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PolitiFact Goes Post-Modern Print
Tuesday, 20 December 2011 16:52

I will join in the piling on exercise. Politifact, which is supposed to verify the veracity of claims made by politicians, jumped into the world of language devoid of meaning in its selection of the "lie of the year." 

Politifact's "lie of the year" was the claim by Democrats that the House Republicans voted to end Medicare when they voted for Representative Ryan's system of premium supports, or vouchers. Under this plan, people who turn age 65 after 2022 would not get the traditional Medicare plan. Under the Ryan plan, seniors would be given a sum of money by the government, which they could then use to buy into a range of plans. The proposal includes no guarantee that the money provided by the government would be sufficient to purchase an adequate plan. The Congressional Budget Office's (CBO) projections imply that it would be grossly insufficient to pay for a Medicare equivalent policy. 

Those are the basic facts [read the CBO analysis and/or the projections that we derived from the CBO analysis]. Given these facts, how can it be a "lie" to say that the Republicans voted to get rid of Medicare? 

In the Politifact world, if a company replaces its defined benefit pension with a 401(k) plan, workers who said that the company was getting rid of the pension would be liars. The Medicare system has existed as a fee for service program for almost half a century. It does allow for other options, but people have always been able to choose the traditional fee for service plan and the vast majority of beneficiaries have always chosen this option.

Representative Ryan and his Republican colleagues in Congress voted to take away this option for people turning age 65 after 2022. That is the truth on Planet Earth, in Politifact-land this counts as not only a lie, but as the "lie of the year."

The Wall Street Journal Has Not Heard About the Housing Bubble Print
Tuesday, 20 December 2011 14:03

The housing bubble apparently still has not gotten word about the housing bubble. Of course it is easy to see how an $8 trillion bubble whose collapse wrecked the economy could escape the attention of the nation's premier business publication.

If the WSJ had gotten word about the housing bubble it would not have said silly things about the baby boom cohorts like:

"In part because of improvidence and weak wage growth, in part because many have lost jobs and in part because of the severe recession, Baby Boomers as a group are unready for two or even three decades of life after they stop working."

See people who have heard of the housing bubble, and the stock bubble that preceded it, know that tens of millions of baby boomers did not save because their house was doing it for them. If a $250,000 home goes up 10 percent in price, this is as good as putting $25,000 into a 401(k).

This is the well-known (among people who have taken intro econ) housing wealth effect. There is also a stock wealth effect. These asset bubbles are the main reason that baby boomers did not save sufficiently for retirement. 

This predicted effect of asset bubbles is one of the reasons why people who know economics thought it was incredibly bad policy for Robert Rubin, Larry Summers and Alan Greenspan to celebrate the stock bubble in the 90s and for George W. Bush, Robert Rubin, and Alan Greenspan to celebrate the housing bubble in the last decade. The fact that tens of millions of baby boomers would end up ill-prepared for retirement was a 100 percent predictable outcome from these bubbles.

Unfortunately the people who were making economic policy at the time did not give a damn and the Wall Street Journal is covering up for them now.

Inequality and Growth: Charles Lane Tells It Like It Isn't Print
Tuesday, 20 December 2011 08:00

Charles Lane tells Washington Post readers that:

"Western Europe’s recent history suggests that flat income distribution accompanies flat economic growth. Which European country recorded the biggest decrease in inequality between 1985 and 2008? That would be Greece."

An argument based on a sample of one may fit the standards of the Washington Post, but it is not the sort of thing that normal people would find compelling. If we look the IMF's data on per capita GDP growth since 1980 one would be hard-pressed to find a clear relationship between inequality and growth.

The United States, an outlier for being unequal, does do relatively well in this picture. However, the much more egalitarian Swedes and Dutch fared even better by this measure. In fact, the per capita GDP growth record of most West European countries was not very differently from the U.S. over this period.

It is also worth noting that most Western European countries took much of the gains of higher productivity in the form of shorter work hours. It is now standard across the continent for workers to have 4-6 weeks a year of vacation. As a result of more vacations and benefits like paid family leave and paid sick days, the average work year for workers in West Europe is around 20 percent shorter than for workers in the United States. When we adjust for hours worked, it would be difficult to identify any growth dividend in the United States from its greater inequality.  

