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The Post Discovers Inequality Print
Sunday, 19 June 2011 08:10

The Post had a major front page article on the growth in inequality in the United States over the last three decades. While it is good to see the Post taking note of this enormously important development, the piece does manage to misrepresent some key points.

First, there has been new research that sheds additional light on the identity of the top earners, but we have long had a pretty good idea of who the big earners were. There are regular reports from Fortune and other sources on the pay of top executives at the major corporations. The growing gap between this pay and the pay of ordinary workers has long been noted in reports by my friends at the Economic Policy Institute and Institute for Policy Research and elsewhere. So telling us that many of the big earners are CEOs at major companies is not exactly news.

Neither is it news that many of the top earners are Wall Street types. There are news articles every year on the bonuses paid out at Goldman, Citigroup and the rest. We already knew that the financial sector accounted for a hugely disproportionate chunk of the top earners.

The other major flaw in this piece is its seeming willingness to accept the explanation that higher pay is explained by the growth of companies. First, this does not appear to have been the case in the 50s and 60s when the economy and many companies grew very rapidly, with no comparable explosion in pay at the top.

Second, the rise in pay for top executives far exceeds the growth of companies. While there has been some increase in concentration over the last three decades, it has not been nearly large enough to explain the rise in pay of top earners. Many of the huge companies of the 60s and 70s, for example General Motors and AT&T, have been seriously downsized relative to the size of the economy.

The increased size of companies could at best explain a small portion of the rise in executive pay and would not explain at all the huge gap between the pay for top executives at U.S. companies and the pay for top executives for large foreign corporations like Toyota or Volkswagon. These gaps are likely explained by the corruption of the corporate governance process in the United States where the CEOs get to largely decide the people who determine their pay. Stockholders are likely to exert more control elsewhere and thereby keep pay for top executives more in line with the market.

 
The Post Tells Readers that Business Leaders are "Exasperated" Despite Record Profits Print
Friday, 17 June 2011 07:24

Readers of the Washington Post article on a meeting between a group of business leaders and President Obama's chief of staff William Daley must be wondering how the Post knew that the executives were "exasperated," as the Post told readers in the third paragraph. 

The Post told readers that the executives had complaints over environmental regulations and stalled "free-trade deals." (What the Post describes as a "free-trade deal" would be described as a "trade deal" by neutral reporters rather than advocates. These deals have little to do with creating free trade between the countries involved.)

Of course businesses will always want more profit and if they looking "exasperated" helps them get their way with a weak president and a gullible media, they will look as exasperated as possible. In reality, the profit share of income is at record highs, so environmental regulations of the Obama administration and the stalled trade deals are not having too much of a negative impact on the bottom line.

The article also described the May jobs report as "surprisingly glum." While it was glum, there was nothing surprising about it to people who follow the economy. There was considerable evidence of weakness in the economy and the labor market prior to the release of the report, most importantly a jump in the number of weekly unemployment claims to averages well above 400,000. This number of claims is inconsistent with strong job growth.

 
Michael Gerson Doesn't Have Access to Data on Interest Rates Print
Friday, 17 June 2011 06:59

That is what readers of his column will undoubtedly conclude when they see him say that if President Obama agrees to a deal with large reductions in spending:

"Credit markets would find it reassuring that the federal government is not completely paralyzed."

Those who have access to information about credit markets know that they are already very reassured as demonstrated by their willingness to hold U.S. government debt at extremely low interest rates. The interest rate on 10-year Treasury bonds has been hovering near 3.0 percent. It is unlikely that any deal on the budget will lower this significantly or that any further reduction in rates would have a noticeable impact on the economy.

 
David Brooks Discovers That It Was All Fannie Mae's Fault Print
Friday, 17 June 2011 05:01

"Night is day," "slavery is freedom," okay David Brooks edited those lines out of his column on Fannie Mae today, but this is pretty much how the rest of it reads. He tells us that the economic crisis was the result of Fannie Mae pushing bad mortgages and buying off everyone who tried to stand in their way.

There's a small problem in this story. The worst junk mortgages that inflated the housing bubble to extraordinary levels were not bought and securitized by Fannie and Freddie, they were securitized by Citigroup, Merrill Lynch, Goldman Sachs, Lehman and the other private investment banks. These investment banks gobbled up the worst subprime and Alt-A garbage that sleaze operations like Ameriquest and Countrywide pushed on homebuyers.

