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Robert Samuelson Still Hasn't Heard About the Housing Bubble, #24,201 Print
Monday, 27 January 2014 05:50

The story of the housing bubble and the impact of its bursting is pretty damn simple. If we go back to the bubble years, 2002-2007, the housing market was driving the economy. It was doing this both directly as construction spending peaked at close to 6.5 percent of GDP, two percentage points above its average over the prior two decades. It also drove consumption as people spent based on the equity in their home created by the bubble. The savings rate fell to almost zero based on this housing wealth effect.

When the bubble burst, we had nothing to replace the lost demand. Housing construction fell to well below normal levels in response to the huge overbuilding of the bubble years. At the trough construction was down by more than 4.0 percentage points of GDP or $660 billion a year in today's economy. Consumption also fell as the home equity that was driving it disappeared. If we assume a housing wealth effect of 5-7 percent (i.e. a dollar of housing wealth increases annual consumption by 5-7 cents) then the loss of $8 trillion in housing wealth would correspond to a reduction in annual consumption of between $400 billion and $560 billion. Taken together, the loss of construction and consumption spending imply a loss in annual demand of more than $1 trillion.

That's the basic story, unfortunately it is far too simple for most analysts to understand. Hence we have Robert Samuelson bemoaning the fact that the Fed wasn't able to instill the confidence to get businesses to invest and consumers to spend. The problem with the Samuelson story is that its basic facts are wrong.

Non-residential investment is almost back to its pre-recession share of GDP. Given the weak demand in the economy, this is very impressive. It certainly doesn't give any evidence of a lack of confidence. And consumers are spending. The savings rate is now below 5.0 percent of GDP. This compares to a pre-stock and housing bubble average of more than 10.0 percent of GDP. The only time that the saving rate has been lower has been at the peaks of the stock and housing bubbles. In short, Samuelson is looking for an explanation for weaknesses in spending that do not exist.

The need for additional demand stems primarily from the trade deficit. This creates a gap in demand of roughly 3.0 percent of GDP, which would be closer to 4.0 percent of GDP if we were at full employment. For some reason, Samuelson doesn't discuss this issue, perhaps because he doesn't have access to the data.

(Reports are that Ezra Klein left the Post because it's so hard to get government data there.)

Funny Numbers on Housing Print
Sunday, 26 January 2014 09:04

One of the reasons that the housing bubble caught so many people by surprise was that the media relied largely on people who had an interest in pushing housing as their sources in reporting. This still seems to be the case today as indicated by a NYT piece on the housing market.

At one point the piece cites economist Mark Zandi, telling readers:

"Tighter lending standards are shutting out close to 12.5 million consumers who would qualify in normal times."

It's difficult to attach any meaning to this statement. We currently have 75 million home owning households and 40 million renting households. Is Zandi saying that among the 40 million renting households we have 12.5 million people who would in other times qualify for mortgages but do not today? Many renters do now qualify for a mortgage. If we say that a quarter of renters could now buy a home if they wanted, then Zandi's claim would be that 12.5 million of the 30 million remaining renters (42 percent) would in normal times be able to get mortgages but are unable to do so because of tight credit conditions today. That one is a bit hard to believe. (It's possible that the number includes people who can't refinance because they have little or no equity in their home, but that is a very different issue.)

In the same vein, the piece tells readers:

"Mortgages are roughly seven times harder to get than they were five years ago, according to the Mortgage Bankers Association’s credit availability index, and they show few signs of getting easier."

The seven times harder refers to an index that the Mortgage Bankers Association constructed that is at one seventh of its value five years ago. It doesn't mean that a person has one seventh the chance of getting a mortgage.

Incredibly this piece never mentions the role of the Federal Housing Authority (FHA). While the FHA virtually disappeared as a factor in the housing market at the peak of the housing boom, because it did not relax its standards, its role hugely expanded after the crash. When the housing market was bottoming out in 2009 and 2010 it guaranteed more than 20 percent of new mortgages. It still insures close to 15 percent. Many people who would not meet the standards for a Fannie Mae or Freddie Mac mortgages can get one insured by the FHA.


                                 Source: Business Insider/HUD.

