Readers are undoubtedly confused by the reference to 1000 percent tariffs on prescription drugs. We don’t call our protection for prescription drug companies “tariffs,” we call them “patent monopolies.” But government interventions in the market don’t care what we call them, they have the same effect.
Like tariffs on imports, government-granted patent monopolies hugely raise the cost of prescription drugs, often making the price ten or even a hundred times as much as the free market price. In a free market without patents or related protections, drugs would almost invariably be cheap. It’s rare that it would cost more than $20 or $30 per prescription to manufacture and distribute drugs, and often considerably less. Patent monopolies allow drug companies sell drugs for hundreds or even thousands of dollars per prescription.
This would be a bad story if we were talking about smartphones or running shoes, but it is an especially bad story when we are talking about drugs that people need for their health or even their life. As it is now, because of patent monopolies people often have to struggle to get the money they need for life-saving drugs or battle with insurers to cover the costs. This would not be the case if drugs were selling for their free market prices.
In addition to hugely raising the price of prescription drugs, patent monopolies also provide enormous incentives for drug companies to mislead the public about the safety and effectiveness of their drugs. We saw this most clearly in the opioid crisis, where the drug companies misled the public about the addictiveness of the new generation of opioids, but this is a recurring problem. Economics teaches us that people respond to incentives and patent monopoly prices provide an enormous incentive to push drugs as widely as possible even if it means exaggerating their benefits and downplaying their risks.
The drug companies usually silence anyone raising questions about their patent monopolies by insisting that we would not be able to develop new drugs without this incentive. This is not true. While we do have to pay for the research involved in developing drugs, the federal government spends over $50 billion a year on biomedical research through the National Institutes of Health and other agencies.
Most of this money goes to more basic research, which drug companies then build on to develop new drugs and vaccines. But there is nothing natural about this division of labor. The federal government could double or triple this spending and look to replace much or all of the patent-monopoly supported research now being undertaken by the pharmaceutical industry.
There are several big advantages of going this route. First, all the new drugs developed could be sold as cheap generics the day they are approved by the FDA. No one would then have to struggle to come up with tens of thousands of dollars for life-saving drugs or beg their insurer to pick up the tab.
A second big advantage is that all the research could be fully open. The government could require that all research findings be posted on the web as soon as practical, imposing a rule comparable to the Bermuda Principles in the Human Genome Project. That means no one would have the incentive or ability to lie about the effectiveness and safety of new drugs. The data would all be available for any researcher to evaluate.
A third advantage is that the funding could be used to support research into new uses of older drugs and also dietary and environmental causes of disease. Since this research is unlikely to result in a patentable product, the pharmaceutical industry has little interest in pursuing it.
At the moment there is little interest in policy circles in advancing alternative mechanisms for financing drug research. Senator Bernis Sanders has proposed legislation that would set up prize funds to buy out patents and make new drugs available as generics, but he has found few allies in this effort.
We actually have a great example of a vaccine developed through this open-source model. Drs. Peter Hotez and Maria Elena Bottazzi, along with their colleagues at Baylor College of Medicine and Texas Children Hospital, developed a Covid vaccine, Corbevax. This vaccine has now been administered to well over 100 million people in India and Indonesia, protecting them against serious illness and death from Covid.
While this vaccine would likely sell for around $5 booster shots in the United States, as opposed to more than $100 for the Pfizer and Moderna boosters, the FDA refuses to approve it based on the clinical trials done elsewhere and the bridging studies it accepts from the drug companies. If the FDA would grant approval, it would provide a great example of the potential benefits of an alternative model of drug development.
Anyhow, it may be a long time before we have public funding for the development of new drugs, but it would be a huge first step if we could start to have the discussion. Most policy-oriented people can understand how a 10 percent tax on imports can be a bad thing. Somehow we have to also get them to understand how a 1000 percent tax on prescription drugs can also be a bad thing. Learning is possible.
Readers are undoubtedly confused by the reference to 1000 percent tariffs on prescription drugs. We don’t call our protection for prescription drug companies “tariffs,” we call them “patent monopolies.” But government interventions in the market don’t care what we call them, they have the same effect.
Like tariffs on imports, government-granted patent monopolies hugely raise the cost of prescription drugs, often making the price ten or even a hundred times as much as the free market price. In a free market without patents or related protections, drugs would almost invariably be cheap. It’s rare that it would cost more than $20 or $30 per prescription to manufacture and distribute drugs, and often considerably less. Patent monopolies allow drug companies sell drugs for hundreds or even thousands of dollars per prescription.
This would be a bad story if we were talking about smartphones or running shoes, but it is an especially bad story when we are talking about drugs that people need for their health or even their life. As it is now, because of patent monopolies people often have to struggle to get the money they need for life-saving drugs or battle with insurers to cover the costs. This would not be the case if drugs were selling for their free market prices.
