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Robert Samuelson Discovers the Secret of Obamacare: President Obama's Big Ego Print
Sunday, 25 March 2012 20:35

Wow, nothing gets by Robert Samuelson. He tells us today that he has uncovered the secret as to why President Obama insisted on pushing for the Affordable Care Act (ACA). It all boils down to his big ego.

At the end of a piece titled "Obama's Ego Trip," Samuelson cites a section of book by Noam Scheiber on the Obama presidency:

"Obama’s advisers tell him he can be known for preventing a second Great Depression. 'That’s not enough for me,' Obama replies."

There it is: President Obama's big ego. Well, perhaps someone should share a little secret with Samuelson: all presidents have big egos. They wouldn't end up with the job otherwise.

Also, perhaps Samuelson missed it, but President Obama campaigned on health care reform. This is a very important political issue to a large portion of his constituency. They would have been very angry, or least disappointed, if he failed to deliver. 

In terms of making the case that it is a bad bill, Samuelson should do a better job of reading his own sources. He dismisses the impact of health insurance on health outcomes telling readers:

"Consider a study of Massachusetts’s universal coverage program, enacted under former governor Mitt Romney, by economists Charles J. Courtemanche of the University of Louisville and Daniela Zapata of the University of North Carolina at Greensboro. It estimated that about 1.4 percent of the state’s adult population moved into the 'very good' or 'excellent' health categories."

Here's part of the abstract from the study:

"Using individual-level data from the Behavioral Risk Factor Surveillance System, we provide evidence that health care reform in Massachusetts led to better overall self-assessed health. An assortment of robustness checks and placebo tests support a causal interpretation of the results. We also document improvements in several determinants of overall health, including physical health, mental health, functional limitations, joint disorders, body mass index, and moderate physical activity. The health effects were strongest among women, minorities, near-elderly adults, and those with incomes low enough to qualify for the law’s subsidies. Finally, we use the reform to instrument for health insurance and estimate a sizable impact of coverage on health. "

That doesn't sound too shabby on its face. Samuelson is unimpressed that only 1.4 percent of the adult population moved into the "very good" or "excellent" health categories following the extension of insurance, but of course the vast majority of the adult population (over 88 percent) was already insured. This implies that close to 15 percent of the people who gained coverage as a result of the reform (coverage is now around 96 percent) saw a marked improvement in their health status.

There have been many other studies done over the years, such as this one on breast cancer and this one on the health of newborns, showing the health benefits of insurance coverage. Samuelson is fighting a losing battle if he is trying to argue that increased coverage rates will not lead to better health outcomes. 

It is also arguable that extending coverage is the less important effect of the ACA. The law also effectively ensures the people have genuine insurance. As it stands now, most people are insured through their job. If a person develops a serious illness that causes them to lose their job (e.g. cancer), they will also lose their insurance. Then they are forced to seek in the individual market.

Because they have a pre-existing condition, insurers will typically charge exorbitant fees that will make insurance unaffordable to all but the wealthiest people. One of the key provisions of the ACA is a ban on charging higher fees for pre-existing conditions, ensuring that people in this situation will be able to purchase affordable coverage.

Next we have Samuelson complaining about the $1.5 trillion cost over ten years. This is supposed to be a big scary number. Let's put in a little context. GDP over this period will be roughly $200 trillion, which means that the tab will be roughly 0.8 percent of GDP.

Furthermore, Samuelson is just flat out wrong when he says that the revenue raised to cover this cost could have been used for other purposes. Much of this projected revenue is specific to health care, as in the fines that large companies will pay for not insuring their workers. In principle we could fine companies for not insuring their workers to pay for a tax cut for rich people or another war, but that might be a hard sell politically.

Samuelson also gets the economics wrong on the burden of this cost. He says that it will increase the cost of labor, making firms less willing to hire. Economists across the political spectrum agree that non-wage compensation costs (like health insurance premiums or penalties) come out of wages. This means that some workers may see lower take-home pay as a result of the ACA, but there should be little impact on employers' willingness to hire.

