Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

Follow on Twitter Like on Facebook Subscribe by E-mail RSS Feed

The Washington Post gained notoriety in the last decade by relying on David Lereah as its main source the housing market. Lereah was the chief economist for the National Association of Realtors and author of Why the Real Estate Boom Will Not Bust and How You Can Profit from It. It continues to follow the pattern of relying on a narrow group of economists, most of whom seem to specialize in repeating what the others are saying.

It devoted a major news article to explaining why "$2 gasoline isn’t having the economic impact everyone thought it would." According to the piece, the main problem is that people have increased their savings:

"Kathy A. Jones, Schwab’s chief strategist on credit markets, said that consumers have increased their savings as oil prices have dropped. And as the savings rate has gradually edged higher, Jones said, the use of credit cards has declined. According to the Bureau of Economic Analysis, the personal savings rate climbed to 5.6 and 5.5 percent respectively in October and November, the highest rates in three years."

Actually, the saving rate is poorly measured since it depends on a measure of income that is subject to large revisions. If we take spending as a share of GDP, we find that it was 68.33 percent in the first three quarters of 2015, down trivially from its 68.4 percent measure in 2014 and almost identical to the 68.37 percent share in 2013. In other words, the data (as opposed to the economists) say people are spending pretty much what we should expect them to spend. If we want to find the sources of weak growth, we should look elsewhere.

While the piece correctly identifies equipment investment as one of the other sources of weakness, remarkably it ignores the trade deficit. Measured in 2009 dollars, the trade deficit rose from $442.5 billion in 2014 to $546.1 billion in the first three quarters of 2015. Assuming a multiplier on net exports of 1.5 this rise in the trade deficit would be sufficient to knock roughly a percentage point off GDP growth in 2015. 

It is remarkable that the Post would not include this sharp rise in the trade deficit in a discussion of the economy's weak growth in 2015. In this context, it is probably worth noting that the Post is a strong proponent of the Trans-Pacific Partnership (TPP). Supporters of the TPP tend to ignore the trade deficit and its impact on growth and jobs.

Add a comment

Austin Frakt has an interesting discussion in the NYT of patterns in clinical testing of cancer drugs suggesting a bias towards testing drugs treating late-stage patients with little chance of survival as opposed to more promising drugs treating people at early stages or even prevention. However the remedies involve a less demanding testing process by the Food and Drug Administration and increased use of marketing exclusivity to provide more incentive to testing.

Incredibly, there is no discussion of publicly funded clinical trials. In addition to overcoming the bias reported in the piece, publicly funded trials would also have the advantage that the drugs would be available at generic prices as soon as they are approved. In addition, all of the data from the trials would be fully available to other researchers and physicians to help in their prescribing choices.

For those worried about the inefficiency of government testing, the process could be contracted out to private companies, just as the Defense Department contracts out the development of weapon systems. (A big advantage of drug testing over weapon development is that there is no excuse for secrecy in drug testing. Complete openness should be a condition of any contracts.) 

The reluctance to consider public funding for clinical trials seems to stem from some strange belief that if the government touches the money, then the resulting process is hopelessly inefficient. It is difficult to understand the basis for such a view.

Add a comment

The NYT headlined an article on the drop in unemployment insurance claims, "Jobless claims near 42-year low as labor market tightens." While it would be good news if fewer people were filing for unemployment insurance because they were not losing their jobs, this is only part of the story behind the drop in claims. Due to tighter restrictions on unemployment insurance, a much smaller share of the unemployed are eligible for benefits than in prior decades.

For example, in the most recent month, just under 2.2 million people were collecting benefits out of 7.9 million unemployed, which means that 29.1 percent of the unemployed were collected benefits. If we go back to November of 1973 (42 years ago), 1.7 million people were getting benefits out of unemployed population of 4.3 million, for a ratio of 39.5 percent.

Part of the drop in claims in recent years is due to the improvement in the labor market, but part of the decline is due to fewer people being eligible. One can debate whether the tighter restrictions are desirable, but this is clearly a separate issue from a tightening of the labor market.

Add a comment

Catherine Rampell devoted her column today to a popular Washington pastime: trying to get young people angry at their parents and grandparents so that they are not bothered by the enormous upward redistribution of income taking place in this country.

