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The Great Escape Print
Sunday, 05 June 2011 10:32

I will be on vacation and not blogging until Thursday, June 16.

So until then, don't believe anything you read in the newspaper.

 
Dan Balz and the Washington Post STILL Don't Understand the Housing Bubble Print
Sunday, 05 June 2011 08:34

It was bad enough that the Washington Post could not see the housing bubble on the way up. As a result, it totally missed the most predictable economic disaster in the history of the world.

If anyone at the paper knew arithmetic, they would have noticed that nationwide house prices had sharply diverged from a 100-year long trend, rising by more than 70 percent in excess of the overall rate of inflation. The paper would have also noticed that there was no remotely plausible explanation for this run-up on either the demand or supply side of the housing market. They also would have noticed that rents had remained virtually flat during this period (adjusted for inflation). And, they would have noticed that the country had a record vacancy rate as early as 2002, the opposite of the shortage that would be expected if the run-up in house prices was driven by fundamentals.

Of course, since the Post's main (and often only) source on the housing market was David Lereah, the chief economist at the National Association of Realtors (NAR) and the author of the 2006 best seller, Why the Real Estate Boom Will Not Bust and How You Can Profit from It, it is perhaps not surprising that the Post managed to completely overlook the $8 trillion housing bubble that wrecked the economy. Lereah was paid by the NAR to promote real estate. The Post apparently thought that he was supposed to be providing unbiased assessments of the state of the housing market.

What is perhaps is even more remarkable is that the Post, acting like a low-IQ dog, is unable to learn from its mistakes. It still relies on the new chief economist at the NAR, Lawrence Yun, as its main source of information on the housing market. And, as Dan Balz tells us in his column today, it is still utterly clueless about the housing bubble.

Balz's complaints against the economy's performance in the Obama years is that the unemployment rate remains high and that house prices are continuing to fall. While the former complaint is a tremendous indictment of the Obama administration, the latter complaint is like blaming President Obama for gravity. House prices must decline by about 10 percent more to be back on their long-term trend. While there is no magic to the trend (prices could end up somewhat higher or somewhat lower), there is no reason to think that the end point will be higher given the enormous oversupply of housing in the country. (Vacancy rates are still at a near-record.)

In other words, anyone who understood the housing market should anticipate that the bubble will fully deflate, leaving house prices roughly at their trend level. Obama can be blamed for not doing more to help the people who are losing their homes (Right to Rent would have been a costless, non-bureaucratic route) but certainly not for the decline in house prices itself.

Furthermore, what possible policy goal is served by high housing prices? This is a redistribution of wealth from people who don't own homes to people who do, with the people owning the most expensive homes benefiting the most. It is understandable that a right-wing Republican might push for this sort of upward redistribution; it is difficult to see why an ostensibly progressive Democrat would want it. Would Balz have President Obama run for re-election on his "unaffordable housing" policy?

The big question that millions are asking is, will the Post will be able to figure out the housing bubble before it goes out of business? Place your bets! 

 
The Post Goes Negative on the Economy Print
Saturday, 04 June 2011 08:31

The May jobs report was bad news, but it was not as bad as the Washington Post and many other news outlets made it seem. When we get monthly data it is always important to remember that we are pulling out a snapshot from a longer period of time. Firms do not make their hiring and firing decisions over a single month. They have general impressions of how many people they need and they adjust their workforce accordingly.

For this reason it is important to take the 54,000 jobs created in May against the backdrop of 234,000 jobs added in April. Employers who hired many workers in April were likely to add few or none in May. For example, the retail sector reportedly added 64,000 jobs in April. It lost 8,500 in May. Food manufacturing added 6,300 workers in April, it lost 7,000 in May.

It is more likely that the April numbers overstated the underlying rate of job growth in the economy and the May numbers understate it, than there was some huge shift in the economy between the two months. Still, the average rate of job growth over the last three months was just 160,000.

It takes roughly 90,000 jobs a month to keep even with the rate of growth of the labor force. This means that if the economy stayed on this growth path, it would take almost a decade to get back to normal levels of unemployment. Furthermore, with house prices falling again and another round of state and local cutbacks kicking in next month, it is more likely that the job growth will be slowing than speeding up in the months ahead. 

 
Deficit and Jobs: The Battle of the Washington Philosophers Print
Saturday, 04 June 2011 08:06

The NYT continues to operate under the bizarre illusion that Congress is filled with philosophers. It headlined a piece today on the stalemate over budget and economic policy, "War of Ideas on U.S. Budget Overshadows Job Struggle." Of course Congress is actually composed of politicians who get their office by appealing to important interest groups.

If the debate were actually one of ideas, as claimed in this article, then it would be possible to use evidence. For example, the article tells readers:

"Republicans said the slow pace of hiring in May underscored the need for sharp cuts in federal spending and regulation to spur corporate investment. ...

"They argue that Democratic efforts to revive growth through public spending programs have failed as the economy remained weak and unemployment high almost two years after the end of the recession.

