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).
The NYT headlined an article on the release of the newest Case-Shiller housing price data, "housing market shrugging off rise in mortgage interest rates." This may or may not be true, but the new Case-Shiller data will not provide us much information on this question.
The data released today was for the three month period ending in April. This means that the typical home in the sample was sold in March. It is also important to remember that the index picks up closings. Since it typically takes roughly two months between contracting and closing, the Case-Shiller data released today is telling us about house sales that were contracted back in January. That is not going to give us much information about how the housing market is responding to a rise in mortgage rates that has mostly occurred over the last two months.
The piece also tells readers:
"If mortgage rates rise to 4 percent by the end of the year, as the Mortgage Bankers Association forecasts, they will still be much lower than the rates most Americans have experienced over the last few decades. In May, the average interest rate on a 30-year fixed mortgage stood at 3.5 percent."
This statement is bizarre because interest rates have already crossed 4.0 percent. The Mortgage Bankers Association reported that the average contracted rate two weeks ago was 4.17 percent. It is almost certain to be higher now since Treasury rates have risen substantially in the last two weeks.Add a comment
The Wall Street Journal seems to have completely missed the story of the housing bubble and the resulting economic collapse. It begins an article telling readers:
"After a slow start early in the economic recovery, consumer spending has begun to pick up. The question is whether Americans are ready to open their wallets more widely."
It is just mind-boggling to see this in the country's leading business newspaper. Umm, no actually wallets have been pretty wide open for a long time. The way that economists determine the width of the opening is by looking at the saving rate. In the good old days before the stock and housing bubbles, savings out of disposable income averaged more than 8.0 percent.
The savings rate began to fall in the late 1980s in the response to the beginnings of the stock bubble. It fell further in the late 1990s as the bubble peaked. The savings rate bottomed out at just over 2.0 percent in 2000. It rose again after the bubble burst but then fell back to 2.0 percent as a result of the wealth created by the housing bubble. (Actually the saving rate fell to near zero by some measures.)
Predictably, the saving rate rose again following the collapse of the housing bubble and the loss of $8 trillion in housing wealth. However it has remained unusually low, at less than 4.0 percent in recent quarters. This means that consumers are actually spending quite freely. It is not clear what data the piece is referring to when it complains that consumers have been reluctant to spend. Clearly the opposite is true.Add a comment
Since my comments on Greg Mankiw's defense of the one percent prompted so much response, I thought I should add some clarification on the treatment of patents and copyrights. First off, my main point is that these are government policies designed to meet a public purpose (i.e. promoting innovation and creative work), not natural rights that are an end in themselves. In this sense altering them does not raise questions of rights as would restricting the freedom of speech or assembly.
Those who like to point to the constitutional origin of these forms of property should note where patents and copyrights appear in the constitution. They are listed as a power of Congress along with other powers, like the power to tax. They do not appear in the Bill of Rights where rights of individuals are explicitly described.
The constitution authorizes Congress to create monopolies for limited periods of time "to promote the Progress of Science and useful Arts." In this sense, patents and copyrights are explicitly linked to a public purpose. If it were determined that patents and copyrights are not the most efficient means for promoting innovation and creative work, and therefore Congress decided to stop authorizing these monopolies, individuals would have no more constitutional basis for complaint than if Congress decided that it didn't need to raise taxes.
Once we recognize that patents and copyrights are policies to promote innovation and creative work then the question is whether they are best policy and if so, are they best structured now for this purpose. Neither assumption is obvious and I would argue that the latter is almost certainly not true.
In terms of whether these are the best policies, in my earlier post I was simply pointing out that alternative mechanisms already exist and support a great deal of work. I actually didn't advocate any specific policy, but I have written on alternatives to both. Here's a discussion of alternatives to patent supported drug research and here is a proposal modeled after the tax deduction for charitable contributions for supporting creative work. (By the way, the folks who were arguing for the merits of markets over central planning are in the wrong place. You were looking for Joe Stalin's blog, there is no proposal for central planning in my work.)Add a comment
Last week we had to teach Robert Samuelson about inflation. He noted that the wealth of households was back to its pre-recession level, but spending was not. This led him to think that the wealth effect no longer applied. However, when we adjusted the data for inflation and then brought in Mr. Arithmetic it turned out that people were spending more than would be predicted by the wealth effect, not less.