Steven Rattner Has Another Confused Piece About the Economy in the NYT Print
Saturday, 25 January 2014 22:51

Steven Rattner took up large chunks of the NYT opinion section to express confused thoughts on manufacturing. Rattner sorts of meanders everywhere and back. The government should help manufacturing, but not like Solyndra and Fisker. Right, we don't want help the losers, we just want to help all the companies that got loans and were successful. Does Rattner want to tell us how we would determine in advance which ones those will be?

We want better education. Sure, that's great, any ideas on how we should do that?

It's hardly worth going through all the silliness in Rattner's piece, rather I will just mention the incredible bottom line. Rattner never once mentions the value of the dollar. This happens to be huge. If Rattner has access to government data he would know that manufacturing employment first began to fall in the late 1990s, even as the economy was booming, after the dollar soared due to the botched bailout from the East Asian financial crisis. The run-up in the dollar had the equivalent effect of placing a 30 percent tariff on our exports and giving a 30 percent subsidy for imports. Under these circumstances, it is hardly surprising that manufacturing employment fell and the trade deficit soared.

Rattner's confusion about trade and the value of the dollar extends to his endorsement of new "trade" deals. Of course agreements like the Trans-Pacific Partnership have little to do with trade barriers, they are about imposing corporate friendly regulations on the U.S. and our trading partners.

Among the top priority for U.S. negotiators is increasing the strength of patent protection for prescription drugs. Insofar as they succeed it will mean that foreigners will have to pay more money to Pfizer and Merck, which means that they will have less money to buy U.S. manufactured goods. That is hurting, not helping U.S. manufacturing . That one should be simple enough even for Steven Rattner to understand.  


NPR Discovers That Obamacare Needs Healthy People, It Doesn't Matter If They Are Young Print
Friday, 24 January 2014 20:51

All Things Considered ran a piece making the obvious point, it doesn't matter for the finances of the health insurance exchanges whether or not young people sign up. What matters is that healthy people sign up. Some of us have been making this point for a while, but it's great to see that major national news outlets are capable of learning.

Norwegian Researcher Shows Election of Republican Governor in North Carolina Sends Employment Plummeting Print
Friday, 24 January 2014 17:26

Brad Plummer calls our attention to a study by an economist at the University of Oslo showing that employment in North Carolina plummeted immediately following the election of Republican Governor Pat McCrory. According to the study, whose lead author is University of Oslo Professor Marcus Hagedorn, employment fell by 295,000 or 7.0 percent in the three months from November, 2012 to February, 2013. This plunge in employment was associated with a 5.3 percentage point drop in the employment to population ratio and a 6.3 percentage point decline in the labor force participation rate.

This falloff in employment is far sharper than even the worst period following the collapse of Lehman in 2008. In the worst three month period following the collapse the employment population ratio fell by just 1.1 percentage point, just over one-fifth of the drop seen following the election of Governor McCrory.

The plunge in North Carolina's employment is especially striking since it came at time when the national economy was adding jobs at a respectable rate keeping the employment to population ratio nearly constant. Clearly businesses in North Carolina responded negatively to their new governor.

Actually, these data are directly taken from the Hagedorn paper (Table 1), but this is not a point that he makes in the paper. Instead, the paper claims that there was a sharp uptick in employment in the period since severe cuts in unemployment insurance benefit duration and eligibility were put in place in July of last year. While the data, which the authors have constructed from their analysis of the Current Population Survey, does show a sharp turnaround (which actually begins in February), it also shows this striking falloff in employment following the election.

job loss-sc 17306 image002

                                        Source: Bureau of Labor Statistics and Hagedorn, 2014.


In reality, this sharp falloff in employment almost certainly did not happen. This is horrific depression type stuff. Unless North Carolina was hit by some devastating epidemic, war, or climate disaster (the data are seasonally adjusted), employment could not have fallen as indicated in the data shown in the paper. Conversely, this also means that employment almost certainly did not rise as shown in the data. In other words, the data series in the paper is being moved by errors in measurement, not anything real in the economy.

The paper's author obviously wants to argue that cutting unemployment benefits is a good thing for job creation and economic growth. His data are far too flimsy to make the case, which more reliable data clearly do not support. But if we want to treat the Hagedorn data as being authoritative then we can say that McCrory's election was the worst thing to hit North Carolina since General Sherman's army.


Note: Chart added and label corrected.