She begins the piece by telling readers that college students are wasting their time complaining about diversity issues and sensitivity to racism and sexism, then gets to the meat of the story:

“Older generations have racked up trillions in debt and stuck young people with the bill. This is not just due to expensive wars, unfunded tax cuts, Keynesian financial interventions and the other usual scapegoats for fiscal profligacy.

“One of the largest ongoing sources of spending involves huge age-specific transfers: Our politicians are paying off older, higher-voter-turnout Americans in the form of generous benefits that those older people have not paid for and never will. Which means the tab will need to be picked up by someone else — i.e., someone younger.

“For example, a married couple with a single breadwinner who earned the average wage his whole life and turned 65 this year will collect more than six times as much in net Medicare benefits as the couple paid out in taxes. That’s after taking into account both Medicare premiums and other ways the couple could have invested their payroll tax money.

“'Invincible' youngsters are subsidizing health care for their not-yet-Medicare- eligible elders on the individual insurance market as well. And elsewhere on government balance sheets, spending on the old is crowding out spending on the young. At the state level, politicians have responded to swelling pension obligations by disinvesting from public higher education. These funding cuts have then been offset with massive tuition hikes — which fall to, you guessed it, today’s college students.

“Fiscal issues of course aren’t the only way that young people have been done wrong by their elders. The warming of our planet and some politicians’ promises to undermine what small progress has been made to curb climate change also come to mind.”

There is so much wrong here that it hard to know where to begin. Let’s start with an easy one, the story of Medicare and Social Security.

Add a comment

I am going to do a bit of nitpicking on a Paul Krugman post on the Affordable Care Act (ACA). Krugman notes the continued progress of the ACA in reducing the number of uninsured and keeping costs down. Krugman basic points are right, the ACA is working and its opponents are determined to ignore its success.

The basis of the nitpick is that among the positive items, Krugman tells us that "the pool is getting younger." The problem with this comment is that the age of the enrollees really does not matter much, what matters is their health. It's true that on average young people have lower health care costs, but they also pay much lower premiums. The ratio of payments for the oldest group (ages 55-64) to the youngest is three to one for an average policy. The ratio of average costs is roughly 3.5 to 1.

This means that it matters somewhat for the ACA if the distribution skews older, but not very much. The Kaiser Family Foundation did the arithmetic a few years ago and found that even an extreme age skewing only raised costs by 2 percent. What matters much more is if there is a skewing by health. The difference in costs within each age group swamp the differences between age groups.

This matters because it is important to get a proper understanding of the progress of the ACA and what matters. I recall a few years ago talking with some twenty somethings who were saying that they didn't plan to sign up for the exchanges. They were putting it as sort of a threat because they didn't like the ACA. (They were single payer supporters -- so am I.) I encouraged them to sign up because I thought it was good that they had insurance, but explained it was far more important if the 60-year-olds in good health sign up than if they did.

If this sounds strange, think of the premium as a tax that varies by age. There are large numbers of people of all ages with near zero health care expenses, but the older ones pay a tax that is three times as high as the younger ones pay. In this case, it clearly matters much more that we get the older healthy people into the pool than the younger ones.

Anyhow, this is a relatively small point, but people should be clear on what it is at issue. We should kill the "young invincible" myth for good.

Add a comment

By Cherrie Bucknor and Dean Baker

Those of us unhappy with the Fed rate hike this month frequently point to the sharp drop in employment rates (EPOP) compared with the pre-recession level. The overall employment rate (the percentage of the adult population with jobs) is still down by more than 3.0 percentage points from pre-recession peaks. Even if the unemployment rate is not far above the pre-recession level, there remains a very large gap in the percent of the population that is working. This doesn't show up in the unemployment rate because many people have dropped out of the labor force and are not looking for work, and therefore are not counted as unemployed. 

One response is that because of the aging of the population many baby boomers are now retired and have no interest in working. A way to get around this issue is to restrict the comparison to the prime age population, people between the ages of 25–54. These people are not likely to be retired. This gives us pretty much the same story: the EPOP for prime age workers was down by 2.9 percentage points in November compared with its peak pre-recession level.

The next argument is that we have many prime age workers who have dropped out because they don't have the skills needed to find work in today's economy. This one might seem peculiar because these workers apparently did have the skills back in 2007 and the economy has not changed that much in the last eight years. But we can also test this one fairly easily.

