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A Bit of Confusion on Consumption Print
Wednesday, 26 October 2011 07:17

I'm not ordinarily one to complain that a person is not an economist, but when one writes on economics, it does help to have some familiarity with the topic. That does not seem to be the case with the NYT column by James Livingston touting the merits of more consumption.

While part of the story sounds very good -- reverse the upward redistribution from wages to profits -- some of the rest does not make sense. Yes, consumption has grown more than investment over the last century. That happens in every country as it develops. When it is poor, there is a real focus on building up the capital stock to get richer, which means that investment will be a very high share of GDP.

In China investment accounts for close to 50 percent of GDP now, compared to around 20 percent in the U.S. However, as China moves from a rapidly developing country into being a wealthy country, its consumption share of income will almost certainly rise, as was the case with the U.S. and other wealthy countries. This doesn't change the fact that it is investment, not consumption, that provides the basis for productivity gains which will make the country wealthier in the future.

Also Livingstone tells us that we should not worry about the large trade deficit because many of the goods we import are made by U.S.-owned companies. I understand how this helps the shareholders in these companies, but I can't see what this does for the rest of us.

The basic accounting identity here is inescapable. If we have a large trade deficit then must have either large budget deficits or negative private saving or some combination of the two. Over the long-run, that is not a pretty picture.

 
Contrary to What the Post Says It's Not Hard to Project the Lost Revenue from Governor Perry's Tax Plan Print
Wednesday, 26 October 2011 05:11

The Washington Post left readers with the impression that Governor Perry's flat tax proposal would give people the option of staying under the current tax code. It favorably cited a Heritage Foundation analyst comment that:

"it will be difficult for analysts to accurately predict what its economic and fiscal impact would be."

Actually, it should not be very difficult to project the economic and fiscal impact of the plan.

If people are given the option of paying $2 for a gallon of gas or $4 we would usually assume that they would opt to pay $2. Undoubtedly there will be some people who would make mistakes under Governor Perry's plan and end up paying more in taxes than necessary, but presumably most people will get it right and the ones who get it wrong are not likely to be off by much.

As the NYT showed, an analyst of the plan by the Tax Policy Center of the Urban Institute and the Brooking Institution showed that the flat tax would imply a substantial tax increase for most low and middle-income households. These people would presumably keep paying tax at their current rate. However, the Perry plan would provide large reductions in taxes for the highest income taxpayers. Undoubtedly these people, all of whom have professional tax preparers, would take advantage of the large tax cut offered under the Perry plan.

It is a very simple exercise to project the revenue from a tax plan that is likely to leave the tax bill of the bottom 80 percent little changed and provide large tax cuts to top 20 percent and especially the top 1 percent. The result is a large fall in revenue and a big increase in the deficit. The Post misled its readers by implying otherwise.

 
Does the NYT Invest in Pets.com? Print
Tuesday, 25 October 2011 04:50

For those young uns out there, Pets.com was the poster child of the craziness of the 90s stock bubble. At the peak of the bubble it had a market valuation in the hundreds of millions of dollars even though it had never made a profit nor any clear way of making a profit.

While most people now recognize the craziness of the stock bubble years, there are some people, apparently including the NYT editorial board, who still do not recognize the craziness of the housing bubble years. Its editorial today calls for stronger measures from the Obama administration in the hope of "restoring home equity," which in turn it tells readers "is also crucial to getting consumers to spend again."

Umm, no it is not crucial to getting consumers to spend again since consumers are already spending at a higher than normal rate. The saving rate is currently around 5 percent compared to a pre-bubble average of more than 8 percent. It continues to be the case that consumption is higher than normal, not lower than normal. This corresponds to a situation in which households are putting little aside for retirement. That is especially dangerous when almost all the serious people in Washington want to cut their Social Security and Medicare benefits.

In the short term, the demand lost from the housing bubble will have to be filled by government deficits. In the longer term we will have to get the dollar down to increase exports. This is what Mr. Arithmetic says and no one has ever won an argument with him.

 
Brooks Is Wrong: The OWS Crew Is Against Redistribution Print
Tuesday, 25 October 2011 04:26

David Brooks told readers that the Occupy Wall Street movement it out of step with the country because it favors redistribution while most of the country opposes it. It is not clear what Brooks thinks he means by this.

The country has been seeing enormous redistribution over the last three decades, but it has all been in an upward direction. For example, the government gave trillions of dollars of below market interest rate loans to the largest banks to save them from collapse. The big banks continue to benefit from a too big to fail subsidy.

