That’s one question that readers of Eduardo Porter’s insightful column on the prospects of the euro must be asking. Porter commented on the concerns expressed by Germany about inflation in a context where the inflation rate has been drifting lower for years and is now near zero. He argued that:
“conditioned by memories of hyperinflation after World War I, they still fear higher inflation.”
Hmmm, “memories of hyperinflation?” Let’s see, we’re talking about a burst of hyper-inflation that took place in the early 1920s. If we say that someone had to be roughly 10 or so at the time to have a clear memory, then those with memories of this hyper-inflation would have to be over 100 years old today.
This point is worth noting, because hyperinflation is not something that any sizable number of Germans alive today actually experienced. For the most part, even their parents didn’t experience it. The Germans’ concern about hyperinflation is based on national myth, not their own experience. They are making the rest of the eurozone pay an enormous price for this myth.
That’s one question that readers of Eduardo Porter’s insightful column on the prospects of the euro must be asking. Porter commented on the concerns expressed by Germany about inflation in a context where the inflation rate has been drifting lower for years and is now near zero. He argued that:
“conditioned by memories of hyperinflation after World War I, they still fear higher inflation.”
Hmmm, “memories of hyperinflation?” Let’s see, we’re talking about a burst of hyper-inflation that took place in the early 1920s. If we say that someone had to be roughly 10 or so at the time to have a clear memory, then those with memories of this hyper-inflation would have to be over 100 years old today.
This point is worth noting, because hyperinflation is not something that any sizable number of Germans alive today actually experienced. For the most part, even their parents didn’t experience it. The Germans’ concern about hyperinflation is based on national myth, not their own experience. They are making the rest of the eurozone pay an enormous price for this myth.
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Robert Samuelson used his column today to tout a new study that analyzes home purchases by the income level of the buyer in contrast to previous work that analyzed data by average income in a zip code. The conclusion of the study is that increased aggregate debt to income levels was the result of more people buying homes, not higher ratios of debt to income among purchasers. This means that the problem was not a deterioration in lending standards. It also finds that the growth of debt was proportionate to income in each quintile, meaning that low-income households were not singled out for bad loans.
This is an interesting analysis that seems to contradict much other evidence. For example, while it shows no correlation between income levels and delinquency, we know that African Americans were far more likely to lose their home in the crash than the population as a whole. It would be striking if this is exclusively a question of race and not income.
We also know that both subprime and Alt-A mortgages skyrocketed as a share of total mortgage issuance during the downturn, with the former going from around 8-9 percent in 2000 to 25 percent in 2005. The latter went from 2-3 percent to 15 percent in 2005. It is difficult to believe that the growth of these riskier mortgage types wasn’t not associated with a rise in the debt to income ratios of borrowers.
And, we have a survey done by the National Association of Realtors at the time. This survey found that 43 percent of first-time homebuyers in 2005 put zero down or less (many people borrowed more than the value of their home). This certainly would not have been the case ten years earlier. Part of the problem could be that the first year in the analysis is 2002, a point at which the bubble was already well underway. The deterioration from 2002 to 2006 would have been far less than if the analysis had begun in a year before the bubble began. The other possibility is that the analysis is not picking up second loans that raised debt-to-income as well as debt to value ratios.
However the deeper point in this discussion is that the question of banker fraud versus a mistaken belief that the bubble will last forever is not an either/or proposition. It is entirely possible that most of the bankers issuing mortgages that they knew borrowers could not pay, or that were based on mis-stated information that they had entered, believed that rising house prices would ensure the quality of the mortgages. The investment bankers who packaged them into mortgage backed securities may have also believed in the bubble.
However this does not change the fact that falsifying mortgage information is fraud and that knowingly packaging fraudulent mortgages into mortgage backed securities is also fraud. The people convicted of fraud charges in the Enron scandal all had large amounts of Enron stock. This indicated that they believed the company was a good buy and presumably had a good business model. They still committed fraud. That is likely true of the folks at places like Countrywide, Goldman Sachs, and Citigroup.
Robert Samuelson used his column today to tout a new study that analyzes home purchases by the income level of the buyer in contrast to previous work that analyzed data by average income in a zip code. The conclusion of the study is that increased aggregate debt to income levels was the result of more people buying homes, not higher ratios of debt to income among purchasers. This means that the problem was not a deterioration in lending standards. It also finds that the growth of debt was proportionate to income in each quintile, meaning that low-income households were not singled out for bad loans.
