Back in January, when the Congressional Budget Office (CBO) issued its annual Budget and Economic Outlook, the Washington Post and other deficit hawk types seized on the projections of rising deficits and debt to GDP ratios in the latter part of its 10-year projections. There was another round of cries for deficit reduction, with cuts to Social Security and Medicare again holding center stage.
Some of us took the opportunity to point out that the projections of rising deficits hinged almost entirely on CBO’s projections that interest rates would rise sharply in the next few years. In effect, it assumed that interest rates would soon return to levels that were similar to their pre-crash levels. CBO had made the same assumption in its prior six Budget and Economic Outlooks. It had been wrong.
It now looks like it will be wrong again, at least for its 2016 prediction on rates. It projected in January that the 10-year Treasury bond rate would average 2.8 percent. It has averaged less than 2.0 percent through the first five and half months of the year and is currently hovering near 1.6 percent.
This means that if interest rates are going to return to “normal” or near normal levels, it is likely to be further in the future than previously believed. Don’t bet on that causing the deficit hawks to give up their attacks on Social Security and Medicare, but hopefully the rest of the world will take them even less seriously than is currently the case.
One final point: it would be good if interest rates did rise because it would mean the economy was getting stronger, so there is no reason to celebrate low interest rates. However, in the context of an economy than is still far from having recovered from the collapse of the housing bubble, low interest rates are better than high interest rates.
Back in January, when the Congressional Budget Office (CBO) issued its annual Budget and Economic Outlook, the Washington Post and other deficit hawk types seized on the projections of rising deficits and debt to GDP ratios in the latter part of its 10-year projections. There was another round of cries for deficit reduction, with cuts to Social Security and Medicare again holding center stage.
Some of us took the opportunity to point out that the projections of rising deficits hinged almost entirely on CBO’s projections that interest rates would rise sharply in the next few years. In effect, it assumed that interest rates would soon return to levels that were similar to their pre-crash levels. CBO had made the same assumption in its prior six Budget and Economic Outlooks. It had been wrong.
It now looks like it will be wrong again, at least for its 2016 prediction on rates. It projected in January that the 10-year Treasury bond rate would average 2.8 percent. It has averaged less than 2.0 percent through the first five and half months of the year and is currently hovering near 1.6 percent.
This means that if interest rates are going to return to “normal” or near normal levels, it is likely to be further in the future than previously believed. Don’t bet on that causing the deficit hawks to give up their attacks on Social Security and Medicare, but hopefully the rest of the world will take them even less seriously than is currently the case.
One final point: it would be good if interest rates did rise because it would mean the economy was getting stronger, so there is no reason to celebrate low interest rates. However, in the context of an economy than is still far from having recovered from the collapse of the housing bubble, low interest rates are better than high interest rates.
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No, I’m not talking about its decision not to raise interest rates yesterday, I mean the release of May data on industrial production. The data showed a decline in manufacturing output in May of 0.4 percent. The output levels for both March and April were also revised downward. Over the last three months production has been declining at a 2.4 percent annual rate.
This indicates that the manufacturing sector continues to be a drag on the economy and is likely to mean further job losses in the months ahead. The report is yet another warning that the economy is not moving along at a healthy pace.
No, I’m not talking about its decision not to raise interest rates yesterday, I mean the release of May data on industrial production. The data showed a decline in manufacturing output in May of 0.4 percent. The output levels for both March and April were also revised downward. Over the last three months production has been declining at a 2.4 percent annual rate.
This indicates that the manufacturing sector continues to be a drag on the economy and is likely to mean further job losses in the months ahead. The report is yet another warning that the economy is not moving along at a healthy pace.
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There have been several pieces in the media complaining that the Fed is having a hard time raising interest rates from their current unusually low level. This is true, but the basic story here is quite simple: the economy remains very weak.
The growth rate has averaged just 2.0 percent for the last five years and may well fall below that pace in 2016. That is not an environment in which it makes sense for the Fed to be raising interest rates.
The recent news reports make it sound like the problem is that the Fed can’t raise interest rates, as though this is a goal in itself. The real point is that we should want to see a strong economy in which it might be necessary for the Fed to raise interest rates to prevent overheating. The fact that the economy is not stronger means that people are unable to get jobs, or full-time jobs, or jobs that fully utlilize their skills.
It also means that we are foregoing an enormous amount of potential output. We could be devoting resources to the spread of clean energy, educating our kids, or providing better health care. But because there is not enough demand in the economy, resources just sit idle.
This is a real and huge problem. The fact that the Fed can’t raise interest rates? Sorry, not in the same ballpark.
There have been several pieces in the media complaining that the Fed is having a hard time raising interest rates from their current unusually low level. This is true, but the basic story here is quite simple: the economy remains very weak.
The growth rate has averaged just 2.0 percent for the last five years and may well fall below that pace in 2016. That is not an environment in which it makes sense for the Fed to be raising interest rates.
