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Houses Can Be Rented Print
Saturday, 05 November 2011 12:29

I hate to take issue with someone making an argument that I essentially agree with, but Joe Nocera's case for principal reduction does have a major flaw. The gist of Nocera's argument is that people are losing their homes and that because of tighter lending standards, new buyers will not be able to replace them. He argues that this will lead to massive oversupply and therefore further downward pressure on prices.

Okay, boys and girls, you have 3 minutes to figure out what's wrong with this picture.

Time up? Okay, can you say "rent?" You see, if it really proves to be the case that we get the promised glut of ownership units then something magical happens to them. They become rental units. In the story described here we should see rents rising sharply relative to sales price since so many more families are now restricted to the rental market.

And, if rents are rising and people can't sell their homes, then they rent them out: horrible problem solved. (Those who think this doesn't happen should look at the data. Almost one third of rental units are already single family homes.)

So banks should be persuaded and pressured to do principal reductions. They should also be persuaded and pressured to allow people to stay in their homes as renters following foreclosures. Nocera is right on the policy, but he's stretching a bit in making the argument.

 
Bill Clinton, the Person Who Set the Economy on Its Bubble Driven Path, Has Economic Advice for the Country Print
Saturday, 05 November 2011 08:02

The Post reports on a new book by President Clinton which offers economic advice to the country. While the book notes in passing that Clinton's policies contributed to the economic crisis by deregulating Wall Street, it failed to point out that Clinton's policies were actually central to the disaster the economy is now facing.

Clinton promoted both the growth of the stock bubble and the over-valuation of the dollar. The latter came about when his administration organized the "saving" of East Asia following its financial crisis in 1997. The harsh terms of the bailout required the countries of the region to run huge trade surpluses in order to meet their payments. This meant raising the value of the dollar against their own currencies.

Other developing countries wanted to avoid ever being in this situation so they too began to accumulate reserves at a huge pace after 1997 by keeping down the value of their own currencies against the dollar. This led to the huge run-up in the dollar and therefore the large trade deficit that we saw in the last decade and continue to see today.

The demand gap created by the trade deficit was filled by the housing bubble in the last decade. With the bubble now burst it can only be filled by government budget deficits until the dollar falls enough to bring trade closer to balance. Given the enormous disaster that resulted from his economic mismanagement (which could have been reversed had anyone in the Bush administration been awake), it is highly ironic that President Clinton would write a book offering economic advice to the nation.

 
The Washington Post Goes "Thuggish" on Social Security Print
Saturday, 05 November 2011 07:44

That's their word, not mine. The lead editorial in the Washington Post complains that AARP is taking out ads against cuts to Social Security. The first sentence tells readers that "the word 'thuggish' comes to mind."

It certainly does, although not in reference to the ads. The elite who manage the economy and deliberate on economic policy (a group that includes the Washington Post's editors) completely mismanaged the economy over the last decade, allowing a huge $8 trillion housing bubble to grow unchecked. This bubble burst, as bubbles always do, with devastating consequences for the economy.

One of the consequences was to turn the relatively modest budget deficits of the pre-crisis period (1-2 percent of GDP) into much larger deficits on the order of 8-10 percent of GDP. These deficits are of course necessary to sustain demand after the collapse of the housing bubble left the economy reeling.

Now the Post wants to use the deficits created by the mismanagement of its friends and associates as a pretext to take away a substantial chunk of Social Security benefits. (The preferred cut du jour is a 0.3 percent reduction in the annual cost of living adjustment. This would be cumulative so that a retiree would see their benefits fall by roughly 3 percent after 10 years, 6 percent after 20 years and 9 percent after 30 years. It would be a much larger hit to the income of the typical retiree than ending the Bush tax cuts would be to the typical person affected.) Given that most retirees and near retirees have just seen their wealth devastated by the collapse of the housing bubble, leaving them little other than their Social Security, this seems a particularly cruel one-two punch.

 
WAPO Ombudsman Defends Hit Job on Social Security Print
Friday, 04 November 2011 22:23

If there were ever any doubts that "Fox on 15th Street" was a fitting label for the Washington Post, Patrick Pexton, the paper's ombudsman removed them with his defense of the Post's front page piece on Social Security last Sunday. Just to remind readers, the whole premise of that piece, as expressed in its headline, is that Social Security has crossed some "treacherous milestone" because it had gone "cash negative earlier than expected."

While this assertion was presented in a sensationalistic manner in the Post, as both the headline and the lead, it is actually not true. Social Security has not gone "cash negative" in the sense that the trust fund is still growing. While current benefit payments exceed designated Social Security tax revenue, the income to the system, which includes interest on its holdings of government bonds, still exceeds benefit payments.

