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Training Doesn't Help Much When There are no Jobs Print
Friday, 04 June 2010 05:12
Good piece in USA Today discussing the usefulness of job training in the middle of a downturn.
 
David Brooks Has Never Heard of the Economics Profession Print
Friday, 04 June 2010 04:27

Probably not the medical profession either. In discussing school reform today he applauded the fact that the Obama administration was making it easier to fire teachers, telling readers: "in every other job in this country, people are measured by whether they produce results." How many economists suffered any career consequences after failing to foresee the largest economic crisis in 70 years? You can't mess up more than Chairman Bernanke and company. Yet, they all still have high-paying jobs -- they probably didn't even miss a scheduled promotion.

The same obviously applies to many of those Wall Street high-rollers who would have sank their companies had it not been for the bailout from the nanny state. (I will refrain from commenting on reporters and columnists.) So, insofar as teachers are not evaluated based on their performance, they are clearly not alone.

It is also worth noting that it is not as easy to measure teacher quality as Brooks and many others seem to believe. Berkeley economist Jesse Rothstein found that "good" 5th grade teachers improved the scores of their students in 4th grade. The issue here is obviously one of selection. Parents who are very involved in their kids education make sure that their kids are taught by a teacher who is considered to be good. This means that part of the explanation for their better student test scores is that they are getting better students.

 

 
Small Business Loans Are Down in a Recession: Why Should We Be Surprised? Print
Thursday, 03 June 2010 16:10

USA Today told readers that, "small businesses usually help drive job creation during recoveries but credit clogs have hurt hiring," in the context of covering a speech by Federal Reserve Board Chair Ben Bernanke. Mr. Bernanke did not actually say that credit clogs are hurting small businesses in his speech, noting the possibility that banks have reduced lending because they see fewer good lending opportunities.

If it is the case that banks have reduced lending because of inadequate capital then we should be seeing two things:

1) Banks that do not have weak capital conditions should be lending aggressively, since there are many good loan opportunities that are not being met by their competitors; and

2) Larger firms, who can raise capital directly on capital markets (e.g. by issuing bonds or commercial paper) should be expanding rapidly to take advantage of opportunities that are closed to their capital constrained competitors.

There is no obvious evidence of either #1 or #2, suggesting that the issue is not a problem of capital constraints by weak banks, but rather a situation where firms weakened by the recession are less creditworthy than they were formerly.

 
Plunge in Mortgage Applications Goes Unnoticed Print
Thursday, 03 June 2010 03:35
In the weeks since the end of the extended first time homebuyers tax credit purchase mortgage applications have fallen sharply. They dropped another 4.1 percent last week reaching their lowest level since April of 1997. This deserved some attention since it implies that home sales are falling sharply. This suggests that the price declines seen in recent months are likely to accelerate in the summer.
 
When Anger Subsides, Banks Get Their Way Print
Wednesday, 02 June 2010 04:50

Morning Edition did a brief overview of the prospects for the financial reform bill as it heads to a conference committee. The piece concluded by citing Robert Litan, vice president for research and policy at the Ewing Marion Kauffman Foundation:

"He says that over the next two years, as regulators work out the details of the Volcker rule, the current anti-bank anger will probably subside. Litan says that will allow more rationality and less emotion to be applied to the issue."

The anger at the conduct of the bank has brought much more public involvement into an area that is normally the exclusive preserve of bank lobbyists. If the anger dies down, then the only people left in the room will be the bank lobbyists. This may not bring more rationality to the debate, but it will likely ensure that the final provisions more closely reflect the interest of the financial industry.

 
Pearlstein Nails Spendthrift Bluedogs Print
Wednesday, 02 June 2010 04:33
Steven Pealstein hits a homerun with his column today. He notes the efforts of the Blue Dog Democrats to increase payments to doctors under Medicare. These are the same folks who have gained notoriety in recent days for opposing the extension of jobless benefits and funding to support state Medicaid programs.
 