If the drop in labor force participation was explained by less-skilled workers leaving the labor force then we should see most of the drop in employment rate among less-educated workers, with little or no change in employment rates for more educated workers. That is not what the data show.

Book1 9619 image001

Source: Authors' analysis of Current Population Survey.

As can be seen, the overall EPOP is lower than the EPOP for people with college or advanced degrees. It has also dropped the most, falling by 3.3 percentage points from its 2007 level and 4.8 percentage points from its 2000 level. But the EPOP for prime age workers with college degrees has also fallen sharply, dropping by 1.7 percentage points from its 2007 level and 2.7 percentage points from the 2000 level. Even people with advanced degrees have seen substantial drops in employment with a decline in their EPOP of 1.6 percentage points from 2007 and 2.9 percentage points from 2000.

What should we make of these drops in employment among the most highly educated workers? We could twist the skills argument and say that even though these people are highly educated, they got their degrees in the wrong areas. Or, we could just say that we have a serious shortfall in demand in the economy and that it is not showing up in the unemployment rate because so many people have given up looking for work.

Or, we could say that millions of prime age workers suddenly decided they would take a long vacation. A shortfall in demand seems more likely and the Fed's rate hike does not help in this case.

Add a comment

Eduardo Porter discusses the question of whether retirees will have sufficient income in twenty or thirty years. He points out that if no additional revenue is raised, Social Security will not be able to pay full scheduled benefits after 2034.

While this is true, it is important to note that this would have also been true in the 1940, 1950s, 1960s, and 1970s. If projections were made for Social Security that assumed no increase in the payroll tax in the future, there would have been a severe shortfall in the trust fund making it unable to pay full scheduled benefits.

We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised. (The age for full benefits has already been raised from 65 to 66 and will rise further to 67 by 2022, but no further increases are scheduled.)

The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.

For this reason, Social Security should be seen first and foremost as part of the story of wage inequality. If workers get their share of the benefits of productivity growth then supporting a larger population of retirees will not be a problem. On the other hand, if the wealthy manage to prevent workers from benefiting from growth during their working lives, they will also likely prevent them from having a secure retirement.



Since folks asked, roughly 40 percent of the shortfall projected by the Social Security trustees would not be there if there had not been a massive upward redistribution of income over the last three decades. The story is here.

Add a comment

I have yet to see the Big Short, but folks I know who have seen it say it's a great movie. But apart from its dramatic qualities, we have to once again raise the question of whether the story of the downturn is really a story of a financial crisis or a burst housing bubble.

I see that the generally astute Neil Irwin weighs in on the side of the financial crisis in his review of the movie.

"A lot of people thought a decade ago that there might be a housing bubble. Few of them understood the connections between housing prices and poor lending practices, and the connection from poor lending practices to complex, highly rated securities, the connection between those securities to the balance sheets of major banks, and the peril to the economy if just a few of them faltered.

"At each link in that chain, there were people aware that something was wrong, but lacked the ability to put those pieces together and connect bad lending in Florida suburbs with the existential risk being taken by companies like Bear Stearns and Lehman Brothers.

"The impossible job for the regulators (and journalists, and credit rating agencies) of the future is to better understand how the pieces within the infinitely complex economy and financial system connect with one another.

"'The Big Short' is a powerful reminder of how hard that will be."

I have been around the block on this one many times, most recently with Brad DeLong back in April (see also here and here). The basic point is that the demand created by the housing bubble was driving the economy prior to the crash. This demand was felt through two channels. First, record high house prices pushed residential construction to record levels of GDP. Second, at its peak the bubble had created $8 trillion (@ 60 percent of GDP) of ephemeral housing equity.This led to an enormous consumption boom as people were spending based on this bubble generated equity.

Add a comment

This is what the NYT told readers in an article that reported Secretary Clinton wants to embrace her husband's economic record as president. While the last four years of the Clinton presidency did have low unemployment and rising real wages for workers at the middle and bottom of the income distribution, these gains were driven by the demand generated by the stock bubble.

The bubble led to a surge of investment in high tech, as start-ups were using the money they could raise from issuing stock to finance their investment. (Generally companies first issue stock to allow the founders to cash out some of their profits.) The stock wealth generated by the bubble also led to a consumption boom as savings rate fell to what were at the time record lows.