The fact that there is no clear link between inequality and growth suggests that inequality is the result of the institutional and political structure, not the dynamics of the economy. For example, in the United States we allow banks to enjoy the benefit of too big to fail insurance from the government, which means that they can take big risks with money borrowed from creditors. When the bets pay off, the executives get huge paychecks. When they don't, the taxpayers get the bill. This policy promotes rent-seeking, not growth.

Also, unlike Europe and Asia, we have rules of corporate governance that allow top executives to rip off their corporations by paying themselves huge salaries, even when they fail. This policy also does not contribute to growth.

We also have a policy of making it difficult for foreign professionals to compete with highly paid professionals in the United States. This raises the cost of health care and other services, by forcing people to pay more for doctors, lawyers and other highly paid professionals.

And, we have a policy that gives patent monopolies to drug companies. This allows the drug companies and their top executives to make large amounts of money at the expense of patients. These monopolies increase the annual cost of drugs by more than $250 billion a year, approximately 5 times the amount at stake with the Bush tax cuts to the wealthy.

These and other policies that redistribute income upward do not promote growth. Unfortunately, these policies will almost never be discussed in the pages of the Washington Post which restricts itself to the sort of simplistic growth versus inequality nonsense presented by Lane.

Marketplace Radio Gets Economics of AT&T Merger Wrong Print
Tuesday, 20 December 2011 05:53

Marketplace Radio had a segment on the proposed merger of AT&T and T-Mobile. It reported that AT&T argued that the acquisition of T-Mobile would allow it to better serve consumers by giving it a large number of cell phone towers in areas where AT&T currently provides inadequate coverage. The segment then said that the Federal Communications Commission (FCC) saw things differently. They blocked the merger because they argued it would lead to excessive concentration and higher prices for consumers.

Actually, there is no conflict between these views. AT&T was arguing that there are substantial economies of scale in the industry that can still be gained even for a firm that already has a 25 percent market share. The FCC argued that allowing firms to gain an even larger market share would imply substantial monopoly pricing power.

These are totally consistent positions. This is why phone companies have historically been either publicly owned or subject to government regulation. The argument is that the nature of the technology would lead to natural monopolies (in the old days, no one was going to lay a parallel set of wires to the old AT&T network).

It is desirable to let firms take advantage of all the available economies of scale to reduce their costs. However, if left unregulated they would take advantage of the lack of competition to gouge consumers. The answer is to have regulators set their prices based on an assessment of their actual costs. It is remarkable that this standard economic solution has not been raised in the public debate over the merger. 

Robert Samuelson: "Bye Bye Darwin?" Print
Monday, 19 December 2011 05:21

Okay, Samuelson actually wants to say goodbye to Keynes, but he would have had a better case if he was talking about Darwin and the theory of evolution. After all, when we have seen nothing but confirming evidence for years, why should we still accept the theory?

Samuelson tells readers:

"The eclipse of Keynesian economics proceeds. When Keynes wrote “The General Theory of Employment, Interest and Money” in the mid-1930s, governments in most wealthy nations were relatively small and their debts modest. Deficit spending and pump priming were plausible responses to economic slumps. Now, huge governments are often saddled with massive debts. Standard Keynesian remedies for downturns — spend more and tax less — presume the willingness of bond markets to finance the resulting deficits at reasonable interest rates. If markets refuse, Keynesian policies won’t work."

It seems the problem here is that Robert Samuelson has not heard about the euro. The countries he has identified as reaching a situation where they "lose control over their economy" are all on the euro. These are countries that do not issue their own currency. In this sense they are like Ohio and Texas. These states cannot freely run deficits because the Federal Reserve Board has no explicit or implicit commitment to back up their debt. Greece, Italy and Spain are in the same situation, as the European Central Bank (ECB) has repeatedly insisted that it will not back up the government debt they issue.

Samuelson says it is "unclear" why, given our own debt and deficit, interest rates are still just 2 percent and investors are willing to lend us trillions of dollars. Actually it is very clear. The Federal Reserve Board stands behind the debt of the United States government and there are few good investment opportunities in the current economy. 