"'You talk to job creators around the country like we have,' House Speaker John A. Boehner said Friday. 'They’ll tell you the overtaxing, overregulating and overspending that’s going on here in Washington is creating uncertainty and holding them back.'"

There are several specific testable claims in these assertions. For example, Mr. Boehner claims that overtaxing and overregulating are big problems for businesses. It would have been appropriate to ask him what he is talking about.

Taxes are actually lower today than they were in the late 90s when the economy was growing rapidly and adding 250,000 jobs a month. If Mr. Boehner's view is that taxes are preventing firms from adding jobs, then he must have a good reason for believing that the lower tax rates of 2011 are a bigger problem that the higher tax rates of 1996-2000. The NYT deprived its readers of Mr. Boehner's thoughts on this key issue.

It would also have been helpful to identify the regulations that Mr. Boehner considers to be major obstacles to hiring. There have been relatively few major increases in regulation since President Obama took office. The most important concern health care and these will have relatively little effect until 2014.

It is not plausible that a regulation that does not take effect for another 2 and 1/2 years would discourage hiring today, especially since turnover in most businesses is rapid enough that firms can easily shed through attrition any workers that prove to be unprofitable in a context of the new health care regulations. And of course, firms could always just increase average hours and hire temps, neither of which they are doing. This suggests that the problem is lack of demand, not regulations.

There is also research on the impact of President Obama's stimulus package on jobs. If the NYT is going to feature the political battle as a war of ideas it should present evidence on which ideas are right. (NYT reporters have time to find this evidence, its readers generally do not.) For example, a study of the stimulus's employment impact by two Dartmouth professors found that it likely had a larger employment effect than expected. The problem was that the stimulus was far too small, leading to a net expansion (federal stimulus minus state and local cutbacks) of government spending and tax cuts of around $150 billion a year against a contraction in annual demand in the private sector due to the collapse of the housing bubble of close to $1.2 trillion.

This is the sort of discussion that would appear in a genuine discussion of a battle of ideas. Of course, it is silly to imagine that members of Congress are really arguing about ideas. They are trying to position themselves for re-election. Battles of ideas take place in college philosophy departments, not between elected officials.

 
Is It Neutral Reporting to Just Present Anything Politicians Say as Reasonable? Print
Friday, 03 June 2011 10:43

This is the practice at the WSJ when it comes to Republican nonsense on the economy. The Republicans blamed the economy's weak job performance in May on the deficit and regulations. Is there any coherent story that they can tell on this or does the WSJ not care?

Suppose the Republicans blamed the weak jobs numbers on the Chicago Bulls loss in the NBA semi-finals. Would this also just be repeated without comment. How about if they blamed it on the color purple? Sure, it's just a he said/she said world.

For the record, if a serious person made this argument then they would back it up with evidence. For example, firms that make longer hiring commitments would be doing less hiring than firms in industries with rapid turnover. (Try to explain the loss of temp jobs in May.) We should also see a big increase in average hours worked, since this does not require any commitment by employers. (We don't.)

If reporters did their jobs, politicians would actually have to make coherent arguments when they talked about the economy, instead of just saying whatever nonsense advanced their political agenda.

 

 

 
The Washington Post Allowed Senator Simpson (and Erskine Bowles?) to Misrepresent President Obama's Deficit Commission Print
Friday, 03 June 2011 04:55

Former Senator Alan Simpson, a co-chair of President Obama's deficit commission, repeatedly misrepresented the commission in a column in the Washington Post. (It is possible that the piece was co-authored by Simpson's co-chair, Erskine Bowles, a Director of Morgan Stanley. The Post's identification says, "the writers were co-chairs of the National Commission on Fiscal Responsibility and Reform.")

The article repeatedly refers to the deficit commission's report and recommendations. This is not true. The commission did not produce a report and never even voted on one. The column is presumably referring to the report of the co-chairs. This report was never submitted for a vote because it did not have the support of the necessary majority.

 
Moody's, Which Gave Investment Grade Ratings to Hundreds of Billions of Toxic Mortgage Backed Securities Print
Friday, 03 June 2011 04:24

The Washington Post had a major article on a threat by Moody's to downgrade U.S. debt. The article identifies Moody's as "one of the premier credit-rating agencies." It also would have been reasonable to identify Moody's as one of the credit rating agencies that helped to extend the housing bubble by routinely giving investment grade ratings to mortgage backed securities and collaterized debt obligations that were full of bad and even fraudulent mortgages.

Moody's also has managed to miss most of the major corporate bankruptcies in recent years, giving both Lehman's and Bear Stearns top investment grade ratings until just before their collapse. It's record on rating sovereign debt is also not very good. It downgraded Japan's debt almost a decade ago yet Japan can still borrow long-term at interest rates of less than 1.5 percent. This suggests that financial markets do not have much regard for Moody's ratings. This would have been useful information to provide readers.