It has strengthened patent monopolies and sought to impose them on foreign countries through trade agreements. These monopolies provide the basis for huge drug companies like Pfizer and Merck.

The government has also pursued a policy of one-sided enforcement of labor law. The firing of union organizers and other law-breaking measures directed against workers are given a slap on the wrist, whereas unsanctioned strikes are confronted with the full power of the law, with unions seeing assets seized and officers put in jail.

It would not be surprising if most of the country is against this sort of redistribution since 99 percent (or thereabout) are losers from these government interventions. But this is consistent with a populist stance against the wealthy and their abuse of governmental powers to advance their interests.

 
The Washington Post STILL Has Not Heard About the Housing Bubble Print
Monday, 24 October 2011 04:44

During the run-up of the housing bubble the Washington Post's main and often exclusive source in stories on the housing market was David Lereah, the chief economist for the National Association of Realtors and the author of the 2005 bestseller, Why The Real Estate Boom Will Not Bust and How You Can Profit From It. A front page article in today's newspaper indicates that its understanding of the housing market has not improved much.

Many of the basic facts in the article are wrong. For example, it tells readers that, "a quarter of all homeowners are 'underwater,'" owing more than their homes are worth. In fact, the correct statement is that a quarter (actually 22.5 percent in the Core Logic piece that is linked to in the piece) of mortgage holders are underwater. Since roughly one-third of all homes do not carry a mortgage, this translates into about 16 percent of all homeowners.

The piece also tells readers that:

"Housing prices remain near a crisis low. Millions of people are deeply indebted, owing more than their properties are worth, and many have lost their homes to foreclosure or are likely to do so. Economists increasingly say that, as a result, Americans are too scared to spend money, depriving the economy of its traditional engine of growth."

Actually, rather than being near a crisis low, house prices can be better described as still being about 10 percent above their trend level. If the Post has some reason to believe that the fundamentals in the housing market justify this divergence from a 100-year long trend in nationwide house prices it should have discussed it in this article.

Also, consumption continues to be higher than normal relative to disposable income, not lower, as this quote asserts. The saving rate is currently hovering near 5 percent, compared to a post-war pre-bubble average of more than 8 percent. Consumption is down relative to its bubble peaks, but this is easily explained by the loss of close to $7 trillion in housing bubble wealth and $6 trillion in stock market wealth, not being too scared to spend.

Book2_20820_image001

Source: Bureau of Economic Analysis.

The article also includes the bizarre and unsourced assertion that:

"Behind the scenes, Geithner had grave concerns that if courts could change the terms of mortgage loans after the fact, banks would be less likely to lend, reducing the availability of credit in the financial system."

It is certainly possible that Geithner claims that allowing bankruptcy judges to alter mortgages would reduce lending, but the Post has no way of knowing that he actually believed this. As a practical matter, it is difficult to see why it would have much impact on lending, although it would undoubtedly reduce bank profits.

 
Doesn't NPR Know That the Wage Matters for Workers? Print
Monday, 24 October 2011 04:23

Workers work for pay. Most of the country understands this fact, but apparently the reporters and editors at National Public Radio do not. A Morning Edition segment [sorry, no link yet] on the impact that Alabama's crackdown on illegal immigrants is having on the ability of farms in the state to get workers never once mentioned the wages being offered for this work. 

The piece repeated complaints by farmers that they could not get citizens or green card holders to work in their fields because the work is too hard. The inability to get workers presumably reflects the pay being offered. For example, if the farmers were offering $40 an hour plus health care benefits, then they would likely be able to fund people willing to work in their fields.

Of course offering higher wages would make most of these farms unprofitable, but it is not true that people in the United States are literally unwilling to do farm work. The question is the wage at which they would be willing to work.

 
The NYT Can't Find Anyone to Say Anything Good About Argentina Print
Sunday, 23 October 2011 21:47

That is sort of striking since its President Cristina Kirchner seems headed for re-election with a clear majority of the votes. Argentina has also enjoyed the strongest growth over the last decade of any country in Latin America. Nonetheless all 5 of the NYT's sources in an article discussing the election were critical of Kirchner.

This quote deserves special mention:

"'This election really seemed to defy the normal rules of politics,' said Michael Shifter, the president of the Inter-American Dialogue in Washington. 'But that is what happens when things are going well in the economy and there is a dearth of alternatives.'"