The recent news reports make it sound like the problem is that the Fed can’t raise interest rates, as though this is a goal in itself. The real point is that we should want to see a strong economy in which it might be necessary for the Fed to raise interest rates to prevent overheating. The fact that the economy is not stronger means that people are unable to get jobs, or full-time jobs, or jobs that fully utlilize their skills.
It also means that we are foregoing an enormous amount of potential output. We could be devoting resources to the spread of clean energy, educating our kids, or providing better health care. But because there is not enough demand in the economy, resources just sit idle.
This is a real and huge problem. The fact that the Fed can’t raise interest rates? Sorry, not in the same ballpark.
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That’s right, CEPR Co-Director Dean Baker has been Beating the Press for 10 years now (and that doesn’t include the commentary on economic reporting he did for 10 years before that).
This means 10 years of waking up every morning — even on weekends! — at 4:30AM, combing through The New York Times, The Wall Street Journal, The Washington Post (or as he has been known to say, Fox on 15th street) and other major new outlets. 10 years of dismantling bogus economic theory. 10 years of uncovering the ideological bias behind misrepresentation of data and revealing the spin that promotes narrow interests.
Beat The Press has called out deficit hawks, Social Security slashers, and bubble deniers. Every day for the past 10 years (or close to it anyway) Dean has candidly explained what policies mean for real people.
All of this wouldn’t be possible without your support.
CEPR receives no dedicated funding for our blogs — all funding must come from general support, which is getting harder and harder to come by. With a 24-hour-news cycle and moneyed interests dominating the political world, it is as important as ever that people are informed about the matters that impact them the most.
Won’t you show BTP some 10th Anniversary love by clicking here and donating today? Robert Samuelson will thank you! Well…maybe not, but all of us at CEPR will.
Thanks for your support,
Dean and your friends at CEPR
That’s right, CEPR Co-Director Dean Baker has been Beating the Press for 10 years now (and that doesn’t include the commentary on economic reporting he did for 10 years before that).
This means 10 years of waking up every morning — even on weekends! — at 4:30AM, combing through The New York Times, The Wall Street Journal, The Washington Post (or as he has been known to say, Fox on 15th street) and other major new outlets. 10 years of dismantling bogus economic theory. 10 years of uncovering the ideological bias behind misrepresentation of data and revealing the spin that promotes narrow interests.
Beat The Press has called out deficit hawks, Social Security slashers, and bubble deniers. Every day for the past 10 years (or close to it anyway) Dean has candidly explained what policies mean for real people.
All of this wouldn’t be possible without your support.
CEPR receives no dedicated funding for our blogs — all funding must come from general support, which is getting harder and harder to come by. With a 24-hour-news cycle and moneyed interests dominating the political world, it is as important as ever that people are informed about the matters that impact them the most.
Won’t you show BTP some 10th Anniversary love by clicking here and donating today? Robert Samuelson will thank you! Well…maybe not, but all of us at CEPR will.
Thanks for your support,
Dean and your friends at CEPR
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The NYT has another piece that talks about China’s demographic problem due to an aging population. (In fairness, this is really a sidebar, the piece is mostly arguing that China has failed to get itself on a sustainable growth path.) I went through the arithmetic on this last week.
The basic point is simple: China has had extraordinarily rapid productivity growth over the last three and a half decades. The impact of this growth on raising wages and living standards swamps any conceivable negative effect from a declining ratio of workers to retirees. The math is about as simple as it gets, but I’m still curious how the bad story is supposed to manifest itself.
Keep in mind, the story is supposed to be a labor shortage. What does that mean?
That’s a serious question, how does an economy know it’s having a labor shortage? Presumably it means that the lowest paying jobs end up going unfilled because people have better options. So what? Many retail stores will go out of business, so will some restaurants, and other low wage employers. Why would we care? Remember, no one is going unemployed. These businesses are going under because they can’t find workers willing to work at the wage they are offering. Instead, workers are going to better paying, higher productivity jobs. That’s unfortunate for these businesses, but hey, that’s capitalism.
There is an issue that much of the support for retirees may go through the government, which means that China would have to increase taxes. There may be a Chinese Grover Norquist who will make any tax increases very difficult politically, but that is a political issue, not an economic one. Workers who have seen their real wages double or triple in the last couple of decades can certainly afford to pay somewhat higher taxes to support their retired parents.
So again, what exactly is the problem?
The NYT has another piece that talks about China’s demographic problem due to an aging population. (In fairness, this is really a sidebar, the piece is mostly arguing that China has failed to get itself on a sustainable growth path.) I went through the arithmetic on this last week.
The basic point is simple: China has had extraordinarily rapid productivity growth over the last three and a half decades. The impact of this growth on raising wages and living standards swamps any conceivable negative effect from a declining ratio of workers to retirees. The math is about as simple as it gets, but I’m still curious how the bad story is supposed to manifest itself.
Keep in mind, the story is supposed to be a labor shortage. What does that mean?
