CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press

Beat the Press

 facebook_logo  Subscribe by E-mail  


The Enron Felons Believed in Enron: Corrective to Samuelson on the Housing Bubble Print
Monday, 02 February 2015 05:44

Robert Samuelson used his column today to tout a new study that analyzes home purchases by the income level of the buyer in contrast to previous work that analyzed data by average income in a zip code. The conclusion of the study is that increased aggregate debt to income levels was the result of more people buying homes, not higher ratios of debt to income among purchasers. This means that the problem was not a deterioration in lending standards. It also finds that the growth of debt was proportionate to income in each quintile, meaning that low-income households were not singled out for bad loans.

This is an interesting analysis that seems to contradict much other evidence. For example, while it shows no correlation between income levels and delinquency, we know that African Americans were far more likely to lose their home in the crash than the population as a whole. It would be striking if this is exclusively a question of race and not income.

We also know that both subprime and Alt-A mortgages skyrocketed as a share of total mortgage issuance during the downturn, with the former going from around 8-9 percent in 2000 to 25 percent in 2005. The latter went from 2-3 percent to 15 percent in 2005. It is difficult to believe that the growth of these riskier mortgage types wasn't not associated with a rise in the debt to income ratios of borrowers.

And, we have a survey done by the National Association of Realtors at the time. This survey found that 43 percent of first-time homebuyers in 2005 put zero down or less (many people borrowed more than the value of their home). This certainly would not have been the case ten years earlier. Part of the problem could be that the first year in the analysis is 2002, a point at which the bubble was already well underway. The deterioration from 2002 to 2006 would have been far less than if the analysis had begun in a year before the bubble began. The other possibility is that the analysis is not picking up second loans that raised debt-to-income as well as debt to value ratios.

However the deeper point in this discussion is that the question of banker fraud versus a mistaken belief that the bubble will last forever is not an either/or proposition. It is entirely possible that most of the bankers issuing mortgages that they knew borrowers could not pay, or that were based on mis-stated information that they had entered, believed that rising house prices would ensure the quality of the mortgages. The investment bankers who packaged them into mortgage backed securities may have also believed in the bubble.

However this does not change the fact that falsifying mortgage information is fraud and that knowingly packaging fraudulent mortgages into mortgage backed securities is also fraud. The people convicted of fraud charges in the Enron scandal all had large amounts of Enron stock. This indicated that they believed the company was a good buy and presumably had a good business model. They still committed fraud. That is likely true of the folks at places like Countrywide, Goldman Sachs, and Citigroup.

 
4th Quarter GDP: Happy Days Are Here Again (not) Print
Saturday, 31 January 2015 09:19

The Commerce Department reported that GDP grew at a 2.6 percent annual rate in the fourth quarter, roughly a half point below most forecasts. This brought growth for the year (fourth quarter to fourth quarter) to 2.5 percent, a modest slowing from the 3.1 percent rate in 2013. Since GDP is the broadest measure of overall economic activity, the weak quarter and weak year-round performance might seem to fly in the face of all the upbeat news we've been hearing on the economy recently. But, most news coverage seemed determined not to let the data spoil the story.

For example, the Post told readers:

"For all of 2014, the U.S. economy grew at a 2.4 percent pace — a relatively dreary number much in line with the previous years of a long recovery. But that number is somewhat misleading: A brutal winter in the northeast led to a sharp contraction in the first quarter. Since then, the nation has seen its best nine-month stretch of growth since 2003 and 2004."

Actually, instead of the 2.4 percent (I get 2.5 percent) pace being misleading, the comment about the next 9 months is misleading. The economy shrank a 2.1 percent annual rate in the first quarter, a drop that was clearly in large part due to the weather. However the strong growth reported for the next two quarters was in large part due to the first quarter shrinkage.

To see this point, assume that the actual rate of growth in the economy is 2.8 percent annually, or 0.7 percentage points a quarter. Now suppose that the economy goes into reverse in a quarter due to weather so that we show that it shrank 0.5 percentage points (2.0 percent annual rate). If the economy returns to its trend path in the following quarter, then it will grow by 1.9 percentage points (0.7 percentage points for the quarter's trend growth, 0.7 percentage points for the first quarter, and 0.5 percentage points to make up for the drop). This 1.9 percentage point quarterly growth translates into roughly a 7.6 percent annual rate. 

This exercise is overly simplistic, but that is basically the story of the rapid growth in the second and third quarters. This growth cannot be understood without reference to the decline in GDP in the first quarter.

The NYT seemed to largely ignore the data altogether, with a lead paragraph telling readers:

"Powered by healthy spending from increasingly optimistic consumers, the American economy is emerging as an island of relative strength in the face of renewed torpor and turmoil elsewhere in much of the world."