While the bubble did produce a period of prosperity, its collapse was both inevitable and predictable. While the recession resulting from the crash is usually thought to have been short and mild, it actually led to what was at the time the longest period without job growth since the Great Depression. The economy did not gain back the jobs lost in the recession until January of 2005. At the time, the economy was being propelled by the housing bubble.

Clintonomics set the economy on this path of bubble driven growth through its engineering of the bailout from the East Asian financial crisis. The result of the bailout was a huge run-up in the dollar against other currencies. Developing countries, which had been borrowing capital, switched to become huge lenders of capital as they tried to accumulate all the reserves they could to protect themselves from facing a similar situation as the East Asian countries.

The direct result of the run-up in the dollar was an explosion in size of the U.S. trade deficit, as the over-valued dollar made U.S. produced goods and services less competitive in the world economy. The trade deficit has led to a huge gap in demand (now around $500 billion annually) which can be filled only by large budget deficits or bubble-driven growth. 

It is striking that Secretary Clinton would embrace policies that have led to so much pain for large segments of the American public. This could hurt her prospects in getting the nomination or winning the general election.

Add a comment

A NYT article on the uncertain politics in Spain following an election which left no obvious path to a majority government noted that the outcome was in large part a revolt against the austerity imposed on the country. There have been similar revolts in Greece and Portugal. The piece points out the popular discontent and tells readers:

"As the result in Greece showed, even anti-austerity parties have to answer to financial markets and balance national budgets, and the numbers are still deeply stacked against the policies of the old left and their heavy spending on welfare states."

The countries of southern Europe actually had relatively less developed welfare states. The countries with heavy spending on welfare states are mostly in northern Europe. They have relatively small budget deficits and face extremely low interest rates in financial markets. The difference between these countries and the countries in southern Europe is that the latter collect less money in tax revenue.

It is also worth noting that, least in the case of Spain, the problems with deficits followed the crisis. Before 2008, the country was running budget surpluses and had a very low national debt.

It is also worth mentioning that it is not the financial markets that are constraining Spain and other southern European governments. The decision by Germany and other northern European countries to deliberately keep their rates of inflation very low is requiring the southern European countries to adjust trade imbalances through deflation and austerity.

If these countries still had their own currencies, they would simply allow the value to decline. Within a currency union, it would be expected that the surplus countries would share in the adjustment process by having moderately higher rates of inflation, but Germany and its followers have refused to accept this responsibility.

Add a comment

It's hardly a surprise to see a column in the Washington Post opinion pages calling for lower federal budget deficits. In spite of the continued weakness of the labor market and the economy, the Washington Post continues to push for less demand, growth, and employment.

Fred Hiatt did the job today by praising Rhode Island Governor Gina Raimondo for cutting public employee pensions, and contrasting these cuts with increased tax cuts and spending at the federal level. Hiatt's complaint is that Congress agreed to extend tax cuts, which with interest are projected to cost $780 billion over the next decade. This comes to roughly 0.4 percent of GDP over this period.

In a context where the economy is likely to face a shortfall in demand, this addition to the deficit will lead to more growth and jobs, although its impact would be larger if more of the money were committed to items like education and infrastructure or the tax cuts went to lower or middle income people. Assuming a multiplier of 1, the addition to GDP would be approximately 0.4 percent of GDP, implying around 500,000 more jobs. (If the Fed is deliberately blocking growth by raising interest rates, then the tax cuts will not boost growth.)

It is also worth noting that Raimondo's pension strategy in Rhode Island has meant a windfall for hedge funds, which are now collecting substantial fees from the state's pension funds. While the Washington Post is generally happy to see cuts to ordinary workers' pensions and Social Security, it consistently applauds actions, such as the TARP, which give public money to the financial sector.

Add a comment

Brad posted a short note commenting on my paper on rents as the basis for upward redistribution in the last thirty five years. The paper outlines ways in which rents in various areas can explain this upward redistribution, as opposed to the sort of argument advanced by Thomas Piketty that it is some natural process that is inherent to capitalism.

Brad suggested that Piketty would respond by saying that the beneficiaries of this upward redistribution are behind the mechanisms (e.g. stronger and longer patent protection and a bloated financial sector) that have led to this upward redistribution. I agree that this is likely Piketty's response, but I would raise two points.

