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 Washington Post and Robert Samuelson did their part in publicly passing along the marching orders from the rich and powerful to Ben Bernanke and the Federal Reserve Board. The word from these folks is "No Inflation!" If that means millions more people will suffer unemployment for a few more years, that's a price that the Post and Samuelson are willing to pay.
Of course the rich and powerful have numerous channels for making their concerns known to the Fed, they don't need the Post and Samuelson to put them into print. So, this really is a public service.
What's neat about this picture is that there is little dispute about the basic facts surrounding inflation. Inflation is a problem that stems from an overheated economy. Apart from war or political collapse there are no instances of inflation just shooting up from low levels into Weimar type hyper-inflation. This means that if we are going to have a problem with inflation, it will arise gradually and we will first have to get back to something near full employment. It will not just creep on us overnight when we are sleeping. (There can be supply induced inflation. Suppose Saudi Arabia's oil fields are blown up and the price of oil goes to $400 a barrel. This would cause inflation, but the Fed's actions are not going to affect this outcome.)
The other basic fact is that moderate rates of inflation do very little harm. The economy operates every bit as well with 4-5 percent inflation as it does with 1-2 percent inflation. This is a heavily researched topic and the overwhelming majority of this research has found little or no negative effect from moderate rates of inflation (e.g. here and here).
Yet, both the Post edit board and Samuelson argue strongly that Bernanke should not risk higher inflation to try to reduce the unemployment rate. The edit told readers:
"the core rate of inflation (price increases excluding food and energy costs) has crept up to within striking distance of the Fed’s 2 percent target. Printing more money might push it above that, unleashing dangerous inflationary expectations."
Ooooooh, dangerous inflationary expectations. That's really scary. Since the core inflation rate has been above 2.0 percent for most of the last 50 years, it's hard to see what anyone would be worried about.
But then the Post gets to the substance of the matter:
"The Fed recently promised to continue making funds available to the financial system at nearly zero percent interest. While perhaps necessary in the short run, this policy amounts to a penalty on prudent savers and a reward to over-leveraged debtors."
Yep, we should really be worried about rewarding those over-leveraged debtors -- lazy bums, many of them are not even working. And the "prudent savers?" Yes, that woud include all those wealthy people with large amounts of money to invest. But hey, no class issues here.
Robert Samuelson also notes how more expansionary policy has the effect of transfering wealth from creditors to debtors in the context of discussing a proposal by Harvard economist to deliberately target 6 percent inflation for a couple of years:
"To be sure, higher inflation represents a wealth transfer to debtors (who repay in cheaper dollars) from creditors (who receive cheaper dollars). That’s unfair, Rogoff says, but it may be less unfair and disruptive than outright defaults by overborrowed debtors."
Samuelson concludes that the risks of inflation are just too great and then wrong tells readers:
"Remember: The economy’s basic problem is poor confidence spawned by pervasive uncertainties."
As noted in today's lesson on accounting identities, the share of GDP devoted to investment in equipment and software is almost back to its pre-crisis level. And, the saving rate is still below its post-war average, meaning that consumption is high, not low. The economy's basic problem is that the dollar is too high, which is causing a large trade deficit.
When we think about the trade-offs between inflation and unemployment it is important to remember that the tens of millions of people who are unemployed or underemployed today did not do anything wrong. It was people like Alan Greenspan and Ben Bernanke who messed up. And of course other actors in national policy debates, who were too obsessed with budget deficits to notice an $8 trillion housing bubble did not help either.Add a comment
National income accounting is really basic stuff. It is taught in every intro economics class. It would be a really great thing if only the people who wrote about and implemented economic policy understand it.
Starting at the beginning, we know that we can add up GDP on the output side by summing its components, consumption, investment, government, and net exports. This must be equal to the incomes generated in production. This gives us a basic identity that:
1) C+I+G+(X-M) = Y
where Y stands for income. This identity must always hold, it is true by definition.