Comparing the interest rate on government debt of countries with similar debt/deficit situations, it is very clear that being able to issue currency makes an enormous difference. For example, the interest rate on Spain's and Austria's debt is much higher than the interest rate on UK debt, even though both countries have much lower debt to GDP ratios. In short, Samuelson finds mystery and confusion where in fact there is none.

He does the same in warning us off stimulus. First he cites Christine Romer, President Obama's former chief economic adviser, as saying that determining the exact number of jobs created by the last stimulus is "incredibly hard." As Barbie would say, so is math.

We can't know the exact number of jobs generated by the stimulus because a hell of a lot things were going on in the economy at the time and it is very difficult to construct a proper counterfactual. This does not amount to an argument against stimulus.

It is incredibly hard to determine the counterfactual if the United States did not enter World War II. In Samuelson's world that would be a compelling argument against having fought Hitler. The research that has attempted to measure the number of jobs created found that the impact was pretty much along the lines predicted by the Obama administration, but yes, there is a large degree of uncertainty around these numbers.

Finally, he comes up with a harsh warning against trying the more stimulus route. Quoting Berkely economist Barry Eichengreen, he tells readers:

"At some point, however, investors will recognize this behavior for the Ponzi scheme it is. ... If history is any guide, this scenario will develop not gradually but abruptly. Previously gullible investors will wake up one morning and conclude that the situation is beyond salvation. They will scramble to get out. Interest rates in the United States will shoot up. The dollar will fall. The United States will suffer the kind of crisis that Europe experienced in 2010, but magnified."

So Eichengreen, through Samuelson, is telling us that if we go the route of more stimulus we will get a really bad situation. There are two issues here. First is Eichengreen's story credible? And second, what is the alternative?

Eichengreen presumably has not made the same mistake as Samuelson, but again we issue our own currency, so the United States can never literally be in the same situation as Europe in 2010. We can always pay our debt, it is denominated in dollars and we issue dollars.

But Eichengreen tells us the "dollar will fall." Actually, the official policy of both the Bush and Obama administrations were that we want the dollar to fall (mostly against the yuan). This is the only plausible way to address our trade deficit. A lower valued dollar will make imports more expensive, leading us to buy less of them, and make our exports cheaper, causing foreigners to buy more.

If we could get the dollar to fall enough to balance our trade it would create over 5 million jobs in manufacturing. This is more than 250 times the number of jobs that the oil industry claims will be created by the Keystone pipeline. Why would we be concerned about this prospect?

If Eichengreen means that the dollar would go into a free fall -- reaching 3 or 4 dollars to a euro, 2 cents to a yen, 40 cents to a yuan -- this is more than a bit hard to imagine. Under such circumstances U.S. exports would be hyper-competitive and our import market for other countries would vanish. Maybe Eichengreen wants to bet that this is a plausible future, but I doubt that many others would.

If for some reason investors really did send the dollar into a free fall, our trading partners would have no choice but to intervene in order to avoid the enormous damage that such a collapse would imply for their own economies. (Of course it is worth remembering that the long-term deficit horror stories are entirely driven by health care costs, a fact that Samuelson used to know.)

In short, the horror story is nice for little kids, but not terribly plausible in the real world. (Japan's debt to GDP ratio is over 200 percent, we have a very long way to go before we get there. It can borrow long-term in financial markets at interest rates a bit over 1.0 percent.)

Finally, what is the alternative? Tens of millions of people are supposed to go unemployed or underemployed. These are people unable to care for their children properly, unable to prepare for their own retirement, and in many cases, unable to keep their homes. Absent major stimulus, things are not going to get better for these people anytime soon. And given the consistently overly optimistic track record of forecasters, it may be close to a decade until we have fully recovered from the downturn.

It is important to remember that the unemployed/underemployed are not in financial trouble because they messed up. They are in financial trouble because people like Alan Greenspan, Ben Bernanke, and Robert Rubin messed up. They are in financial trouble because news outlets like the Washington Post only had room in their news and opinion pages for people whining about budget deficits. (This is back in 2004-2007, when deficits were small.) They had no room for the people warning that the housing bubble would inevitably burst and sink the economy.