In addition to hugely raising the price of prescription drugs, patent monopolies also provide enormous incentives for drug companies to mislead the public about the safety and effectiveness of their drugs. We saw this most clearly in the opioid crisis, where the drug companies misled the public about the addictiveness of the new generation of opioids, but this is a recurring problem. Economics teaches us that people respond to incentives and patent monopoly prices provide an enormous incentive to push drugs as widely as possible even if it means exaggerating their benefits and downplaying their risks.
The drug companies usually silence anyone raising questions about their patent monopolies by insisting that we would not be able to develop new drugs without this incentive. This is not true. While we do have to pay for the research involved in developing drugs, the federal government spends over $50 billion a year on biomedical research through the National Institutes of Health and other agencies.
Most of this money goes to more basic research, which drug companies then build on to develop new drugs and vaccines. But there is nothing natural about this division of labor. The federal government could double or triple this spending and look to replace much or all of the patent-monopoly supported research now being undertaken by the pharmaceutical industry.
There are several big advantages of going this route. First, all the new drugs developed could be sold as cheap generics the day they are approved by the FDA. No one would then have to struggle to come up with tens of thousands of dollars for life-saving drugs or beg their insurer to pick up the tab.
A second big advantage is that all the research could be fully open. The government could require that all research findings be posted on the web as soon as practical, imposing a rule comparable to the Bermuda Principles in the Human Genome Project. That means no one would have the incentive or ability to lie about the effectiveness and safety of new drugs. The data would all be available for any researcher to evaluate.
A third advantage is that the funding could be used to support research into new uses of older drugs and also dietary and environmental causes of disease. Since this research is unlikely to result in a patentable product, the pharmaceutical industry has little interest in pursuing it.
At the moment there is little interest in policy circles in advancing alternative mechanisms for financing drug research. Senator Bernis Sanders has proposed legislation that would set up prize funds to buy out patents and make new drugs available as generics, but he has found few allies in this effort.
We actually have a great example of a vaccine developed through this open-source model. Drs. Peter Hotez and Maria Elena Bottazzi, along with their colleagues at Baylor College of Medicine and Texas Children Hospital, developed a Covid vaccine, Corbevax. This vaccine has now been administered to well over 100 million people in India and Indonesia, protecting them against serious illness and death from Covid.
While this vaccine would likely sell for around $5 booster shots in the United States, as opposed to more than $100 for the Pfizer and Moderna boosters, the FDA refuses to approve it based on the clinical trials done elsewhere and the bridging studies it accepts from the drug companies. If the FDA would grant approval, it would provide a great example of the potential benefits of an alternative model of drug development.
Anyhow, it may be a long time before we have public funding for the development of new drugs, but it would be a huge first step if we could start to have the discussion. Most policy-oriented people can understand how a 10 percent tax on imports can be a bad thing. Somehow we have to also get them to understand how a 1000 percent tax on prescription drugs can also be a bad thing. Learning is possible.
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Donald Trump seems very confused about the state of California’s economic health. He gave a press conference Friday in which he implied that California’s economy was collapsing.
This is not true. California has a considerably higher per capita income than the rest of the country. It’s currently ranked 5th. Its economy is also growing considerably more rapidly than the rest of the country.
Since the first quarter of 2018, its economy grew 17.0 percent compared to 13.5 percent for the country as a whole.
Source: Bureau of Economic Analysis.
In fact, this comparison understates the gap somewhat. California accounts for more than 10 percent of the U.S. economy, which means that the U.S. economy outside of California grew by just a bit more than 13.0 percent over this period.
Of course, growth is not the only thing, but it is an important metric. And by most other measures, California is doing better than the average state in the country. It does have a serious shortage of housing due largely to zoning issues. Its Democratic governor is trying to address this problem and Vice-President Harris has as well, during her presidency. It doesn’t seem as though Donald Trump has noticed.
I guess it is unreasonable to expect a reality TV show star like Donald Trump to know about economics.
Donald Trump seems very confused about the state of California’s economic health. He gave a press conference Friday in which he implied that California’s economy was collapsing.
This is not true. California has a considerably higher per capita income than the rest of the country. It’s currently ranked 5th. Its economy is also growing considerably more rapidly than the rest of the country.
Since the first quarter of 2018, its economy grew 17.0 percent compared to 13.5 percent for the country as a whole.
Source: Bureau of Economic Analysis.
In fact, this comparison understates the gap somewhat. California accounts for more than 10 percent of the U.S. economy, which means that the U.S. economy outside of California grew by just a bit more than 13.0 percent over this period.