This week it looks like we have to teach Mr. Samuelson about supply and demand. His column is a warning that "cheap money" (e.g. the quantitative easing and low interest rate policy pursued by the Fed) may do more harm than good. This comes in the context of the drop in world stock markets following Ben Bernanke's indication of a pullback from these policies.
Never mind that the drop in world stock markets is exactly what would be predicted if cheap money actually was helping the economy (in that case, the pullback would be expected to lead to lower growth and likely lower profits, therefore we would expect to see lower stock prices), let's deal with the rest of his story. The basic problem in the column is an inability to distinguish clearly between supply and demand.
This first comes up when he complains that in spite of cheap money:
"the speed of the U.S. recovery (about 2 percent annually) is roughly half the average of all recoveries from 1960 to 2007. As for the global economy, it grew 2.5 percent in 2012, down from the 3.7 percent average from 2003 to 2007, says IHS Global Insight."
This one is easily explained by lack of demand. Housing bubbles in the United States and elsewhere had been driving the economy prior to the downturn. Those bubbles have mostly burst, although Canada, Australia, and the UK have seen bubbles reemerge. The fact that the downturn was caused by a collapsed bubble instead of the Fed raising interest rates meant that the recovery would be much slower and more difficult than in prior recessions. There was no easy way to replace the consumption and construction demand created by these bubbles. Some of us were yelling this at the top of our lungs back at the start of the recession, but apparently Samuelson didn't hear us and is therefore surprised by the weakness of the recovery.Add a comment
Tyler Cowen has an interesting piece on the problems facing developing countries going forward. As he notes, these will be different in the future than they were in the past. However the piece is strange due to one of the items it mentions, the aging of the population, and one it leaves out, intellectual property claims. (Btw, Cowen references a column by Dani Rodrick as raising the issue of new problems confronting developing countries. Rodrick does not mention aging in his list of concerns.)
On the former point, Cowen seems determined to apply the Peter Peterson financed obsession with cutting Social Security and Medicare to the whole world. He gives us the bad news:
"It is less well known that fertility rates in much of the Middle East and North Africa are also falling rapidly. In Iran, for example, it is now estimated at 1.86 per woman, which over time would mean that families are not replenishing themselves. And shrinking and older populations, of course, limit future economic growth."
Wow, back when I learned economics we cared about per capita income, not growth per se. Most people would think that Denmark is better off than Bangladesh, even though Bangladesh has a far higher GDP. Fewer people means fewer demands on resources of all types and less greenhouse gas emissions. I suppose Cowen is worried that the beaches will be less crowded and there will be smaller traffic jams. That prospect is not likely to be a major concern for most people in the developing world.
Cowen also gives us the bad news about China:
"Finally, many lower-income countries will be old before they are rich. China’s population, for example, is aging rapidly, given the government’s one-child policy and the decline in birthrates that accompanies rising income."
Let's think about this one for a moment. China has seen unprecedented growth in per capita income over the last three decades. Per capita GDP has risen by a factor of 13. This swamps the growth in almost every other developing country. While aging can impose some burden on the working population, it will not prevent both workers and retirees from enjoying much higher living standards than they did in the recent past.Add a comment
Ireland has been repeatedly touted as a success story by advocates of austerity. However as Floyd Norris points out in a nice piece today, the widely touted turnaround is mostly a quirk in the data.
For tax purposes, several large UK companies have moved their headquarters from the UK to Ireland. This changes nothing in terms of Ireland's actual GNP, in the sense of money flowing to people living in Ireland, but it does lead to an increase in reported GNP. The profits of these UK companies now show up in Ireland's GNP rather than in the UK. When an adjustment is made for this switch Ireland's GNP growth looks considerably weaker the last four years. Instead of turning positive in 2010 its current account just turned positive last year, and even then just by a small amount.
It seems like the austerity advocates will have to look elsewhere for their success story.Add a comment
Suppose the price of corn plummets. Does that mean that the world economy is going down the tubes?
Well, it could be the result of the collapse of demand in the world economy leading to less demand for all commodities or it may just be the result of a bumper corn crop. The latter would be good news for the world economy even though it would be bad news for farmers who produce lots of corn.
Such is the case with stock markets. Stock markets move up and down all the time often for reasons that have nothing to do with the state of the economy. They also have very little predictive power. The market has more than doubled from its 2010 lows even though growth has averaged a pathetic 2.0 percent over the last three years.