But Samuelson says that we have no choice but to make these people suffer because if we don't then something really bad will happen. It is difficult not to ask whether Samuelson's assessment of this risk of the bad unknown may be somewhat different if it was his family that was facing unemployment and eviction.



Samuelson ended his column by saying:

"Were Keynes alive now, he would almost certainly acknowledge the limits of Keynesian policies. High debt complicates the analysis and subverts the solutions. What might have worked in the 1930s offers no panacea today."

As Gary Burltess reminds me, the debt to GDP ratio in the UK in the mid-30s when Keynes was writing The General Theory was close to 200 percent.

Misleading Claims on the Keystone Pipeline: Brought to You By Our Friends at Washington Post Print
Sunday, 18 December 2011 09:57

News outlets reserve the option to factcheck ads and will generally refuse to run an ad that is clearly false. This is apparently not the practice at the Washington Post (a.k.a "Fox on 15th Street).

The paper had a full page ad in the Sunday edition pushing the Keystone Pipeline. One of the claims in the add is that the unemployment rate among construction workers is 20 percent. If the Post had made the long trip over to the Bureau of Labor Statistics (BLS) website it would have discovered that the November employment report showed the unemployment rate among construction workers to be 13.1 percent. That is considerably higher than the national average of 8.6 percent, but still quite a bit short of 20 percent.

It is also worth noting some of the other misleading statements in the ad. It refers to 20,000 jobs that will be "directly" created by construction of the pipeline. Most of these jobs are not in the construction industry, but rather jobs along the supply line, for example in pipeline manufacturers or for truck drivers. While the economy can use these jobs as well, if we're looking at employing construction workers, the 20,000 figure is the wrong number. Direct employment in construction of the pipeline will be less than half of this number.

Finally, it is worth putting this figure in some context. BLS tells us that there were 1.1 million unemployed construction workers in November. If we assume (generously) that half of the 20,000 jobs mentioned in the ad are in construction, then the pipeline would reduce unemployment among construction workers by less than 1 percent. Note that this is 1 percent, not 1 percentage point. Assuming that the industry's numbers are accurate, construction of the pipeline would create enough jobs to reduce unemployment in the construction industry by approximately 0.1 percentage points. 

You Don't Have to Save When Your House Does it For You Print
Sunday, 18 December 2011 09:39

Adam Davidson had an amusing piece on the consumption of various items (e.g. lipstick, nail polish and men's underwear) that can be taken as reflecting consumers' sentiment. At one point he comments on the high levels of consumption of the last two decades and implied low levels of savings:

"During the fast growth of the late 1990s and mid-2000s, and the dark times that followed, people have been choosing to spend more and save less than ever before. Paradoxically, this happened just as pensions have been disappearing and life spans have been increasing. It suggests that Americans are so caught up in every short-term enthusiasm or agony that they haven’t thought enough about long-term fiscal health."

While this is true in the sense that most workers are ill-prepared for retirement due to their lack of saving, it is important to recognize that their consumption was driven in large part by the wealth created by first the stock bubble in the 90s and then the housing bubble in the last decade. People saw stock prices soar at double digit rates in the second half of the 90s. They were led to believe by experts (i.e. the people quoted in places like the NYT and Washington Post) that stock prices would continue to remain high. If the wealth created by this bubble had been real, then many of the people who were not saving during this period would have been just fine.

The same applied, albeit even more so, to the run-up in house prices in the last decade. Housing is much more widely held than stock. When people saw their house prices rise by 10-20 percent a year, they saw little point in putting a few thousand dollars into a retirement account. The increase in house prices gave many homeowners far more additional wealth during the bubble years than they could have hoped to accrue by putting aside a portion of their income.

While it was predictable that this bubble would also burst, most homeowners were far more likely to hear the voice of someone like Federal Reserve Board Chairman Alan Greenspan, insisting that there was no bubble, then one of the few economists who were raising the alarm. Given the information that they had at the time, it was perfectly reasonable for people to think that they did not need to save for their retirement.

Romer on Financial Crises: Getting Argentina Wrong Print
Sunday, 18 December 2011 09:27

It is amazing how frequently people seem to ignore the data when they discuss the financial crisis in Argentina. In a generally solid column on financial crises and their aftermath in today's paper, Christina Romer tells readers that it took Argentina 8 years to recover its pre-crisis level of per capita GDP following its 2001 financial crisis.