Of course, growth is not the only thing, but it is an important metric. And by most other measures, California is doing better than the average state in the country. It does have a serious shortage of housing due largely to zoning issues. Its Democratic governor is trying to address this problem and Vice-President Harris has as well, during her presidency. It doesn’t seem as though Donald Trump has noticed.
I guess it is unreasonable to expect a reality TV show star like Donald Trump to know about economics.
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The New York Times had a piece noting that, while we don’t see evidence of an increase in layoffs, we have seen a downturn in hiring which has been associated with a 0.8 percentage point rise in the unemployment rate since April of last year. The piece notes that the monthly rate of job creation has slowed to just 115,000 in the last three months, down from 451,000 in the same months two years ago.
It is worth noting that we are hitting the peak retirement years for the baby boom cohort. The youngest turn 60 this year, while the oldest are 78. In 2020, before the pandemic, the Congressional Budget Office (CBO) projected we would be creating just 20,000 jobs a month in 2024.
As a result of larger than expected immigration, we have been creating far more jobs than had been projected. With immigration now having slowed sharply, it is not clear how many jobs need to be created monthly to prevent the unemployment rate from rising. It is not clear that the June to August pace is too slow.
The New York Times had a piece noting that, while we don’t see evidence of an increase in layoffs, we have seen a downturn in hiring which has been associated with a 0.8 percentage point rise in the unemployment rate since April of last year. The piece notes that the monthly rate of job creation has slowed to just 115,000 in the last three months, down from 451,000 in the same months two years ago.
It is worth noting that we are hitting the peak retirement years for the baby boom cohort. The youngest turn 60 this year, while the oldest are 78. In 2020, before the pandemic, the Congressional Budget Office (CBO) projected we would be creating just 20,000 jobs a month in 2024.
As a result of larger than expected immigration, we have been creating far more jobs than had been projected. With immigration now having slowed sharply, it is not clear how many jobs need to be created monthly to prevent the unemployment rate from rising. It is not clear that the June to August pace is too slow.
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In 1980 Ronald Reagan brought the term “misery index” into political debates. The concept is simple, it’s the sum of the unemployment rate and inflation rate over the last year. It’s not obvious that these two numbers should have the same importance, and they certainly are not the only measures that matter in evaluating the economy, but they do provide an interesting snapshot.
Anyhow, Reagan could point to a misery index that was over 20 percent as the election approached. The inflation rate was in the double-digits and unemployment was still high as a result of a steep but short recession in the spring. The high level for the misery index was a theme Reagan hit on repeatedly in the campaign.
The misery index has largely faded from use over the last four decades, but it is still interesting to see what this simple snapshot shows. Here’s the picture since 1960.
Source: Bureau of Labor Statistics and author’s calculations.
As can be seen, the index for 2024 is near the low point for this sixty-four-year period. (I used the data through August for both inflation and unemployment.) At 6.8 percent, it is 0.2 percentage points higher than it was in 2016 and 0.5 percentage points higher than in 1964, the low point for the period.[1]
In fact, there is a decent chance that it will end up being lower than the 2016 measure by election day. Inflation is clearly headed lower, driven by slower rental inflation and also a recent drop in gas prices. It is likely that the CPI will show a year-over-year inflation rate that is at least 0.2 percentage points lower than the 2.6 percent rate reported through August. If the unemployment rate doesn’t rise, this would leave us tied with the 2016 measure for the second-lowest misery index during this period.
At least by the Reagan index measure, the Biden-Harris economy looks pretty good.
[1] I have used October as the reference month, even though the unemployment data sometimes would not be available by election day and the CPI never would be. The logic is that voters actually experience October unemployment and inflation by election day, even if they haven’t seen the report on these measures from the Bureau of Labor Statistics.
In 1980 Ronald Reagan brought the term “misery index” into political debates. The concept is simple, it’s the sum of the unemployment rate and inflation rate over the last year. It’s not obvious that these two numbers should have the same importance, and they certainly are not the only measures that matter in evaluating the economy, but they do provide an interesting snapshot.
Anyhow, Reagan could point to a misery index that was over 20 percent as the election approached. The inflation rate was in the double-digits and unemployment was still high as a result of a steep but short recession in the spring. The high level for the misery index was a theme Reagan hit on repeatedly in the campaign.
The misery index has largely faded from use over the last four decades, but it is still interesting to see what this simple snapshot shows. Here’s the picture since 1960.
Source: Bureau of Labor Statistics and author’s calculations.