We can then divide Y into disposable income, which is total income, minus taxes. This gives us:
2) Y = YD + T
We can then divide disposable income into savings and consumption, since by definition any income that is not consumed is saved. This gives us:
3) YD = C+S
since we now know that Y = C+S+T, we can rewrite equation 1 as,
4) C+I+G+ (X-M) = C+S+T
we then eliminate consumption from both sides and we get:
5) I+G+(X-M) = S+T, rearranging terms gives:
6) (X-M) = (S-I)+(T-G)
This one actually has a clear meaning. X-M is exports minus imports, or the trade surplus, S-I is private saving minus private investment, and T-G is taxes minus government spending, or the budget surplus. This identity means that the trade surplus is equal to the sum of the surplus of private savings over investment and the government budget surplus. Remember, this is an accounting identity, it must be true.
Now, let's bring this back to the concerns that the Post and Samuelson raise today. Both are very concerned about inflation (I'll beat up on them for this is another post), but they also hold out the hope that the economy will get back to full employment once consumers and firms are more confident about the economy.
But consider the accounting identity. The country has a large trade deficit, which means that X-M is a large negative number. It's currently around 4 percent of GDP (just under $600 billion), but would certainly be much larger if the economy were near full employment. Imports rise with income, so that with a higher level of GDP the trade deficit would expand.
If X-M is negative, then either or both (S-I) or (T-G) MUST be negative. This means either or both that we have negative private savings or we have a budget deficit.
We can have the former with a very low private saving rate, as we did during the stock and housing bubble. In both periods there was aa consumption boom driven by transitory wealth created by the bubbles. It is difficult to understand why anyone would want a low private saving rate.
It means that people reach retirement with very little to support them other than their Social Security or Medicare, which both the Post and Samuelson want to cut. So no one can consistently want both low private saving and cuts to Social Security and Medicare, unless they want the elderly to be very poor. (It is in principle possible to raise investment, but in practice very difficult. The equipment and software investment share of GDP is already almost back to its pre-crash levels, so the prospects of further increases are very limited.)
The other possibility is that we can have a large budget deficit, making T-G a big negative number. But, we know the Post and Samuelson hate budget deficits, they complain about them all the time.
For those who believe in accounting identities and evolution there is only one other place to go, we must get our trade deficit down. We need X-M to be a much smaller negative number. The best mechanism for getting the trade deficit down is reducing the value of the dollar.
A lower dollar would make imports more expensive for people in the United States, leading them to buy fewer imports. It would also make our exports cheaper for people living in other countries, leading them to buy more of our exports. Fewer imports and more exports translates into a smaller trade deficit.
So we should want a lower dollar, right? Not so fast, Samuelson explicitly warns that a falling dollar could be a bad consequence of higher inflation. The Post editorial never mentions a lower dollar as a possible benefit of more expansionary monetary policy.
What can we conclude from this? We can conclude that Samuelson and the Post do not know national income accounting.
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I was going to swear off Casey Mulligan for the rest of the summer, but it can be hard to stick to a diet. He has a delicious new post and I just have to take a couple of swipes.
First, he criticizes me and Paul Krugman because we have praised studies of the impact of the stimulus that do not take account of displacement effects. Mulligan's example is the move of Yankee Stadium. He notes that the move created jobs in the new location but correctly points out that these was pretty much entirely offset by the jobs lost in the previous location.
This is a fair enough critique in the context of Yankee Stadium. In fact many claims of job creation by businesses (e.g. Boeing creating jobs in its proposed plant in South Carolina) are in fact stories of displacement. In the Boeing case, the jobs would be coming from unionized facilities in Washington State.
But how do we envision the job displacement in the stimulus story? If Illinois has more jobs in road construction due to the stimulus or more teachers in its classrooms, do we think this means fewer construction workers or teachers have jobs in Indiana or Wisconsin? It's a bit hard to see how that works. In the Yankee Stadium and Boeing example, we are taking something away and moving it to a new location. What exactly is being taken away in the stimulus story?
