George Will began a Washington Post column on tax reform by bemoaning the fact that we have defined success downward. He notes the celebration over the 321,000 job gain reported for November, then tells readers:
“In the 1960s, there were nine months in which more than 300,000 jobs were added, the last being June 1969, when there were about 117 million fewer Americans than there are now .”
While Will is right about the low bar for success (we should be seeing very rapid job growth following a steep downturn like the 2008-2009 recession), the sixties do not support his case for a need to cut tax rates. Through most of the 1960s the top individual tax rate was 70 percent, while the corporate rate was 50 percent. That compares to a top individual rate of 41 percent today, and a corporate tax rate of 35 percent. The top marginal tax rate in the first two months when we had 300k plus job gains was 90 percent. If Will wants to make the case for lower tax rates spurring job growth, he should not be citing the sixties.
Will then goes on to complain that one third of the people approaching retirement have no savings. This is indeed a serious problem, but it is hard to see it being cured by tax reform. Most of these people would have been in the zero, ten, or fifteen percent bracket for most of their working lives. Furthermore, they would have had the opportunity to put as much money as they plausibly would have been able into a tax deferred 401(k). It is very difficult to envision a tax reform that will enable these people to qualitatively increase their savings. Their main problem is not enough income, with close to four decades of stagnant wages.
Will also says the real estate industry really should support tax reform even if it caps the exemption for the mortgage interest deduction, because faster economic growth will lead to higher home prices. Both parts of this are wrong. Douglas Holtz-Eakin, who had been President George W. Bush’s chief economist, examined all the standard macroeconomic models for the impact of large tax cuts on growth when he was head of the Congressional Budget Office. He found that even the most extreme assumptions implied that large tax cuts had only a modest effect on growth.
Furthermore, economic growth is not associated with higher house prices. House prices only kept pace with inflation during the years of rapid growth in the 1950s and 1960s.
George Will began a Washington Post column on tax reform by bemoaning the fact that we have defined success downward. He notes the celebration over the 321,000 job gain reported for November, then tells readers:
“In the 1960s, there were nine months in which more than 300,000 jobs were added, the last being June 1969, when there were about 117 million fewer Americans than there are now .”
While Will is right about the low bar for success (we should be seeing very rapid job growth following a steep downturn like the 2008-2009 recession), the sixties do not support his case for a need to cut tax rates. Through most of the 1960s the top individual tax rate was 70 percent, while the corporate rate was 50 percent. That compares to a top individual rate of 41 percent today, and a corporate tax rate of 35 percent. The top marginal tax rate in the first two months when we had 300k plus job gains was 90 percent. If Will wants to make the case for lower tax rates spurring job growth, he should not be citing the sixties.
Will then goes on to complain that one third of the people approaching retirement have no savings. This is indeed a serious problem, but it is hard to see it being cured by tax reform. Most of these people would have been in the zero, ten, or fifteen percent bracket for most of their working lives. Furthermore, they would have had the opportunity to put as much money as they plausibly would have been able into a tax deferred 401(k). It is very difficult to envision a tax reform that will enable these people to qualitatively increase their savings. Their main problem is not enough income, with close to four decades of stagnant wages.
Will also says the real estate industry really should support tax reform even if it caps the exemption for the mortgage interest deduction, because faster economic growth will lead to higher home prices. Both parts of this are wrong. Douglas Holtz-Eakin, who had been President George W. Bush’s chief economist, examined all the standard macroeconomic models for the impact of large tax cuts on growth when he was head of the Congressional Budget Office. He found that even the most extreme assumptions implied that large tax cuts had only a modest effect on growth.
Furthermore, economic growth is not associated with higher house prices. House prices only kept pace with inflation during the years of rapid growth in the 1950s and 1960s.
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The NYT seems intent on hiding the elephant in the living room. Yesterday it gave us a piece on why men are leaving the labor force, today it gives us a piece on why women are leaving the labor force.
Both articles raise some interesting and important issues. The article on women and work in particular gives an excellent discussion of how most other wealthy countries are far ahead of the United States in providing support for working mothers in the form of paid family leave, paid sick days, and affordable child care. (These are all areas in which CEPR has done considerable research.)