As can be seen, the index for 2024 is near the low point for this sixty-four-year period. (I used the data through August for both inflation and unemployment.) At 6.8 percent, it is 0.2 percentage points higher than it was in 2016 and 0.5 percentage points higher than in 1964, the low point for the period.[1]
In fact, there is a decent chance that it will end up being lower than the 2016 measure by election day. Inflation is clearly headed lower, driven by slower rental inflation and also a recent drop in gas prices. It is likely that the CPI will show a year-over-year inflation rate that is at least 0.2 percentage points lower than the 2.6 percent rate reported through August. If the unemployment rate doesn’t rise, this would leave us tied with the 2016 measure for the second-lowest misery index during this period.
At least by the Reagan index measure, the Biden-Harris economy looks pretty good.
[1] I have used October as the reference month, even though the unemployment data sometimes would not be available by election day and the CPI never would be. The logic is that voters actually experience October unemployment and inflation by election day, even if they haven’t seen the report on these measures from the Bureau of Labor Statistics.
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The New York Times ran a column, by Duke University law professor Jedidiah Briton-Purdy, telling Vice-President Harris how she can turn around her deficit in public opinion polling on the economy. The gist of the piece is that most people are hurting now, but Harris can turn things around by adopting a more populist agenda.
It would be great to see Harris push a more populist agenda. I have written extensively on how the economy has been rigged to redistribute income upward, so I totally support Harris pushing more progressive policies. However, the extent to which anyone will hear a progressive message is open to question. The most fundamental problem is that people now believe a story about the economy that is almost completely at odds with reality.
Contrary to what Briton-Purdy tells us, most people are not hurting now, or at least not more than they did in the past, like before the pandemic when Donald Trump was president. Back then most people said the economy was good.
Somehow, when all the data tell us that most people are doing better off, especially those in the lower end of the income distribution, we have a continual drumbeat in the media about the economy being awful. And it is not just data on wages and prices, we see people behaving as though they are doing pretty well.
For example, air travel was at record highs this summer. At its peak, boardings were close to 3 million a day. That is not the one percent. We have a similar story with car travel, which also hit record highs this summer, with 70 million people hitting the road on the holidays, also not the one percent.
Purchases of restaurant meals are up by 10.5 percent compared with the pre-pandemic rate, after adjusting for inflation. Purchases of meals at fast-food restaurants, also adjusted for inflation, are up by 19.4 percent. Inflation-adjusted spending at sporting events is up by 12.2 percent.
This list can be extended at considerable length, but the point is that people are not acting as though they are suffering. We do have tens of millions of people struggling to get by, and many of them are not getting by, but that was true in 2019 when the prevailing story was the great economy.
When we have a prevailing economic story that is literally 180 degrees at odds with the economic reality, it is worth asking how we can envision Vice-President Harris getting her economic message out to the electorate, if she were to push the themes advocated by Briton-Purdy. The media have bent or even invented data to tell a bad economy story throughout the Biden-Harris administration.
Since the media have used their power to convince the public of a bad economy story that is 180 degrees at odds with reality, what chance will Harris have of getting out her message on the economy in a coherent way? That seems pretty unlikely in the seven weeks left until the election unless we envision that the media will completely change their policies on covering the Democrats.
To be clear, I don’t know what Harris can best say in the current media environment, but any discussion that does not recognize that Harris’s message will not be directly transmitted to the voters is unrealistic. Instead, it will be mediated by news organizations that have been insistent on painting a negative picture of the economy regardless of the facts.
I wish the Democrats had spent more time combatting the misinformation about the economy that major media outlets spewed endlessly for the last three and a half years, but it’s kind of late now. Harris can put worthwhile proposals on the table, which she already has, and hope that they reach the public. But her best hope is that a majority of voters will be unwilling to put a lying, corrupt, incompetent, buffoon back in the White House. I guess we’ll see.
The New York Times ran a column, by Duke University law professor Jedidiah Briton-Purdy, telling Vice-President Harris how she can turn around her deficit in public opinion polling on the economy. The gist of the piece is that most people are hurting now, but Harris can turn things around by adopting a more populist agenda.
It would be great to see Harris push a more populist agenda. I have written extensively on how the economy has been rigged to redistribute income upward, so I totally support Harris pushing more progressive policies. However, the extent to which anyone will hear a progressive message is open to question. The most fundamental problem is that people now believe a story about the economy that is almost completely at odds with reality.
Contrary to what Briton-Purdy tells us, most people are not hurting now, or at least not more than they did in the past, like before the pandemic when Donald Trump was president. Back then most people said the economy was good.
Somehow, when all the data tell us that most people are doing better off, especially those in the lower end of the income distribution, we have a continual drumbeat in the media about the economy being awful. And it is not just data on wages and prices, we see people behaving as though they are doing pretty well.
For example, air travel was at record highs this summer. At its peak, boardings were close to 3 million a day. That is not the one percent. We have a similar story with car travel, which also hit record highs this summer, with 70 million people hitting the road on the holidays, also not the one percent.