This is an interesting analysis that seems to contradict much other evidence. For example, while it shows no correlation between income levels and delinquency, we know that African Americans were far more likely to lose their home in the crash than the population as a whole. It would be striking if this is exclusively a question of race and not income.
We also know that both subprime and Alt-A mortgages skyrocketed as a share of total mortgage issuance during the downturn, with the former going from around 8-9 percent in 2000 to 25 percent in 2005. The latter went from 2-3 percent to 15 percent in 2005. It is difficult to believe that the growth of these riskier mortgage types wasn’t not associated with a rise in the debt to income ratios of borrowers.
And, we have a survey done by the National Association of Realtors at the time. This survey found that 43 percent of first-time homebuyers in 2005 put zero down or less (many people borrowed more than the value of their home). This certainly would not have been the case ten years earlier. Part of the problem could be that the first year in the analysis is 2002, a point at which the bubble was already well underway. The deterioration from 2002 to 2006 would have been far less than if the analysis had begun in a year before the bubble began. The other possibility is that the analysis is not picking up second loans that raised debt-to-income as well as debt to value ratios.
However the deeper point in this discussion is that the question of banker fraud versus a mistaken belief that the bubble will last forever is not an either/or proposition. It is entirely possible that most of the bankers issuing mortgages that they knew borrowers could not pay, or that were based on mis-stated information that they had entered, believed that rising house prices would ensure the quality of the mortgages. The investment bankers who packaged them into mortgage backed securities may have also believed in the bubble.
However this does not change the fact that falsifying mortgage information is fraud and that knowingly packaging fraudulent mortgages into mortgage backed securities is also fraud. The people convicted of fraud charges in the Enron scandal all had large amounts of Enron stock. This indicated that they believed the company was a good buy and presumably had a good business model. They still committed fraud. That is likely true of the folks at places like Countrywide, Goldman Sachs, and Citigroup.
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Is someone paying them to give their readers inaccurate information? I’m inclined to doubt that explanation, but why does the paper keep using this description when it is so obviously not true?
The issue came up in the context of a discussion of the agenda of the Democrats in the House of Representatives. The article notes differences between House Democrats and President Obama and trade, and then tells readers;
“Republican leaders are preparing legislation that would grant Obama broad authority to finalize one of the largest free-trade pacts [the Trans-Pacific Partnership] in the nation’s history.”
The Trans-Pacific Partnership (TPP) is far from a “free-trade” deal. It actually will increase some protection in some areas, notably stronger and longer patent and copyright protection. Most of the deal is devoted to creating a uniform and largely business friendly regulatory structure. It creates special courts for businesses to sue governments outside of the normal judicial process. Since most trade barriers between the parties in the pact are already low, it will do little to reduce formal barriers to trade.
It is difficult to see why the Post cannot simply refer to the TPP as a “trade agreement,” or even more accurately a “commercial agreement.” It could save its praise of the pact for the opinion pages.
Is someone paying them to give their readers inaccurate information? I’m inclined to doubt that explanation, but why does the paper keep using this description when it is so obviously not true?
The issue came up in the context of a discussion of the agenda of the Democrats in the House of Representatives. The article notes differences between House Democrats and President Obama and trade, and then tells readers;
“Republican leaders are preparing legislation that would grant Obama broad authority to finalize one of the largest free-trade pacts [the Trans-Pacific Partnership] in the nation’s history.”
The Trans-Pacific Partnership (TPP) is far from a “free-trade” deal. It actually will increase some protection in some areas, notably stronger and longer patent and copyright protection. Most of the deal is devoted to creating a uniform and largely business friendly regulatory structure. It creates special courts for businesses to sue governments outside of the normal judicial process. Since most trade barriers between the parties in the pact are already low, it will do little to reduce formal barriers to trade.
It is difficult to see why the Post cannot simply refer to the TPP as a “trade agreement,” or even more accurately a “commercial agreement.” It could save its praise of the pact for the opinion pages.
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Steven Rattner doesn’t like people focusing on stimulus as a path to help Europe grow because it is “simplistic.” Instead he wants Europe to focus on reducing business regulation, protections for workers, and taxes for the wealthy.