The failure of the United States to meet the needs of working parents largely explains why so many countries have passed the United States in the percentage of prime age (ages 25-54) women who are employed. This figure now stands at 69.9 percent in the United States. By comparison, it is 78.4 percent in Denmark, 76.1 percent in France, and 72.0 percent in Japan.
But the failure of the United States to meet the needs of working parents doesn’t respond to the headline of the piece, “why U.S. women are leaving jobs behind.” The answer to this question is very clearly the state of the economy. After all, the employment to population ratio (EPOP) for prime age women peaked in 2000 at 74.2 percent, coincidentally the peak of the business cycle. After the stock bubble burst and threw the economy into recession in 2001 the EPOP for prime age women declined. It bottomed out at 71.8 percent in 2004 and then started to rise as the economy began to create jobs again. It peaked at 72.5 percent in 2006 and 2007 and then tumbled to a low of 69.0 percent in 2011. Since then it has inched up gradually as the labor market has begun to recover from the downturn.
Anyhow, it is good to see the NYT draw attention to the failure of the United States to provide adequate support for working families which leads to unnecessary hardships for both parents and children. But it is seriously misleading to imply that the causes of the drop in employment of women in this century can be found anywhere other than the failed macroeconomic policies originating in Washington.
In other words, U.S. women are leaving the labor force because Alan Greenspan and other financial regulators and the economics profession were too incompetent to recognize an $8 trillion housing bubble. And they are leaving the labor force because Washington politics are dominated by a cult of balanced budgets. This cult is so powerful that even the politicians who know it is nonsense are scared to challenge it. Washington politics is also dominated by powerful interest groups (e.g. Walmart, General Electric, the financial industry) who benefit from an over-valued dollar and don’t care about the millions of jobs lost due to the resulting trade deficit.
Anyhow, these macroeconomic forces are not really questionable. Unfortunately they are rarely discussed in the media. Stories like the one today and yesterday badly mislead the public by largely ignoring these forces.
The NYT seems intent on hiding the elephant in the living room. Yesterday it gave us a piece on why men are leaving the labor force, today it gives us a piece on why women are leaving the labor force.
Both articles raise some interesting and important issues. The article on women and work in particular gives an excellent discussion of how most other wealthy countries are far ahead of the United States in providing support for working mothers in the form of paid family leave, paid sick days, and affordable child care. (These are all areas in which CEPR has done considerable research.)
The failure of the United States to meet the needs of working parents largely explains why so many countries have passed the United States in the percentage of prime age (ages 25-54) women who are employed. This figure now stands at 69.9 percent in the United States. By comparison, it is 78.4 percent in Denmark, 76.1 percent in France, and 72.0 percent in Japan.
But the failure of the United States to meet the needs of working parents doesn’t respond to the headline of the piece, “why U.S. women are leaving jobs behind.” The answer to this question is very clearly the state of the economy. After all, the employment to population ratio (EPOP) for prime age women peaked in 2000 at 74.2 percent, coincidentally the peak of the business cycle. After the stock bubble burst and threw the economy into recession in 2001 the EPOP for prime age women declined. It bottomed out at 71.8 percent in 2004 and then started to rise as the economy began to create jobs again. It peaked at 72.5 percent in 2006 and 2007 and then tumbled to a low of 69.0 percent in 2011. Since then it has inched up gradually as the labor market has begun to recover from the downturn.
Anyhow, it is good to see the NYT draw attention to the failure of the United States to provide adequate support for working families which leads to unnecessary hardships for both parents and children. But it is seriously misleading to imply that the causes of the drop in employment of women in this century can be found anywhere other than the failed macroeconomic policies originating in Washington.
In other words, U.S. women are leaving the labor force because Alan Greenspan and other financial regulators and the economics profession were too incompetent to recognize an $8 trillion housing bubble. And they are leaving the labor force because Washington politics are dominated by a cult of balanced budgets. This cult is so powerful that even the politicians who know it is nonsense are scared to challenge it. Washington politics is also dominated by powerful interest groups (e.g. Walmart, General Electric, the financial industry) who benefit from an over-valued dollar and don’t care about the millions of jobs lost due to the resulting trade deficit.