Purchases of restaurant meals are up by 10.5 percent compared with the pre-pandemic rate, after adjusting for inflation. Purchases of meals at fast-food restaurants, also adjusted for inflation, are up by 19.4 percent. Inflation-adjusted spending at sporting events is up by 12.2 percent.
This list can be extended at considerable length, but the point is that people are not acting as though they are suffering. We do have tens of millions of people struggling to get by, and many of them are not getting by, but that was true in 2019 when the prevailing story was the great economy.
When we have a prevailing economic story that is literally 180 degrees at odds with the economic reality, it is worth asking how we can envision Vice-President Harris getting her economic message out to the electorate, if she were to push the themes advocated by Briton-Purdy. The media have bent or even invented data to tell a bad economy story throughout the Biden-Harris administration.
Since the media have used their power to convince the public of a bad economy story that is 180 degrees at odds with reality, what chance will Harris have of getting out her message on the economy in a coherent way? That seems pretty unlikely in the seven weeks left until the election unless we envision that the media will completely change their policies on covering the Democrats.
To be clear, I don’t know what Harris can best say in the current media environment, but any discussion that does not recognize that Harris’s message will not be directly transmitted to the voters is unrealistic. Instead, it will be mediated by news organizations that have been insistent on painting a negative picture of the economy regardless of the facts.
I wish the Democrats had spent more time combatting the misinformation about the economy that major media outlets spewed endlessly for the last three and a half years, but it’s kind of late now. Harris can put worthwhile proposals on the table, which she already has, and hope that they reach the public. But her best hope is that a majority of voters will be unwilling to put a lying, corrupt, incompetent, buffoon back in the White House. I guess we’ll see.
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The Census released new data on median household income today showing a large jump, after adjusting for inflation. The Washington Post wrote about the reported rise, but told readers:
“After inflation, median household income rose to $80,610 last year, up from $77,540 in 2022 but less than the $81,210 families brought home in 2019.”
The problem is with the comparison to 2019, the last year before the pandemic. There was a large problem of non-response to the survey for 2019, which was fielded in the middle of the pandemic shutdown in the spring of 2020. The Census Bureau wrote about this problem when it released the 2019 data in the fall of 2020.
Their analysis found that when correcting for non-response bias, income was 2.8 percent lower than the number reported. If we adjust the reported number for 2019 for this bias, it would put median income for 2019 at $78,936, almost $1,700, or 2.0 percent, below the level reported for 2023.
In other words, the Post’s failure to accurately report on 2019 income numbers by adjusting for a well-known error in the data, led the paper to tell people the economy is worse under Biden than Trump by this measure, when the reality is the opposite. Income is higher, in spite of the impact of the pandemic in 2023 than in 2019.
Addendum
It has been pointed out to me that there continues to be an issue of non-response bias in the years since the pandemic, which is likely still leading to an overstatement of income of around 1.5 percent. As a result, while the gap between Census reported and adjusted income was unusually large for the 2019 year, it is still substantial for the 2023 gap. The larger gap in 2019 likely means that the adjusted income for 2023 is higher than it was for 2019, but not by as much as I indicated above.
The Census released new data on median household income today showing a large jump, after adjusting for inflation. The Washington Post wrote about the reported rise, but told readers:
“After inflation, median household income rose to $80,610 last year, up from $77,540 in 2022 but less than the $81,210 families brought home in 2019.”
The problem is with the comparison to 2019, the last year before the pandemic. There was a large problem of non-response to the survey for 2019, which was fielded in the middle of the pandemic shutdown in the spring of 2020. The Census Bureau wrote about this problem when it released the 2019 data in the fall of 2020.
Their analysis found that when correcting for non-response bias, income was 2.8 percent lower than the number reported. If we adjust the reported number for 2019 for this bias, it would put median income for 2019 at $78,936, almost $1,700, or 2.0 percent, below the level reported for 2023.
In other words, the Post’s failure to accurately report on 2019 income numbers by adjusting for a well-known error in the data, led the paper to tell people the economy is worse under Biden than Trump by this measure, when the reality is the opposite. Income is higher, in spite of the impact of the pandemic in 2023 than in 2019.
Addendum
It has been pointed out to me that there continues to be an issue of non-response bias in the years since the pandemic, which is likely still leading to an overstatement of income of around 1.5 percent. As a result, while the gap between Census reported and adjusted income was unusually large for the 2019 year, it is still substantial for the 2023 gap. The larger gap in 2019 likely means that the adjusted income for 2023 is higher than it was for 2019, but not by as much as I indicated above.
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Donald Trump seems to get very confused when talking about economics. The U.S. did have respectable growth under his administration, but it was not especially good by any standard metric. We also were very far from being the fastest growing economy in the world.