Interestingly, he presents zero evidence that these changes will boost the continent’s growth, in contrast to the now vast amount of evidence (e.g. here, here, and here) that stimulus will increase growth. On their face, many assertions seem outright wrong. For example, according to the OECD’s assessment, employment protection for workers in Germany are the second strongest in Europe, yet it has an unemployment rate of 5.1 percent. This suggests that labor market protections are not the biggest problem stunting growth.
Rattner also warns about Europe and even Germany losing “competitiveness.” It is not clear what meaning he assigns to that word, but Germany has a trade surplus of more than 6.0 percent of GDP, in contrast to a deficit of 2.4 percent of GDP in the United States.
In some cases, his complaints not only lack evidence, but they defy logic. It is not efficient to allow companies to dismiss workers at will. Long-term employees make substantial commitments and sacrifices to develop firm specific skills. It will often be difficult for them to find new employment if they lose their job in their late forties or fifties. Dismissing these workers imposes costs on them and the government in the form of unemployment benefits and other transfer payments. That might be good for the businesses who can chalk up higher profits, but it is bad for the economy and society.
In short, this piece tells us that Rattner wants Europe to be more pro-business at the expense of the rest of society. He doesn’t have any real argument as to why anyone who is not rich should support his position, although I suppose it is not simplistic.
Steven Rattner doesn’t like people focusing on stimulus as a path to help Europe grow because it is “simplistic.” Instead he wants Europe to focus on reducing business regulation, protections for workers, and taxes for the wealthy.
Interestingly, he presents zero evidence that these changes will boost the continent’s growth, in contrast to the now vast amount of evidence (e.g. here, here, and here) that stimulus will increase growth. On their face, many assertions seem outright wrong. For example, according to the OECD’s assessment, employment protection for workers in Germany are the second strongest in Europe, yet it has an unemployment rate of 5.1 percent. This suggests that labor market protections are not the biggest problem stunting growth.
Rattner also warns about Europe and even Germany losing “competitiveness.” It is not clear what meaning he assigns to that word, but Germany has a trade surplus of more than 6.0 percent of GDP, in contrast to a deficit of 2.4 percent of GDP in the United States.
In some cases, his complaints not only lack evidence, but they defy logic. It is not efficient to allow companies to dismiss workers at will. Long-term employees make substantial commitments and sacrifices to develop firm specific skills. It will often be difficult for them to find new employment if they lose their job in their late forties or fifties. Dismissing these workers imposes costs on them and the government in the form of unemployment benefits and other transfer payments. That might be good for the businesses who can chalk up higher profits, but it is bad for the economy and society.
In short, this piece tells us that Rattner wants Europe to be more pro-business at the expense of the rest of society. He doesn’t have any real argument as to why anyone who is not rich should support his position, although I suppose it is not simplistic.
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That is not exactly what the NYT said. Instead its article on the dispute between the new Greek government and Germany and other northern European countries chose to use bias in the opposite direction telling readers:
“But beneath the arguments over austerity is a deeper conflict of democratic wills, between the verdict of voters in Greece, who are desperate for some relief, and those in Germany, Finland and the Netherlands, who do not want their taxes used to underwrite a blank check for countries that get into financial trouble.”
Really? The voters in Germany, Finland, and Netherlands are just concerned about issuing blank checks? Have they noticed that Greece cut its budget by 27 percent since 2008? This would be equivalent of a cut in annual spending in the United States of almost $1 trillion in its impact on the budget and close to $2 trillion in its impact on the economy.
These cutbacks, coupled with the austerity that the European Union has imposed on much of the rest of the euro zone, has had the predictable effect of throwing Greece’s economy into a downturn that makes the U.S. depression look like an economic boom. Are voters in Germany, Finland, and the Netherlands really so ignorant of economics that they do not understand this fact?
At another point the article tells readers:
“Jeroen Dijsselbloem, the head of the group of finance ministers from countries using the euro, said he did ‘not believe in this north-south divide,’ noting that ‘there are a lot of countries in the north, think of the Baltics; in the south, think of Spain; and Ireland’ in the west, and they ‘have done major reforms, and they are all back on the growth track.'”