Anyhow, these macroeconomic forces are not really questionable. Unfortunately they are rarely discussed in the media. Stories like the one today and yesterday badly mislead the public by largely ignoring these forces.
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Due to Japan’s national debt, which is well more than twice its GDP, Japan’s children are burdened with interest payments that are close to 0.8 percent of GDP. That sounds pretty awful right? How are the kids going to be able to make it?
If the sarcasm isn’t obvious, then you need some basis of comparison here. The interest burden in the United States is now 1.4 percent of GDP. When our children were really being crushed by the burden of the debt back in the early 1990s the interest burden peaked at a bit more than 3.0 percent of GDP, a bit less than four times Japan’s current burden. In fact, the figure of 0.8 percent of GDP overstates the true burden since much of this money is paid to Japan’s central bank and then refunded to the government.
The prompt for this discussion is an article in the Washington Post about the prospects for Japan’s Prime Minister Shinzo Abe and his economic program, now that he has called snap elections. To get an assessment of the impact of Japan’s debt on the welfare of future generations the Post turned to Kayoko Kamiya, who is identified as “a 43-year-old housewife.”
“Well, we are only shifting the burden to my children, so it’s tricky, … Raising the tax [a consumption tax increase that had been scheduled to go into effect in April, but now has been delayed by Abe] earlier would make things at least easier later. I feel unsure if it’s right that the current generation doesn’t take care of the debt.”
The piece also tells us that the bond rating agencies (yes, those people who rated subprime mortgage backed securities as Aaa) are threatening to downgrade Japan’s debt. It might have been worth pointing out that the financial markets appear to disagree with the bond rating agencies. The interest rate on 10-year Japanese government bonds is 0.40 percent.
In a piece providing an assessment of the economy’s performance under Abe, it would have been worth noting that Japan’s employment rate has risen by 2.2 percentage points since Abe took office at the end of the 2012. This would be the equivalent of adding more than 5 million workers in the United States.
Addendum:
This piece wrongly asserts that Japan has been in a deflationary spiral over the last 15 years. This is not true. It has consistently had very low inflation rates that did in some years turn negative. However, the deflation rate never exceeded -1.0 percent and it has not accelerated, as would be implied by a delfationary spiral. The basic problem in Japan is the same as in Europe, the inflation rate has been too low over the last two decades.
Due to Japan’s national debt, which is well more than twice its GDP, Japan’s children are burdened with interest payments that are close to 0.8 percent of GDP. That sounds pretty awful right? How are the kids going to be able to make it?
If the sarcasm isn’t obvious, then you need some basis of comparison here. The interest burden in the United States is now 1.4 percent of GDP. When our children were really being crushed by the burden of the debt back in the early 1990s the interest burden peaked at a bit more than 3.0 percent of GDP, a bit less than four times Japan’s current burden. In fact, the figure of 0.8 percent of GDP overstates the true burden since much of this money is paid to Japan’s central bank and then refunded to the government.
The prompt for this discussion is an article in the Washington Post about the prospects for Japan’s Prime Minister Shinzo Abe and his economic program, now that he has called snap elections. To get an assessment of the impact of Japan’s debt on the welfare of future generations the Post turned to Kayoko Kamiya, who is identified as “a 43-year-old housewife.”
“Well, we are only shifting the burden to my children, so it’s tricky, … Raising the tax [a consumption tax increase that had been scheduled to go into effect in April, but now has been delayed by Abe] earlier would make things at least easier later. I feel unsure if it’s right that the current generation doesn’t take care of the debt.”
The piece also tells us that the bond rating agencies (yes, those people who rated subprime mortgage backed securities as Aaa) are threatening to downgrade Japan’s debt. It might have been worth pointing out that the financial markets appear to disagree with the bond rating agencies. The interest rate on 10-year Japanese government bonds is 0.40 percent.
In a piece providing an assessment of the economy’s performance under Abe, it would have been worth noting that Japan’s employment rate has risen by 2.2 percentage points since Abe took office at the end of the 2012. This would be the equivalent of adding more than 5 million workers in the United States.