Their effect on the economy is also limited. Few companies rely on the stock market to raise capital for investment. The main impact of the stock market on the economy is through the wealth effect on consumption. This is usually estimated as being in the range of 3-4 percent. That means a 10 percent run-up in the stock market, which would generate roughly $2 trillion in wealth, would eventually lead to $60-$80 billion in additional annual consumption. (The impact is usually estimated to be felt over a 2-3 year period.) With a multiplier of 1.5 this implies an impact of 0.6-0.7 percentage points of GDP. That is not trivial, but it is hardly the difference between a booming economy and stagnation.
This is why the NYT badly misled readers with a lead sentence in an article that said:
"Tumbling stock, bond and commodity prices around the world are demonstrating just how reliant the global economy has become on the monetary policies of the Federal Reserve."
The movements in markets showed that the markets respond to actions of the Fed. The plunge in stock prices is bad news if you own a lot of stock, just as a plunge in corn prices is bad news if you have lots of corn. It is not necessarily bad news for the economy.Add a comment
Chrystia Freeland notes the rapid growth in the wealth of the extremely rich. Then she follows Greg Mankiw in arguing that this growth is largely positive insofar as it resulted from people like Steve Jobs and J.K. Rowling producing great innovations or creative material enjoyed by hundreds of millions of people.
While Freeland notes problems from the resulting inequality, she does commit the same error as Mankiw in implying both that the enormous wealth of these people is a natural outgrowth of the market and that these creative people would not have been as productive absent these enormous rewards. Neither claim is remotely plausible.
The choice of Jobs and Rowling is especially ironic in this context since the wealth of both individuals is so obviously dependent on the intervention of the government in the form of patent and copyright monopolies. These monopolies are a prize awarded by the government as a way to provide incentives for creative work. These are quintessential forms of government intervention, they are 180 degrees at odds with the free market.
Of course the government could have easily structured these monopolies in ways that did not allow Jobs and Rowling to get quite as rich. Suppose the length of these monopolies was cut in half or by 75 percent. (In the good old days copyrights lasted for 14 years, subject to an option for renewal. The duration is now 95 years.) Suppose the scope was drawn much more narrowly so that these monopolies did not apply to derivative works or were not enforced with the same vigor.
Even if we decide that these prizes of government monopolies are the best way to support innovative and creative work, the fact that they are structured to allow for such enormous wealth is a decision by governments. It was not the market. Mankiw has apparently made the sort of Excel spreadsheet type error for which Harvard professors have become famous.
Btw, we have many other mechanisms already in place to finance innovation and creative work. Ever hear of universities? foundations? the National Institutes of Health? the Department of Defense, as in the Internet? These alternatives could easily be expanded and altered to replace patents and copyrights. Going in this direction may or may not be the best way to finance innovation and creative work, but the point is that the choice of mechanism is a policy choice made by governments. It is not the result of the natural working of the market.
Oh, and there is some reason to believe that the individuals who get incredibly rich through patent and copyright protection will use their wealth to ensure that patent and copyright protection become stronger and last longer and that alternative mechanisms never get seriously considered in policy circles. (How much has the Gates Foundation contributed to supporting alternatives to patents for developing drugs and vaccines?)
The other obvious flaw in the Mankiw logic is the implication that the great wealth received by a Jobs or Rowling was necessary to persuade them to be enormously creative people. The history of science is full of people who did great work without achieving anything remotely comparable to the wealth of a Steve Jobs or Bill Gates. Anyone know the names of the individuals responsible for the big breakthroughs that gave us the Internet?
How about Jonas Salk who developed the first polio vaccine, protecting hundreds of millions of people from a horrible disease? He did this work without the promise of getting as rich as a Bill Gates.
In terms of creative work, there are countless writers, musicians and other creative workers who never made any substantial sum from their work. Is J.K. Rowlings' work more valuable to society than the paintings of Vicent van Gogh, the music of Charlie Parker, or the writings of Franz Kafka? These people produced work that hundreds of millions of people have enjoyed over the decades without anything like the compensation of a J.K. Rowling.
Clearly we can structure a system in which a small number of creative people can get very rich. But that hardly implies that great wealth is a necessary incentive for generating work of great creativity.
In short, Mankiw has told us that the government has provided prizes that allow people to get enormously wealthy. He has no evidence that these prizes are the most efficient way to promote innovation and creativity, but he doesn't see anything wrong with the resulting inequality.