That’s a serious question, how does an economy know it’s having a labor shortage? Presumably it means that the lowest paying jobs end up going unfilled because people have better options. So what? Many retail stores will go out of business, so will some restaurants, and other low wage employers. Why would we care? Remember, no one is going unemployed. These businesses are going under because they can’t find workers willing to work at the wage they are offering. Instead, workers are going to better paying, higher productivity jobs. That’s unfortunate for these businesses, but hey, that’s capitalism.
There is an issue that much of the support for retirees may go through the government, which means that China would have to increase taxes. There may be a Chinese Grover Norquist who will make any tax increases very difficult politically, but that is a political issue, not an economic one. Workers who have seen their real wages double or triple in the last couple of decades can certainly afford to pay somewhat higher taxes to support their retired parents.
So again, what exactly is the problem?
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I’ll be back on Tuesday, June 14th. Remember, until then don’t believe anything you read in the newspaper.
I’ll be back on Tuesday, June 14th. Remember, until then don’t believe anything you read in the newspaper.
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Neil Irwin has an interesting piece in the Upshot section of the NYT noting factors that people may not consider in deciding between renting and buying their home. One item I would add to the list is the tendency to overstate the value of the mortgage interest tax deduction.
It is common for realtors to push houses on prospective buyers by telling them that their mortgage interest is tax deductible. This is true, but the value of the deduction is only equal to the difference between the household’s deductions including mortgage interest and the standard deduction.
Most people will have few deductions other than their mortgage interest deduction. Typically, they may have state income taxes, and that will be pretty much it.
Suppose these taxes come to $5k a year for a couple and their mortgage interest is $10,000 a year. If they are in the 25 percent bracket, they might be inclined to think that they are saving $2,500 a year from their taxes due to the mortgage interest deduction. In fact, since the standard deduction for this couple is $12,600, they are only benefiting to the extent that the mortgage interest deduction puts them above this number. In this case their combined deductions are now $15,000, which is $2,400 above the standard deduction. That will save them $600 a year on their taxes, not $2,500.
Furthermore, as time goes on, interest will be a smaller share of this couple’s mortgage payment as the mortgage is gradually paid off. This will reduce the amount that can be deducted against their taxes. This means that the mortgage interest deduction will be of less use to this couple over time.
Many homebuyers are unaware of these facts, these realtors can be misleading. They are worth keeping in mind by potential homebuyers.
Neil Irwin has an interesting piece in the Upshot section of the NYT noting factors that people may not consider in deciding between renting and buying their home. One item I would add to the list is the tendency to overstate the value of the mortgage interest tax deduction.
It is common for realtors to push houses on prospective buyers by telling them that their mortgage interest is tax deductible. This is true, but the value of the deduction is only equal to the difference between the household’s deductions including mortgage interest and the standard deduction.
Most people will have few deductions other than their mortgage interest deduction. Typically, they may have state income taxes, and that will be pretty much it.
Suppose these taxes come to $5k a year for a couple and their mortgage interest is $10,000 a year. If they are in the 25 percent bracket, they might be inclined to think that they are saving $2,500 a year from their taxes due to the mortgage interest deduction. In fact, since the standard deduction for this couple is $12,600, they are only benefiting to the extent that the mortgage interest deduction puts them above this number. In this case their combined deductions are now $15,000, which is $2,400 above the standard deduction. That will save them $600 a year on their taxes, not $2,500.
Furthermore, as time goes on, interest will be a smaller share of this couple’s mortgage payment as the mortgage is gradually paid off. This will reduce the amount that can be deducted against their taxes. This means that the mortgage interest deduction will be of less use to this couple over time.
Many homebuyers are unaware of these facts, these realtors can be misleading. They are worth keeping in mind by potential homebuyers.
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In an article on the decision by Japan’s Prime Minister, Shinzo Abe, to delay a long scheduled increase in its sales tax, the NYT told readers:
“Its [Japan’s] debt may be large, but it is almost entirely funded by domestic savers, making a crisis like the one in Greece much less likely.”
While it is true that most Japanese debt is held domestically, an even more important difference is that Japan’s debt is almost entirely in yen. This means that Japan can never be in the situation Greece faced where it was unable to meet payments on its debt. Japan could always print the money to pay the bonds. Greece could not, since it is not allowed to print euros.
There is a risk that printing large amounts of yen would lead to inflation, but that is a very difference situation that the one Greece faces. Also, the idea that Japan will face a risk of excessive inflation at any point in the near future does not seem very plausible.
In an article on the decision by Japan’s Prime Minister, Shinzo Abe, to delay a long scheduled increase in its sales tax, the NYT told readers:
“Its [Japan’s] debt may be large, but it is almost entirely funded by domestic savers, making a crisis like the one in Greece much less likely.”
While it is true that most Japanese debt is held domestically, an even more important difference is that Japan’s debt is almost entirely in yen. This means that Japan can never be in the situation Greece faced where it was unable to meet payments on its debt. Japan could always print the money to pay the bonds. Greece could not, since it is not allowed to print euros.
There is a risk that printing large amounts of yen would lead to inflation, but that is a very difference situation that the one Greece faces. Also, the idea that Japan will face a risk of excessive inflation at any point in the near future does not seem very plausible.
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