguing that it is possible to raise the minimum wage without any job loss. He apparently feels that he can now dismiss this claim as fairy-tale economics because the Congressional Budget Office (CBO) issued a study that put its best guess of the job loss from the administration's proposal at 500,000.

It's worth noting that in its report CBO did not dismiss the possibility of zero job loss as fairy-tale economics. CBO noted the economic research on the topic and commented that the plausible range of impact would include near zero. CBO did not do original research; rather it chose to pick a number for its estimate that was a midpoint of the findings of recent research. (See my colleague John Schmitt's post for a longer discussion.) So the dismissal of a zero estimate of job loss as fairy-tale economics is Samuelson's invention, not a conclusion based on CBO's analysis.

It is also worth doing a little arithmetic to assess the 500,000 figure. As Samuelson points out, CBO projects that the minimum wage hike would affect 16 million people directly and another 8 million through spillover effects. This means that the lost jobs will be roughly equal to 3 percent of the workers directly affected and 2 percent of the total number of workers who see wage hikes.

For the most part, the reduction in employment of 500,000 will not correspond to workers being laid off. More likely it means that workers will not be replaced when they leave and that firms will be slower to hire when they see an increase in demand.

This is important to keep in mind, because we are not talking about 500,000 workers being permanently unemployed. Minimum wage jobs tend to be high turnover jobs. As a practical matter, a loss of 500,000 jobs means that workers will spend more time looking for jobs when they first enter the labor force or change jobs. This means that they can expect to spend roughly 2-3 percent less time working, but when they do work they will get close to 19 percent more per hour. Note this is not "fairy-tale economics," this is Robert Samuelson's economics if he bothered to think through what he was saying.

Read more...

 

 
The Thumb on the Scale in the Winner Take All Economy Print
Sunday, 23 February 2014 09:34

Robert Frank has an interesting discussion in the NYT of the "winner take all" dynamics created by the Internet economy, but he leaves out an important part of the picture. The notion of winner take all is that advances in modern technology allow the best in various areas to become hugely wealthy, while leaving almost everyone else out in the cold. There are reasons for disputing this view in general (see The End of Loser Liberalism: Making Markets Progressive --free download available), but the entertainment industry, the focus of Frank's piece provides excellent turf for framing the issues.

Frank points to evidence that an increasing share of sales of music is going to a relatively small number of big hit performers. He sees this as evidence of the winner take all theory. However there is an important aspect to this story that Frank neglects to mention.

The big winners get to be big winners because the government is prepared to devote substantial resources to copyright enforcement. This is crucial because if everyone could freely produce and distribute the music or movies of the biggest stars, taking full advantage of innovations in technology, they would not be getting rich off of their recorded music and movies.

The internet has made copyright hugely more difficult. The government has responded by passing new laws and increasing penalties. But this was a policy choice, it was not an outcome dictated by technology. The entertainment industry and the big "winners" used their money to influence elected officials and get them to impose laws that would restrain the use of new technology. If the technology was allowed to be used unfettered by government regulation, then we would see more music and movies available to consumers at no cost.

In other words, it is government regulation that makes a winner take all economy in this case, not technology. There are alternative mechanisms for financing creative work (here's mine), but the interest groups that promote strong copyright protection don't want the public to consider them.

It is worth noting that the government does not put the same effort into enforcing all laws. Years ago I did political work that often involved putting posters up in public places. People who disagreed with these posters tore them down quickly. Their actions were a clear violation of the law, but the police were not prepared to devote any resources to enforcing the law in this instance. There was no risk of major fines or imprisonment to individuals who broke this law regardless of how many times they did it.

It would be interesting to see the argument that there is a greater public interest in preventing the circulation of unauthorized copies of Miley Cyrus's latest hit than in protecting freedom of speech. Of course it's obvious where the money is in this debate.

Anyhow, insofar as we have a winner take all economy in the entertainment industry it is because we have laws that protect the winners, not technology. Best of luck to Robert's kids in their new band. 

 

 

 
The Decision to Let Lehman Fail Print
Sunday, 23 February 2014 09:23

Gretchen Morgensen picks up an important point in the Fed transcripts from 2008. The discussion around the decision to allow Lehman to go bankrupt makes it very clear that it was a decision. In other words the Fed did not rescue Lehman because it chose not to.

This is important because the key regulators involved in this decision, Ben Bernanke, Hank Paulson, and Timothy Geithner, have been allowed to rewrite history and claim that they didn't rescue Lehman because they lacked the legal authority to rescue it. This is transparent tripe, which should be evident to any knowledgeable observer. (Who has legal standing to stop a bailout?)

Anyhow, in retrospect the choice not to rescue Lehman in a context where the Fed was unprepared to deal with the consequences certainly was disastrous. We all make mistakes, but this gang of three made a whopper. And reporters have an obligation to make this clear to the public, not to assist in the cover-up.

Btw, on the topic of whopper mistakes, someone sent me this collection of Bernanke clips on the housing bubble.