The Myth of the German Boom Persists in Roger Cohen's Columns Print
Friday, 24 January 2014 07:59

The mythical German economic boom, along with Santa Claus and the Loch Ness Monster, made an appearance in Roger Cohen's NYT column this morning. (Actually, Santa is still recovering from his busy Christmas and Nessie is hiding, but the German boom is there, really.) Cohen tells readers that Germany did the right thing when its Social Democratic government weakened its welfare state. He now is pleased that France's Socialist President Francois Hollande is about to follow suit.

"The German left partially dismantled the welfare state built by the German left. Unemployment fell, the economy boomed. Germany today is Germany and France is France."

Let's see, Germany boomed and France is France. Let's check the score on that one. Here's growth from 2002 to 2013 in the two countries. [I have corrected this to show more recent data, thanks Mark.]


Germany shows a hair more growth through the summer of 2013, but is a cumulative difference of 2.4 percentage points of growth over 11 years (0.2 percentage points a year) the difference between a booming economy and France? This is not trivial, but I'm not sure it is exactly the difference between a booming economy and a stagnant one. (The difference is somewhat larger in per capita terms. Germany's population is shrinking slowly while France's is growing. Some folks consider the latter a big positive, although I'm not in that camp. I have nothing against French people, but I don't see how they are doing the world a service by producing more of them.) 

While the difference in growth rates since Germany's weakening of its welfare state may not justify Cohen's celebration of a booming German economy, there is a notable difference in labor market outcomes. In the most recent data Germany has an unemployment rate of 5.2 percent while France has an unemployment rate of 10.8 percent.

This gap cannot be explained by the differences in growth rates in the two countries. Rather it stems from Germany's aggressive use of work sharing and other policies designed to keep workers on the payroll even if it means a reduction in work hours. If Hollande wanted to copy a policy from Germany he might have looked to its success with work sharing. That policy has been far more successful in lowering unemployment than cuts in the welfare state have been in promoting growth.


Note: In response to comments, France is red, Germany is blue.


The Other World Of The Obamacare Opponents Print
Friday, 24 January 2014 06:38

For all its many flaws Obamacare will prove to be a great thing for the simple reason that it will guarantee most of the population affordable health care insurance. The key group here is not the uninsured, many of whom will be able to get insurance as a result of the law, but rather the bulk of the under age 65 population whose insurance depends on their job. For the first time, these people will be in a situation where if they lose their job, they will still be able to get insurance they can afford. (Yes, I know that not everyone will find the insurance available through the exchanges affordable, hence the use of the word "most.")

Anyhow, it is fascinating to see the continuing vitriole of the right against Obamacare, which is bearing ever less relationship to reality. We have heard endless talk about how Obamacare was creating a "part-time nation" as employers reduced work hours to get under the 30-hour cutoff for employer sanctions under the ACA. This one suffers from the problem that there were fewer people reported as working part-time at the end of 2013 than at the end of 2012. (Some of us are fans of voluntary part-time employment.)

Ed Rogers, writing in the Washington Post, told readers that the number of uninsured was rising because Target had stopped offering insurance to part-time workers. (Apart from the limited impact of the insurance status of Target's part-time employees on national insurance rates, it is possible that Target stopped offering part-timers the option to buy into their insurance because few were taking it, given the expansion of Medicaid and the subsidies in the exchanges under the ACA.)

Wilson then linked to a "smart piece" by Megan McArdle which touted the imminent demise of Obamacare. Among the troubles of Obamacare cited by McArdle is that many of the people now signing up for Medicaid were already eligible before the ACA. This is an interesting claim, but so what if it is true? They previously had not been covered, now they are. And the problem is?

Another of the highlights is that the $2,500 in savings for a typical family has not materialized. Actually slower growth in health care costs have reduced spending by more than 10 percent compared to what was projected in 2008. That would translate into savings in the ballpark of $2,500 for a family of four. Clearly much of the slower cost growth was not due to the ACA, but does anyone doubt that if cost growth had accelerated it would be blamed on the ACA?

Anyhow, as the exchanges and Medicaid expansion become more a part of the health care framework, the ACA is going to gain increased acceptance even by Republicans, just as Medicare did. At some point, clever Republican politicians will recognize this fact and adjust their message to stay in line with their base. Meanwhile, the dead enders will get ever further removed from reality as they continue to push for the repeal of Obamacare.