The trillions of dollars that the geniuses at the private investment banks funneled into the housing market were the force that inflated the bubble to its 2006 peaks. Fannie and Freddie were followers in this story, jumping into the subprime and Alt-A market in 2005 to try to maintain market share. They were not the leaders.

Just to be clear, Fannie and Freddie were serious bad actors. They are both huge companies that do nothing else but deal with housing. It is incredible that they did not recognize the housing bubble and take steps to try to deflate it, and protect themselves, before it grew to such dangerous levels.

Suppose that Fannie and Freddie started demanding appraisals of rental values and refused to buy any mortgage where the ratio of sale price to annual rent was higher than 20. This action by itself likely would have shaken some sense into the housing market. I said this back in 2002, when I first warned of the housing bubble and predicted the collapse of Fannie and Freddie. I also frequently criticized Fannie and Freddie in public forums, including debates with their chief economists. Unlike Brooks, I wasn't worried about non-issues as economic disaster loomed on the horizon.

As much as Fannie and Freddie deserve blame for incompetence and corruption, no serious person can make them the main culprits in this story. The Wall Street crew made hundreds of billions on pushing fraudulent mortgages. Furthermore, if we had competent economists running the Fed, they would have been shooting at the housing bubble as early as 2002 also. This does not mean raising interest rates in an economy that was struggling to recover from the collapse of the stock bubble. (I'll say that again, since people have a hard time understanding "do not raise interest rates." The Fed should not have raised interest rates.)

If Greenspan had paid attention to the economy he would have had the Fed's staff devoted full-time to documenting the evidence for the housing bubble and he would have used every public appearance (e.g. congressional testimonies, public speeches, international forums) to warn of the risks posed by the housing bubble. He also would have used the Fed's full regulatory authority to police the mortgage issuing practices of the banks under its supervision. He also would have prodded other regulators to use increased scrutiny for the institutions under their control. (Greenspan was never shy about making suggestions to others.)

My guess is that these actions would have by themselves crashed the bubble and done so long before it grew to such dangerous levels. They would be essentially costless, so it is difficult to see why a vigilant Fed chair would not have followed this route.

It is difficult to believe that these actions would not have been sufficient to deflate the bubble. After all, the David Brooks of the world can ignore Dean Baker warning of the housing bubble, they cannot ignore the Fed chair issuing such warnings, backed up by endless Fed papers documenting the case.

It is incredible, that even after the collapse of the housing bubble has wrecked the economy and wiped out the life's savings of tens of millions of middle class and moderate income families (this loss of wealth is why people are not spending, it has little to do with "pessimism"), there is still so little effort to re-examine the fixation on homeownership in this country.

Why on earth is President Obama looking to push a renewed Fannie and Freddie type system? Does the public really need to subsidize mortgage interest rates through a government guarantee system, in addition to the mortgage interest deduction?

Brooks might devote some of his fire to these loonie schemes. He might also shoot at the whiners who think no one will issue a mortgage if they have to maintain a 5 percent stake in it. And, he might also call for some criminal investigations of the banks that pushed and securitized fraudulent mortgages. But none of this seems to fit Brooks' agenda.

 

Addendum:

I had occasion to quote from this 2006 Moody's assessment of Freddie Mac. It does a great job of putting Fannie and Freddie's subprime dealings in context:

Freddie Mac has long played a central role (shared with Fannie Mae) in the secondary mortgage market. In recent years, both housing GSEs have been losing share within the overall market due to the shifting nature of consumer preferences towards adjustable-rate loans and other hybrid products. For the first half of 2006, Fannie Mae and Freddie Mac captured about 44 percent of total origination volume -- up from a 41 percent share in 2005, but down from a 59 percent share in 2003. Moody’s would be concerned if Freddie Mac’s market share (i.e., mortgage portfolio plus securities as a percentage of conforming and non-conforming origination), which ranged between 18 and 23 percent between 1999 and the first half of 2006, declined below 15 percent. To buttress its market share, Freddie Mac has increased its purchases of private label securities. Moody’s notes that these purchases contribute to profitability, affordable housing goals, and market share in the short-term, but offer minimal benefit from a franchise building perspective. (p 6)

 
The Deals are "Trade" Pacts, Not "Free Trade" Pacts Print
Thursday, 16 June 2011 06:45

If you are an advocate pushing for the new trade pacts with South Korea, Colombia, and Panama you might call them "free trade" pacts. The idea of "free trade" has considerable resonance with an important segment of the public (i.e. business people). However, the deals do not free all trade (don't expect to see a flood of Korean doctors into the United States) and they actually increase many barriers, most importantly by strengthening intellectual property protection. So, when the Post calls the deals "free trade" pacts it is acting in its role as an advocate, not as a newspaper.