Samuelson also ignores the cost control measures in the bill. The Republicans in Congress have been yelling about "rationing" and "death panels" based on the ACA's Independent Payment Advisory Board (IPAB), which is supposed to limit increases in the cost of Medicare.

We can't know how effective this and other measures will be in containing costs, but it is worth pointing out that you can't have it both ways. Either the Republicans are off on another planet in claiming that IPAB will limit care or Samuelson is wrong in saying that ACA does nothing to contain costs.

There is one final point worth noting in reference to the quote from Scheiber's book. President Obama cannot honestly take credit for saving the United States from a second Great Depression. The first Great Depression came about because of a decade of inadequate responses to the downturn, not just from mistakes in the initial crisis.

We now know how to get out of a depression, we just have to spend money. Even if we had seen a full-fledged financial collapse in the fall-winter of 2008-2009, this would not have condemned us to a decade of double-digit unemployment.

This point can be seen clearly in the case of Argentina, which did have a full-fledged financial meltdown following its default in December of 2001. It took the country 1.5 years to make up the ground lost in the crisis after which it sustained strong growth until the world economic crisis led to a downturn in 2009.



                                     Source: International Monetary Fund.

Even if we assume that the economic policymakers in the United States are less competent than Argentina's, so that it takes twice as long to recover lost ground, that would imply it would only take 3 years to recover the ground lost in a financial crisis. That is well short of what would be considered a second Great Depression.

A Poor Defense of Ed DeMarco Print
Sunday, 25 March 2012 10:24

Gretchen Morgenson has done a lot of outstanding reporting on the financial industry over the last decade, however today's defense of Ed DeMarco, the head of the Federal Housing Finance Authority falls wide of the mark. DeMarco has drawn considerable heat as of late because of his refusal to allow Fannie Mae and Freddie Mac to do principal reductions to make it easier for underwater homeowners to stay in her home.

Morgenson defends this refusal by saying that DeMarco's refusal is actually protecting taxpayers from providing yet another bailout to the banks. Her argument is that many of these underwater homeowners have second liens on their homes which are held by banks. If Fannie and Freddie do principal reductions on the first lien, then it greatly increases the likelihood that these second liens will be paid off, thereby enriching the banks at the taxpayers' expenses. (If a home goes into foreclosure, the first lien has absolute priority. Not a penny goes to the second lien unless the first lien is paid in full. This means that second loans generally have zero value in a foreclosure.)

There are two problems with this story. The first is that a very large percent of F&F underwater mortgages do not have a second lien. Core Logic estimates that 60 percent of underwater mortgages do not have a second lien. The share is almost certainly higher with F&F loans than with mortgages more generally, since F&F did not get into the worst of the subprime loans where homebuyers put zero down. This means that for the vast majority of underwater mortgages held by F&F there is no issue of subsidizing banks indirectly through a principle write-down, since there is no second loan.

The second issue is that the holder of the first mortgage can negotiate with the holder of the second mortgage to set terms for a principal write-down. It is possible that banks would be obstinate and refuse to make serious concessions. In this case, DeMarco with have a solid reason for refusing to go ahead with write-downs. However he has never indicated publicly that F&F have tried this sort of negotiation and been rebuffed. If this is the case, then DeMarco has a responsibility to explain the problem to the public and Congress. Most likely he has not said anything because he has never attempted to go this route.

Finally, Morgenson offers up a defense of DeMarco's conduct by noting that foreclosure rates are much lower on F&F loans than on the loans held by banks or in private issue mortgage backed securities. While this is undoubtedly true, it should be expected given that the loans issued by F&F were much higher quality than the loans that were placed in private issue mortgage backed securities.

Since F&F stayed away from the worst subprime and Alt-A mortgages they naturally would have lower default and foreclosure rates on their loans. This is not evidence that they have been especially effective in their modifications.