The Deficit Hawks Opposed to the Jobs Bill Were Too Dumb to See an $8 Trillion Housing Bubble Print
Tuesday, 01 June 2010 20:21

David Leonhardt devoted his column day to consider the dilemma of the deficit hawks who are trying to decide whether to support the jobs bill. It outlines several of the main arguments as to why it would make sense to support additional jobs measures, while also noting (and exaggerating) the basis for concerns about the deficit.

However, the article neglected one important factor in the debate. We are in this situation because the deficit hawks, like Representative Jim Cooper who is featured in the piece, were unable to see the $8 trillion housing bubble that eventually sank the economy. In other words, we have 9.9 percent of the workforce unemployed, with almost as many either involuntarily working part-time or having left the workforce altogether, because people like Jim Cooper could not see the largest financial bubble in the history of the world.

Mr. Cooper enjoys a hefty six-figure salary and can look forward to a comfortable pension. This makes him far better off than the tens of millions of workers who are now suffering because of the incompetence of Mr. Cooper and his colleagues.

In any debate over jobs measures it is worth noting the irony that the people who are suffering at present are suffering due to the incompetence of people who are very comfortable, in spite of having failed disastrously at their jobs. And, the incompetents are now torn deciding the fate of those who are suffering as a result of their incompetence.

 
Leonhardt on Risk: BP, the Housing Bubble and Budget Print
Tuesday, 01 June 2010 19:42

David Leonhardt's magazine piece on mis-estimating risk gets the story of BP largely right. The top executives felt free to take big gambles with safety and the environment because it was entirely a one-sided bet for them. Large profits from increasing production could mean millions or even tens of millions of dollars in additional compensation each year. On the other hand, the downside from even the worst possible disaster carried little consequence for top executives (who will still be hugely rich) or even the company since Congress capped liability at $75 million.

However he gets the story of the housing bubble and the budget deficit almost completely wrong. He argues that Greenspan and Bernanke missed the fact that the economy faced a nationwide housing bubble because we had never seen one before. While that may be partially true, this comment also ignores the incentives facing the Fed chairs. Large financial companies like Goldman Sachs and Citigroup were making enormous profits from the financing that fueled the bubble. If Greenspan or Bernanke had tried to clamp down on the bubble they would have been confronted by the full force of this powerful industry. They may have found themselves ridiculed and pushed to the side as happened to Brooksley Born when she tried to regulate derivatives in 1998 as head of the Commodities and Futures Trading Commission.

In contrast, their decision not to clamp down on the bubble led to catastrophic results leading to the worst economic downturn in 70 years with tens of millions of people unemployed or underemployed. Yet, both Greenspan and Bernanke are still wealthy men and highly respected. In fact, Bernanke was reappointed to a second term as Fed chair in spite of his disastrous first term.

In short, the problem was not that they underestimated risk. The problem is that they face an entirely assymetric tradeoff structure. Clamping down on financial speculation was sure to have serious consequences for their careers, even if they were right. By contrast, failing to regulate properly did not seem to damage either man's wealth or stature in any major way even though it led to just about the most distrous possible outcome.

Leonhardt also gets the story of the risks from the budget deficit largely wrong.  He writes:

"The big financial risk is no longer a housing bubble. Instead, it may be the huge deficits that the growth of Medicare, Medicaid and Social Security will cause in coming years — and the possibility that lenders will eventually become nervous about extending credit to Washington. True, some economists and policy makers insist the country should not get worked up about this possibility, because lenders have never soured on the United States government before and show no signs of doing so now. But isn’t that reminiscent of the old Bernanke-Greenspan tune about the housing market?"

First, it is pecular to include Social Security in this list. Social Security is growing at a relatively slow pace. It is projected to grow less rapidly than interest on the government debt. Like interest on the government debt, Social Security benefits have already been paid for in advance by their beneficiaries. Wall Street tycoons like Peter Peterson have been desperate to gut Social Security for decades and have invented numerous stories (e.g. that the Trust Fund does not exist) to advance their agenda. However a responsible newspaper should not be advancing this agenda under the guise of news reporting.