It would have been worth pointing out that on Mr. Dijsselbloem’s “growth track” Spain’s economy is projected to first exceed its 2008 GDP in 2019. Ireland is projected to first pass its 2007 peak in 2016. By comparison, in the Great Depression, U.S. GDP was 6.0 percent larger in 1937 than it had been at the onset of the depression eight years earlier in 1929.
It also would be worth pointing out that many of the crisis countries’ problems did not stem from a lack of “budget discipline.” Several were running modest deficits and Spain and Ireland actually had large budget surpluses before the crash. Their economic problems stemmed from the fact that bankers in places like Germany, Finland, and the Netherlands were not very competent and thought that the housing bubbles in these countries could keep growing forever. Therefore they funneled hundreds of billions of dollars in loans that further inflated the bubbles and distorted the crisis countries’ economies.
That is not exactly what the NYT said. Instead its article on the dispute between the new Greek government and Germany and other northern European countries chose to use bias in the opposite direction telling readers:
“But beneath the arguments over austerity is a deeper conflict of democratic wills, between the verdict of voters in Greece, who are desperate for some relief, and those in Germany, Finland and the Netherlands, who do not want their taxes used to underwrite a blank check for countries that get into financial trouble.”
Really? The voters in Germany, Finland, and Netherlands are just concerned about issuing blank checks? Have they noticed that Greece cut its budget by 27 percent since 2008? This would be equivalent of a cut in annual spending in the United States of almost $1 trillion in its impact on the budget and close to $2 trillion in its impact on the economy.
These cutbacks, coupled with the austerity that the European Union has imposed on much of the rest of the euro zone, has had the predictable effect of throwing Greece’s economy into a downturn that makes the U.S. depression look like an economic boom. Are voters in Germany, Finland, and the Netherlands really so ignorant of economics that they do not understand this fact?
At another point the article tells readers:
“Jeroen Dijsselbloem, the head of the group of finance ministers from countries using the euro, said he did ‘not believe in this north-south divide,’ noting that ‘there are a lot of countries in the north, think of the Baltics; in the south, think of Spain; and Ireland’ in the west, and they ‘have done major reforms, and they are all back on the growth track.'”
It would have been worth pointing out that on Mr. Dijsselbloem’s “growth track” Spain’s economy is projected to first exceed its 2008 GDP in 2019. Ireland is projected to first pass its 2007 peak in 2016. By comparison, in the Great Depression, U.S. GDP was 6.0 percent larger in 1937 than it had been at the onset of the depression eight years earlier in 1929.
It also would be worth pointing out that many of the crisis countries’ problems did not stem from a lack of “budget discipline.” Several were running modest deficits and Spain and Ireland actually had large budget surpluses before the crash. Their economic problems stemmed from the fact that bankers in places like Germany, Finland, and the Netherlands were not very competent and thought that the housing bubbles in these countries could keep growing forever. Therefore they funneled hundreds of billions of dollars in loans that further inflated the bubbles and distorted the crisis countries’ economies.
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Robert Samuelson cautioned, somewhat reasonably, against over-optimism on the U.S. economy. His basic point is that other economies around the world don’t look very good right now. Their weakness could spill over and dampen growth in the United States. This is largely right, especially with the recent run-up in the dollar making U.S. goods and services less competitive.
However Samuelson does get some items wrong. He tells readers that Japan’s economy is in a recession. This is almost certainly wrong. We don’t have growth data for fourth quarter yet, but it is almost certain to be positive. Furthermore, even the drop in the third quarter was misleading. The economy contracted because of a large drop in inventory accumulations. Final demand actually grew modestly in the quarter. The unemployment rate has actually fallen slightly through Japan’s recession, with the unemployment rate averaging 3.5 percent in October and November, compared to 3.6 percent in the first quarter.
The Japan story is fairly simple. The austerity gang got the government to impose a large tax increase in April, which was a severe hit to the economy. However, with aggressive monetary policy and no further austerity, the economy is again growing at a modest pace.
The other point worth correcting is Samuelson’s comment that one-third of U.S. corporate profits now come from overseas. This is true in an accounting sense but it is almost certainly a gross exaggeration of the economic distribution of profits. Most major U.S. corporations find ways to have profits from the United States show up on the books of subsidiaries in countries with lower tax rates.
