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Article Artículo

The Effort to Divert Class War Into Generational War: Lessons On Economics You Won’t Get from Jeff Bezos

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

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

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

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

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

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

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

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

Dean Baker / December 25, 2015

Article Artículo

The Big Short, the Housing Bubble and the Financial Crisis

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

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

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

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

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

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

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

Dean Baker / December 22, 2015