Contrary to what Trump seems to believe, China’s economic growth hugely outpaced U.S. growth under his watch. China’s economy grew by a cumulative total of 25.4 percent in the years from 2017 to 2021, compared to just 9.3 percent for the United States.
Source: International Monetary Fund.
As a share of world GDP (purchasing power parity), China went from 16.15 percent at the start of the period to 18.42 percent at the end. By contrast, the U.S. share fell slightly from 15.98 percent in 2017 to 15.87 percent in 2021.
Donald Trump seems to get very confused when talking about economics. The U.S. did have respectable growth under his administration, but it was not especially good by any standard metric. We also were very far from being the fastest growing economy in the world.
Contrary to what Trump seems to believe, China’s economic growth hugely outpaced U.S. growth under his watch. China’s economy grew by a cumulative total of 25.4 percent in the years from 2017 to 2021, compared to just 9.3 percent for the United States.
Source: International Monetary Fund.
As a share of world GDP (purchasing power parity), China went from 16.15 percent at the start of the period to 18.42 percent at the end. By contrast, the U.S. share fell slightly from 15.98 percent in 2017 to 15.87 percent in 2021.
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Kevin Erdmann argued in a Washington Post column on Thursday that the main problem with U.S. housing policy is over-restrictive lending rules from Fannie Mae and Freddie Mac. While there may be some issues with current policy being overly restrictive, that does not explain the collapse of the housing prices in 2007-2009, nor the current inadequate supply of housing.
The Atlanta example Erdmann uses in his piece is very helpful in making these points. Erdmann says there was no bubble in Atlanta’s house prices and therefore there was nothing to burst. He attributes the sharp decline in house prices in 2007-2009, and especially in the bottom tier of the housing market, to tighter credit requirements from Fannie and Freddie.
However, the data do support the case that there was a housing bubble building in the decade prior to 2007, especially in the lower tier of the housing market. Here’s the inflation-adjusted Case-Schiller index for the lower tier of the housing market (bottom third) from 1992 to the present.
As can be seen, there is a sharp rise in the index from 1996 to the middle of 2005. At that point the index levels off and then starts falling rapidly in 2007. In the price run-up, inflation-adjusted house prices for the bottom third of the market rose by 38.8 percent. This contrasts with rents in Atlanta, which rose at almost exactly the same rate as overall inflation.
This had been the general pattern for house prices in the period before the housing bubble. Nationwide house prices rose roughly in step with the rate of inflation from 1896 to 1996. There were enormous divergences across regions, with prices hugely outpacing inflation in places like New York and San Francisco, while falling far behind inflation in Detroit, St. Louis and many small cities and towns.
Erdmann points out that house prices in the lower tier of housing fell much more than the price of more expensive houses in Atlanta in the crash. This is true, but house prices at the higher end rose by much less in the bubble. Prices in the top tier rose by 27 percent in real terms over the period from 1996 to the peak in 2005.
This was still a bubble, given the trend in rents, but considerably smaller than the one in the lower tier in Atlanta. For that reason it is not surprising that there would have been a sharper fall in house prices in the bottom tier.
The other point worth noting in this graph is that house prices for the bottom tier of housing in Atlanta had largely recovered their bubble peaks just before the pandemic. Since the pandemic, real house prices for the bottom tier have actually exceeded their bubble peaks. This is true for the higher tiers as well.
This suggests that builders have serious incentive to be building lots of housing in Atlanta and elsewhere, but for some reason they are not. The tightening of credit standards by Fannie and Freddie cannot explain this failure to build more housing, since that should be reflected in house prices, which it clearly is not.
There is one other point worth noting about Erdmann’s point on Fannie and Freddie credit standards. The average credit score has risen substantially over the last two decades. This means that using a fixed credit score as a cutoff would imply a smaller share of potential borrowers are being excluded. It also would have been helpful if Erdmann had included data on mortgage issuance in the 1990s before credit standards had been relaxed and the bubble had begun to build.
In any case, this point is secondary. If excessively high credit standards were the factor that was really clogging the housing market, we should not be seeing real house prices at above their bubble peaks. These prices give builders plenty of incentive to build, but for some reason they are not constructing housing at anything like the bubble pace, or even the pre-bubble pace.
Kevin Erdmann argued in a Washington Post column on Thursday that the main problem with U.S. housing policy is over-restrictive lending rules from Fannie Mae and Freddie Mac. While there may be some issues with current policy being overly restrictive, that does not explain the collapse of the housing prices in 2007-2009, nor the current inadequate supply of housing.
