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Will the Banks Stop Fracking? Print
Thursday, 20 October 2011 04:24
Good article in the NYT. It discusses the fact that most mortgages may prohibit property owners from signing drilling leases with gas companies without prior approval. The point is that the mortgage holder must be concerned about preserving the value of the property and drilling could reduce it. This could be a case of banks doing what they are supposed to do.
Argentina, Planet Money, and Other Planets Print
Wednesday, 19 October 2011 10:56

I see that my earlier blogpost on Planet Money's podcast on Argentina has prompted a defense from both Planet Money and Megan McArdle. Both seem to feel that the piece on Argentina was quite balanced and indicated that there were many positive aspects to Argentina's decision to default.

That was not the story that I heard. The piece I heard began by mentioning Greece's debt crisis and then said (slight paraphrase):

"There is a worst case scenario and that scenario has a name: Argentina."

My guess is that if we can promise the Greek people a policy path that will give them 3 months of sharp downturn, followed by 3 months of stagnation and then 9 and half years in which its economy will grow at an average annual rate of close to 7 percent, they would jump for joy. No one has a path for Greece that looks even half as promising as the route that Argentina has actually followed. So the question is how can Planet Money accurately describe this as a "worst case scenario?"

In fact, even Planet Money's defense of its piece begins by citing this line from the story:

"It has been a tough decade for Argentina."

Of course the data show that it has not been a tough decade for Argentina. It had recovered the ground lost to the recession by 2004. Argentina's economy then enjoyed 4 more years of exceptional growth before the world economic crisis temporarily derailed it in 2009, but it then saw strong growth resume again last year.

There certainly were problems from the default. As McArdle points out, some of Argentina's creditors are still pursuing their claims in various jurisdictions, including the United States. (The creditors' representative here, Robert Shapiro, was featured prominently in the podcast.) This makes it difficult for Argentina to borrow in international capital markets.

The IMF did everything in its power to try to sink the country's economy, including making bogus growth projections. In the three years prior to the default every single IMF growth projection proved overly optimistic. In the three years following default every single IMF growth projection proved overly pessimistic. The probability of this happening by random chance is non-existent.

(Btw, McArdle asked why I began my chart in 1998. The answer was to show the full extent of the downturn preceding the default. Economists usually believe that it is easier to recover from a cyclical downturn than to increase growth from a trend path, so I was trying to show the extent to which the post-default growth was just the recovering from the downturn.)  

But the question is not whether the default caused problems, the question is whether anyone on Planet Earth can describe Argentina as presenting a worst case scenario for Greece as Planet Money clearly did.

The NYT Misleads Readers by Implying that Large Budget Deficits Have Been A Longstanding Problem Print
Wednesday, 19 October 2011 05:37

The NYT implied that large budget deficits have been a longstanding problem in an article discussing the progress of the supercommittee working on a deficit plan. It told readers that the committee is trying to find solutions:

"in a matter of weeks, to find fiscal answers that have eluded Congress and the White House for years."

Actually, the budget deficits prior to the downturn were relatively modest. The Congressional Budget Office actually projected that the deficit would turn to a surplus after the Bush tax cuts were scheduled to expire this year. The large deficits were caused by the downturn, not inadequate taxation or excessive spending.

It Wasn't Just in Hindsight that the Housing Bubble Was Dangerous Print
Wednesday, 19 October 2011 04:49

The Washington Post told readers that Federal Reserve Board Chairman Ben Bernanke now says that it is appropriate for the Fed to target bubbles like the stock market bubble in the 90s or the housing bubble in the last decade which "were in hindsight dangerous bubbles."

Actually, it was easy to see in real time that these were dangerous bubbles. Greenspan, Bernanke and other people in policy making positions simply chose to ignore the evidence. Since the Washington Post and other news outlets are covering up this failure, rather than holding these people responsible for the incredibly economic disaster that resulting from their mismanagement, we can anticipate more such failures in the future.

Economic theory predicts that people respond to incentives. There is clearly no incentive to challenge the conventional wisdom in the economics profession even when it is as wrong as it can possibly be.

The New York Times Discovers the Housing Wealth Effect Print
Wednesday, 19 October 2011 04:26

In a bizarre article, the NYT told readers that, "economists have only recently devoted serious study to how a decline in housing prices affects consumer spending." Actually economists have studied the effect of house prices on consumption for close to a century.

The housing wealth effect is a well-known concept in economics, not something that economists have just stumbled upon. It is usually estimated as being between 5-7 cents on the dollar. This implies the loss of roughly $7 trillion in housing wealth would lead to a drop in annual consumption of between $350-$490 billion, more than twice as large as the number cited in this article.

In fact, rather than being depressed consumption is still somewhat higher relative to income that was normally the case through the post-war period. Prior to the run-up of the stock bubble in the 90s, saving averaged more than 8 percent of disposable income. At 5 percent, the saving rate is still well below this level, meaning that consumption is high, not low. The NYT should have been able to find an economist who could have explained these facts.


              Source: Bureau of Economic Analysis.


[Thanks Jay R. for the correction. I understand there is some dispute as to whether the housing wealth effect has long been known, as I claim. I encourage readers to go Google Scholar and see for yourself.]