It really should not have been hard to find someone who has positive things to say about President Kirchner. It appears that the NYT is relying on a narrow range of sources who are more in tune with Argentina's creditors than the majority of the Argentine population.

The article at one point comments negatively about the state of Argentina's economy, noting that growth is expected to slow to 4.6 percent next year. This rate would still be almost a full percentage point faster than the average growth rate in Brazil over the last decade. Brazil is described as a positive contrast to Argentina in the article.

 
More NYT Editorializing About the Budget in the News Section Print
Sunday, 23 October 2011 21:38

The NYT discussed Defense Secretary Leon Panetta's responsibilities and told readers that one of the issues on the table is "the financial health of a debt-ridden country." It is not clear how the NYT made the determination that the United States is debt ridden. The financial markets seem to disagree with its assessment since they are willing to lend money to the United States at very low interest rates.

The more obvious economic problem is massive unemployment and the fact that the economy is operating far below its potential and is projected to continue to do so long into the future. If the NYT were listing the economic problems facing the country, unemployment might be the more obvious one to mention, but in any case, the sort of speculation that appears in this article is ordinarily left to opinion pages.

 
Greg Mankiw Gets It Wrong on the Budget Print
Sunday, 23 October 2011 08:48

Mankiw told readers that:

"to maintain current levels of taxation, we will need to substantially reduce spending on the social safety net, including Social Security, Medicare, Medicaid and the new health care program sometimes called Obamacare."

Actually, all we have to do is to fix our private health care system. If per person health care costs in the United States were the same as in any other wealthy country we would be looking at huge budget surpluses, not deficits. However, the physicians, the hospitals, the drug companies and other providers are incredibly powerful interest groups. They try to ensure that their over-payments, relative to other countries, are not even discussed in debates over budget policy.

Mankiw also errors in comparing the U.S. to Greece. Even in the worst case scenario, where financial markets get freaked over the deficit, the comparison would be to Zimbabwe. Unlike Greece, the United States has its own currency. In the event that the financial markets would not buy up U.S. government bonds, the Fed could do so directly.

This raises a risk of inflation, but if it is just a case of financial markets getting irrational jittery, then the United States need not be troubled. Of course for Greece and other countries without their own currency, it is every bit as bad when fears in the financial market have no basis in reality as when they do. There is nothing that the government can do to counteract them.

 
New York Times Editorializes on Budget Policy in Pension Article Print
Sunday, 23 October 2011 08:26

The New York Times used an article on Rhode Island's pension system to denounce "the nation’s profligate ways," which it warns will catch up with us. Newspapers are supposed to leave such editorializing to the opinion pages.

In fact there is good reason to believe that the nation's obsession with frugality is now catching up with us. The country lost close to $1.4 trillion in annual demand due to the collapse of the housing bubble. In the short term this can only be replaced by larger government deficits. However, because politicians in Washington do not want larger deficits, the economy is operating at close to 6 percent below its potential GDP and millions of workers are needlessly unemployed or underemployed. Since there is very limited support for the unemployed in the United States, this situation is a disaster for the millions of people facing it. 

The article also gets some of the facts on state and local pensions wrong. It tells readers:

"By conventional measures, state and local pensions nationwide now face a combined shortfall of about $3 trillion. Officials argue that, by their accounting, the total is far less."

Actually, the conventional measure to impute pension liabilities implies a shortfall of $1 trillion. Many economists are insisting in using a discount rate that implies the larger $3 trillion figure. If state and local governments actually adopted this discount rate and used it to guide policy, then it would mean large tax increases in the present, so that little or no money had to be contributed to pensions in the future. It is difficult to see how this would be good public policy.

The piece then complains that:

"But with pensions, hope often triumphs over experience. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their investments of 8.25 percent; the real number for the last decade is about 2.4 percent."

This statement is incredible because it is precisely because pensions had a low return in the last decade that it is reasonable to assume a higher return in the future. The big issue in pension accounting is stock returns. These will depend on the price to earnings ratio. At the start of the last decade the price to earnings ratio in the stock market was over 30. This implied that returns would be very low over any long period since stocks cannot possibly give their historic average 10 percent return (7 percent real), when the price to earnings ratio is already at such inflated levels. (This paper that I co-authored with Christian Weller provides a discussion of this issue.)

However, now that the market has fallen sharply relative to trend earnings, it is again plausible that stocks will provide 10 percent nominal returns in the decades ahead. In fact, it is almost impossible to describe a scenario in which the market provides a return that is substantially below this level.

 
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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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