 
AP's "Fact Check" Distorts the Fundamentals of a Republican Plan to Reshape Medicare Print
Thursday, 02 June 2011 08:38

Major news outlets like to adhere to the pretext that the truth in any political argument always lies in the middle. This means that they feel the need to say that the truth in the current battles over the budget and Medicare lies somewhere between the Democratic and Republican positions.

In the past this practice meant, for example, that most of these news organizations said things like the truth on civil rights was somewhere between the positions put forward by people like Martin Luther King and segregationists like George Wallace. Many might think the truth does not always lie between the positions set out by the major actors in national political debates.

In keeping to this "truth lies in the middle" approach, AP's Fact Check criticized Representative Debbie Wasserman Schultz, the chair of the Democratic National Committee, for attacking Representative Paul Ryan's plan for Medicare, which was adopted by the Republican House. Fact Check criticizes Wasserman for:

"falsely accusing the GOP of pushing a proposal that tells the elderly 'you’re on your own' with health care and that lets insurers deny coverage to the sick."

Fact Check goes on to quote Wasserman as saying about the Ryan plan:

"'You know what, you’re on your own. Go and find private health insurance in the health care insurance market; we’re going to throw you to the wolves and allow insurance companies to deny you coverage and drop you for pre-existing conditions. We’re going to give you X amount of dollars, and you figure it out.'"

It then tells readers:

"THE FACTS: First, the Ryan plan explicitly forbids insurance companies from denying coverage to anyone who qualifies for Medicare, including those who have pre-existing illnesses. Second, it does not merely send money to the elderly and leave them to their own devices in arranging for medical care.

"The plan calls for Medicare to stay the same for people 55 and older. But starting in 2022, new beneficiaries would get their health insurance from competing private insurers instead of from the government. The government would offer subsidies to pay for the coverage and set standards that insurers must follow. One condition, says the plan, is that participating insurers “agree to offer insurance to all Medicare beneficiaries, to avoid cherry-picking and ensure that Medicare’s sickest and highest-cost beneficiaries receive coverage.”

"Nor would the government merely send 'X amount of dollars' to the elderly and let them figure out whether they can afford coverage. The subsidies would go to the plan selected by the beneficiary."

While Fact Check is correct on the treatment of pre-existing conditions, it is wrong to imply that the Ryan plan in any way guarantees coverage. According to the Congressional Budget Office's (CBO) projections, the cost of a Medicare equivalent plan for a person at age 65 would be equal to 44 percent of the median person's income by 2030. It would have risen to 68 percent of the median 65-year old's income by 2050. (This ignores the fact that the plan increases the age of eligibility to 67 by 2046. )

Health care costs are higher for older retirees. CBO's projections imply that by 2050 the cost of a Medicare equivalent plan for someone age 75 would be 143 percent of the median 75-year-old's income and 200 percent of the median 85-year-old's income. Given the huge gap between the cost of care and the ability of seniors to pay it is wrong to imply, as Fact Check does, that the Ryan plan in any way ensures that seniors will get decent coverage. As Wasserman claimed, if the Ryan subsidy is insufficient to pay for care, the plan tells seniors that they are on their own.

The truth does not always lie in the middle. Fact Check would have known this if it had bothered to analyze the CBO projections before criticizing Representative Wasserman.

 
Federal Regulations Restrict the Use of Government Subsidized Student Loans, Not Private Colleges Print
Thursday, 02 June 2011 05:32

The Washington Post, which is part of a corporation whose primary income comes from for-profit colleges, told readers that new regulations on student loans would:

"effectively would shut down for-profit programs that repeatedly fail to show, through certain measures, that graduates are earning enough to pay down the loans taken out to attend those programs."

It is important to note that the rules being proposed don't restrict for-profit colleges in any way. They simply impose conditions that they must meet in order for their students to be eligible to receive student loans.

The rules are restrictions on students trying to get loans in the same way that prohibitions on using food stamps for junk food would a restriction on food stamp recipients, not restrictions on the junk food industry. In that case, the junk food industry would still be free to sell their product to whoever wanted to buy it, including people receiving food stamps. However, they would just be prohibited from buying the junk food with their food stamps.

In the same way, anyone who wants to would still be able to attend any for-profit college they chose. They could even borrow money to do so. They would just be unable to get a subsidized loan from the government for this purpose.

 
Umm, Representative Ryan's Plan Does Turn Medicare Into a Voucher Program Print
Thursday, 02 June 2011 05:16

The Washington Post reported that House Budget Committee Chairman Paul Ryan won applause from the Republican freshman caucus when he criticized President Obama for saying that Ryan's Medicare plan would turn the program into a voucher system. The Post should have reminded readers that Ryan Medicare plan does turn the program into a voucher system.

Ryan's plan gives beneficiaries a fixed amount on money that they can use to buy insurance in the private market. This is what most people would consider a voucher system. The Congressional Budget Office's projections indicate that it would raise the cost of buying Medicare equivalent policies by $34 trillion, approximately 5 times the size of the projected Social Security shortfall.

 
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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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