The other point Mulligan raises that deserves comment is his argument that more workers are employed in the summer because of the increased supply of young people looking for jobs. Mulligan sees this as evidence that the underlying problem is supply and not demand, since the additional supply of young workers seeking jobs led to more employment.
Of course there is a flip side to this picture that Mulligan has ignored. There is also increased demand in the summer. This is when families take vacations and go to beaches and resorts. That is both because the weather is better (not many lifeguards are employed on Coney Island in January) and because the kids are out of school. In other words, spending on tourism and recreation is highly seasonal.
We could use Mulligan's seasonal argument as a test of whether unemployment was driven by supply or demand factors if we could just isolate the supply side of the picture. But there is no easy way to do that and Mulligan certainly has not found one.Add a comment
The NYT reported on S&P's downgrade of Japanese government debt to the 4th highest level. It explained the downgrade by noting Japan's continued weak growth, political problems and concerns about deflation. These are factors that might concern the Japanese public when they vote for their leaders, but it is difficult to see what they have to do with bondholders holding Japanese government debt.
Bondholders are presumably worried about whether they will get paid back. None of the issues raised in this discussion have any direct bearing on whether Japan's government can repay its debt. In fact, since the debt is denominated in yen, it would be difficult to understand how Japan would be unable to repay its debt, unless it forgets how to print yen.
In fact, the concern about deflation undermines one of the arguments that is occasionally made in the context of the U.S. downgrade, that S&P is concerned about inflation eroding the value of the debt. While this story never made sense in any case, if Japan sees deflation then bondholders will actually be repaid in yen that are worth more than the yen they lent. (The credit rating agencies are not in the business of making inflation forecasts. Furthermore, if an increased risk of inflation was the basis for its downgrade then S&P should have downgraded all dollar denominated debt regardless of the issuer.)
It is important for the media to analyze the basis for these downgrades since there are serious questions about the competence of S&P and the other credit rating companies. They rated hundreds of billions of dollars of subprime mortgage backed securities as Aaa. They also gave top investment grade ratings to Lehman, Bear Stearns and AIG until their bankruptcies (or bailout in the case of AIG).
Given their abysmal track record, it is entirely plausible that there is no basis for their downgrades of sovereign debt. There certainly cannot be a prima facie assumption that they have any idea what they are doing.Add a comment
The NYT told readers that the Fed will be reluctant to engage in more quantitative easing or take other steps to boost the economy because it is worried about inflation. It then told readers that inflation has been 3.6 percent over the last year, implying that this is a serious problem.
Actually, as a matter of policy the Fed has long focused on the core inflation rate, which excludes food and energy prices. Over the last 12 months, the core inflation rate has been just 1.8 percent, which is below its 2.0 percent target. Furthermore, in prior years the Fed had not even viewed the 2.0 percent core rate as a strict bound. The year over year inflation rate was consistently above 2.0 percent in two decades prior to the recent recession, with the exception of a period in 2003-2004 when the weak economy pushed inflation below this rate. In other words, if Bernanke and the Fed now view 2.0 percent core inflation as an upper bound, then this is a much stricter anti-inflation policy than they have applied in the past.
Furthermore, higher inflation is actually one of the goals of a quantitative easing policy. Higher inflation reduces the real interest rate. Firms are more likely to invest if they expect that they can sell the goods that they produce at a higher price in future years. This is why Bernanke actuallyadvocated that the Bank of Japan deliberately target a higher inflation rate in a paper that he wrote while he was still a professor at Princeton.
