Dean Baker
The Exchange (Yahoo! Finance), November 26, 2012

November 27, 2012

November 27, 2012 (Housing Market Monitor)

Millions are no doubt wondering how we know that the government has to reduce deficits by $4 trillion over the next decade. This appears to be the magic number that underlies the budget discussions between President Obama and the Republicans in Congress, and it is widely accepted by Serious People everywhere, but where did this magic number come from?

One place where it gained prominence was in the report authored by Morgan Stanley director Erskine Bowles and former senator Alan Simpson, the co-chairs of President Obama's deficit commission. However, many other people have touted this $4 trillion number as the appropriate limit on the country's debt burden.

The attachment to a particular debt number seems more than a bit peculiar for a number of reasons. The first and most obvious is that the financial markets don't seem the least bit bothered by the current levels of debt and prospective future levels of debt. They presumably understand what most people in the Washington policy debate do not, the high deficits of the last 5 years are the result of an economic collapse, not profligate spending or huge tax cuts. This is why the interest rate on long-term Treasury bonds is at post-war lows.

The markets recognize that if the economy recovered, then deficits would again be at manageable levels. In the mean time, low interest rates reflect the fact there is little demand for capital.

However beyond the economic facts, the Washington debt mongers also seem confused on what the debt means. The proximate burden of the debt on the government is the amount of interest that we pay. Instead of being very high, this is in fact near a post-war low. 

State governments spend a lot of money — usually in the form of tax breaks for companies — trying to bring jobs to their states. The problem with this kind of race-to-the-bottom strategy is that the most they can hope to achieve is to shift jobs from one

Dean Baker
Truthout, November 26, 2012

Anyone wanting to learn about the economy who talked to the nation's top economists in 2006 would have been wasting their time. Almost none of them had any clue that the collapse of the $8 trillion housing bubble was going to wreck the economy. This presumably reflects a rigid dogmatism and conformity on the part of these economists, since it should have been both very easy to recognize an unprecedented run-up in house prices as a bubble and also to understand that the collapse of the bubble, which was quite evidently driving growth, would lead to a severe downturn.

Remarkably, it seems from a Washington Post article that attributes the continuing weakness of the economy to the indebtedness of underwater homeowners, that many of the country's top economists have no better understanding of the economy today than in 2006.The claim is the drop off in consumption due to the debt burden of these homeowners explains the weakness of the recovery.

Some simple arithmetic shows the absurdity of this view. The amount of underwater equity is estimated at between $700 billion (Core Logic) and $1.1 trillion (Zillow). Suppose that we can disappear this debt through some decree, how much additional consumption would we see? If we assume that these households spend an incredibly large share of this increase in their net wealth, say 15 cents on the dollar, this would imply additional consumption of between $105 billion (Core Logic estimate) and $165 billion a year (Zillow estimate).

However we would have also destroyed the wealth of the mortgage holders. Let's assume that they just spend 2 cents on the dollar of their wealth. This would imply a net boost to demand of $91 billion to $143 billion. While this would be a helpful boost to the economy, equivalent to a government stimulus program of this size, this would hardly be sufficient to make up a shortfall in annual output that the Congressional Budget Office puts at close to $1 trillion.

Furthermore, even this gain is almost certainly a huge exaggeration of the actual effect. With 11 million homeowners underwater, the above calculation implies an increase in average annual consumption of between $9,500 and $15,000 a year. The median homeowner has an income of less than $70,000 a year. It doesn't seem likely that such a family would either have this amount of savings each year that they could instead decide to consume if they were no longer underwater in their mortgage or that they could borrow this amount on any sort of sustained basis. In short, the numbers in my calculation above almost certainly hugely overstate the economic impact of eliminating underwater mortgage debt.

In fact, there is no need to turn to implausible underwater mortgage debt explanations for the weakness of the economy. The economy is acting exactly as those who warned of the bubble predicted. We saw a sharp falloff of residential construction as we went from a near record boom, with construction exceeding more than 6.0 percent of GDP at the 2005 peak, to a bust where it fell below 2.0 percent of GDP. This meant a loss in annual demand of more than $600 billion a year.

“Will the elections in Honduras be free and fair?”

This was the question asked yesterday by Aljazeera’s Inside Story Americas, in a discussion with professor Dana Frank of the University of California Santa Cruz, and Pam Spees, an attorney with the Center for Constitutional Rights (CCR), which filed evidence last week with the International Criminal Court (ICC) regarding ongoing impunity for crimes against humanity committed by coup leaders Roberto Micheletti, General Romeo Vasquez Velasquez, palm oil magnate Miguel Facusse, and others. (See our previous post here.)

Honduras’ presidential elections are a year away, but if they are anything like the country’s previous elections in 2009, the answer would be no. Those elections were overseen by an un-elected coup regime, which attacked protesters, raided civil society offices and censored media outlets. An Amnesty International spokesperson declared, “Justice seems to have been absent also on Election Day in Honduras," and most Latin American countries refused to recognize the new government of Porfirio Lobo afterward.

Party primary elections were held on Sunday, with the preliminary results showing “Mauricio Villeda ahead as presidential candidate for the Liberal Party while the National Party was favoring Juan Orlando Hernández,” and former first lady Xiomara Castro de Zelaya emerged – running unopposed - as the candidate of the new Liberty and Refoundation (LIBRE) party (which emerged from the National Resistance Front to the coup (FNRP)). Notably, of the three, Zelaya had received the most votes (357,926) as of this writing, with Hernández’s 306,012 second. But, only about two-thirds of the mesas had been examined before technical problems caused a vote count disruption, and Hernández’s National Party challenger Ricardo Álvarez called for a “vote by vote recount.” The Supreme Electoral Tribunal vowed yesterday to issue final results “within 10 days.”

As the CCR and the International Federation for Human Rights (FIDH) noted in its evidence to the ICC, several LIBRE party candidates and members have been killed this year. Spees told Aljazeera:

We saw the same types of threats and violence around the elections in November of 2009 after the coup, and it’s continued and expanded, and what we’re seeing is either killings of candidates or would-be candidates. We’re seeing threats and attacks. It’s not an atmosphere in which you can legitimately, realistically expect to have free and fair elections.