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).

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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.

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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?

 

Addendum

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.

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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.

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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.

 

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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.

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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.

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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. 

 

Addendum

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

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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.

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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.

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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.

Addendum

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.

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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.  

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The NYT had an article reporting on the fact that the vast majority of people in Kentucky want the state to leave in place its expansion of the state's Medicaid program under the Affordable Care Act (ACA), even though it just elected a governor who is strongly opposed to the ACA. The piece notes that 425,000 people in the state (just under 10 percent of the population) have signed up for Medicaid, then adds "by contrast, only 89,000 people have bought private coverage through Kynect, the state’s health care exchange."

It is important to note that people phase in and out of the exchanges, in large part due to changing employment patterns. Roughly 3.0 percent of the workforce lose or leave their jobs every month. This means many people who had health care insurance may lose it or many who don't have it may acquire it, as they change jobs. This means that the number of people who had insurance through the exchanges at some point over the last two years is likely far larger than the number currently on the exchanges.

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Paul Krugman comments that Portugal can be a situation where its aging population, combined with a large outflow of younger people due to high unemployment, can lead to an ever worsening financial situation where fewer workers are left to support a larger debt and non-working population. (Note, the key factor here is the migration, not the aging.)

That pretty well describes the picture with Puerto Rico, with a large segment of its working age population moving to the mainland United States, leaving the island with relatively few working people to provide taxable income. The upside for Puerto Rico is that at least it has benefits like Social Security and Medicare covered by the national government, compared with Portugal, which must pay for its equivalents from its own tax revenue.

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Why is it so hard for reporters to simply tell us what people say instead of what they think? I'm sure many of these reporters are very insightful, but the reality is they do not know what people think, it is just their speculation.

Therefore, when a Washington Post article on the prospects in Congress for the Trans-Pacific Partnership (TPP) told readers:

"Obama has said the pact is central to his economic agenda, but it is also viewed inside the administration as an important foreign policy initiative to balance the growing economic clout of China."

The Washington Post does not know that the administration actually views the TPP as an important foreign policy initiative, it knows that people in the administration make this claim. While the claim may actually reflect their thinking, it is also possible that they would seek to sell a deal with few obvious economic benefits for most people in the United States on foreign policy grounds. Politicians sometimes do things like that.

There are a number of other comments in the piece that are not quite right. At one point it refers to proponents of the TPP as "trade supporters." This is not accurate. Trade supporters might well oppose the deal because of the increased protectionism in the form of stronger copyright and patent protections. These will raise the price of drugs and other affected products by several thousand percent above the free market price.

Trade supporters may also be unhappy with the TPP since it does nothing to address currency management by parties to the deal. Through currency management countries can prevent the currency market from adjusting, thereby maintaining large trade surpluses that would otherwise not be possible. Using intervention to keep down the value of a currency, as is currently done by many countries, has the same effect as imposing a tariff on all imports and having subsidies for all exports. The Obama administration chose not to pursue this issue in the TPP.

For these reasons, many supporters of trade may oppose the TPP. It would have been more accurate to describe the people referred to in the piece as "trade deal" or TPP supporters.

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The Washington Post had an article on a commitment by Secretary of State John Kerry that the United States would double its aid to developing countries for dealing with climate change from $400 million annually to $800 million by 2020. Those who are worried about the tax increases needed to pay for this aid may be interested in learning that the additional commitment comes to a bit less than 0.009 percent of the $4.7 trillion the government is projected to spend in 2020.

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Matt O'Brien used his column this morning to take Obama to task for failing to fill vacant postions on the Fed's board of governors. I agree with O'Brien with one major exception.

O'Brien refers to the Taper Tantrum in the summer of 2013, when mortgage and other long-term interest rates soared after Chair Ben Bernanke indicated the Fed would soon begin to taper its quantitative easing program. He sees the market reaction as partly a result of the composition of the Fed's board of governors, which included two Obama appointees not fully committed to growth promoting policies. He argues that the tantrum unnecessarily slowed the housing market and growth.