This is also the reason that deflation can be a problem as the article notes. However, there is no magic to zero. The problem of deflation is that the the inflation rate is lower than is desired. If the desired inflation rate is 4.0 percent, then the drop of the inflation rate from 0.5 to -0.5 percent is no worse than the drop from 1.5 percent to 0.5 percent. Deflation per se is only a problem when the rate of price decline is so rapid that it undermines the ability to plan. This was the case at the start of the Great Depression when prices were declining at a near double-digit annual rate.Add a comment
That is how CBS News would report it. In its discussion of the rise in the deficit in the years that President Obama has been in office it tells its audience:
"Mr. Obama blames policies inherited from his predecessor's administration for the soaring debt. He singles out:
- "two wars we didn't pay for"
- "a prescription drug program for seniors...we didn't pay for."
- "tax cuts in 2001 and 2003 that were not paid for."
He goes on to blame the recession, and its resulting decrease in tax revenue on businesses, for making fewer sales, and more employees being laid off. He says the recession also resulted in more government spending due to increased unemployment insurance payments, subsidies to farms and funding of infrastructure programs that were part of his stimulus program."
It is likely that President Obama blames the recession for the rise in the deficit because it happens to be true. For example, the deficit was 0.4 percent of GDP in 1974. In 1976 it was 4.0 percent of GDP ($600 billion in today's economy). In 1981 the deficit was 2.6 percent of GDP. In 1983, in the middle of the recession, it hit 6.0 percent of GDP. In 1989 the deficit was 2.8 percent of GDP. The recession raised the deficit to 4.7 percent of GDP in 1992. And in 2000 the surplus was 2.4 percent of GDP. The impact of the recession, coupled with the war and the Bush tax cuts, turned this into a deficit of 3.5 percent of GDP in 2003.
In other words, this is not a debatable point. Recessions lead to deficits, and severe recessions, like the one that accompanied President Obama's move to the White House lead to large deficits. Reporters should know this and if they do, they should identify this as a fact to their audience, not an assertion by a politician to be viewed with skepticism.Add a comment
That's what the Dow Jones effectively told readers today. The article reported that in response to a question at a conference:
"Greenspan also said he believes that the sharp rise in gold prices is due to market concerns about inflation taking off in the long run. He noted how there has never been such a major expansion of credit in U.S. economic history."
Let's look this one up. There is an organization called the "Federal Reserve Board" that puts out really good data on credit. If we look at its most recent Flow of Funds accounts, we see that credit for the economy as a whole expanded at a 3.0 percent annual rate in 2009, a 4.2 percent annual rate in 2010, and a 2.3 percent annual rate in the first quarter of 2011, the most recent quarter for which data is available.
Has there ever been "such a major expansion of credit in U.S. economic history?"
Well, actually credit expanded more rapidly than the 4.2 percent rate in 2010 in every single year that Greenspan chaired the Fed. In fact, it expanded more rapidly in every year in this series (going back to 1976) and probably every year since the Great Depression. In other words, for Alan Greenspan night is day, up is down, he is looking at an extraordinarily slow pace of credit expansion and telling reporters that is the fastest on record.
Of course, Greenspan is probably not familiar with the Flow of Funds data. If he had been, he probably would have noted the historic drop in the ratio of homeowners' equity to market value that occurred even as house prices were soaring to record levels. (Rising house prices translate one to one into equity. Other things equal, rising house prices should have meant a rising ratio of equity to value.) This was a very clear warning sign about the housing bubble to those familiar with the Fed's data.
A serious news service should not be passing along such ill-informed nonsense to its readers uncorrected, except if its purpose is to point out that the person who chaired the Fed for almost two decades doesn't have a clue about the economy.Add a comment
A Reuters article on plans by the European Union to impose a tax on foreign exchange transactions (actually the proposed tax would apply to a wide array of financial transactions, not just foreign exchange) reads like an editorial against such a tax. It tells readers that the tax could cause traders to leave the London market, that it would reduce liquidity and thereby increase volatility and also disrupt efforts to develop algorithms for intraday trading. It describes these as unintended consequences of the tax.