The Post also tells readers:

"The Korea deal is expected to generate more than $10 billion in additional annual sales for U.S. companies."

Actually people hold expectations. The Post doesn't tell us which people. This is important, since many people's expectations prove to be unjustified. For example, many "expected" NAFTA to lead to a U.S. trade surplus with Mexico, creating hundreds of thousands of jobs. These expectations proved to be wrong. It would be interesting to know if the same people are the ones who expect $10 billion in additional annual sales from the Korea trade pact.

 
Why Does the Public Hear: "tales of six-figure pensions and public employees comfortably retiring in their early 50s"? Print
Thursday, 16 June 2011 05:24

The NYT told readers that many states are planning to increase employee contributions to their pensions. One of the reasons is that legislators are hearing:

"tales of six-figure pensions and public employees comfortably retiring in their early 50s."

This is true because the media have been repeating tales circulated by right-wing and business organizations who are attacking public sector workers and public sector unions. In fact, the vast majority of public sector workers do not retiree in their early 50s and do not enjoy especially generous benefits.

For example, in New York state, which is featured prominently in this article, the average benefit in 2010 paid by the state's main pension program was $18,300. Most of the workers who retiree in their early 50s are public safety employees like police and firefighters.

If the media had been doing a competent job reporting on this issue, legislators would be hearing tales of 70-year old retirees trying to get by on less than $20,000 a year. (Roughly 30 percent of public sector employees do not get Social Security.)

The article also includes the bizarre assertion that, "the era of generous compensation for public-sector employees is ending." In fact, after adjusting for education and experience the compensation for public employees is slightly less than for their private sector counterparts.

This article also cites a Pew Center study that refers to a public pension shortfall of more than $1 trillion. It would have been worth noting that this shortfall is equal to approximately 0.25 percent of projected GDP over the next 30 years (the time horizon for most pensions). It also would have been worth noting this study found that New York state's pension is 100 percent funded, contrary to the assertion cited in the article by New York Governor Andrew Cuomo that its pension is unsustainable. The article should have corrected Mr. Cuomo on this point.

 
Ken Rogoff Thinks the U.S. Economy Will Collapse If Its Trade Deficit Declines Print
Thursday, 16 June 2011 04:03

This is the implication of his statement in a NYT column that:

"loans from emerging economies are keeping the debt-challenged United States economy on life support."

Is that so? Suppose that emerging economies announced tomorrow that there will be no more loans to the United States. There would be two responses. First, interest rates in the U.S. would rise. Second, the dollar would plummet, especially against the currencies of countries like China, which have been buying U.S. bonds (e.g. lending money) as part of a deliberate policy to keep down the value of their currency against the dollar. Will these events sink the U.S. economy?

First, it's not clear how high U.S. interest rates will go, since U.S. Treasury bonds remain one of the few safe assets for investors around the world. However, if rates did start to rise precipitously then the Fed could engage in a QE3 and buy huge amounts of debt.

Could this lead to inflation? It is unlikely given the massive amount of excess capacity and huge numbers of unemployed workers in the U.S. economy. However, even if it did lead to an  uptick in inflation, this would be a good thing since it would help relieve the debt burden of homeowners and help to spur growth. This argument was made not long ago by an economist named Ken Rogoff.

What about the falling dollar part of the story? Actually, this is what both the Obama and Bush administrations supposedly have been requesting/demanding from China. A lower dollar is essential for getting the trade deficit down. Everything else is chicken feed. There is nothing in any economist's bag of tricks that will have as much impact on the trade deficit as a 20 percent decline in the value of the dollar.

This should be a headline item in every newspaper every day, since the trade deficit is tied directly to the budget deficit. If the U.S. has a trade deficit, then it must have negative national saving. (It's an accounting identity.) This means either negative private savings (e.g. the zero household savings rate of the housing bubble years) or large government budget deficits.

This means that if deficit whiners understood economics, they would all be demanding a lower-valued dollar. In short, the emerging economies have no weapons against the U.S. They would do us and the world a great favor if they stopped lending us money.

 
I'm Back Print
Thursday, 16 June 2011 04:02

Thanks for the kind wishes. Oregon is beautiful.

 
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! 

 
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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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