First, do we believe that all of these mechanisms were somehow preordained? Was it inevitable that we would have TRIPS, extending and strengthening patent and copyright protection throughout the world? Was there no way to avoid the financial deregulation that gave us too big to fail banks and an explosion of short-term trading and proliferation of new financial instruments? We can look back and know who won these battles, but surely it was possible that some or most of them could have gone the other way.

The other point is how we envision political battles going forward. We know the rich will fight any policy that jeopardizes their wealth and power, but let's consider two scenarios. On the one hand, we have policies that give shareholders more power to contain CEO pay and proposals to publicly fund clinical trials so that new drugs can be put on the market at generic prices. On the other hand we have a proposal for a global tax on wealth. Which direction has better prospects?



Joe Seydl raises a good question in his comment, asking: "who are the selfless activists who are supposed to continuously keep competiton fair?"

The answer is that I am not expecting anyone to be a selfless activist. I am expecting people to act in their own interest. The pharmaceutical companies rip people off by getting longer and stronger patent protection. Doctors rip people off by creating protectionists barriers that restrict supply. The financial industry rips people off on the fees they charge to manage pensions, IRAs, and 401(k)s, and CEOs rip off shareholders by paying themselves exorbitant salaries.

This is not a story that requires selfless activists, but there is a collective action problem. For example, people paying more money for their health care due to high doctors' pay have to act to remove the protections that get them high pay. The shareholders being ripped off by CEOs have to act to check CEO pay.

Collective action problems are difficult, but the other side has managed to overcome them. They have been able to reduce or eliminate trade barriers that allowed U.S. manufacturing workers to enjoy relatively high wages. The same story applies to the reduction or elimination of agricultural subsidies that have supported small farmers. 

The problem for progressives is figuring out how to mobilize people who have a direct stake in leading the efforts to rein in abuses. In the case of the drug companies, the insurance industry would be an obvious suspect. In the case of doctors, nurses and other health care professionals who could do many of the tasks that doctors try to preserve for themselves, would be an obvious group. Also foreign educated physicians who are excluded from the U.S. could make an appeal to all the "free traders" who consider any protectionist barrier a crime against humanity if the beneficiary is a less-educated workers. (Yes, these people are pathetic hypocrites.)

Anyhow, the point of the rent argument is that there is money on the table. We just have to get people to notice the money so that they will take it.

Add a comment

In its usual bipartisan way the Post took even-handed swipes at Republican Representative Jeb Hensarling and Bernie Sanders, a senator and candidate for the Democratic presidential nomination, over their criticisms of the Federal Reserve Board. Never mind that Hensarling's criticisms were over the Fed's failure to raise interest rates to prevent hyper-inflation over the last five years, while Sanders' criticism was over the fact that the Fed's recent rate hike will slow growth and the rate of job creation. In Washington post bi-partisan land, both are equally damnable offenses. 

But what is even more striking is the Post's ability to treat the Fed as a neutral party when the evidence is so overwhelming in the opposite direction. The majority of the Fed's 12 district bank presidents have long been pushing for a rate hike. While there are some doves among this group, most notably Charles Evans, the Chicago bank president, and Narayana Kocherlakota, the departing president of the Minneapolis bank, most of this group has publicly pushed for higher rate hikes for some time. By contrast, the governors who are appointed through the democratic process, have been far more cautious about raising rates. 

It should raise serious concerns that the bank presidents, who are appointed through a process dominated by the banking industry, has such a different perspective on the best path forward for monetary policy. With only five of the seven governor slots currently filled, there are as many bank presidents with voting seats on the Fed's Open Market Committee as governors. In total, the governors are outnumbered at meetings by a ratio of twelve to five.

Any serious discussion of Fed policy would note that the banking industry appears to have a grossly disproportionate say in the country's monetary policy. Furthermore, it seems determined to use that influence to push the Fed on a path that slows growth and reduces the rate of job creation. The Post somehow missed this story or at least would prefer that the rest of us not take notice.

Add a comment

The NYT reported on the reaction in financial markets to the Federal Reserve Board's decision to raise interest rates on Wednesday. The piece notes the generally calm reaction, but also indicates there continue to be some concern about asset bubbles. It comments:

"Regulators have pointed to a number of worrisome signs in recent weeks. A federal agency said on Tuesday that credit risks were 'elevated and rising' for American corporations and many foreign borrowers, even as investors are demanding significantly higher interest rates on junk bonds and foreign debt. The report, by the Office of Financial Research, however, said overall risks to stability remained 'moderate.'"