If it had talked to a proponent of the tax, she would have noted the size of the taxes being discussed would just raise transactions costs back to where they were in the 80s or 90s. The cost of trading has plummeted in the last 3 decades due to computers. This tax will simply reverse some of this decline. There was already an extremely well-developed market in foreign exchange in the 80s.
The effect of a tax on volatility is unclear. While it reduces the incentive for arbitrage, it will also make speculation less profitable. This could make large speculative swings of the sort that we have seen in financial markets in recent weeks less likely.
Finally, it is not clear why it views the fact that the tax will make it more difficult to construct trading algorithms as an unintended consequence. These algorithms may provide large profits to the people who develop them, but the benefits to the economy and society are likely to be near zero. If a transactions tax discourages skilled mathematicians and computer programmers from developing complex formulas for financial arbitrage and instead has them work in a productive area of the economy, then the tax will have been a great success.
[Addendum: Reuters does go a small bit of the way back toward saving its soul by running this column from my friend Mark Thoma.]Add a comment
The Post had a front page article that implied that we should be concerned about the possibility that GE and other companies were transferring sophisticated technologies to China. Actually, the same argument that holds the United States benefits from importing low cost manufactured goods from China would also hold that it benefits from importing low cost high tech products from China. The latter would put downward pressure on the wages of engineers and other highly-skilled workers, but lead to lower prices for high tech products and thereby free up money for other consumption.
It is interesting that the Post so explicitly expresses its concern, in the news section, about losing high skilled jobs due to trade, but applauds the loss of less-skilled skilled jobs.Add a comment
Morning Edition told listeners that Spain has built up huge debt. This is not true. Spain actually was lowering its debt prior to the collapse of its housing bubble in 2007. The recession that resulted from this collapse has led the country to run large deficits, however with four years of large deficits its debt to GDP ratio is still just 52.6 percent of GDP, well below the level in the United States.
It then interviewed an economist who said that Spain's main need was to reform its labor market. While there may be useful labor market reforms that Spain can implement, arguably its biggest problem is the contractionary monetary policy of the European Central Bank (ECB). The ECB is run by a perverse cult that worships 2.0 percent inflation and is prepared to sacrifice almost all other economic goals to meet this target.
This is especially harmful to countries like Spain with large trade deficits. Since Spain shares a currency with the rest of the euro zone, the most effective way for it to gain competitiveness is to have its wage growth lag the growth in surplus countries like Germany.
If overall inflation were 3-4 percent, as advocated by many economists, it would be possible for Spain to increase its competitiveness with low positive wage growth. However, with inflation near zero, Spain must actually see wage declines in order to increase its competitiveness. This process of deflation tends to be slow and painful, involving high unemployment for long periods of time. It would have been helpful if Morning Edition had made this basic point to its listeners.Add a comment
Joe Nocera's NYT columns are usually well worth reading, but he really misses the boat in today's complaint about the National Labor Relations Board (NLRB) costing jobs. The basic story is that the NLRB is obstructing Boeing's efforts to move production facilities from their unionized facilities in Washington State to non-union South Carolina.
There are several aspects to the issue that are misrepresented in the column. First, this is an issue about the transfer of jobs, not the creation of jobs. The jobs that would be created in South Carolina would come at the expense of jobs in Washington State. Boeing is not becoming less efficient in the production of planes -- it will not require more workers per planes. Nor is likely that it will have any boost in orders, or at least not any time soon. This means that we are debating a transfer of jobs, not arguing over job creation.
The second point is that Nocera unduly credits Boeing for keeping jobs in the United States. Like almost all corporations, Boeing sets up its operations where it expects to minimize its costs.
It actually has outsourced a large amount of work to overseas facilities in the last two decades. This has proven to be a problem for Boeing since it has made it difficult to maintain coordination and quality control. News reports have blamed Boeing's dispersion of production for delays in meeting its delivery schedules. In other words, it has not been patriotism that has led Boeing to keep much of its production in the United States. It was an effort to ensure that it could produce its planes to acceptable standards in a timely manner.