The Atlanta example Erdmann uses in his piece is very helpful in making these points. Erdmann says there was no bubble in Atlanta’s house prices and therefore there was nothing to burst. He attributes the sharp decline in house prices in 2007-2009, and especially in the bottom tier of the housing market, to tighter credit requirements from Fannie and Freddie.
However, the data do support the case that there was a housing bubble building in the decade prior to 2007, especially in the lower tier of the housing market. Here’s the inflation-adjusted Case-Schiller index for the lower tier of the housing market (bottom third) from 1992 to the present.
As can be seen, there is a sharp rise in the index from 1996 to the middle of 2005. At that point the index levels off and then starts falling rapidly in 2007. In the price run-up, inflation-adjusted house prices for the bottom third of the market rose by 38.8 percent. This contrasts with rents in Atlanta, which rose at almost exactly the same rate as overall inflation.
This had been the general pattern for house prices in the period before the housing bubble. Nationwide house prices rose roughly in step with the rate of inflation from 1896 to 1996. There were enormous divergences across regions, with prices hugely outpacing inflation in places like New York and San Francisco, while falling far behind inflation in Detroit, St. Louis and many small cities and towns.
Erdmann points out that house prices in the lower tier of housing fell much more than the price of more expensive houses in Atlanta in the crash. This is true, but house prices at the higher end rose by much less in the bubble. Prices in the top tier rose by 27 percent in real terms over the period from 1996 to the peak in 2005.
This was still a bubble, given the trend in rents, but considerably smaller than the one in the lower tier in Atlanta. For that reason it is not surprising that there would have been a sharper fall in house prices in the bottom tier.
The other point worth noting in this graph is that house prices for the bottom tier of housing in Atlanta had largely recovered their bubble peaks just before the pandemic. Since the pandemic, real house prices for the bottom tier have actually exceeded their bubble peaks. This is true for the higher tiers as well.
This suggests that builders have serious incentive to be building lots of housing in Atlanta and elsewhere, but for some reason they are not. The tightening of credit standards by Fannie and Freddie cannot explain this failure to build more housing, since that should be reflected in house prices, which it clearly is not.
There is one other point worth noting about Erdmann’s point on Fannie and Freddie credit standards. The average credit score has risen substantially over the last two decades. This means that using a fixed credit score as a cutoff would imply a smaller share of potential borrowers are being excluded. It also would have been helpful if Erdmann had included data on mortgage issuance in the 1990s before credit standards had been relaxed and the bubble had begun to build.
In any case, this point is secondary. If excessively high credit standards were the factor that was really clogging the housing market, we should not be seeing real house prices at above their bubble peaks. These prices give builders plenty of incentive to build, but for some reason they are not constructing housing at anything like the bubble pace, or even the pre-bubble pace.
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In reporting on Donald Trump’s plan to put Elon Musk in charge of a commission to ferret out waste in government, it probably would have been worth noting that there is already an agency dedicated to this purpose. The Government Accountability Office (GAO) has been in existence for over 100 years. It is non-partisan and has extensive experience in uncovering government waste.
It also would have been worth noting that having efforts to uncover massive waste is an old joke in Washington politics. Jimmy Carter claimed he would eliminate waste with his zero-based budgeting when he took office in 1977. It was quickly abandoned as too chaotic.
Bill Clinton had an effort under his administration when he put Vice-President Al Gore in charge of “reinventing government.” It may not have accomplished much but kept Al Gore out of trouble.
In addition to mentioning some of this history, it also is worth noting that there would be an extraordinary conflict of interest created by putting someone with many large government contracts and subsidies in charge of an effort to examine government efficiency. This conflict of interest problem is especially large since Trump is committing to getting rid of most of the top civil service officials, which would presumably include the leadership of the GAO. This means that the non-partisan agency created to prevent government corruption will in effect be blocked from policing Trump and Musk’s efforts to “improve” government efficiency.
In reporting on Donald Trump’s plan to put Elon Musk in charge of a commission to ferret out waste in government, it probably would have been worth noting that there is already an agency dedicated to this purpose. The Government Accountability Office (GAO) has been in existence for over 100 years. It is non-partisan and has extensive experience in uncovering government waste.
It also would have been worth noting that having efforts to uncover massive waste is an old joke in Washington politics. Jimmy Carter claimed he would eliminate waste with his zero-based budgeting when he took office in 1977. It was quickly abandoned as too chaotic.
Bill Clinton had an effort under his administration when he put Vice-President Al Gore in charge of “reinventing government.” It may not have accomplished much but kept Al Gore out of trouble.
In addition to mentioning some of this history, it also is worth noting that there would be an extraordinary conflict of interest created by putting someone with many large government contracts and subsidies in charge of an effort to examine government efficiency. This conflict of interest problem is especially large since Trump is committing to getting rid of most of the top civil service officials, which would presumably include the leadership of the GAO. This means that the non-partisan agency created to prevent government corruption will in effect be blocked from policing Trump and Musk’s efforts to “improve” government efficiency.