Note: You can find further ruminations on this issue here.Add a comment
Harvard's standing in economic policy debates took a big hit when the famous Reinhart-Rogoff 90 percent debt-to-GDP growth cliff was shown to be the result of a simple spreadsheet error. Niall Ferguson's strange rant in the Wall Street Journal about the United States becoming the land of government regulation continues the downhill slide.
The gist of the piece is that the country is going down the road to economic stagnation and suffocating bureaucracy because of excessive regulation. The Affordable Care Act (ACA) is the main villain in this story.
It's fair to say that just about everything in the piece is wrong. Starting with the meat, rather than being some horrible burden for small businesses, the main effect of the ACA on the vast majority of small businesses will be to provide them with a subsidy if they offer their workers insurance. The mandate only applies to firms that employ more than 50 workers, most of whom already provide insurance that would meet the mandate anyhow. So these engines of innovation will grind to a halt if the government offers them subsidies for insurance? Interesting theory.
Ferguson then cites a number of hack studies that find enormous costs to regulation. The main trick in this sort of study is to add up every possible cost associated with restrictions without taking account of the benefits of these regulations.
Suppose we had a new law that allowed oil, gas, and other mineral companies to dig up anyone's property without any compensation whatsoever. This would undoubtedly lead to huge growth in these extractive industries and a big gain in GDP that the Fergusons of the world would celebrate.
Of course there would be no accounting of the destruction to people's property or the loss in value they may experience as a result of having an oil rig next to their front porch. Ferguson is effectively mourning that in the United States companies don't enjoy this freedom to excavate or to in other ways damage the environment and the public's health.
Other parts of Ferguson's argument are equally off the mark. His main measure of regulation is the number of pages in the Federal Register. It's not clear that this is a measure of anything. The originally proposed Volcker Rule, which prohibited banks with government insured deposits from engaging in speculative trading, was quite short. It grew an order magnitude larger as the industry watered down the restriction with gobs of exceptions.
By Ferguson's measure, the watered down Volcker Rule means more regulation than the strong Volcker Rule because it involves more pages. There would be a similar story with many rules in the Federal Register.
Finally, Ferguson is badly confused when it comes to economic growth. He tells us:
"The last time regulation was cut was under Ronald Reagan, when the number of pages in the Federal Register fell by 31%. Surprise: Real GDP grew by 30% in that same period."
Apparently Ferguson is impressed that the U.S. economy grew in the 1980s. Of course the U.S. economy almost always grows, economists usually ask about the rate of growth. At the peak of the Reagan business cycle in 1990, the economy was 33.8 percent larger than at the prior business cycle peak in 1981. By comparison, the economy was 41.1 percent larger in 2001 than it had been in 1990. In other words, the economy grew more rapidly after the evils of regulation had returned in the post-Reagan era.
The economy grew much more in the 1960s, the highpoint of liberal intervention. It was 51.6 percent larger in 1970 than in 1960. Even the dreadful 1970s had more growth than Ferguson's low regulation Reagan days, expanding by 39.9 percent from 1970 to the business cycle peak in 1981. The productivity data, which measures growth per hour worked, would show a similar picture.
So there you have it: Ferguson has no serious measure of either the cost or the extent of regulation. And he gets the story on growth completely backward. This is the sort of wisdom on economic policy that we are coming to expect from Harvard University and the Wall Street Journal opinion page.Add a comment
Yesterday I got to make fun of the NYT for telling readers that food stamps was a $760 billion program. I thought they were giving the 10-year cost, but apparently they had just made a mistake and added a zero to the annual cost, as they later acknowledged in a correction.
This helped make my point. No one, apparently including the editors at the NYT, has any idea what these budget numbers mean. If the original article had told readers that spending on the food stamp program was roughly 1.8 percent of this year's budget it would have immediately conveyed meaningful information to readers. And the editors at the NYT probably would have noticed if the piece had said that food stamps were 18 percent of the budget.
Anyhow, today the NYT obliged us with another example of meaningless budget numbers in reporting on the budgetary consequences of immigration reform. According to a new report from the Congressional Budget Office (CBO):
"The report estimates that in the first decade after the immigration bill is carried out, the net effect of adding millions of additional taxpayers would decrease the federal budget deficit by $197 billion. Over the next decade, the report found, the deficit reduction would be even greater — an estimated $700 billion, from 2024 to 2033."