Finally, Nocera misrepresents the issue at hand. No one disputes that Boeing has the right to relocate its operations in a state with few unions and anti-labor laws, like South Carolina. The issue is whether the move to South Carolina was part of an explicit threat directed against the union.
The situation is exactly analogous to moving a plant overseas. A company has the legal right to relocate a facility to Mexico or China in order to reduce its costs. However, it does not have the right to threaten to move if its workers vote to join a union. An explicit threat of this nature would be a violation of labor law, since it would imply that it is punishing its workers for joining a union.
The question in this case is whether the move to South Carolina is part of a threat against its unions. This involves an examination of the record of negotiations and discussions between management and Boeing's unions. Without knowing this history, it is not possible to make an apriori assumption that the NLRB case has no merit, as Nocera does in his column.Add a comment
CNBC told its audience that 56 percent of the economists who responded to a National Association of Business Economists Survey thought that spending cuts were better than tax increases for reducing the deficit. It would have been worth reminding people that almost all of these people were too incompetent to see the $8 trillion housing bubble that crashed and wrecked the economy.
This is an important piece of information since there is no reason to assume that these economists know any more about the economy than they did four years ago.Add a comment
The Post gave Eric Cantor the opportunity to lay out his economic vision today. Let's have a little fun seeing how many things he got wrong.
Cantor begins by telling us:
"Our country is facing two related but separate crises. The first is the federal government’s debt crisis, the result of decades of fiscal mismanagement by both political parties as well as unsustainable entitlement commitments."
Debt crisis? Does Cantor mean the fact that we have to pay just over 2.0 percent interest on 10-year Treasury bonds, a post-depression low? Of course, there was a near debt crisis when the Republicans refused to raise the debt ceiling. If they had held to this position, then legally prohibiting payment of the debt can be viewed as a debt crisis, but this has nothing to do with the level of the debt or its sustainability.
As a practical matter, the debt-to-GDP ratio was actually relatively low prior to the downturn. It had been falling in the Clinton years, so the 90s should not be included in his list of "decades of fiscal mismanagement." Even with the Bush tax cuts, the cost of the wars, and the Medicare drug benefit, the deficit was projected to be just 1.4 percent of GDP in 2009, until the collapse of the housing bubble brought down the economy.
Cantor then tells us:
"the Obama administration’s anti-business, hyper-regulatory, pro-tax agenda has fueled economic uncertainty and sent the message from the administration that 'we want to make it harder to create jobs.'"
He then tells us about, "...the “Transport Rule,” which could eliminate thousands of jobs." Hmmm, thousands of jobs. That's not millions, hundreds of thousands or even tens of thousands. Back in the late 90s the economy was generating 3 million jobs a year or 250,000 a month. Cantor's "thousands of jobs," if accurate, would translate into one day's job growth back then.
But Cantor then comes back with the "ozone regulation" which he tells us "would cost upward of $1 trillion and millions of jobs in the construction industry over the next decade." It would be interesting to know where these numbers came from, perhaps they are somewhere near the story of creation in the bible.
Then we get:
"There is the president’s silence as the National Labor Relations Board seeks to prevent Boeing from opening a plant in South Carolina that would create thousands of jobs."
No, this was about shifting jobs from plants that are unionized to plants that are not unionized. There was not an issue of net job creation, unless Cantor thinks that non-union workers are less efficient so that it takes more of them to build a plane.
Cantor next jumps back to taxes, complaining that these regulations:
"coupled with the president’s insistence on raising the top tax rate paid by individuals and small businesses, has resulted in a lag in growth that has added to the debt crisis, contributing to our nation’s credit downgrade."
Yep, President Obama wants to raise the tax rate paid by the wealthy, a group which excludes the vast majority of small business owners, back to the level it was at when we were creating 3 million jobs a year. Clearly this is a job killer.