Accounting Identities for Thomas Friedman Print
Wednesday, 19 October 2011 04:05

Thomas Friedman tells readers that we should want China to raise the value of its currency, but the real problem for the United States is that we are not building up our infrastructure and we don't save. While the first point is right, the second suffers from ignorance of national income accounting.

If we have a trade deficit then we must have negative national savings. At full employment, we will have a large trade deficit, unless our currency declines in value. This means that we will either have large budget deficits (which Friedman really doesn't like) or we will have negative private savings. There is no way around this. So the problem of low savings is the problem of an over-valued currency, they are not separate issues.

The Post Wrongly Tells Readers That Central Banks Can't Do More to Boost Growth Print
Tuesday, 18 October 2011 05:00

In an article about the IMF reversing its pro-austerity stance, the Post told readers:

"Central banks, which have already reduced interest rates to extremely low levels, have little remaining ability to boost economic activity."

This is not true. Central banks could explicitly target higher rates of inflation. This would lower real interest rates and reduce debt burdens. This policy has been advocated by many prominent economists, including Paul Krugman, Ken Rogoff, the former chief economist of the IMF, and Ben Bernanke when he was still a professor at Princeton.

David Brooks: People Prefer Values to Jobs Print
Tuesday, 18 October 2011 03:50

David Brooks is so cute when he tries to talk about economics. He apparently never heard of the "wealth effect," one of the most basic concepts in economics. Brooks tells readers that we are seeing a change in American values with people turning away from debt.

Actually, people have simply seen much of their wealth disappear with the collapse of the housing bubble. Close to $7 trillion of housing wealth has disappeared since the peak of the bubble. In the bubble years, people went into debt because they had this wealth to cover their debt. Now that this wealth has vanished, people are reducing their debt accordingly. This is the principle that you can get a larger mortgage on a $400,000 home than a $200,000 home. That is not a change in philosophy as Brooks suggests.

The other part of Brooks piece is the implicit celebration of unemployment. Brooks tells us (correctly) that people are cutting back consumption. He also proudly tells us that they don't the government to spend more money either. That's just great. We get less demand from the private sector and we also get less demand from the government. This translates into less demand. That means fewer jobs and more unemployment.

That could be a counter to this if investment would rise, but there is no plausible story under which it would. Firms don't rush out to invest because the economy is shrinking. The world doesn't work that way. 

Ultimately, the U.S. will have to get the dollar down to restore full employment without large net borrowing by either the public or private sector. A lower valued dollar will make U.S. goods more competitive internationally and reduce our trade deficit. However, this will not happen tomorrow and certainly does not appear to be a phenomenon that Brooks has thought about.

Argentina Suffering From Default: Not on This Planet Print
Monday, 17 October 2011 14:41

NPR's Planet Money made its entry in the Stake Your Claim game show with a segment on Friday that claimed that Argentina is suffering horribly as a result of its decision to default at the end of 2001. It turns out that Argentina has actually been doing quite well since its 2001 default as the most recent data from the IMF show.

Click to Enlarge


Source: International Monetary Fund.

As can be seen, Argentina was already in a severe recession prior to default. It had tied its currency to the dollar, which went through the roof following the East Asian financial crisis in 1997. While the United States could support the trade deficit that resulted from the over-valued dollar, Argentina could not. It eventually had no choice but to break its peg with the dollar and default on its debt in December of 2001. Its economy fell sharply in the next quarter, but had stabilized by the summer of 2002. It then began to grow rapidly and was above its pre-recession level by the end of 2004. It has continued to grow rapidly in the subsequent years, although the 2009 recession did bring growth to a halt for a year.

The IMF projects that Argentina's GDP this year will be almost 60 percent above its pre-recession level. This is where Planet Money's claim breaks down. 

If Our Children Don't Do Better Than Us, It Will Be Because the Top 1 Percent Took It All Print
Monday, 17 October 2011 04:46

Robert Samuelson warns that our children may not do better than us. His warning is based on rising health care costs, aging of the population and the resulting rise in Social Security and Medicare expenses, and the risk of an end to productivity growth. Remarkably the upward redistribution of income doesn't feature in his story.

This is striking since upward redistribution is such a huge part of the picture. His example of workers not gaining is taken from a Health Affairs article that reported that 95 percent of compensation growth from 1999 to 2009 for a median four person family was eaten up by inflation and health care costs. However, if there had not been an upward redistribution of income over this period, compensation for a typical family would be about 10 percent higher (@$10,000 in today's dollars).

Samuelson also raises the prospect of productivity growth winding down. He wrongly says that productivity growth is already committed to supporting an aging population. In fact, it would take just 5 percent of the projected wage growth over the next 30 years to make the Social Security trust fund fully solvent for the rest of the century.

Health care costs are projected to take more of people's income, but this is far more the result of our broken health care system. If we paid the same per person for our health care as other wealthy countries we would be facing enormous budget surpluses in the decades ahead. If our per person costs were the same as the average of other wealthy countries it would free up more than $1.2 trillion a year ($4,000 per person) for other uses.

It is difficult to reduce health care costs because the public debate on health care is dominated by protectionists like Samuelson who are resistant to allowing more trade in health care services.

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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.