Insofar as profits are foreign only in accounting, they will not be affected by the slowdown elsewhere in the world. Of course reduced corporate profits are not likely to have much impact on domestic demand in any case. Companies are already sitting on vast piles of cash, so lower profits would likely have little impact on investment. A reduction in dividend payouts or a fallback in stock prices may have a modest impact on the consumption of the wealthy, but this would probably not be large enough to have noticeable impact on the economy.
Robert Samuelson cautioned, somewhat reasonably, against over-optimism on the U.S. economy. His basic point is that other economies around the world don’t look very good right now. Their weakness could spill over and dampen growth in the United States. This is largely right, especially with the recent run-up in the dollar making U.S. goods and services less competitive.
However Samuelson does get some items wrong. He tells readers that Japan’s economy is in a recession. This is almost certainly wrong. We don’t have growth data for fourth quarter yet, but it is almost certain to be positive. Furthermore, even the drop in the third quarter was misleading. The economy contracted because of a large drop in inventory accumulations. Final demand actually grew modestly in the quarter. The unemployment rate has actually fallen slightly through Japan’s recession, with the unemployment rate averaging 3.5 percent in October and November, compared to 3.6 percent in the first quarter.
The Japan story is fairly simple. The austerity gang got the government to impose a large tax increase in April, which was a severe hit to the economy. However, with aggressive monetary policy and no further austerity, the economy is again growing at a modest pace.
The other point worth correcting is Samuelson’s comment that one-third of U.S. corporate profits now come from overseas. This is true in an accounting sense but it is almost certainly a gross exaggeration of the economic distribution of profits. Most major U.S. corporations find ways to have profits from the United States show up on the books of subsidiaries in countries with lower tax rates.
Insofar as profits are foreign only in accounting, they will not be affected by the slowdown elsewhere in the world. Of course reduced corporate profits are not likely to have much impact on domestic demand in any case. Companies are already sitting on vast piles of cash, so lower profits would likely have little impact on investment. A reduction in dividend payouts or a fallback in stock prices may have a modest impact on the consumption of the wealthy, but this would probably not be large enough to have noticeable impact on the economy.
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It’s not quite that bad, but pretty close. An article on the victory of Syriza in Greece told readers:
“International economists say the eurozone needs a judicious mix of all of the above: monetary stimulus to avoid deflation, deficit-cutting by debtor countries, higher spending by creditor countries, and broad economic overhauls in many nations to lift long-term prospects.”
Really? Do all international economists say this? Did these international economists predict the economic collapse in 2008? If not, when did these international economists stop being wrong about the economy? Do these international economists know that the OECD says that Germany has stricter employment protection regulations than either Italy or France?
Later we are told:
“Ms. Merkel’s economic medicine, with its focus on Europe’s long-term prospects in a fast-changing global economy, could show benefits eventually, economists say. The problem, they add, is that meanwhile, Europe is staring at a lost decade.”
It’s not clear who these economists are or what they can possibly be thinking. There is a large and growing body of evidence that high rates of long-term unemployment permanently lower a country’s productive potential. With countries like Greece, Spain, and possibly France looking at decade or more of double-digit unemployment under the German plan, the losses to GDP could easily last 20 years or more. If the economists the Wall Street relies upon are making GDP growth projections for 2033 and beyond, they probably should lose their licenses.
It’s not quite that bad, but pretty close. An article on the victory of Syriza in Greece told readers:
“International economists say the eurozone needs a judicious mix of all of the above: monetary stimulus to avoid deflation, deficit-cutting by debtor countries, higher spending by creditor countries, and broad economic overhauls in many nations to lift long-term prospects.”
Really? Do all international economists say this? Did these international economists predict the economic collapse in 2008? If not, when did these international economists stop being wrong about the economy? Do these international economists know that the OECD says that Germany has stricter employment protection regulations than either Italy or France?
Later we are told:
“Ms. Merkel’s economic medicine, with its focus on Europe’s long-term prospects in a fast-changing global economy, could show benefits eventually, economists say. The problem, they add, is that meanwhile, Europe is staring at a lost decade.”
It’s not clear who these economists are or what they can possibly be thinking. There is a large and growing body of evidence that high rates of long-term unemployment permanently lower a country’s productive potential. With countries like Greece, Spain, and possibly France looking at decade or more of double-digit unemployment under the German plan, the losses to GDP could easily last 20 years or more. If the economists the Wall Street relies upon are making GDP growth projections for 2033 and beyond, they probably should lose their licenses.
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