The WSJ Says the Elderly Are Rich But We Didn't Know It (see correction) Print
Thursday, 23 January 2014 21:04

Sylvester Scheiber and Andrew Biggs have good news for us in a Wall Street Journal column, apparently the elderly are much better off than we realized.  Scheiber, a pension consultant and former chairman of the Social Security Advisory Board, and Biggs, an economist at the American Enterprise Institute and former Deputy Commissioner of the Social Security Administration, tell readers that the standard numbers on income for the elderly are way off.

The most commonly used measures of income are from the Census Bureau's Current Population Survey CPS). Scheiber and Biggs say that this survey misses a large portion of the income of retirees. For example, they tell readers:

"For 2008, the CPS reported $5.6 billion in individual IRA income. Retirees themselves reported $111 billion in IRA income to the Internal Revenue Service. The CPS suggests that in 2008 households receiving Social Security benefits collected $222 billion in pensions or annuity income. But federal tax filings for 2008 show that these same households received $457 billion of pension or annuity income.

"In combined terms, the Current Population Survey that ostensibly documents how poorly pensions and individual retirement plans provide retirement income ignores at least 60% of the income being delivered to retirees. Even that is not the whole story—because tax filings do not include distributions from Roth plans, since those distributions are not taxable."

Scheiber and Biggs go on to complain about the use of the CPS to assess retiree income and suggest alternative sources which they say would be more accurate.

This is an interesting argument. It is certainly newsworthy when someone finds major flaws in the most widely used survey for measuring income. However before we join Scheiber and Biggs in demanding that the Social Security Administration and other official bodies discard the data from the CPS, we may want to think this one over a bit.

There is one major problem with the Scheiber-Biggs story: the CPS is not the only data set that gives us these sorts of numbers about the income of the elderly. The Census Bureau has a totally separate survey, the Survey on Income and Program Participation (SIPP) that yields largely similar numbers to the CPS.



Did We Need a Landmark Study to Tell Us Mobility Didn't Decrease for People Entering the Labor Market Between 1990 and 2007? Print
Thursday, 23 January 2014 07:46

The Washington Post gave front page coverage to some serious non-news when it highlighted a "landmark" study showing no substantial changes in mobility for children born in the early 1990s relative to children born in the early 1970s. While this findings is presented as surprising to both people who expected an increase or decrease in mobility, it really would have been surprising if the study had found otherwise.

The big shift in the income distribution against workers at the bottom occurred in the 1980s before the oldest people in this study entered the labor force. The upward redistribution in the period between when the oldest and youngest people in this study entered the labor force would have been primarily to the one percent. It would have been very surprising in a context where they are not big changes in the income distribution among the bottom four quintiles that there would be substantial changes in mobility.

It is probably useful that these researchers confirmed what most observers of the economy already believed, but it doesn't seem like front page news.

1.5 Million Fracking Jobs? Is Legalized Marijuana Affecting the NYT Print
Thursday, 23 January 2014 06:28

That's what readers must be asking after seeing this piece discussing the prospects for fracking in Australia. The piece tell readers:

"Whereas about 1.5 million fracking jobs have taken place in the United States, only 2,500 have occurred in Australia, according to the Victoria report."

It's not clear where the NYT got the 1.5 million jobs figure, but it's a safe bet that it is not from the Bureau of Labor Statistics (BLS). The December, 2013 jobs figure for oil and gas extraction 48,400 higher than the December 2007 number, before the impact of both fracking and the recession. The figure for mining and support activities is up by 98,400. If we assume that this is all due to fracking then the total increase in employment is 146,800, less than one-tenth of the NYT's number.

While there are undoubtedly some secondary effects from respending by workers in this sector and lower gas prices, if these are included then it would also be necessary to count the loss of jobs in the coal industry, clean energy and conservation sectors. There is no plausible story that could get from number of jobs in the sector reported by to the NYT's 1.5 million.

It also would have been useful if this piece was more specific about the environmental issues raised in Australia. In the United States, firms engaged in fracking have a special exemption from the Safe Water Drinking Act which lets them keep secret the chemicals used in fracking. The exemption was justified on the grounds that the mix of chemicals used is an industrial secret. This makes it difficult to determine if they have polluted groundwater. It would be worth knowing if the same issue has come in Australia. 



I have been informed that "fracking jobs" refers to sites that have been fracked, not people employed. My guess is that a small fraction of NYT readers would have known this. As a result, the statement may well be true, but likely would have misled the vast majority of the people who read it.

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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.