It is worth pointing out that the debate over this issue has become hugely overblown. It would not make a big difference to the overall economy or even the housing market if DeMarco were to allow principal reductions. The biggest effect is that perhaps another 200,000-300,000 homeowners may be able to avoid foreclosure in the next few years. This would be a good thing for these people. However the impact on the housing market and the economy would be negligible.

Ignore Monthly Changes in Housing Data! Print
Saturday, 24 March 2012 14:53

The main thing that careful observers know from watching housing data over the years is that the monthly data should be largely ignored when assessing the housing market. The point here is that random factors have a large impact on monthly sales and price numbers, so that the noise often overwhelms the actual information about the housing market in a single month's release.

To see the point, let's start with existing home sales. The Realtors reported a small drop in February from an upwardly revised January number. This touched off a round of news stories about the weak state of the housing market. (The February sales number was higher than the unrevised number, meaning that it was higher than the level of sales that we had thought actually took place in January prior to the release.)



                            Source: National Association of Realtors.

Note that months where we see big changes in one direction are often followed and/or preceded by a big change in the opposite direction. For example, we could have been alarmed by the 3 percent falloff in sales last July, but then we would have been ecstatic over the 9 percent jump in August, only to be put in the doldrums by the 3 percent drop in September.

There is a similar story with month to month price changes.



                            Source: National Association of Realtors.

These data are even more erratic. The 8 percent one-month rise in prices in March must have seemed really exciting. On the other hand, the nearly 5 percent one-month drop back in January must have terrified people. Of course neither of these movements was likely real. These are just random fluctuations in the data.

The picture is no better with new home sales. Here are the monthly changes over the last year.


                            Source: Census Bureau.

Note the great boom showing sales growth of more than 8 percent last March and almost 4 percent in April. This was followed by four consecutive months of declining sales. In short, we see big monthly movements, but no clear patterns.

The same applies to the price of new homes.


                            Source: Census Bureau.

This one shows a huge 8 percent single month jump in prices last June, which was followed by two consecutive months in which prices fell by more than 4.0 percent. This series is even more erratic than the other three.

There are good reasons for expecting these series to be erratic. Factors such as the weather can play a huge role in the number of homes sold. In this case the monthly data might be telling us more about the state of the weather than the underlying market. While sales data (but not the price data) are seasonally adjusted, a milder than normal winter will have a substantial upward impact on the sales data.

The best rule of thumb is to see the monthly data as part of a longer trend. If a number is qualitatively different than the ones that proceeded it, most likely it is the result of random error, not a qualitative change in the market. This is especially true with the price data, in part because these series (unlike the Case-Shiller data) do not control for the mix of housing. This means that a reported price rise may be entirely due to the mix of houses being sold, not a higher price for each house.


Addendum: I have corrected earlier graphing problems.

WSJ Lets Bernanke Play Fast and Loose in Lecturing About the Fed and the Economy Print
Saturday, 24 March 2012 13:59

The Wall Street Journal let Federal Reserve Board Chairman Ben Bernanke get away with a bit of Three-card Monte in a lecture he gave to George Washington University about the Fed's role in the housing bubble. According to the WSJ Bernanke absolved the Fed of blame for the housing bubble because of its low interest rate policy. He noted that other countries, like the UK, had housing bubbles even though they had more restrictive monetary policy.

This international comparison is very neat in the context of another issue that Bernanke raised in this lecture. The WSJ reported that Bernanke also made a pitch for the importance of central bank independence in reference to Paul Volcker's tenure as Fed chair:

"Volcker’s tough policies successfully drove down inflation, but caused a recession that stirred the ire of construction workers who would mail two-by-four planks of wood with a nail driven in them to the Fed as a symbol of their protest, Bernanke noted. If Volcker had to face re-election, he might not have been able to sustain his policies."

Actually, inflation rates fell sharply everywhere in the world in the early 80s. Not all central banks pursued as restrictive a monetary policy as the Fed. This suggests that the high unemployment caused by Volcker's policies were not necessary for bringing down inflation.