Wow, 2.5 annual growth! That should embarrass China with its 7.4 percent growth. Those interested in comparisons with our own past recoveries should know that growth averaged 5.2 percent over the three years 1976-1978 and 5.4 percent over the years 1983-1985. Still feel like celebrating?

Read more...

 

 
The BS Storm is Coming on Trade Deals Print
Friday, 30 January 2015 08:12

Okay folks, get out those umbrellas, we are about to showered with all sorts of garbage as the corporate interests pushing for the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Pact ((TTIP) go into overdrive to get Congress to approve their deals. We are entering the logic-free zone where ostensibly serious people say any sort of nonsense imaginable to advance these trade deals (not free-trade deals).

Today's entry is a piece by David Ignatius in the Washington Post pushing the merits of the Trans-Pacific Partnership (TPP). Ignatius' big punch line is:

"The Peterson Institute for International Economics estimates that the market-opening features of the TPP will boost U.S. exports by about $123 billion annually by 2025 and add 600,000 jobs."

Hey, 600,000 jobs sounds pretty good. What sort of troglodyte could be opposed to that?

There are a few points that are worth noting on this. First, the comment on exports is a big giveaway. No serious person would talk about exports. Exports do not create jobs in an underemployed economy, net exports create jobs. To see the distinction, suppose that GM shuts a car assembly plant in Ohio and instead ships the parts to Mexico to be assembled. The finished cars are then imported back into the United States.

Exports have risen in this story by the value of the car parts. If you think GM's move of the assembly plant to Mexico was a job creator in the United States, then think more carefully. Anyone who understands basic economics knows that exports by themselves don't create jobs, you have to look at net exports (exports minus imports). Someone who just discusses exports is either ignorant of economics or not being honest.

The next point is that standard trade models are full employment models. This means that everyone who wants a job at the prevailing wage has a job. (Ignatius does not provide a link so it's not clear where he got his numbers.) This means that they create jobs through increasing efficiency. The job creation effect will almost invariably be small and it results from an increased supply of labor. Greater efficiency means higher wages (in these models) and therefore more people want to work.

Read more...

 

 
Why Does the Washington Post Call the Trans-Pacific Partnership a "Free-Trade" Pact? Print
Thursday, 29 January 2015 08:12

Is someone paying them to give their readers inaccurate information? I'm inclined to doubt that explanation, but why does the paper keep using this description when it is so obviously not true?

The issue came up in the context of a discussion of the agenda of the Democrats in the House of Representatives. The article notes differences between House Democrats and President Obama and trade, and then tells readers;

"Republican leaders are preparing legislation that would grant Obama broad authority to finalize one of the largest free-trade pacts [the Trans-Pacific Partnership] in the nation’s history."

The Trans-Pacific Partnership (TPP) is far from a "free-trade" deal. It actually will increase some protection in some areas, notably stronger and longer patent and copyright protection. Most of the deal is devoted to creating a uniform and largely business friendly regulatory structure. It creates special courts for businesses to sue governments outside of the normal judicial process. Since most trade barriers between the parties in the pact are already low, it will do little to reduce formal barriers to trade.

It is difficult to see why the Post cannot simply refer to the TPP as a "trade agreement," or even more accurately a "commercial agreement." It could save its praise of the pact for the opinion pages.

 
Arithmetic Is Very Simple, But It's Still True Print
Thursday, 29 January 2015 05:54

Steven Rattner doesn't like people focusing on stimulus as a path to help Europe grow because it is "simplistic." Instead he wants Europe to focus on reducing business regulation, protections for workers, and taxes for the wealthy.

Interestingly, he presents zero evidence that these changes will boost the continent's growth, in contrast to the now vast amount of evidence (e.g. here, here, and here) that stimulus will increase growth. On their face, many assertions seem outright wrong. For example, according to the OECD's assessment, employment protection for workers in Germany are the second strongest in Europe, yet it has an unemployment rate of 5.1 percent. This suggests that labor market protections are not the biggest problem stunting growth. 

Rattner also warns about Europe and even Germany losing "competitiveness." It is not clear what meaning he assigns to that word, but Germany has a trade surplus of more than 6.0 percent of GDP, in contrast to a deficit of 2.4 percent of GDP in the United States.

In some cases, his complaints not only lack evidence, but they defy logic. It is not efficient to allow companies to dismiss workers at will. Long-term employees make substantial commitments and sacrifices to develop firm specific skills. It will often be difficult for them to find new employment if they lose their job in their late forties or fifties. Dismissing these workers imposes costs on them and the government in the form of unemployment benefits and other transfer payments. That might be good for the businesses who can chalk up higher profits, but it is bad for the economy and society.