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Peter Coy had a somewhat bizarre column in the New York Times yesterday warning us that even though we have gotten rid of most of the pandemic inflation with little rise in unemployment, “any further decline in inflation may not be as painless.” The column highlights a new paper by Gauti Eggertsson, one of the nation’s leading macroeconomists.
Whether or not Eggertsson’s theoretical analysis is correct, it is beside the point in terms of the current economy. We don’t need any further decline in inflation because we have already hit the Fed’s 2.0 percent target.
If it seems I am getting ahead of the game, you have to look at the data more closely. It’s true that the year over year rate in the Personal Consumption Expenditure deflator (PCE) stands a 2.5 percent, which is above the Fed’s 2.0 percent target, but we can look a bit around the corner here.
We know with virtual certainty that the rental indexes (rent proper and owners’ equivalent rent) will be showing much lower inflation in future months. The reason we can be certain of this fact is that the Bureau of Labor Statistics publishes a “New Tenant Rent Index” which tracks rents in units that change hands.
This index leads the overall rent indexes, since they are dominated by leases that could have been signed 1-3 years ago. These leases eventually end and are negotiated in ways that reflect current market conditions.
This New Tenant Rent Index has been showing sharply lower rental inflation. In fact over the last year it actually fell by 1.1 percent. This index is relatively new, so we can’t say with much precision how quickly the overall rental indexes will adjust to it or the extent to which they will adjust, but we can be quite certain that rental inflation will continue to slow, as it has for over a year.
Year over year rental inflation is currently 5.2 percent. Suppose it falls to 2.0 percent. Since these indexes comprise roughly 15 percent of the PCE deflation, this drop of 3.2 percentage points would lower the inflation rate by roughly 0.5 percentage points, bringing us to the Fed’s 2.0 percent inflation target.
Even if we take a much more modest scenario and say rental inflation falls to 3.0 percent, that still gets us to 2.2 percent, which is close enough to 2.0 percent that no serious person would spend a lot of time worrying about the difference.
Still not convinced? The annualized inflation rate over the last three months was 0.9 percent. The annualized inflation rate for the core index was 1.7 percent.
This inflation battle is over and won. Eggertsson’s work may have some useful insights for the next war on inflation, but it’s too late to be of any help in the last one.
Peter Coy had a somewhat bizarre column in the New York Times yesterday warning us that even though we have gotten rid of most of the pandemic inflation with little rise in unemployment, “any further decline in inflation may not be as painless.” The column highlights a new paper by Gauti Eggertsson, one of the nation’s leading macroeconomists.
Whether or not Eggertsson’s theoretical analysis is correct, it is beside the point in terms of the current economy. We don’t need any further decline in inflation because we have already hit the Fed’s 2.0 percent target.
If it seems I am getting ahead of the game, you have to look at the data more closely. It’s true that the year over year rate in the Personal Consumption Expenditure deflator (PCE) stands a 2.5 percent, which is above the Fed’s 2.0 percent target, but we can look a bit around the corner here.
We know with virtual certainty that the rental indexes (rent proper and owners’ equivalent rent) will be showing much lower inflation in future months. The reason we can be certain of this fact is that the Bureau of Labor Statistics publishes a “New Tenant Rent Index” which tracks rents in units that change hands.
This index leads the overall rent indexes, since they are dominated by leases that could have been signed 1-3 years ago. These leases eventually end and are negotiated in ways that reflect current market conditions.
This New Tenant Rent Index has been showing sharply lower rental inflation. In fact over the last year it actually fell by 1.1 percent. This index is relatively new, so we can’t say with much precision how quickly the overall rental indexes will adjust to it or the extent to which they will adjust, but we can be quite certain that rental inflation will continue to slow, as it has for over a year.
Year over year rental inflation is currently 5.2 percent. Suppose it falls to 2.0 percent. Since these indexes comprise roughly 15 percent of the PCE deflation, this drop of 3.2 percentage points would lower the inflation rate by roughly 0.5 percentage points, bringing us to the Fed’s 2.0 percent inflation target.
Even if we take a much more modest scenario and say rental inflation falls to 3.0 percent, that still gets us to 2.2 percent, which is close enough to 2.0 percent that no serious person would spend a lot of time worrying about the difference.
Still not convinced? The annualized inflation rate over the last three months was 0.9 percent. The annualized inflation rate for the core index was 1.7 percent.
This inflation battle is over and won. Eggertsson’s work may have some useful insights for the next war on inflation, but it’s too late to be of any help in the last one.
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