In fact, this is a good argument for a central bank that is more democratically accountable. If Volcker felt as much obligation to protect against excessive unemployment -- which negatively affects large segments of the non-rich population -- as he did to combat inflation, perhaps he would have managed to contain inflation while inflicting less pain.

On the earlier point about the Fed's responsibility for allowing the housing bubble to grow to such dangerous levels, some of us who complained about the policy at the time were not advocating higher interest rates. We advocated first and foremost that the Fed use its enormous bully pulpit to call attention to the bubble and to the fact that people buying homes at bubble-inflated prices stood to lose their lives savings.

These warnings could have been backed up by research by the Fed's huge staff of economists which would have showed that there was an unprecedented run up in house prices with no basis in the fundamentals of the housing market. The Fed could have used the public appearances and congressional testimonies of Greenspan and other Fed officials to bring this evidence to the public's attention. (Instead, Greenspan argued the opposite, claiming that there was no bubble.)

The Fed also has substantial regulatory powers over the financial industry. They could have used this power to crack down on the widespread issuance and securitization of fraudulent mortgages which was evident to anyone paying attention at the time. 

Good and Bad Reasons for Slower Economic Growth Print
Friday, 23 March 2012 07:42

An NYT Economix blognote discussed a new paper by two economists (James Stock and Mark Watson) that purports to give us the bad news that we are likely to see a permanent slowdown in growth. Stock and Watson attribute this slowdown to a slower rate of growth of the labor force.

Before anyone gets too upset about the prospect of slower growth, it is worth reflecting for a moment on the different possible causes of slower growth. There are essentially four:

1) slower productivity growth;

2) higher unemployment or underemployment (involuntary);

3) slower population growth;

4) reduced labor force participation or hours worked.

The first two of these causes of slower growth are unambiguously bad. If productivity growth slows, then we are seeing less improvement in living standard for each hour we work. That is definitely bad news. However, nothing in the Stock and Watson paper suggests that productivity growth has slowed or will anytime soon.

I'll come back to reason 2, but let's look at reason 3 and 4 for a moment. Reason 3 is clearly true. Our population growth is slowing, as people are having fewer kids than they did in the 40s, 50s, and 60s. This means that we will have slower overall growth. However this could be associated with faster per capita growth. Each worker will now have more capital to work with, which could mean that they are more productive. Fewer people also means that there will be less strain on the infrastructure and the environment. In other words, if this is the reason why growth is slowing, there is no obvious cause for concern.

Reason 4 is a similar story but from a slightly different angle. Suppose people choose to retire early, take longer vacations, or have shorter workweeks. All of these practices would lead to slower growth, but it is hard to see anything negative in this picture. If people decide that they would rather work 10 percent less and have 10 percent less income, there is no reason that economists or anyone else should be upset. This also has the same benefits for the infrastructure and environment as the slower population growth noted above.

In short, if growth is expected to slow for reasons 3 and 4, as Stock and Watson argue in their paper, there is no obvious reason for anyone to be concerned. This is certainly not bad news. In fact it is arguable it is good news given the problem of global warming and other environmental concerns.

Finally, we have reason number 2, where growth slows because workers can't get work. This is undeniably bad news, especially in a country like the United States where the support system for the unemployed is minimal. In fact, contrary to Stock and Watson, this is the main reason that growth has slowed since the downturn in 2007. There have been sharp declines in the overall employment to population ratio, but this drop has been concentrated among younger workers. These are not people who we could plausibly believe had opted to drop out of the workforce voluntarily.

The good part of the story is that we know how to restore growth to its former trend in this case: spend more money to create demand. Unfortunately, the politics are such that we are not likely to see this happen anytime soon.

February Existing Home Sales Should Not Have Disappointed Print
Friday, 23 March 2012 07:02

The Post headlined an article on the release of existing homes sales data for February, "housing report disappoints as existing home sales dip in February." It's not clear why anyone would have been disappointed. The 4.59 million annual sales rate reported for February was below the 4.63 million rate now reported for January, but above the 4.57 million rate that had been reported before the revision.