Addendum:
This piece wrongly asserts that Japan has been in a deflationary spiral over the last 15 years. This is not true. It has consistently had very low inflation rates that did in some years turn negative. However, the deflation rate never exceeded -1.0 percent and it has not accelerated, as would be implied by a delfationary spiral. The basic problem in Japan is the same as in Europe, the inflation rate has been too low over the last two decades.
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Ron Lieber had a well-reasoned “Your Money” piece in the NYT that discussed the merits and pitfalls of buying a home with a low down payment. However it may have misled readers about the findings of the research.
It noted that some people have raised concerns about the risks of default on low down payment mortgages (it linked to a post by me) and then it referred to others disputing that low down payments are associated with higher risks, using “fresher data.” The fresher data in question is a study by the Urban Institute which actually shows a strong inverse relationship between the size of the down payment and default risk for every year analyzed.
For example, in 2001, people with strong credit scores (FICO above 750) had a 0.2 percent default rate if they put 20 percent or more down on their house, their default rate was six times as high, 1.2 percent, if their down payment was between 3-5 percent. For people with low credit scores (below 700), the default rate was 2.2 percent with a down payment of 20 percent or more, it was 5.1 percent for a down payment between 3-5 percent.
The comparable numbers for 2007 were 4.5 percent for people with strong credit scores and 20 percent or more down, compared to 13.5 percent for people with strong credit ratings and 3-5 percent down. For people with low credits scores, and putting 20 percent or more down, the default rate was 20.9 percent compared to 30.6 percent for those putting 3-5 percent down.
The way the study implies a weak relationship between down payment and default risk is by comparing default rates for people who put between 5-10 percent down and people who put 3-5 percent down. Since almost all the the people in the former category are putting just 5 percent down, the study is effectively telling us that the default rate is not much higher if people put 3 percent rather than 5 percent down. This is probably true.
Ron Lieber had a well-reasoned “Your Money” piece in the NYT that discussed the merits and pitfalls of buying a home with a low down payment. However it may have misled readers about the findings of the research.
It noted that some people have raised concerns about the risks of default on low down payment mortgages (it linked to a post by me) and then it referred to others disputing that low down payments are associated with higher risks, using “fresher data.” The fresher data in question is a study by the Urban Institute which actually shows a strong inverse relationship between the size of the down payment and default risk for every year analyzed.
For example, in 2001, people with strong credit scores (FICO above 750) had a 0.2 percent default rate if they put 20 percent or more down on their house, their default rate was six times as high, 1.2 percent, if their down payment was between 3-5 percent. For people with low credit scores (below 700), the default rate was 2.2 percent with a down payment of 20 percent or more, it was 5.1 percent for a down payment between 3-5 percent.
The comparable numbers for 2007 were 4.5 percent for people with strong credit scores and 20 percent or more down, compared to 13.5 percent for people with strong credit ratings and 3-5 percent down. For people with low credits scores, and putting 20 percent or more down, the default rate was 20.9 percent compared to 30.6 percent for those putting 3-5 percent down.
The way the study implies a weak relationship between down payment and default risk is by comparing default rates for people who put between 5-10 percent down and people who put 3-5 percent down. Since almost all the the people in the former category are putting just 5 percent down, the study is effectively telling us that the default rate is not much higher if people put 3 percent rather than 5 percent down. This is probably true.
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The NYT had an interesting piece on the decline in employment rates among prime age male workers. While it discusses many of the causes of this decline, it missed the most obvious: policy decisions that have depressed demand in the economy. Many readers of the piece may wrongly believe that the current low employment rate is primarily the result of a long-term trend. This is not true.
From 1979 to 2000 the employment to population ratio (EPOP) fell by 2.1 percentage points. If it had continued this pace of decline, it would have fallen by roughly 1.4 percentage points since 2000. In fact, it has dropped by 5.1 percentage points. The most obvious explanation for this more rapid rate of decline is weak demand. The weakness of demand is in turn caused by a decision to keep down the size of the budget deficit and to sustain an over-valued dollar. These are both policy decisions made in Washington that have nothing to do with the character and skills of the workers who do not have jobs.
It’s also worth noting that wages for the jobs that these men may be able to get would be considerably higher if the government decided to run a high employment policy. As Jared Bernstein and I show in our book, wages for those at the bottom of the income distribution are strongly influenced by the unemployment rate.