In short, this piece tells us that Rattner wants Europe to be more pro-business at the expense of the rest of society. He doesn't have any real argument as to why anyone who is not rich should support his position, although I suppose it is not simplistic.

 
More Debt Fetishism at the Washington Post Print
Wednesday, 28 January 2015 05:49

We're still down close to five million jobs from our trend employment path. Or, to put this in generational terms, millions of kids are being raised by parents who can't find work. We have endless needs for infrastructure, health care, child care, and education, and reducing greenhouse gas emissions which are not being met because of concerns over budget deficits. Given this situation, Ruth Marcus would naturally use her column in the Washington Post to warn about the government debt.

She bemoans the fact that President Obama barely even mentioned the debt in his State of the Union address:

"Oh, the debt. Yawn. How passe. How 2009.

"Once, President Obama held a summit on fiscal responsibility (2009). Once, he gave an entire speech devoted to the subject (2011). Once, his State of the Union addresses (2010, 2011, 2013) were studded with double-digit references to the problem of sky-high deficits and lingering mountains of debt.

"Now, the topic receives just a glancing mention, a clause ('shrinking deficits') in a series of presidential back-pats and a refutation of warnings of Apocalypse Soon."

While Marcus is clearly terrified by the deficit and debt, the column gives no reason why we should be more concerned about debts and deficits (yes, big numbers) than the number of trees in the United States (a number I do not know offhand, but I'm sure it's also big).

The best we get is a quote from an earlier State of the Union that is both wrong and arguably appealing to racist sentiments:

"Even after our economy recovers, our government will still be on track to spend more money than it takes in throughout this decade and beyond. That means we’ll have to keep borrowing more from countries like China. That means more of your tax dollars each year will go toward paying off the interest on all the loans that we keep taking out."

The budget deficit actually does not mean that we have to borrow from countries like China. We have to borrow from countries like China because we run a trade deficit. This in turn is the result of an over-valued dollar. The over-valuation of the dollar is the result of countries like China buying up large amounts of U.S. assets, including U.S. government debt. (This is how they "manipulate" their currency.)

If countries like China stopped buying U.S. debt and other dollar denominated assets then the value of the dollar would fall and we would move towards balanced trade. This would increase employment and also, by the way, reduce our budget deficit.

Marcus later tells readers, quoting in part from the Congressional Budget Office:

"Another is that, unlike at the start of the financial crisis, when debt amounted to just (!) 43 percent of GDP, the overhang of already huge debt could 'restrict policymakers’ ability to use tax and spending policies to respond [exclamation mark in original].'"

Read more...

 

 
NYT Says Greek Election Sets Up a Conflict With Northern Europeans Who Don't Believe in Economics Print
Tuesday, 27 January 2015 05:55

That is not exactly what the NYT said. Instead its article on the dispute between the new Greek government and Germany and other northern European countries chose to use bias in the opposite direction telling readers:

"But beneath the arguments over austerity is a deeper conflict of democratic wills, between the verdict of voters in Greece, who are desperate for some relief, and those in Germany, Finland and the Netherlands, who do not want their taxes used to underwrite a blank check for countries that get into financial trouble."

Really? The voters in Germany, Finland, and Netherlands are just concerned about issuing blank checks? Have they noticed that Greece cut its budget by 27 percent since 2008? This would be equivalent of a cut in annual spending in the United States of almost $1 trillion in its impact on the budget and close to $2 trillion in its impact on the economy.

These cutbacks, coupled with the austerity that the European Union has imposed on much of the rest of the euro zone, has had the predictable effect of throwing Greece's economy into a downturn that makes the U.S. depression look like an economic boom. Are voters in Germany, Finland, and the Netherlands really so ignorant of economics that they do not understand this fact?

At another point the article tells readers:

"Jeroen Dijsselbloem, the head of the group of finance ministers from countries using the euro, said he did 'not believe in this north-south divide,' noting that 'there are a lot of countries in the north, think of the Baltics; in the south, think of Spain; and Ireland' in the west, and they 'have done major reforms, and they are all back on the growth track.'"

It would have been worth pointing out that on Mr. Dijsselbloem's "growth track" Spain's economy is projected to first exceed its 2008 GDP in 2019. Ireland is projected to first pass its 2007 peak in 2016. By comparison, in the Great Depression, U.S. GDP was 6.0 percent larger in 1937 than it had been at the onset of the depression eight years earlier in 1929.

It also would be worth pointing out that many of the crisis countries' problems did not stem from a lack of "budget discipline." Several were running modest deficits and Spain and Ireland actually had large budget surpluses before the crash. Their economic problems stemmed from the fact that bankers in places like Germany, Finland, and the Netherlands were not very competent and thought that the housing bubbles in these countries could keep growing forever. Therefore they funneled hundreds of billions of dollars in loans that further inflated the bubbles and distorted the crisis countries' economies.