It is worth distinguishing the possible bubble in junk bonds and foreign debt from the stock and housing bubbles whose collapse brought on the last two recessions. Both the stock and housing bubbles were driving the economy. They directly generated large amounts of demand through investment spending in the case of the stock bubble and residential construction spending in the case of the housing bubble. Both bubbles also led to consumption booms, as households increased spending based on the ephemeral wealth generated by these bubbles. For this reason, it was 100 percent predictable that the collapse of the bubbles would lead to recessions.

The current bubbles in junk bonds and foreign debt are not in any way driving the economy. Presumably we are seeing somewhat more investment as a result of the fact that uncreditworthy companies were able to borrow at a low cost, but there is no notable boom in such investment. Similarly, if foreign borrowers have a harder time getting access to credit, it may be bad news for them, but the impact on the U.S. economy will be limited.

If some banks or other financial institutions have over committed themselves in these areas, the plunge in prices may threaten their survival. This could lead to some late nights for folks at the Fed and other regulators, but it will not pose a major risk to the economy.


Add a comment

In an article on the Federal Reserve Board's decision to raise interest rates, the Washington Post referred to the 2.4 percent median growth forecast of the Fed's Open Market Committee. It might have worth mentioning that the Fed's forecasts have consistently been higher than actual growth. For example, last December their median forecast for growth in 2015 was 2.8 percent. It now appears growth will be around 2.2 percent for the year. The Fed was not out of line with other forecasts. For example the Congressional Budget Office, which quite explicitly tries to be near the middle of major forecasts, forecast 2.9 percent growth for 2015.

Add a comment

Most people realize that politicians don't always give the true explanation for their actions. For example, few politicians are likely to say that they vote against gun control measures because the NRA is a powerful lobby that could derail their political career, even if this is the real reason for their vote. They are more likely to claim they vote against gun control measures because of their belief in the rights of gun owners.

While most people may recognize this fact, apparently the folks at the NYT do not. In an article on the new budget deal it noted that several Democrats had joined with Republicans in suspending the Affordable Care Act's (ACA) tax on medical devices through 2017. The piece told readers:

"Republicans said the device tax discouraged the development and sales of innovative, lifesaving medical technology. Some Democrats from states with thriving medical technology companies agreed."

Of course the NYT does not know that the Democrats who voted to suspend the tax agreed with the claim that it would discourage the development of new technologies. They may have just voted against the tax because the companies in their states and districts are powerful lobbies.

The economics of the medical device industry are similar to the economics of the prescription drug industry. Companies have large research costs, but then are able to sell devices for a markup of several hundred or several thousand percent above their marginal cost. By giving more people access to health care, the ACA was increasing the demand for medical devices and therefore increasing the number of devices that could be sold at high markups, creating a windfall for the industry. The purpose of the tax was to take back some of this windfall.

Opponents of the tax may actually disagree with this logic. Alternatively, they may just be doing the bidding of a politically powerful industry. It is worth noting that the Obama administration did not propose a similar tax on pharmaceuticals, even though the logic would be identical. The pharmaceutical industry is of course even bigger and more powerful than the medical device industry.

On the topic of the article itself, we are told in the first sentence:

"Republican and Democratic negotiators in the House clinched a deal late Tuesday on a $1.1 trillion spending bill and a huge package of tax breaks."

A denominator would be helpful here. Most of the package covers the next two years, a period in which the government is projected to spend a bit less than $8 trillion.

Add a comment

The NYT had a column by Jim Parrot and Mark Zandi on reforming Fannie Mae and Freddie Mac. (Jim Parrott is a senior fellow at the Urban Institute and the owner of Falling Creek Advisors, a financial consulting firm. Mark Zandi is the chief economist at Moody’s Analytics.) The article argues that the problem with Fannie Mae and Freddie Mac was that they were considered too big to fail. It therefore puts forward the case for ending their monopoly on issuing government guaranteed mortgage-backed securities (MBS).