The NYT had an interesting piece on the decline in employment rates among prime age male workers. While it discusses many of the causes of this decline, it missed the most obvious: policy decisions that have depressed demand in the economy. Many readers of the piece may wrongly believe that the current low employment rate is primarily the result of a long-term trend. This is not true.
From 1979 to 2000 the employment to population ratio (EPOP) fell by 2.1 percentage points. If it had continued this pace of decline, it would have fallen by roughly 1.4 percentage points since 2000. In fact, it has dropped by 5.1 percentage points. The most obvious explanation for this more rapid rate of decline is weak demand. The weakness of demand is in turn caused by a decision to keep down the size of the budget deficit and to sustain an over-valued dollar. These are both policy decisions made in Washington that have nothing to do with the character and skills of the workers who do not have jobs.
It’s also worth noting that wages for the jobs that these men may be able to get would be considerably higher if the government decided to run a high employment policy. As Jared Bernstein and I show in our book, wages for those at the bottom of the income distribution are strongly influenced by the unemployment rate.
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A NYT article on a change in other countries’ attitudes towards the United States role in global warming negotiations seriously understated the basis for other countries’ anger toward the United States on this issue. It referred to reactions to President Obama’s inability to get Congress to pass a law to reduce greenhouse gas emissions:
“the United States went back to being viewed as the world’s largest economy and largest historic greenhouse gas polluter, refusing to change course.”
Actually, if the United States were just polluting in the same ratio to GDP as other wealthy countries that would be an enormous step forward. However, we have taken few of the steps that Europe has done over the last four decades to reduce energy consumption. In addition, because we have taken gains in productivity growth rather than leisure, we emit more than twice as much greenhouse gas (GHG) as people in western Europe, even though we have comparable living standards.
If it were just a question of the U.S. emitting a lot of GHG because we are the world’s largest economy, those concerned about global warming would be much more pleasantly disposed toward the United States.
A NYT article on a change in other countries’ attitudes towards the United States role in global warming negotiations seriously understated the basis for other countries’ anger toward the United States on this issue. It referred to reactions to President Obama’s inability to get Congress to pass a law to reduce greenhouse gas emissions:
“the United States went back to being viewed as the world’s largest economy and largest historic greenhouse gas polluter, refusing to change course.”
Actually, if the United States were just polluting in the same ratio to GDP as other wealthy countries that would be an enormous step forward. However, we have taken few of the steps that Europe has done over the last four decades to reduce energy consumption. In addition, because we have taken gains in productivity growth rather than leisure, we emit more than twice as much greenhouse gas (GHG) as people in western Europe, even though we have comparable living standards.
If it were just a question of the U.S. emitting a lot of GHG because we are the world’s largest economy, those concerned about global warming would be much more pleasantly disposed toward the United States.
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Catherine Rampell’s column on Uber is well worth reading. The basic point is very simple and should be obvious. There are good reasons for regulating cabs. They should have proper insurance, meet safety standards (both car and driver), and should also be limited in number. (Cabs create congestion and pollute.)
Whatever regulations are established should apply across the board. Uber doesn’t get an exemption because it is run by incredibly rich twenty somethings.
Catherine Rampell’s column on Uber is well worth reading. The basic point is very simple and should be obvious. There are good reasons for regulating cabs. They should have proper insurance, meet safety standards (both car and driver), and should also be limited in number. (Cabs create congestion and pollute.)
Whatever regulations are established should apply across the board. Uber doesn’t get an exemption because it is run by incredibly rich twenty somethings.
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The housing bubble was apparently too far in the past for many of the people writing about housing to remember. Part of the problem was that many borrowers got loans that they were ill-situated to repay.
One of the factors that is a strong determinant of whether people will be able to pay a mortgage is the size of the down payment. The equity from a down payment serves as a cushion in bad times. It also reduces the risk to lenders, since this is money they stand to recover in the event of a default.
The NYT misled readers about the relative risk from low down payment loans in an article on the decision by the government to allow Fannie Mae and Freddie Mac to purchase loans with just 3 percent down payments. The piece cited several commentators saying that the risk of defaults would not increase substantially by lowering down payment requirements.