 
WaPo Tells Liberals That They Have No Political Power: The Case of Social Security Print
Saturday, 22 February 2014 09:39

The WaPo gets infuriated at the thought that anyone who doesn't have lots of money could affect political outcomes in the United States. Hence it was quick to run a piece with the headline:

"Liberals didn't kill Obama's Social Security cuts: Republicans did."

The reference is to President Obama's decision to remove the proposal to reduce the annual cost of living adjustment to Social Security benefits. The proposal would have reduced benefits by roughly 0.3 percentage points annually against current law. This cut is cumulative so that after ten years it implies a cut of roughly 3.0 percent, after twenty years, 6.0 percent, and for someone who lives to collect benefits for thirty years the cut would be 9.0 percent. (Obama's proposal includes some offsets, so the actual cuts would be somewhat less, especially for the oldest elderly.)

The point of the piece is that Obama would have gone with this proposal, and probably still would today, if the Republicans were prepared to make some concessions on revenue. This is the logic of saying that the Republicans killed the plan, not liberals.

However this is just half the picture. The Republicans did not force President Obama to take the proposal out of his budget, liberals did. Because of a massive outpouring of opposition from across the country, Democratic members of Congress, who have to run for re-election, urged President Obama not to include the proposal in his 2015 budget.

Otherwise, this might have been a case where you just leave the Christmas lights out all year. Why bother to take them down? It's of course painful at the Post to acknowledge that progressive groups without big bucks can make a difference in national politics, but it does happen from time to time. 

The piece also tells readers:

"many of his advisers believed that chained CPI [the cut to the annual Social Security cost-of-living adjustment], with protections for poor seniors, was a good policy that used a more accurate measure of inflation."

Actually, the Post doesn't know what President Obama's advisers believed. The Post knows what they said. President Obama's advisers hold their positions because they are thought to be good at spinning reporters. Part of that spin means telling reporters that they really "believe" that President Obama's positions are the best possible policy.

It is possible that President Obama's advisers really do believe that seniors living on $1,300 a month (the average Social Security benefit, which is more than 90 percent of the income for almost 40 percent of retirees) have too much money, but they would say this to Washington Post reporters regardless of what they actually believed. That is a job requirement.

If a Post reporter claims that they know an Obama official well enough to ascertain their true beliefs then they are probably too close to that person to be able to report on them objectively.

 
Release of Fed Transcripts Shows Fed Scary Ignorant in 2008, WaPo Scary Ignorant in 2014 Print
Saturday, 22 February 2014 09:09

It's great to be an economist in a top policymaking position in the United States. Unlike dishwashers, cab drivers, and most other workers, you are not held accountable for the quality of your work. We already knew that, since almost none of the people responsible for allowing the housing bubble to grow large enough to collapse the economy have paid any career price. (Ben Bernanke is praised for avoiding a second Great Depression. Talk about setting the bar low.)

Anyhow, the release of the 2008 transcripts of the Fed's Open Market Committee (FOMC) meetings once again show a group of people that is frighteningly ignorant of the economy. The housing market was already in a full-fledged collapse by the end of 2007 with prices falling at the rate of 1.5 percent a month. That translates into a loss of $300 billion in household wealth every single month. Yet the transcripts show the Fed debating whether the economy would see a recession until well into 2008. (The pace of decline eventually accelerated to 2.0 percent a month.)

In the transcript of an early January phone call, Dave Stockon presented an update of the Fed's forecasts which included this line:

"House prices have come in a touch lower than we had forecast. We have also lowered our projection on the level of house prices about 1 percentage point in this forecast. Taken together, those lower equity prices and the lower house prices take 0.1 off growth in 2008 and 0.2 off GDP growth in 2009."

Yeah, a touch lower, and reducing growth by 0.1 percentage point in 2008. This is pretty amazing stuff. It's almost as though they didn't have access to the data showing that house prices were already plunging.

The other item that is amazing in these transcripts is that no one seems to know about the Census Bureau's data on housing vacancies. Vacancy rates of ownership units were already about 50 percent above normal levels by the end of 2007. The vacancy rate on rental units was about 30 percent above normal levels. What did the Fed folks think this implied for house prices?

Incredibly, the first mention of vacancy rates in the transcripts doesn't come until June. Maybe someone should give the FOMC a short lesson on government data sources. If they had seen the vacancy data they would have even less excuse for being surprised by the plunge in house prices, unless they also need an intro course on supply and demand.

The transcripts tell a story where the FOMC is seeing the economy collapse around it and is largely clueless to what is taking place. In fairness, there was little it could do to prevent the collapse at that point, but it is still hard to believe that people who are so ignorant of the economy are able to get paid for this work.

As far as the Post coverage of the release, the piece tells readers in reference to the September meeting near the peak of the financial crisis:

"Even so, Bernanke thought the Fed had probably done enough, according to newly released transcripts. So he recommended that the central bank leave its key interest rate unchanged — a move the Fed would come to regret."