In this sense it is simply wrong to say that the system is cash negative. More money is still coming into the system than is going out. Obviously the Post meant to say that benefit payments exceed tax revenue, but tax revenue is only part of the income for the program. It is a serious failure by the Post to ignore the income stream from interest payments, which is compounded by the failure of the ombudsman to recognize this failure.

This is really not something that is arguable -- Social Security has a stream of income from the interest on its bonds. The Post and its ombudsman may not like this fact, but it is nonetheless true.

The ombudsman also chose to ignore several misleading or false claims that the Post used to advance its Social Security crisis story. For example, the original piece told readers that "the payroll tax holiday is depriving the system of revenue." This is not true. Under the law, the Social Security system is fully reimbursed for the money not collected as a result of the payroll tax holiday.

The piece also claimed that Senate Majority Leader Harry Reid was wrong when he claimed that Social Security was not contributing to the budget deficit. In fact, under the law Social Security has a separate budget that is not part of the on-budget budget. The program can only spend money from its own trust fund, which is money raised through designated taxes or the bonds purchased with this tax revenue. For this reason, it cannot legally contribute to the budget deficit. Presumably the Post and its budget reporter (and its ombudsman) are aware of this fact, but rather than clarifying the issue it chose to take a swipe at Senator Reid for defending Social Security. (The payroll tax holiday put in place for 2010 is arguable an exception to this.)

If the purpose of the piece was to inform readers rather than to raise fears, it might have been useful to put the projected Social Security shortfall in some context so that readers could evaluate the size of the problem. The most recent projections from the Congressional Budget Office put the shortfall over the program's 75-year planning period at 0.58 percent of GDP (exhibit 5). This is just over one-third of the increase in the size of the annual defense budget since the pre-September 11th period.

Alternatively, the Post could have told readers that the projected shortfall is approximately equal to one-tenth the size of the upward redistribution from the bottom 99 percent to the top 1 percent over the last three decades. These or other comparisons would have been made readers better able to assess the size and implications of Social Security's long-run problems.

There are many other problems with the article that are not worth repeating here. (Here is the original blogpost.) Clearly the ombudsman was intent on exoneration rather than a serious examination of the issues raised by the piece and its critics.

However what is perhaps most disturbing is how the ombudsman seeks to settle the issue. He tells readers:

"I spent a couple of days last week talking to Social Security experts across the ideological spectrum. Some, mainly those on the left, didn’t like the story, while those on the right did. But some in the middle, like Jonathan Cowan of the Third Way, declared it realistic and on point."

It is not clear what standing Jonathan Cowan (an English major at Dartmouth college) has to settle this issue other than fitting the Post's definition of being in the middle. One need not have a PhD in a policy field to take part in public debate, but being in the middle of the political spectrum (by the Post's standards) does not make one an expert on an issue.

And in fact, there are many situations where the truth most definitely does not lie in the middle (e.g. the Civil War). The Post's ombudsman has substituted finding the middle ground for finding the truth. This might be the way the Post conducts itself, but it is not the way a serious newspaper carries through its business.

 
Latest Word on Financial Speculation Taxes: The WSJ Has Never Heard of the London Stock Exchange Print
Friday, 04 November 2011 17:33

In case you were wondering how the Wall Street Journal managed to miss the $8 trillion housing bubble that sank the economy, we now know the answer, the WSJ apparently can't find out even basic facts about the world. It doesn't even know about the London Stock Exchange. It ran an editorial today railing against plans by the European Union to impose a financial transactions tax.

The editorial told readers that:

"The main reason the scheme hasn't been enacted anywhere is that even a small tax on every financial transaction would drive business someplace else unless everyone was in it together. The Europeans, who have been toying with imposing a transaction tax of 0.1% on securities and 0.01% on derivatives, estimate that such a move could wipe out 90% of derivatives trading in Europe and cost the British economy and its Treasury tens of billions of pounds a year."

If the WSJ had heard of the London Stock Exchange they would know that it has a 0.5 percent tax on stock trades. Contrary to the WSJ's claim that even a small tax would wipe out the market, the London market remains one of the largest in the world. The UK raises between 0.2-0.3 percent of GDP in revenue each year, the equivalent of $30-$40 billion in the United States.

Of course the London exchange is not the only stock market that imposes a transactions tax, the Hong Kong market does as well, as do several markets in China and India. In fact, most stock markets around the world had transactions taxes until recently. Even the United States had a tax of 0.12 percent on new stock issues and 0.04 percent on trades of existing issues until 1964.