Oh yes, and the debt crisis has reappeared. It is featured again in the next paragraph:
"The debt crisis threatens our long-term future: the ability of our children and their children to have the same opportunities to succeed that this and previous generations have enjoyed. Republicans passed a budget this spring, written by Rep. Paul Ryan, that would address our challenges head-on by putting in place common-sense reforms to manage our debt over the short and long term."
According to the Congressional Budget Office, the Ryan plan would increase the cost of buying Medicare equivalent insurance policies by $34 trillion over the program's 75-year planning horizon. Note that this $34 trillion figure is the higher cost to the country. The total cost shift to future seniors (our children and their children) is $38 trillion.
Then we get another shot at Social Security, Medicare, and Medicaid:
"The president has acknowledged that without reform, spending on entitlement programs is unsustainable. But he has also made clear that he would never support the type of structural changes to Medicaid, Medicare and Social Security needed to make these programs solvent as envisioned in our budget."
Mr. Cantor probably missed it, but Congress passed health care reform last year. According to the Medicare trustees, the bill eliminated more than 75 percent of Medicare's long-term shortfall. That's not 100 percent, but Cantor seems more than a bit off the mark when he complains that Obama "would never support the structural changes ... needed to make these programs solvent," at least in reference to Medicare.
Cantor probably also failed to notice that the Republican budget did not include any thing to improve Social Security's long-term budget situation. This was no doubt an oversight.
For those keeping score, a tax increase that is equal to 5 percent of the wage growth projected over the next thirty years would be sufficient to keep the program fully solvent over its 75-year planning horizon. That doesn't sound like an insoluble problem.
Cantor then concludes with a paean to growth. Yes, more growth would be better, but it's not clear why anyone would think that Cantor's path of tax cuts and lax regulation, which we just tried (remember George W. Bush?) would be the route to fast growth.
Okay, enough fun for now, I have work to do.Add a comment
Showing once again why it is known as "Fox on 15th Street," the Washington Post headlined an article "Social Security crisis is worsening." The subhead told readers, "rise in disability applications driving it to the verge of insolvency."
Those who read the article carefully will discover that the "it" being driven to insolvency is the Social Security disability program, which is a bit more than one-tenth of the combined retirement, survivors and disability program that people usually think of as "Social Security." The latest projections from the Congressional Budget Office show that the combined program will be fully solvent until 2038.
Even after this date, the program will still be able to pay 81 percent of scheduled benefits. Alternatively, if taxes were raised enough to make the program fully solvent, the necessary tax increase is equal to about 5 percent of projected wage growth over the next three decades. The Post doesn't like to make these points because it doesn't advance its agenda for cutting Social Security.Add a comment
The NYT reported that the Obama administration is pressuring Eric Schneiderman, New York's attorney general, to agree to a settlement with the major banks over improper handling of foreclosures and mortgage servicing. The piece has this stunning statement:
"Mr. Donovan [housing secretary Shaun Donovan] defended his discussions with the attorney general, saying they were motivated by a desire to speed up help for troubled homeowners."Add a comment
The NYT's lead editorial told readers that:
"Congress and the White House have yet to figure out that the economy will not recover until housing recovers."
It's not clear what the paper means by this. The piece complains that "sales of existing homes fell in July by 3.5 percent, while prices were down 4.4 percent in July from a year earlier."
If it means that prices must recover then it is looking in the wrong direction. House prices are still about 10 percent above their long-term trend level. In other words, the bubble has not yet fully deflated. If it has any reason for believing that the fundamentals of the housing market justify this sort of divergence from trend it is not clear what this could be. Certainly the near record vacancy rates (down somewhat from the 2009-2010 peaks) do not support the notion that prices are too low.
Also, even with the decline in existing home sales, the recent sales rate is still more than 1 million higher (@30 percent) than the mid-90s pre-bubble rate. So it is not clear what aspects of the housing market the NYT expects to see fixed.