Really, the Fed came to regret not lowering the federal funds rate in September of 2008? What difference exactly would this have made in the financial panic and the collapsing of the housing bubble? If we had lowered the federal funds rate to zero at that point can anyone think that the subsequent set of events would have played out very differently? That's absurd on its face, but I suppose it would at least mean that the FOMC members were not oblivious to the fact that the economy was sinking all around them.

As it is, these transcripts should make readers furious that the FOMC members were getting big paychecks for their work and will enjoy fat pensions in retirement. Unlike workers in Detroit and Chicago, they did mess up on their job, big-time. Read em and weep

 

Addendum:

 

Since some folks asked, of course I saw the recession in 2008. I had been warning about the bursting of housing bubble causing a recession since 2002. See here, here, and here for a few of my columns from 2008. And the material on the housing bubble is here. Seeing this one coming was easy for folks who understood the economy. Unfortunately, it seems that not understanding the economy was and perhaps still is a job requirement for holding a top policy position.

 
David Brooks Stumbles Over the Work Force in Attacking the Minimum Wage Print
Friday, 21 February 2014 05:51

David Brooks doesn't like the idea of raising the minimum wage. But the good news is that he thinks it's a good idea to increase the Earned Income Tax Credit (EITC), an alternative mechanism for helping low-paid workers.

In criticizing President Obama's proposal for raising the minimum wage, Brooks refers to the Congressional Budget Office's (CBO) projection that it would lead to 500,000 fewer jobs, but doesn't get the story quite right:

"Democrats embrace a raise in the minimum wage that could drive another half-million workers out of the labor market."

Actually CBO projected that the higher minimum wage would lead to 500,000 fewer jobs, not drive 500,000 people out of the labor market. This isn't just nitpicking.

Some folks may recall CBO's analysis of the ACA. This concluded that the ACA would reduce the supply of labor by roughly 2 percent. That was a case where people would be leaving the labor force or reducing their supply of labor. The issue here was that the ACA made it possible to get health insurance outside of employment. This would mean that many near retirees or people in bad health might decide to quit their jobs or work fewer hours as a result. Many parents of young children may also decide to work fewer hours or take time off from work to be with their kids.

Opponents of the ACA jumped on the CBO analysis. Some wrongly claimed that CBO concluded the ACA will kill jobs. More informed critics decried the negative incentives for work created by the ACA. And this is partly true. The ACA provides substantial health care subsidies for low and moderate income workers that are phased out as income rises. This phase out is equivalent to a higher tax rate.

For example, if a $4,000 subsidy is phased out as income rises by $20,000, this is equivalent to a 20 percent marginal tax rate. This provides a disincentive to work. (You get to keep 20 cents less of each dollar you earn.) There is reason for thinking the effect of this disincentive is small, but it nonetheless exists.

Now let's get back to David Brooks support for a higher EITC as an alternative to raising the minimum wage. President Obama wants to raise the minimum wage by $2.85 over three years. This would put another $5,700 in the pockets of a full-time full-year worker.

Suppose that we agreed with Brooks and said this is the wrong way to go, instead we will be clever conservatives and give workers the equivalent increase in income through the EITC. Currently, the EITC peaks at a bit under $5,500 for a single person with two kids. This credit is phased out at a rate of 21 cents on the dollar for income above $18,000. This means that for every $1,000 earned above $18,000, workers will lose $210 of their tax credit. This means that the credit falls to zero at an income level around $44,000.

After being convinced by David Brooks that a higher EITC is the better route to go than raising the minimum wage, we decide to raise the maximum EITC by $5,700 a year. This puts the maximum a bit under $11,200. Now we have a little arithmetic problem. Currently we phase out the EITC over roughly a $26,000 income range (from $18,000 to $44,000). If we phase out a $11,200 credit over the same range, then we would need to take back 42 cents of every additional dollar earned ($420 out of every $1,000). This would be a very large increase in the marginal tax rate faced by moderate income workers, giving them a much larger disincentive to work. Is this what David Brooks and his fellow conservatives want?

Alternatively, we could keep the same rate of phase out, but then we would have people earning almost $70,000 a year getting the EITC. That's a pretty expensive alternative to raising the minimum wage.

Of course we could do a mix of a higher tax rate and a higher peak income level, but that still gives us some serious work disincentives and an expensive EITC. There is no way around this problem. Of course we also have the problem of fraud for which David Brooks' plan would provide considerable incentive. Suppose the government gives you $11,200 if you claim that you earned $12,000 last year. There would be a strong incentive for people who are not working to get a friend or family member to say they paid them $12,000 last year to clean their house or take care of their yard.

Conservatives tend to exaggerate the amount of fraud associated with the EITC, but the level is not zero. If the EITC is doubled then the incentive for fraud is increased proportionately. 

As a practical matter, if we were actually debating a large increase in the EITC it is likely that David Brooks' conservative friends, if not Brooks himself, would be raising these concerns about the disincentives to work and the incentives for fraud. But, as long as the higher EITC is just being thrown out as a reason not to raise the minimum wage, these issues won't get into the debate. But that's the service we provide at Beat the Press. 

 

Typos corrected -- thanks Robert Salzberg.

 

 
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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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