The projected growth of Medicare and Medicaid, driven by the explosive growth of health care costs in the private sector, will impose strains on the budget. However, if the growth in health care costs really follows the path assumed in budget projections it will provide a much greater burden on the private sector than the public sector. It is difficult to imagine that the public will itself to be priced out of the market for health care rather than taking simple and obvious steps that challenge the industry's power and ability to continually jack up prices. The point is that this is first and foremost a health care problem. It is only the Peterson Wall Street gang that insists on discussing the issue as a budget problem.

The second reason why the discussion of the budget is not entirely right is that we have been here before. The country has had ratios of debt to GDP in excess of 100 percent following World War II. In spite of this debt burden, interest rates remained low and the economy grew rapidly. Other countries, like the UK and more recently Japan and Italy have sustained much larger debt to GDP ratios without seeing any financial panics.

Finally, unlike Greece, which does not control its own currency, the debt of the United States is in dollars and the United States can always print more dollars. This means that the actual risk is not insolvency, but inflation, since the country would presumably print money rather than face bankruptcy. An honest discussion of the debt problem in the United States would discuss the risk from inflation. In the current environment, this is extremely low. In fact, according to a recent paper by Olivier Blanchard, the IMF's chief economist, the United States would actually benefit from a somewhat higher inflation rate (3-4 percent) since it would reduce debt burdens and lower the real interest rate.

So, the supposed threat from the deficits has been seriously misrepresented by the Wall Street deficit hawks. It is hardly irrational to disregard threats that are incoherent.

 

 

 
The Post Passes Along Credit Card Industry Propaganda Print
Tuesday, 01 June 2010 05:06

The Washington Post reported that several state governments are now trying to remove a clause in the financial reform legislation that could limit the fees that credit card companies charge retailers. The article noted the states' claim that it cost them just 1.5 cents to load benefits like Food Stamp payments onto an electronic card while it can cost 60 cents to issue a check.

The article implies that states could be forced to go back to issuing checks for benefits if they were not able to take advantage of electronic cards that the credit companies now issue for free since they can get back their costs by charging retailers high fees. This is of course absurd. If the credit card fees are limited then states may have to pay a somewhat higher cost to the credit card companies so that they can recoup the cost of issuing the cards, however this would almost certainly be far below the cost of writing checks.

In effect, the credit card companies are using their market power to gouge retailers and sharing some of their gains with state governments to buy their support on this issue. The news article should have pointed this fact out to readers.

 
Conventional Economic Wisdom from People Who Couldn't See an $8 Trillion Housing Bubble is of Little Value Print
Tuesday, 01 June 2010 04:36

The Washington Post notes the conventional wisdom of the Washington elite that there should be a run on U.S. bonds because of the size of the country's debt and deficits. It then points out that the markets seem to be contradicting the conventional wisdom. It is worth noting that nearly all of the purveyors of this conventional wisdom completely missed the $8 trillion housing bubble, the collapse of which wrecked the economy. Missing a bubble of this enormous size suggests that this convention wisdom is not grounded in a serious understanding of the economy. It would have been worth noting this point in discussing the conventional wisdom.

The article also asserts that: "the mix of spending cuts and tax increases that could close the gap [the budget deficit] are wildly unpopular." This is not true. During a period of extraordinarily high unemployment, like the present, there is no reason that the Fed could not simply buy and hold the debt being issued in order to prevent future interest burdens from increasing. To reduce future health care expenditures the government could publicly finance clinical trials for prescription drugs, thereby allowing all new drugs to be sold as generics for a few dollars per prescription. It could also allow Medicare beneficiaries to buy into the lower cost health systems in other countries, sharing the huge savings with the beneficiaries. The government could also roll back defense spending to the levels projected before the wars in Afghanistan and Iraq. And, to raise revenue the government could impose a financial speculation tax like the one that currently exists in the UK.

There is no evidence to suggest that any of these measures are wildly unpopular although powerful interest groups may object to them.

 
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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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