In its list of remedies for underwater homeowners facing foreclosure the editorial missed the simplest one, giving foreclosed homeowners the right to stay in their house as renters paying the market rent. This could be passed into law at the state or federal level or implemented uniltaerally by Fannie and Freddie which are now seeing half of all foreclosed properties.
The right to rent plan involves no complex bureaucratic calculations, nor taxpayer dollars. There is no major moral hazard problem and no serious windfalls. In other words, it's the sort of policy that has no chance in Washington.Add a comment
Okay, that is just not true. Congress can do another big round of stimulus. It could mandate a reduction in the value of the dollar in order to boost net exports. Or it could push an aggressive work sharing program like the one that has led the unemployment rate to fall below pre-recession levels in Germany.
The Fed could target a long-term interest rate. For example it can set a 1.0 percent target for the 5-year Treasury rate. Or it could target a higher rate of inflation, committing itself to throw out enough reserves as necessary to raise the inflation rate to 4.0 percent, a policy that Bernanke advocated for Japan back when he was still a professor at Princeton.
It is simply wrong to claim, as NPR did in this piece, that there is nothing more than Congress and the Fed can do to boost the economy. If it wants to say that none of these measures are politically viable, that may well be a true statement. But then the problem is with the people who dominate politics in the country. It is a political problem, not an economic one and NPR should clearly identify it as such.
[Thanks to Jonathan Lundell.]Add a comment
The Washington Post ran a major article today telling readers that they should just get used to high unemployment. The article presented the view of some economists, that the economy can only recover from a financial crisis after a prolonged period of economic weakness, as somehow reflecting a consensus opinion within the economics profession.
For example, the subhead told readers that while presidential candidates promise a quick recovery, "analysts say this post-recession comeback may take longer." Since this pessimistic view is far from the consensus within the profession, a real newspaper would have said "some analysts." Similarly the sentence, "but because of the severity of this recession, and the accompanying crises hitting banks and other lenders, economists believe that recovering from it will be more difficult," would have the phrase "some economists" in a serious newspaper. (The article does include some dissenters, but it implies that their views are an exception.)
The article then includes a set of charts that show a number of countries in which it took more than a decade for the unemployment rate to return to its pre-crisis level following a financial crisis. It is possible to tell a very different story using a different set of countries as is shown below.
Source: International Monetary Fund.
As can be seen, the unemployment record of these five recent victims of financial crises is mixed. Four years after the crisis (which would be 2012 in the U.S. case) South Korea and Malaysia had unemployment rates that were above the pre-crisis level, although in both cases they were at or below 4.0 percent. Most people in the United States could probably live with this outcome. In the case of both Russia and Mexico the unemployment was below the pre-crisis level four years after the crisis. In Argentina the unemployment rate was 8 full percentage points below the pre-crisis level, although the country had already been in a severe recession prior to the onset of the financial crisis.
The point of this exercise is that it is easy to find countries that were able to recover from the effects of a financial crisis relatively quickly. It is not a pre-ordained fact given to us by God that workers must suffer for years afterward simply because the people who managed the economy were too incompetent to prevent a financial crisis. This is simply an effort by the same group of incompetent economists to excuse their ongoing failure to fix the economy after they wrecked it.
It is also worth noting that this article gets an important fact about the economy and the recovery fundamentally wrong. It told readers that:
"The economy cannot fully heal until consumers and other debtors shed their financial burdens and are able to spend more freely again."
Actually, the failure of consumers to spend freely is not the economy's problem, which can be easily seen by looking at the savings rate. Currently the savings rate is near 5 percent of disposable income. Its average over the years prior to the take-off of the stock bubble in 90s was over 8 percent. In other words, consumers are spending freely. The reason why demand remains weak is that over-building of the bubble years has left construction badly depressed. Also, a trade deficit that is close to 4 percent of GDP is effectively draining $600 billion a year out of the economy.
These simple facts would be evident to anyone who has knows the basic national income accounting that is taught in an intro economics class. The Post should be aware of them.Add a comment