Okay, are we in for a budget bonanza from immigration reform? After all, those are pretty big numbers.Add a comment
While meandering the streets of Paris, Paul Krugman apparently awakened to the fact that the assignment of claims to wealth through patents, copyrights, and other forms of intellectual property is a really big deal. This is good news for those who have been jumping up and down yelling about this issue for the last 15 years or so.
There is really big money in this area. Just to take my favorite one, we spend $340 billion a year on drugs, more than 2 percent of GDP ($295 billion on prescription drugs, $45 billion on non-prescription drugs). We would probably spend about one-tenth this amount in the absence of patent protection. The difference is equal to about 20 percent of after-tax corporate profits.
And this huge gap between price and marginal cost gives drug companies enormous incentive to push their drugs as much as possible. This means concealing evidence that they are ineffective or even harmful. We routinely see stories about the drug companies responding exactly as economic theory predicts.
Of course the huge gap between price and marginal cost leads to all the predicted distortions on the consumer side as well. People have to struggle to find the money to pay for drugs that cost hundreds or even thousands of dollars a prescription when the price would be largely a non-issue if they sold for the generic price.
In the case of the tech sector, Google, Apple, Microsoft, and Samsung compete at least as much in their legal departments as in the quality of the products they develop. Patents are more often used to harass competitors than to protect innovation -- and that is what the business press says.
In the realm of copyright, we have the efforts by the entertainment industry to turn us all into junior copyright cops through measures like SOPA or PIPA.
So intellectual property is a really big deal in the modern economy. And what is neat about it is that these property relations are almost infinitely malleable. (Okay, all property relations are malleable, but IP seems to offer much more room.) That's the key point that we all have to understand because the bad guys want to convince us that patents and copyrights came to us from on high and that it is our obligation to enforce them in their current or strengthened form, otherwise we are dirty communists.
It's great to see that Krugman may now be on the case. Perhaps he will be able to teach the economists a bit of economics. (Hint: an intro textbook goes far here. Large gaps between price and marginal cost are bad in trade, much larger gaps between price and marginal cost are really bad when it comes to intellectual property.)Add a comment
I sure didn't, which is why I was surprised to see an NYT article refer to it as "the $760 billion program." This number is referring to the cost of the program over a 10-year budget window, which careful readers may have gleaned from the rest of the sentence which tells us that fraud accounts for 1 percent of the program's cost or $760 million a year. Nowhere does the piece directly say that the $760 billion figure refers to a ten year spending number and not a one year number.
This is a great example of the absurdity of budget reporting. It is highly unlikely that most NYT readers assume that budget numbers are for a ten year horizon. While this is a standard in budget wonk circles, it is hardly a normal practice anywhere else. Giving a spending figure without even explicitly telling readers the number of years it covers is not providing information. This should not have gotten by an editor.
It would have been simple to write this in a way that would convey information. The government is projected to spend a bit over $50 trillion in the next decade. If the piece had described projected spending on the food stamp program as a bit more than 1.5 percent of projected spending then most readers would have a reasonable idea of the importance of the program in the budget and to their tax obligations. If it makes people feel better it could also include the dollar figure, but since almost no one knows the size of the projected budget (especially over a ten year horizon), the percent number would provide far more information.
There is no excuse for using numbers that don't convey information when it is so simple to use an alternative that would be easily understood by the vast majority of readers.
The NYT has a corrected the piece so that it no longer refers to food stamps as a $760 billion program. It would be nice if they described it as a percentage of the budget so as to actually convey some information to their readers.Add a comment
The NYT reported on the findings of two independent studies that a spinal treatment procedure provided by the medical device maker Medtronic was no more effective than prior treatments and was possibly harmful. The studies implied that earlier studies by Medtronic were biased in exaggerating the potential benefits from the procedure, which has netted the company billions of dollars in revenue over the last decade.
This is exactly the sort of corruption that economic theory predicts would result from government granted patent monopolies. This leads to both large amounts of excess costs and often bad health outcomes.Add a comment
That is the essence of his column today warning liberals of sharp cuts to domestic discretionary spending (e.g. Head Start, education, infrastructure etc.) unless there are cuts to Medicare and Social Security. Hiatt uses the term "entitlements" since it is less popular than the programs to which it refers.
The basic argument is that Hiatt has decided how large the deficit can be, he has decided that there can be no additional cuts to the military, and that there can be no new taxes ever. Therefore if liberals don't want to see the domestic discretionary portion of the budget contract, then they better accept cuts to Social Security and Medicare.