This is clearly not true, if the reference is to the 2001 crisis. According to the IMF's data, real per capital GDP in Argentina exceeded its 2001 level in 2004. Argentina actually first sank into recession in 1998. Its per capita GDP did not exceed the 1998 level until 2006. This would be 8 years, however the reference then should not to the 2001 financial crisis, but the longer period of decline that preceded the financial crisis.

How Did Fannie and Freddie Get to be the Symbols of the Housing Bubble? Print
Saturday, 17 December 2011 08:40

In an article on addressing global warming would a serious newspaper throw in a comment to the effect that "many Americans consider it a hoax," without pointing out that it is not? It did the equivalent in an article on the Security and Exchange Commission's charges against the top executives at Fannie Mae and Freddie Mac for inaccurately representing their exposure to subprime debt.

The Post article at one point commented that:

"Fannie Mae and Freddie Mac, which came to symbolize the housing bubble and its painful aftermath."

In fact, the charges described in the article describe a situation in which the top executives at these institutions bought up stakes in non-prime loans and subprime backed securities just as the market was collapsing. The purchases began in late 2006 and accelerated in 2007 and 2008.

The housing bubble had peaked in the middle of 2006 and subprime issuance plummeted in the second half of the year. It had virtually ceased altogether by 2007. In other words, Fannie and Freddie purchases at this point could have played no role in the splurge of subprime junk loans because the splurge had already stopped.

The purchases of securities backed by subprime and Alt-A loans was simply reducing the explosure of the private investment banks that had issued these securities (e.g. Goldman Sachs and Lehman) or issuers that still had some loans on their books (e.g. Countrywide or Ameriquest). This would have transferred bad debt from the private sector to the government sponsored enterprises, but the economic damage caused by the issuance of these loans had already been done. 

[Addendum: This comment should not at all be taken as a defense of Fannie and Freddie. Unlike the right-wing buffoons who now criticize them for causing the housing bubble, I was critical at the time. I was trying to call attention to the bubble since 2002. Fannie and Freddie financed close to half of the housing in the country at the time. They could have taken steps to stop the bubble (e.g. require appraisals of rental values and refuse to make loans at purchase prices that exceeded a ratio of 18 to 1). Housing is all they do. They should have seen the bubble. Nonetheless, the worst loans were securitized by Citigroup, Merrill Lynch and other private lenders. That is really not a debatable point. Angelo Mozilo and Robert Rubin should be the symbols of the housing bubble, not Fannie and Freddie.]

The Naked Truth on Short-Selling Print
Friday, 16 December 2011 06:36

For some reason short-selling has a bad reputation in many circles. It is often blamed for bad things happening to good companies and/or good countries. The story among short-sellings critics is that it involves market manipulation, where big actors are attempting to profit by sending stocks or bonds plummeting.

Floyd Norris has a good column on short-selling in today's NYT. It sums up research on the issue which indicates that most of the time when companies are complaining about short-sellers, the shorters are actually identifying over-valued stocks and in some cases uncovering fraud.This certainly seems to have been true of the short-sellers who were attacked Fannie Mae and Freddie Mac before they were put into conservatorship or Lehman, Citigroup and other badly troubled banks in the heyday of the financial crisis.

Certainly there are instances where shorting is in fact market manipulation, but there are also instances where traders take long positions to manipulate the market. (The notion of market manipulation here is using your trading to deliberately drive stock prices in the hope of being able to profit from the movement you have created. In the case of shorting, you hope to send the stock price plummeting and then buy back shares at a big discount. On the long side, the hope is to create a euphoria around the stock and then dump it before people realize that the price has no basis in the fundamentals.) There is no intrinsic reason that short trades will be more susceptible to manipulation than long trades, except that most small investors (who lack the ability to move markets) can't do shorts.

Short-trading, when it is based on fundamentals, can be seen as equivalent to exposing counterfeit money. It is showing the public that a company is not as profitable as widely believed. It would have been hugely beneficial to the economy if we had many people shorrting Lehman, Citigroup and the other companies pushing and securitizing subprime mortgages back in 2004. 

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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.