Also, these monthly numbers are highly erratic. The difference between January and February numbers are well within any reasonable margin of error. The same is the case with the monthly price data. The fact that median price for February 2012 was 0.3 percent higher than the median price for February 2011 is virtually meaningless as this can easily be reversed with next month's numbers, and in fact will be unless prices jump by 2 percent.

China Policy: The 99 Percent Versus the 1 Percent Print
Friday, 23 March 2012 05:10

The NYT did a piece on Governor Mitt Romney's pledge to impose tariffs on China to pressure it to lower the value of the dollar relative to the yuan. At one point it noted that many business people are opposed to this position:

"business leaders, while pressing for China to open its markets and protect intellectual property, caution that labeling China a currency manipulator could backfire, harming those efforts."

It would have been worth a paragraph or two expanding on this point. There is a direct conflict in the interests of most workers and many businesses in U.S. policy toward China.

Financial firms like Goldman Sachs and Citigroup have a major interest in getting more access to China's market. Firms with claims to intellectual property like Microsoft and Pfizer have a major interest in getting China to offer increased protection for their copyrights and patents.

By contrast, workers in the United States have a major interest in lowering the value of the dollar against the yuan. Since other countries would likely follow China in allowing their currencies to rise relative to the dollar (this is exactly what happened in 2005, the last time China had a large re-valuation of its currency), the result could be millions of new jobs in manufacturing. This would offer a large number of relatively good-paying jobs for less educated workers, putting upward pressure on the wages of these workers. 

The Obama or Romney administration must decide which goals it will prioritize in its negotiations with China. If it makes more progress in getting access to China's financial markets for Goldman Sachs and Citigroup or increased protection of Microsoft's copyrights then it will make less progress in persuading China to raise the value of its currency.

Whoever is in the White House will have to decide which group's interests are pursued and which group's interests are downplayed. It would have been worth making this conflict more clear to readers.

Housing Starts Fall in February, WAPO Talks About Permits Print
Wednesday, 21 March 2012 07:20

Okay, we should all be happy that the economy seems to be growing more rapidly that it was at this time last year, but can we try to be a little serious about this. The Census Bureau reported that housing starts fell by 1.1 percent in February. That's not a big deal, starts had been trending upward and the monthly numbers are always erratic, but nonetheless a fall in starts is a negative sign.

Apparently, the Post did not want to utter a discouraging word. Its business digest section only discussed the 5.1 percent rise in permits for the month, never mentioning the decline in starts. It also featured a graph showing the rise in permits which was mislabeled as a rise in starts (print edition only).

The Post Asks If the Fed Could Do More on Jobs Print
Wednesday, 21 March 2012 07:15
The piece discusses more aggressive actions that Bernanke could take, such as targeting a higher rate of inflation, a policy he advocated when he was still a professor at Princeton. This is a good article.
The Post Forgot to Mention that the Ryan Plan Would Eliminate the Government Print
Wednesday, 21 March 2012 07:01

The Post probably didn't have room in the piece for such small points, but when it told readers that the Ryan plan:

"calls for spending cuts and tax changes that would put the nation on course to wipe out deficits and balance the budget by 2040."

It would have been reasonable to point out that it gets to this balance by virtually eliminating the non-defense, non-Social Security, and non-health care portions of the budget. According to the Congressional Budget Office's analysis of the Ryan plan (Table 2), all spending on items other than health care and Social Security would be reduced to 4.75 percent of GDP by 2040 and to 3.75 percent of GDP in 2050.

The defense budget is currently over 4.0 percent of GDP and Representative Ryan has indicated that he wants to leave it at this level. That would leave little for the Justice Department, Education Department, Park Service, education, transportation and everything else government does in 2040 and nothing in 2050. That fact would have been worth pointing out in this article.

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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.