The Meltdown Lowdown, No. 16

Dean Baker
The American Prospect Online, July 31, 2008

See article on original website

This week in economic news: The deficit is not at record levels, housing prices continue to fall, and McCain correctly suggests cutting executive pay at Fannie and Freddie.

It's Not a Record Deficit

The government is not, repeat not, projected to run a record deficit in 2009, contrary to what you might see in The New York Times, The Washington Post, USA Today, and other less-than-reputable news sources.

The latest projections show a deficit of $490 billion. By the absolutely meaningless measure of dollars unadjusted for inflation, this is a record. But if anyone thinks this is giving information to readers, then they have no business writing news. The relevant measure is the deficit as a share of gross domestic product. The 2009 deficit will be equal to about 3.3 percent of GDP. Even if you add in 1.3 percent of GDP for the money borrowed from Social Security this only gets you to 4.6 percent, well below the 6 percent the deficit hit in 1983.

To its credit, the USA Today piece included a chart that made this point, as did the last sentence in the article, but the headline writer blew it big time. (The Post piece also included a short reference to the deficit as a share of GDP.)

More Asset Building by Renters

Those who opted to rent rather than to buy are seeing their relative wealth grow by the day, especially in the low end of the housing market in many former bubble markets. The latest Case-Shiller house-prices indices show that house prices in their 20-city index dropped by another 0.9 percent in May.

There were large differences by city. Prices in Charlotte, Dallas, and Boston all rose by more than 1 percent for the month. On the other side, prices in Los Angeles fell by 1.9 percent, and prices in Miami fell by 3.6 percent.

In most markets, prices at the bottom end are falling fastest. For example, in Los Angeles, prices for homes in the bottom third of the housing market fell by 4.2 percent in May. Over the last three months, prices for these homes have been falling at a 46.1 percent annual rate (that is, if they continued to fall for a year at the rate they've been falling for the last three months, they would decline by 46.1 percent). Over the last three months prices for the cheapest one-third of homes in Washington, D.C., have been falling at a 35.8 percent annual rate while prices for the bottom third of homes in the Miami area have been falling at a 57 percent annual rate over the last quarter.

These price declines imply a real bonanza for those who made a decision to rent rather than to buy and who may now decide to buy (or wait for prices to fall further). For example, someone who was considering purchasing a house in the Washington area that would have sold for $353,500 back in February, would have saved himself approximately $33,000 by waiting three months. The returns to waiting were even larger in Los Angeles and Miami.

In the context of the housing bill just passed by Congress, many moderate-income homeowners benefited enormously from the delay. In Los Angeles, the price of homes in the bottom third of the market fell by 22.2 percent between December and May. This means that if a homeowner was in a home appraised at $514,000 in December, the same home would be appraised at $400,000 today.

This homeowner effectively has an additional $114,000 in the bank (or owes that much less) as a result of the delay in getting the bill through Congress. Not only does this mean the homeowner will be more likely to pocket money when selling the home, she will also pay much lower interest while she is in the home. At a 7.5 percent annual interest rate (this includes the 1.5 percent guarantee fee attached by Congress to the loans), the price decline would translate into $8,500 in savings on annual mortgage payments, or $700 a month. With prices still falling rapidly in many areas, moderate-income homeowners will gain enormously if they can wait a few more months before their homes go into the new housing program.

McCain Gets One Right on Fannie and Freddie

Bill Syron, the CEO of Freddie Mac, made $19.6 million last year, according to The Wall Street Journal. As we all know, this extremely highly paid housing-finance executive somehow managed to overlook the largest housing bubble in the history of the world. If he had seen the bubble and stopped pumping mortgage credit into bubble-inflated markets, he could have stopped the bubble from growing to such dangerous levels. Freddie Mac also would not be facing bankruptcy and running to Congress for government handouts.

While Congress shows little interest in holding Mr. Syron responsible or bringing his pay more in line with performance, Sen. McCain has the right idea. He noted that Mr. Syron is effectively working for the government in the wake of the bailout. Therefore, he suggested he get a government salary. The top of the civil-service pay scale might get him close to $200,000 a year. That's probably still considerably more than what he deserves, but a lot less than he is currently set to pocket.

WTO Talks Fail and the "Experts" are Unhappy

That's what the Times says. Of course, not all "experts" agree that a new World Trade Organization deal would necessarily be a good thing.

In fact, the experts can't agree about much concerning the WTO. For years they pushed a new WTO deal in part on the grounds that it would raise agricultural prices worldwide. This was supposed to help farmers in the developing world. However, after the recent surge in food prices, the experts (at least those who supported a new WTO agreement) argued that a new agreement would lower food prices.

It will be a huge step forward when media outlets like the Times and the people upon whom it relies as experts can start talking about trade honestly. Maybe if we pursued trade deals that could actually appeal to majorities in the countries affected, our negotiators wouldn't have to be holding super-secret sessions and coming up with nonsense stories about the benefits of their deals.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.