In spite of these taxes, countries have managed to maintain strong financial markets and healthy economic growth. Maybe the WSJ editorial writers will one day be able to escape its right-wing dungeon and get some facts about the world.

 
Ezekiel Emanuel Seriously Misrepresents Arguments on Health Care Savings Print
Friday, 04 November 2011 06:02

It is dishonest to deliberately misrepresent someone's argument in order to refute it. This is what Ezekiel Emanuel does repeatedly in an NYT blognote on reducing health care costs.

He belittles the idea that there could be substantial health care savings at the expense of the insurance industry by telling readers that industry profits are just $11 billion a year, less than 0.5 percent of national health care expenditures. Presumably Emanuel knows that advocates of a universal Medicare type system see the whole insurance industry as a source of waste, not just the profits.

According to the Centers for Medicare and Medicaid Services, the country spends $150 billion a year administering private insurance. In addition, the fact that providers must deal with an array of complex rules from multiple insurers means that they must have additional office staff who would not be needed if they were just providing health care. This has been estimated as increasing health care costs by as much as 15 percent of total expenditures ($390 billion a year).

Similarly he suggests that the potential savings from lower cost prescription drugs are very small, on the order of $6 billion a year. In fact, we spend almost $280 billion a year on prescription drugs. If these drugs were sold in a free market without patent monopolies, they would cost around $30 billion, leaving a potential saving of $250 billion a year. It would be necessary to find other mechanisms to support research, but the potential savings are an order of magnitude greater than suggested by Emanuel.

 
Adam Davidson Gets Stimulus Wrong in the NYT Print
Friday, 04 November 2011 05:41

Adam Davidson, the co-founder of NPR's Planet Money, has a new column in the NYT magazine, "that tries to demystify complicated economic issues — like whether anyone (C.E.O.’s, politicians, people running for the presidency) can actually create jobs." He is not off to a good start.

He tells readers that:

"One reason we have so few ideas about job creation is that up until recently, the U.S. economy had been growing so well for so long that few economists spent much time studying it."

I seem to recall a lot of debates about employment and output back when I was in grad school a quarter century ago. There were plenty of papers that we read from the 60s that talked about whether we could have macroeconomic policies that could increase employment. Several Nobel winning economists from that period, with names like Paul Samuelson and Robert Solow would probably be surprised to hear that they were not worried about job creation. (It is true that these economists did not expect prolonged periods of stagnation, but they certainly did think about ways to increase employment and reduce the severity of downturns.)

Davidson then goes on to misrepresent the idea of stimulus:

"The stimulus, however, has to be borrowed, and it has to be really, truly huge — probably something like $1.5 or $2 trillion — to fill the gap between where the economy is and where it would be if everyone was spending at pre-recession levels. The goal is to goad consumers into spending again. And President Obama’s jettisoned $400 billion jobs package, hard-core Keynesians argue, is nowhere near what it would take to persuade them."

While his numbers are in the ballpark if he is referring to a 2-year package (something that should have been specified), the notion that we need consumers to spend more is his invention. Spending as a share of disposable income is still higher than normal, not lower than normal. In the short-run the government must fill the demand gap that is created by the collapse of construction following the overbuilding of the housing bubble years. It also must replace the demand that had been generated by consumption that was driven by housing bubble wealth that has now vanished.

There is no reason to expect consumption to return to its bubble levels. It would also be undesirable if it did because it would mean that workers are continuing to put aside inadequate savings for retirement. This is especially problematic in a context where politicians in Washington are determined to cut Social Security and Medicare.

Over the longer term, this demand will be filled by a pick-up in construction, as the excess supply of housing is eventually reduced by population growth and by increased net exports. The latter will happen if the dollar is allowed to fall. In a system of floating exchange rates, like the one we have, a drop in the value of the dollar is the mechanism for adjusting trade deficits. Remarkably, the value of the dollar is never mentioned in this piece.

 
David Brooks Comes Out for the Middle Position on Fracking: Drill, Baby, Drill Print
Friday, 04 November 2011 04:16

As a deep thinker, David Brooks always takes the middle positions between the extremes of the left and the right. We know it is the middle position because David Brooks holds it. Today, David Brooks discusses shale gas and essentially says "drill, baby, drill."

There have been many issues raises about the safety of drilling for shale gas since the companies that are engaged in this process, known as "fracking" don't have to disclose the chemicals they use. While companies in other industries would have to publicly report chemicals used in mining under the Safe Water Drinking Act, the gas companies doing fracking arranged to get a special exemption from Congress because, well, because they could. While a recent study by scientists at Duke found evidence of methane contamination of drinking water in areas near fracking sites, David Brooks assures us that there are no problems.