 
Today's Seniors Do Not Have Better Retirement Benefits Than Prior Generations Print
Monday, 26 January 2015 05:43

A NYT article on the dwindling size of the middle class noted that seniors are more likely to be middle class than in the past. It told readers:

"Today’s seniors have better retirement benefits than previous generations. Also, older Americans are increasingly working past traditional retirement age."

In fact, seniors on average almost certainly have worse retirement benefits. The increase in the normal retirement age from 65 to 66 is equiavlent to a 6 percent cut in Social Security benefits. In addition, changes in the methodology used for calculating the consumer price index reduced the size of the annual cost-of-living (COLA) adjustment by 0.3-0.5 percentage points compared to the increases in the early and mid-1990s. (This means that for the same actual rate of inflation, seniors would see a COLA that is 0.3-0.5 percentage points less than what they would have received in the early and mid-1990s.)

In addition, today's seniors are less likely to have a defined benefit pension, as these are dwindling rapidly. Defined contribution pensions have not come close to making up the loss. Seniors also are far less likely to have retiree health insurance to cover non-Medicare expenses. Medicare has also become less generous in many respects, although the addition of the Medicare drug benefits (Part D) has been a big help to seniors.

The main reason seniors have more income is that they are working later in life. This is a positive insofar as it is the result of the voluntary decision of people in good health who enjoy their work. However in many cases, this is almost certainly not true. Many older workers are staying in the workforce because they have no other way to make ends meet.

 
The Wall Street Journal Goes Fox News, With "Some People Say" Print
Sunday, 25 January 2015 21:53

It's not quite that bad, but pretty close. An article on the victory of Syriza in Greece told readers:

"International economists say the eurozone needs a judicious mix of all of the above: monetary stimulus to avoid deflation, deficit-cutting by debtor countries, higher spending by creditor countries, and broad economic overhauls in many nations to lift long-term prospects."

Really? Do all international economists say this? Did these international economists predict the economic collapse in 2008? If not, when did these international economists stop being wrong about the economy? Do these international economists know that the OECD says that Germany has stricter employment protection regulations than either Italy or France?

Later we are told:

"Ms. Merkel’s economic medicine, with its focus on Europe’s long-term prospects in a fast-changing global economy, could show benefits eventually, economists say. The problem, they add, is that meanwhile, Europe is staring at a lost decade."

It's not clear who these economists are or what they can possibly be thinking. There is a large and growing body of evidence that high rates of long-term unemployment permanently lower a country's productive potential. With countries like Greece, Spain, and possibly France looking at decade or more of double-digit unemployment under the German plan, the losses to GDP could easily last 20 years or more. If the economists the Wall Street relies upon are making GDP growth projections for 2033 and beyond, they probably should lose their licenses. 

 
Japan's Economy Is Not In Recession Print
Sunday, 25 January 2015 21:24

Robert Samuelson cautioned, somewhat reasonably, against over-optimism on the U.S. economy. His basic point is that other economies around the world don't look very good right now. Their weakness could spill over and dampen growth in the United States. This is largely right, especially with the recent run-up in the dollar making U.S. goods and services less competitive.

However Samuelson does get some items wrong. He tells readers that Japan's economy is in a recession. This is almost certainly wrong. We don't have growth data for fourth quarter yet, but it is almost certain to be positive. Furthermore, even the drop in the third quarter was misleading. The economy contracted because of a large drop in inventory accumulations. Final demand actually grew modestly in the quarter. The unemployment rate has actually fallen slightly through Japan's recession, with the unemployment rate averaging 3.5 percent in October and November, compared to 3.6 percent in the first quarter. 

The Japan story is fairly simple. The austerity gang got the government to impose a large tax increase in April, which was a severe hit to the economy. However, with aggressive monetary policy and no further austerity, the economy is again growing at a modest pace.

The other point worth correcting is Samuelson's comment that one-third of U.S. corporate profits now come from overseas. This is true in an accounting sense but it is almost certainly a gross exaggeration of the economic distribution of profits. Most major U.S. corporations find ways to have profits from the United States show up on the books of subsidiaries in countries with lower tax rates.

Insofar as profits are foreign only in accounting, they will not be affected by the slowdown elsewhere in the world. Of course reduced corporate profits are not likely to have much impact on domestic demand in any case. Companies are already sitting on vast piles of cash, so lower profits would likely have little impact on investment. A reduction in dividend payouts or a fallback in stock prices may have a modest impact on the consumption of the wealthy, but this would probably not be large enough to have noticeable impact on the economy.

 
<< Start < Prev 1 2 3 4 5 6 7 8 9 10 Next > End >>

Page 9 of 423

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

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.

Archives