It's not clear why anyone should accept Hiatt's assessment on any of these points. (He is batting close to 100 percent in the being wrong department. Remember when his gang was warning about budget deficits back in 2006-2007 as the collapse of the housing bubble was about to sink the economy?)
Of course the size of the deficit is not fixed and in the near term larger deficits will foster growth and create jobs. Why should liberals accept that cavemen, who have trouble with math and logic, will forever keep us from getting the economy back to full employment?
As far as the military budget, we were spending 3.0 percent of GDP on the military back in 2000, is there some obvious reason that we can't get back to that level again? Our economy will be more than 50 percent larger in 2020, so 3 percent of 2020 GDP would be 50 percent more spending in real dollars than it was in 2000.
As far as taxes, liberals would obviously prefer progressive tax increases to regressive ones, but polling data consistently show that people across the political spectrum would prefer tax increases to cuts in Social Security and Medicare. In other words, if the budget situation requires that we either make cuts to these programs or raise the taxes needed to pay for them, Democrats, Independents and even Republicans prefer to raise taxes. It is only Washington elite types like Fred Hiatt who want to rule out this option.
Finally, most liberals would be happy to have cuts to Medicare that involve cutting excess payments to providers. We pay more than twice as much per person for our health care as the average for people in other wealthy countries. If we got our costs more in line by cutting payments to drug companies and medical equipment companies, most liberals would be fully on board.
We could also go the route of promoting free trade: allowing Medicare beneficiaries to buy into the more efficient health care systems in other countries and splitting the savings. Unfortunately Hiatt and other Washington elite types become ardent protectionists when the discussion is about trade that could reduce the income of their rich friends.
So we can see the problem is not inevitable cuts in domestic discretionary spending. The problem is that people like Fred Hiatt want to rule out any other options in order to try to force cuts to Social Security and Medicare.
One final point, there is no guarantee that even if liberals agreed to cut the benefits received by people on Social Security and Medicare that the money would go to domestic discretionary spending. In the past surplus funds have been used for tax cuts targeted to the rich. In the current political environment in Washington it would be absurd to assume that this could not happen again.Add a comment
That's what readers would probably conclude from a column headlined "Americans have record wealth but aren't spending it." The first paragraph begins:
"In the economic history of our time, June 6, 2013, ought to occupy a special place. That’s the day the Federal Reserve disclosed that the net worth of American households — the value of what they own minus what they owe — hit $70 trillion, a record that exceeded the previous peak before the 2007-09 financial crisis. Higher stock prices and a long-awaited housing recovery are slowly restoring Americans’ lost wealth. By all rights, this symbolic crossing ought to improve confidence, prompt consumers to spend more freely and increase the economy’s growth."
Okay, let's first check the story that consumers are not spending freely. If we turn to the most recent data we see that the saving rate for the first quarter was 2.3 percent. That is slightly higher than the 1.5 percent saving rate we saw at the peak of the bubble in 2005 and 2006, but it's not hugely different. (Arguably, because of the statistical discrepancy in the national accounts we should view the saving rate as being somewhat lower at the bubble peak.)
It is possible that the first quarter saving rate was somewhat lower than normal because households were taking time to adjust their consumption to the ending of the payroll tax cut. Also, they may have been spending part of the big dividend payouts that were made in the 4th quarter to beat the rise in tax rates. If we average in the 5.3 percent saving rate from the 4th quarter, we get an average of 3.8 percent for the last two quarters, 2.3 percentage points above the saving rate at the peak of the bubble. So the question is why consumption is not back to its bubble peaks if wealth is back to its bubble peak.
Samuelson tells us:
"Here’s where the process seems to have broken down. Before the financial crisis, says economist Mark Zandi of Moody’s Analytics, an added dollar of housing wealth might produce 8 cents in extra spending, and an extra dollar of stock wealth, 3 cents. The overall effect was about 5 cents per dollar of new wealth, Zandi says. Now, 2 or 2.5 cents 'seems more likely to me.'"
Okay, let's check that one.Add a comment
The NYT ran a piece telling readers "even pessimists feel optimistic about the American economy." What is striking is the nature of the optimism reported in the article. At one point the article gives as one example of this optimism:
"Mr. Behravesh (the chief economist at IHS Global Insight) now expects the annual growth rate to rise to 2.9 percent in 2014 and 3.5 percent in 2015."