I would disagree with the first part of this story. As we know, economists have a hard time seeing housing bubbles, but we were starting to see the beginnings of one at the time of the tantrum. House prices were rising very rapidly, especially in the bottom third of the market. According to the Case-Schiller tiered price index, in the period from April of 2012 to August of 2013 house prices in the Phoenix market had risen at a 32.6 percent annual rate. In the Las Vegas market they had risen at 44.0 percent rate and in the Atlanta market at a 47.5 percent annual rate.

These markets were badly depressed as a result of the crash, so large increases were a good thing, but on the other hand, it's not hard to see that a market rising at a 47.5 percent annual rate will soon be in bubble territory. And, we were seeing evidence of bubble behavior. People were giving up their day jobs and buying up homes to fix-up and resell. In many cases this involved maxing out on their credit cards or whatever other type of credit they could use. 

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Guest Blog

by Eileen Appelbaum and Rosemary Batt

Co-authors of Private Equity at Work: When Wall Street Manages Main Street

The usually perceptive Deal Professor, Steven Davidoff Solomon has swallowed CalPERS’ staff’s spin on the more than $3.4 billion the California public employees’ pension fund has paid to private equity firms in performance fees (so-called carried interest) hook, line, and sinker. In Private Equity Fees Are Sky-High, Yes, but Look at Those Returns, Davidoff Solomon accepts uncritically CalPERS report of its return on its risky PE investments — a report that the industry publication, Private Equity International in its November 27 Friday Letter, labeled a private equity public relations coup. Those high fees are worth it in Davidoff Solomon’s view because of CalPERS stellar private equity returns. If only!

Davidoff Solomon failed to note that CalPERS’ staff did not provide information in this report on the risk-adjusted return to its risky private equity investments. The staff provided misleading information because its risk-adjusted PE returns were awful: CalPERS investments in private equity have underperformed its risk-adjusted benchmark over the last 10 years and in 3-year and 5-year sub-periods. The staff no doubt expected to pull the wool over the eyes of public sector workers and taxpayers in California, but has surely succeeded beyond its wildest dreams with this endorsement in The New York Times by someone who should know better. Indeed, over the last 10 years, the pension fund’s PE investments underperformed it stock market benchmark by about 300 basis points. In layman’s language, this means CalPERS would have had exactly the same return over this period if it had invested in the stock market index it uses in its benchmark. Actually, CalPERS would have had a much higher return from investing in this stock market index because it could have invested the $3.4 billion of its members’ retirement savings that it paid PE firms in performance fees. It’s amazing that these ginormous performance bonuses were paid to PE firms for delivering results that did not beat the stock market over 10 years and certainly did not provide a return high enough to compensate the pension fund for the greater risk and lack of liquidity present in PE investments.

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Yesterday the Labor Department released October data from its monthly Job Openings and Labor Turnover Survey (JOLTS). The release got surprisingly little attention in the media.

While there were no big surprises, it does not paint a picture of a robust labor market. The number of job opening was down 150,000 from the September level and was almost 300,000 below the peak hit in July. That is not necessarily a big deal; the monthly data are erratic and a monthly change of this size could just be sampling error. Nonetheless, the number of opening has been essentially flat since April, which means that the relatively strong growth reported in the establishment survey does not seem to be making it difficult for firms to find workers.

Consistent with this story, the quit rate remained at a relatively low 1.9 percent. This is a measure of workers' confidence that they can leave a job they don't like and either quickly get a new job or survive on savings or the earnings of other family members. The 1.9 percent rate is well above the 1.3 percent rate at the bottom of the downturn, but low relative to pre-recession levels. In fact, in the weak labor market following the 2001 recession (we continued to lose jobs until September of 2003) the quit rate never fell below 1.8 percent. The current reading looks much more like a recession than a strong labor market. (The series only goes back to the end of 2000, so we don't have long experience with it.)

 

Quit Rate

 

quits rate

Source: Bureau of Labor Statistics.

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By Dean Baker and David Rosnick

Over the last seven years there has been a steady drumbeat of complaints from people who are upset by the Fed’s zero interest rate policy. We first heard that it was going to lead to hyperinflation. Then we were told that low interest rates would fuel asset bubbles. More recently a rate hike has become a matter of the Fed’s credibility.