A study by the Center for Responsible Lending found that the default rate for loans with down payments of between 3 to 10 percent was 6.8 percent. This is 45 percent higher than the default rate it found for mortgages with down payments of 10 percent or more. The gap would be even larger of the comparison was restricted to those with down payments between 3 to 5 percent, with mortgages with down payments of 20 percent or more.
It is dubious housing policy to encourage moderate income people to take out mortgages on which they are likely to default. Furthermore, since the median period of homeownership among low income homebuyers is less than five years, a relatively small portion of households who are able to buy homes through this policy will accumulate any substantial amount of wealth. By contrast, the policy is likely to help the banking and real estate industries accumulate wealth.
Addendum:
In response to the questions in the comments, the study did not directly give the 57 percent figure, you had to back it out from the numbers they did give. According to their data, the additional low down payment mortgages raised the overall average from 4.7 percent to 5.2 percent. In order for this to be the case, the default rate on the additional mortgages had to be 6.8 percent — in other words, 45 percent higher than the higher down payment mortgages.
In fact, assuming their analysis is like every other analysis of default rates, it found a strong inverse relationship between the size of the down payment and the default risk. The likelihood of defaults for those putting down 3-5 percent is probably close to four times as high as those putting down 20 percent. I think it’s great to help low and moderate income people get good housing. But this policy is about helping banks get their bad mortgages insured by taxpayers.
One more point, it is a lie to say that this is an issue about people being able to get a mortgage with a low down payment. This is an issue about people being able to get a government guaranteed mortgage with a low down payment. We are talking about people paying a higher interest rate that reflects the actual risk associated with their mortgage.
Correction: An earlier version had put the difference at almost 80 percent due to an arithmetic error. Thanks to Bill Sermons, at the Center for Responsible Lending for calling the error to my attention.
The housing bubble was apparently too far in the past for many of the people writing about housing to remember. Part of the problem was that many borrowers got loans that they were ill-situated to repay.
One of the factors that is a strong determinant of whether people will be able to pay a mortgage is the size of the down payment. The equity from a down payment serves as a cushion in bad times. It also reduces the risk to lenders, since this is money they stand to recover in the event of a default.
The NYT misled readers about the relative risk from low down payment loans in an article on the decision by the government to allow Fannie Mae and Freddie Mac to purchase loans with just 3 percent down payments. The piece cited several commentators saying that the risk of defaults would not increase substantially by lowering down payment requirements.
A study by the Center for Responsible Lending found that the default rate for loans with down payments of between 3 to 10 percent was 6.8 percent. This is 45 percent higher than the default rate it found for mortgages with down payments of 10 percent or more. The gap would be even larger of the comparison was restricted to those with down payments between 3 to 5 percent, with mortgages with down payments of 20 percent or more.
It is dubious housing policy to encourage moderate income people to take out mortgages on which they are likely to default. Furthermore, since the median period of homeownership among low income homebuyers is less than five years, a relatively small portion of households who are able to buy homes through this policy will accumulate any substantial amount of wealth. By contrast, the policy is likely to help the banking and real estate industries accumulate wealth.
Addendum:
In response to the questions in the comments, the study did not directly give the 57 percent figure, you had to back it out from the numbers they did give. According to their data, the additional low down payment mortgages raised the overall average from 4.7 percent to 5.2 percent. In order for this to be the case, the default rate on the additional mortgages had to be 6.8 percent — in other words, 45 percent higher than the higher down payment mortgages.
In fact, assuming their analysis is like every other analysis of default rates, it found a strong inverse relationship between the size of the down payment and the default risk. The likelihood of defaults for those putting down 3-5 percent is probably close to four times as high as those putting down 20 percent. I think it’s great to help low and moderate income people get good housing. But this policy is about helping banks get their bad mortgages insured by taxpayers.
One more point, it is a lie to say that this is an issue about people being able to get a mortgage with a low down payment. This is an issue about people being able to get a government guaranteed mortgage with a low down payment. We are talking about people paying a higher interest rate that reflects the actual risk associated with their mortgage.
Correction: An earlier version had put the difference at almost 80 percent due to an arithmetic error. Thanks to Bill Sermons, at the Center for Responsible Lending for calling the error to my attention.
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