Brooks also is a bit off on the economics of the industry. He tells us:

"Already shale gas has produced more than half a million new jobs, not only in traditional areas like Texas but also in economically wounded places like western Pennsylvania and, soon, Ohio. If current trends continue, there are hundreds of thousands of new jobs to come."

Let's look at this one a bit. According to the Energy Information Agency (EIA) [Table A14], current production of shale oil is around 5 trillion cubic feet a year. At $4 per thousand cubic feet, this gets us $20 billion a year. For the economy as a whole we spend an average of more than $100,000 per job ($15 trillion GDP, 130 million jobs). If we use this number for the shale oil industry, then we get 200,000 direct jobs in the industry. It would take a multiplier of 2.5 to get us Brooks' number of more than 500,000. (Economists usually assume a multiplier close to 1.5.) 

In the longer term, economic models assume that the economy is at full employment, so the contribution of shale oil to employment would only be to the extent to which it reduces U.S. energy costs below what they would be otherwise. This is likely to be very limited. In the EIA analysis, even in the long-run shale oil is projected to supply around 70 percent of gas production, which is only one source of energy.

If it turns out that fracking results in polluted drinking water, the resulting increase in health care costs could quite possibly exceed any benefits from lower energy prices. Anyone committed to a free market (as opposed to government subsidies to the gas industry) would insist that the gas companies internalize the cost of whatever damage is caused by fracking. Then fracking would only take place if it were justified by market prices. 

 
Can WAMU Say "Cut Social Security?" Print
Thursday, 03 November 2011 04:54

We know that politicians don't like to talk about cutting Social Security or Medicare because both programs are hugely popular across the political spectrum. Even large majorities of Republicans are strongly opposed to cutting these programs. This is why politicians like to use the term "entitlements" when they talk about cutting these programs. Entitlements are much less popular than Social Security and Medicare.

While it is understandable that politicians would like to conceal their efforts to do actions that are opposed by most of their constituents, it is not obvious why the media would feel obligated to assist them in this effort. In a top of the hour news segment, WAMU (one of DC's local NPR affiliates) told listeners about plans to "tweak" or "change" entitlements. In fact, they meant plans to cut Social Security and Medicare.

It is striking that such terms are never used on the tax side. For example, reporters never refer to plans to "change" taxes in reference to plans to end the Bush tax cuts to the wealthy. Nor do they ever refer to this as a "tweak" to the tax code, even though it would have less impact on the after-tax income of the affected population that the cut to Social Security that is being considered (a 0.3 percentage point reduction in the annual cost of living adjustment).

 
Planet Money Is Off the Planet on Demographics and Retirement Print
Thursday, 03 November 2011 04:26

Most people who report on economics have heard of productivity growth. Virtually all economists see it as the main determinant of living standards. However, NPR's Planet Money seems unfamiliar with the concept.

It had a piece on demographics and the problems of supporting retirees in the context of stagnant, or even declining, populations. Incredibly the piece did not even once mention productivity growth.

Economists would consider productivity central to this issue, since it would determine the ability of workers to support a growing population of non-workers. (The burden imposed by supporting a larger number of retirees is at least partly offset by a reduced burden from supporting children.)

Productivity growth is the reason that the country has enjoyed a large increase in per capita income over the last four decades, even as the ratio of workers to retirees fell from 5 to 1 to just 3 to 1. With productivity growth of 2 percent a year (roughly the average over the last 4 decades), the output of an average worker would rise by more than 80 percent over a 30 year period. (Many workers have not benefited from this rise in productivity because of the upward redistribution of income during this period, however this is an issue of distribution, not demographics.)

If an average retiree has 75 percent of the income of an average worker, and the ratio of workers to retirees were to fall from 3 to 1 to 2 to 1 over a 30-year period, it would be possible for both workers and retirees to enjoy a 65 percent increase in living standards. The impact of productivity growth swamps the impact of the change of the dependency ratio in this story, which is why economists focus much more on productivity growth.

It is also worth noting that population growth can have a negative impact on productivity growth. Slower growth in the labor force can raise the capital to output labor, thereby raising the rate of productivity growth. Slower population growth is also likely to lead to less strains on the physical and natural infrastructure which could lead to large gains in living standards that are not measured in GDP. For example, people will spend less time commuting in cities with less dense populations. People will also have more access to natural resources like beaches and national parks if the population were smaller.

Any serious story on demographics and a rising ratio of workers to retirees would discuss these issues.

 

 
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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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