This argument seriously misrepresents the issues with Fannie Mae and Freddie Mac. The real problem was that they issued trillions of dollars in MBS that were implicitly backed up by the government. At the time they failed in the summer of 2008, the generally held view in financial circles was that the government would be obligated to honor their MBS regardless of whether or not it kept Fannie Mae and Freddie Mac in business. In other words, the issue was not the $180 billion bailout (about which elite types routinely and misleadingly say we made a profit) the issue was the huge amount of bad MBS that helped propel the housing bubble.

This was a direct result of the perverse incentives created by a system where private shareholders and top executives stood to profit by passing risk off to the government. This incentive does not exist today. This incentive does not exist today. (The line is repeated because policy folks have a hard time understanding it.) As long as Fannie and Freddie are essentially public companies, that do not offer high returns to shareholders and pay outlandish salaries to CEOs, no one has incentive to take excessive risks.

This changes if we allow private banks to issue mortgage backed securities with the guarantee of the government. This would mean that Goldman Sachs, Citigroup and the rest would be able to issue the same sort of subprime MBS they did in the bubble years with assurance that even in a worst case scenario the government would reimbursement investors for almost the full value of their investment. This is a great recipe for pumping up financial sector profits and another housing bubble. It does not make sense as public policy. 



This piece provides some background on the most likely reform of Fannie Mae and Freddie Mac.

Add a comment

Robert Samuelson again gives us his data free explanation for the weak recovery in his Monday column. He contrasts the current weak recovery with the strong recovery of the eighties. He notes the Fed's efforts to boost the economy in both periods, then tells readers:

"In the 1980s and ’90s, consumers and businesses were eager to spend. The Fed accommodated that demand but did not create it. By contrast, consumers and businesses now are conditioned to be wary. Having lived through events — the financial panic and crushing recession — that supposedly could not happen, they are reluctant spenders. The Fed can try to ease their caution but cannot systematically eliminate it."

The problem with this story is that consumers are spending and businesses are investing. Consumption is at a near record high as a share of GDP. It is only slightly below the peak reached in the housing bubble. 

cons gdp

Non-residential investment as a share of GDP is somewhat below the peaks of the tech bubble in the late 1990s, but is higher than during the eighties boom. The explanation for the weaker recovery is that there was an enormous excess supply of housing coming out of the bubble. This kept construction rates very low ever since the collapse of the bubble. By contrast, the Volcker recession led to a plunge in housing construction, which created a huge amount of pent-up demand for when the Fed lowered interest rates. (The trade deficit, at 3.0 percent of GDP or $500 billion annually, also creates a huge hole in demand that is not easily filled.)

The other major difference between the current recovery and the 1980s was that the structural budget deficit was expanding rapidly in that recovery. In the current recovery it has been contracting rapidly.

In short, there is a very simple story as to why this recovery has been weak and has nothing to do with the factors that Samuelson keeps highlighting.

Add a comment

Okay, this one is a bit personal, but it reflects a larger issue. The Pew Research Center just put out a study showing that a declining share of the U.S. population is middle class, with greater percentages falling both in the upper and lower income category than was the case four decades ago. Washington Post columnist Dan Balz touted this declining middle class story as an explanation for the rise of Donald Trump.

The problem here is that there is nothing new in the Pew study. My friend and former boss, Larry Mishel, has been writing about wage stagnation for a quarter century at the Economic Policy Institute. The biannual volume, The State of Working America, has been tracking the pattern of stagnating middle class wages and family income (for the non-elderly middle class, income is wages) since 1990.

The Pew study added nothing new to this research. They simply constructed an arbitrary definition of middle class and found that fewer families fall within it. 

Perhaps having a high budget "centrist" outfit like Pew tout this finding is the only way to get a centrist Washington Post columnist like Balz to pay attention, but it is a bit annoying when we see someone touted for discovering what was already well-known. Oh well, at least it creates good-paying jobs for people without discernible skills.

Add a comment

In case you were wondering about the importance of a $100 billion a year, non-binding commitment, it's roughly 0.25 percent of rich countries' $40 trillion annual GDP (about 6 percent of what the U.S. spends on the military). This counts the U.S., European Union, Japan, Canada, and Australia as rich countries. If China is included in that list, the commitment would be less than 0.2 percent of GDP.


I see my comment on military spending here created a bit of confusion. I was looking at the U.S. share of the commitment, 0.25 percent of its GDP and comparing it to the roughly 4.0 percent of GDP it spends on the military. That comes to 6 percent. I was not referring to the whole $100 billion.