The trend rate of GDP growth is between 2.2-2.5 percent according to the Congressional Budget Office (CBO) and other forecasters. CBO puts the economy now at roughly 6.0 percent below its trend level of output. If we take the average of Behravesh's forecast for the next two years and assume that the economy sustains this rate going forward, then the economy will be growing at a rate of 3.2 percent.
At that pace it will be closing the output gap at a rate of between 0.7-1.0 percentage point a year. If we take the higher number (1.0 percentage point) then we will get back to potential output in 2019, making this downturn as long as the Great Depression. If we take the lower number then we won't get back to potential GDP sometime in 2021, making this a 14-year downturn.
It would be interesting to know what the real pessimists say.Add a comment
Neil Irwin wrote about a presentation that Alan Krueger gave at the Rock and Roll Hall of Fame that showed how the growing inequality of revenue in the music industry was characteristic of trends in inequality in the larger economy. Irwin quotes Krueger:
"We are increasingly becoming a ‘winner-take-all economy,’ a phenomenon that the music industry has long experienced. Over recent decades, technological change, globalization and an erosion of the institutions and practices that support shared prosperity in the U.S. have put the middle class under increasing stress. The lucky and the talented – and it is often hard to tell the difference – have been doing better and better, while the vast majority has struggled to keep up."
The piece includes a chart that Krueger presented showing that the share of concert revenue going to the top 1 percent of performers went from 26 percent in 1982 to 56 percent in 2003. The next 4 percent saw their share squeezed somewhat from around 36 percent to 29 percent. This led to a fall in the share for everyone else from 38 percent to 15 percent.
While the share of the 1 percent was rising in this period, it is interesting to look what was happening to total revenue, most importantly in pre-recorded music. This rose rapidly as a share of GDP from less than 0.12 percent in 1980 to a peak of just under 0.2 percent in 1998. The obvious explanation for this rise was the growth of CDs. This new format meant that people were not only buying new music, but also many people were purchasing music they already had on tape or records in this new format. After 1998 the share of GDP spent on recorded music plummeted, falling to 0.11 percent in 2012.
It's not clear what Krueger's data would show over this period (his chart ends in 2003), but we might see a growing share for the top 1 percent of a sharply declining revenue stream. The logic is that it costs a great deal of money for the music industry to promote a new artist. In a context of sharply dwindling revenue due to technological innovation (the Internet has made a vast amount of material available at zero cost), it is much less likely that this money will be recouped in sales. As a result it makes more sense for the industry to market music that might have been made 30 or 40 years ago because there is very little risk involved.
However there are two important items in this picture that have nothing to do with technology. The first is efforts to restrict unauthorized copies. The industry has repeatedly gone to Congress to push for beefed up protection for copyright and stronger enforcement measures. The Digital Millennium Copyright Act was one piece of fruit from this effort. Another agenda item was SOPA and PIPA, which would impose much greater burdens on Internet intermediaries.
The other major item here is the extension of the length of copyright protection. The duration is now 95 years. This gives companies an incentive to promote old music that would not otherwise exist.
Anyhow, the point is that the concentration of earnings of the top 1 percent is not just technology, but rather the ability of the rich and powerful to control technology to ensure that it makes them richer and more powerful.
Btw, for those wondering, there was a substantial increase in the share of GDP going to live performances also. It went from 0.05 percent of GDP in 1980 to 0.12 percent in 2005. It had remained pretty stable at that level for several years, but fell back to 0.11 percent in 2011. Presumably the division of revenue from live performances loosely corresponds to the revenue from recorded music since it will be closely related to the extent to which various performers are promoted.Add a comment
Paul Krugman has a nice post on the housing bubble in Canada. Needless to say, I strongly agree. It is painful how so many people refer to this downturn as the result of a financial crisis.
I have often posed the simple question of what would be different right now if we had not had the crisis but house prices were exactly where they are today. Would firms be investing more, would people be consuming more, would we see more building in spite of near record vacancy rates? It's hard to see the answer to any of these questions as being yes.
The failure to recognize the last housing bubble and its risks was an act of astounding incompetence by people in policy positions and really the economics profession as a whole. The failure to see the continuing risks posed by renewed bubbles should be enough to sentence these people to the sort of hardcore unemployment experienced by people with no marketable skills.