One of the most persistent complaints is that the zero interest rate policy is unfair to small savers. The argument is that we have all these elderly people who depend on the income from their savings who are being destroyed by getting near zero interest on their CDs and money market accounts.

There are two problems with this story. The first one is a logical problem. Interest rates are low because the economy is extremely weak. In the simple textbook story (very simple), the interest rate is supposed to equate the supply and demand for savings. Ever since the recession began we have had an enormous excess supply of savings. This means that the interest rate should be lower than it actually is. However, interest rates don’t fall further because they will not go below zero, or at least not much below zero. People are not willing to pay banks to borrow their money.

Given the market outcome pushing interest rates to zero, those who want the 2–3 percent short-term interest rates of pre-recession years effectively want the government to pay them interest rates that are above the market clearing rate. That’s fine as a demand from a self-interested group — I’d like the government to pay me twice what my house is worth — but it’s not one that deserves much credence in policy debates. Most of us probably think it’s more important to use the Fed’s monetary policy to get people employed than to subsidize the interest received by savers.

The other problem is that the story of small saver suffering because of low interest rates doesn’t fit the data. There just are not very many people with substantial amount of savings in CDs, money market, saving accounts, or other short-term assets who don’t also have large amounts of money in stocks and bonds. Anyone who has large sums in stocks and bonds has done very well in the last five years, as both markets have soared, so if they aren’t earning much interest on their savings accounts it is difficult to feel too sorry for them.

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Gretchen Morgensen has an excellent piece in the NYT reporting on the revolving door between Wall Street banks and the Obama administration and the lobbying effort to dismantle Fannie Mae and Freddie Mac. These banks hope to be able to take over the business of the two mortgage giants with a system under which the government would guarantee 90 percent of the value of the mortgage backed securities they issued. While the piece does a very good job detailing the financial connections of the individuals behind this push, there are several important points which make the case against "reform" even stronger than presented in the piece.

To start, the piece tells readers:

"For all the problems associated with Fannie and Freddie, some housing experts say, allowing the nation’s largest banks to assume greater control of the mortgage market would most likely increase costs for borrowers."

Actually, just about all housing experts agree that the privatized system would raise costs. Wall Street types get paid more than government employees and shareholders expect a profit. Therefore, we can be pretty safe in assuming a privatized system will have higher costs. The range of estimates in a Washington Post article from last year was that it would increase mortgage interest rates by between 0.5–2.0 percentage points. (I put myself near the bottom of that range.) If the roughly $6 trillion in mortgage debt on Fannie and Freddie's books were all switched to this privatized system, the additional cost would be $30 billion a year, assuming the bottom end of this range. That is more than the federal government spends on the TANF program each year.

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Paul Krugman and Larry Summers both have very good columns this morning noting the economy's continuing weakness and warning against excessive rate hikes by the Fed. While I fully agree with their assessment of the state of the economy and the dangers of Fed rate hikes, I think they are overly pessimistic about the Fed's scope for action if the economy weakens.

While the Fed did adopt unorthodox monetary policy in this recession in the form of quantitative easing, the buying of long-term debt, it has another tool at its disposal that it chose not to use. Specifically, instead of just targeting the overnight interest rate (now zero), the Fed could have targeted a longer term interest rate.

For example, it could set a target of 1.0 percent as the interest rate for the 5-year Treasury note, committing itself to buy more notes to push up the price, and push down the interest rate to keep it at 1.0 percent. It could even do the same with 10-year Treasury notes.

This is an idea that Joe Gagnon at the Peterson Institute for International Economics put forward at the depth of the recession, but for some reason there was little interest in policy circles. The only obvious risk of going the interest rate targeting route is that it could be inflationary if it led to too rapid an expansion, but excessively high inflation will not be our problem if the economy were to again weaken. Furthermore, if it turned out that targeting was prompting too much growth, the Fed could quickly reverse course and let the interest rate rise back to the market level.

Of course, it would be best if we could count on fiscal policy to play a role in getting us back to full employment (lowering supply through reduced workweeks and work years should also be on the agenda), but the Fed does have more ammunition buried away in the basement and we should be pressing them to use it if the need arises.

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