Add a comment

The New Yorker ran a rather confused piece by Gary Sernovitz, a managing director at the investment firm Lime Rock Partners, on whether Bernie Sanders or Hillary Clinton would be more effective in reining in Wall Street. The piece assures us that Secretary Clinton has a better understanding of Wall Street and that her plan would be more effective in cracking down on the industry. The piece is bizarre both because it essentially dismisses the concern with too big to fail banks and completely ignores Sanders' proposal for a financial transactions tax, which is by far the most important mechanism for reining in the financial industry.

The piece assures us that too big to fail banks are no longer a problem, noting their drop in profitability from bubble peaks and telling readers:

"...not only are Sanders’s bogeybanks just one part of Wall Street but they are getting less powerful and less problematic by the year."

This argument is strange for a couple of reasons. First, the peak of the subprime bubble frenzy is hardly a good base of comparison. The real question is should we anticipate declining profits going forward. That hardly seems clear. For example, Citigroup recently reported surging profits, while Wells Fargo's third quarter profits were up 8 percent from 2014 levels.

If Sernovitz is predicting that the big banks are about to shrivel up to nothingness, the market does not agree with him. Citigroup has a market capitalization of $152 billion, JPMorgan has a market cap of $236 billion, and Bank of America has a market cap of $174 billion. Clearly investors agree with Sanders in thinking that these huge banks will have sizable profits for some time to come.

The real question on too big to fail is whether the government would sit by and let a Goldman Sachs or Citigroup go bankrupt. Perhaps some people think that it is now the case, but I've never met anyone in that group.

Sernovitz is also dismissive on Sanders call for bringing back the Glass-Steagall separation between commercial banking and investment banking. He makes the comparison to the battle over the Keystone XL pipeline, which is actually quite appropriate. The Keystone battle did take on exaggerated importance in the climate debate. There was never a zero/one proposition in which no tar sands oil would be pumped without the pipeline, while all of it would be pumped if the pipeline was constructed. Nonetheless, if the Obama administration was committed to restricting greenhouse gas emissions, it is difficult to see why it would support the building of a pipeline that would facilitate bringing some of the world's dirtiest oil to market.

In the same vein, Sernovitz is right that it is difficult to see how anything about the growth of the housing bubble and its subsequent collapse would have been very different if Glass-Steagall were still in place. And, it is possible in principle to regulate bank's risky practices without Glass-Steagall, as the Volcker rule is doing. However, enforcement tends to weaken over time under industry pressure, which is a reason why the clear lines of Glass-Steagall can be beneficial. Furthermore, as with Keystone, if we want to restrict banks' power, what is the advantage of letting them get bigger and more complex?

The repeal of Glass-Steagall was sold in large part by boasting of the potential synergies from combining investment and commercial banking under one roof. But if the operations are kept completely separate, as is supposed to be the case, where are the synergies?

But the strangest part of Sernovitz's story is that he leaves out Sanders' financial transactions tax (FTT) altogether. This is bizarre, because the FTT is essentially a hatchet blow to the waste and exorbitant salaries in the industry.

Most research shows that trading volume is very responsive to the cost of trading, with most estimates putting the elasticity close to one. This means that if trading costs rise by 50 percent, then trading volume declines by 50 percent. (In its recent analysis of FTTs, the Tax Policy Center assumed that the elasticity was 1.5, meaning that trading volume decline by 150 percent of the increase in trading costs.) The implication of this finding is that the financial industry would pay the full cost of a financial transactions tax in the form of reduced trading revenue.

The Tax Policy Center estimated that a 0.1 percent tax on stock trades, scaled with lower taxes on other assets, would raise $50 billion a year in tax revenue. The implied reduction in trading revenue was even larger. Senator Sanders has proposed a tax of 0.5 percent on equities (also with a scaled tax on other assets). This would lead to an even larger reduction in revenue for the financial industry.

It is incredible that Sernovitz would ignore a policy with such enormous consequences for the financial sector in his assessment of which candidate would be tougher on Wall Street. Sanders FTT would almost certainly do more to change behavior on Wall Street than everything that Clinton has proposed taken together, by a rather large margin. Leaving out the FTT in this comparison is sort of like evaluating the New England Patriots' Super Bowl prospects without discussing their quarterback.  

Add a comment