One item that Krugman misses in comparing household debt in the U.S., U.K., Canada, and the euro zone is that the overwhelming majority of the debt in the U.S. is 30-year fixed rate mortgages. The interest rate on these mortgages will not change if long-term rates rise by 2-3 percentage points as folks like CBO predict.
On the other hand, the standard mortgage in the UK is an adjustable rate mortgage. In Canada it's typically a 5-year mortgage that has to be paid off or refinanced at the end of the period. It's easy to see what happens in these cases when interest rates rise and it's not pretty.
Since I've been asked in e-mails and twitter comments I'll present again the patented Dean Baker Bubble Bursting Formula for Central Bankers:
2) Regulatory Powers
3) Higher Interest RatesAdd a comment
Neil Irwin has an interesting discussion of a new practice by which some private data gathering outfits sell early access to the releases of their data at a premium. The idea is that a small number of people will have access to the new information ahead of the market.
Irwin raises several issues about this practice, but misses an important one: economic efficiency. From an economic standpoint we would like as few resources as possible to be devoted to the process of collecting and disseminating information.
This means for example, that if we can have 2000 people involved in the process of collecting data on employment, wages, prices and output and disseminating this information to the rest of us, we are much richer collectively than if we have 2 million people involved in this process (including the running of financial markets). In the former case, the other 1,998,000 people would be able to spend their time providing the rest of us with health care, housing, education, or other goods and services of value.
However if we deliberately create a situation where there are large amounts of money to be made by getting early access to data then we will almost certainly be pulling more people into this process of collecting and disseminating information. To be concrete, if people think that they can make millions or billions of dollars by beating the crowd to information then many people will devote great effort to beating the crowd to information.
This is pure rent-seeking in that their behavior offers no benefit to the economy. It will not make the economy more efficient if the price of a specific stock or other financial assets adjust 1 second more quickly to new information, however it can make particular individuals very rich.
In principle we want to set rules for the market so that people have incentive to engage in behavior that increases the wealth of society for example by inventing more efficient cars or developing better drugs. We don't want the incentives to drive them toward rent-seeking behavior that offers no social benefit. Opportunities to get market moving data ahead of others will undoubtedly encourage more rent-seeking behavior. This is a loss to the economy and society.Add a comment
The Washington Post shows as little regard for standards of journalistic objectivity in its coverage of trade deals as in its coverage of Social Security. Therefore it was not surprising to see this line in an article reporting on the European Union's decision to restrict areas to be covered in a new trade pact with the United States:
"The Transatlantic Trade and Investment Partnership is a centerpiece of the Obama administration's accelerating push on trade and international economic relations to boost U.S. growth and jobs."
Really? The Post knows that boosting growth and jobs is the main purpose of the Obama administration's trade agenda? That could be the case, but given the central role that corporate lobbyists are playing in designing the agenda it might be reasonable to believe that boosting corporate profits is a high priority. This does not necessarily mean boosting growth and creating jobs and in fact may mean the exact opposite.
For example, when trade agreements increase patent or other barriers on the sale of prescription drugs it will raise the price of these drugs in other countries, pulling money out of consumers pockets and leaving them with less money to spend on other items produced in the United States. This will boost corporate profits but will lower growth and hurt employment. The same is true of many other items on the agenda of U.S. trade negotiators.
The Post need not pass judgment on the motives of the Obama administration in these negotiations. It just should follow normal journalistic standards and report the administration's claims about its agenda (along with the claims of critics) and let readers make up their own minds. It is irresponsible to simply assert that the motives claimed by the administration are its true motives, especially when so much evidence points in the opposite direction.Add a comment
The NYT implied that politicians in the United States and Europe are pushing a trade deal because they want to boost growth in a prolonged period of stagnation. This is not plausible.
Even optimistic projections of the impact of a trade deal show that it would only increase GDP by around 1.0 percent. This increase would only be felt after the changes in the agreement are fully phased in which will almost certainly be more than a decade. The implication is that the impact on annual growth will almost certainly be less than 0.1 percentage point, and even this would be an optimistic scenario.
The more obvious explanation is that powerful corporate interests could benefit from a trade agreement that would over-ride national or local health, safety, and environmental regulations. The most obvious news in this piece is that political leaders are misrepresenting their motives, trying to claim that a trade deal is about economic growth, which could provide benefits to most of the population, as opposed to special interest rules that are intended to benefit a narrow group of corporations.Add a comment