Bethany McLean goes a bit overboard in arguing against refinancing in a NYT column this morning. She cites data showing that the vast majority of subprime loans in the bubble years were for refinancing homes rather than home purchases.
The data are misleading because many of the subprime loans were issued to be refinanced. Many of these loans carried teaser rates and were pushed with the promise that people could refinance before the teaser rate reset. Many buyers took advantage of this option, often refinancing two or three times as house prices continued to rise. For this reason, it is misleading to imply that subprime loans were not important to home purchases during this period.
The piece also carries the bizarre assertion:
“Mr. Rosner [Joshua Rosner, a managing director at the research consultancy Graham Fisher & Company] also points out that while homeownership peaked in 2004, home prices peaked in 2006, because refinancing drove up prices.”
This doesn’t make any sense. Refinancing a home cannot drive up its price. The bubble was driven by demand for homes, not the demand for refinancing. The latter can plausibly drive up the price of mortgages, but it doesn’t directly affect house prices. (Higher mortgages rates would be expected to lower prices, other things equal.)
Bethany McLean goes a bit overboard in arguing against refinancing in a NYT column this morning. She cites data showing that the vast majority of subprime loans in the bubble years were for refinancing homes rather than home purchases.
The data are misleading because many of the subprime loans were issued to be refinanced. Many of these loans carried teaser rates and were pushed with the promise that people could refinance before the teaser rate reset. Many buyers took advantage of this option, often refinancing two or three times as house prices continued to rise. For this reason, it is misleading to imply that subprime loans were not important to home purchases during this period.
The piece also carries the bizarre assertion:
“Mr. Rosner [Joshua Rosner, a managing director at the research consultancy Graham Fisher & Company] also points out that while homeownership peaked in 2004, home prices peaked in 2006, because refinancing drove up prices.”
This doesn’t make any sense. Refinancing a home cannot drive up its price. The bubble was driven by demand for homes, not the demand for refinancing. The latter can plausibly drive up the price of mortgages, but it doesn’t directly affect house prices. (Higher mortgages rates would be expected to lower prices, other things equal.)
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A NYT article on the G-20 summit describes the goal of such meetings:
“World leaders would work together to remove the roadblocks to economic progress, including corruption, trade restrictions and regulations that discourage hiring and firing.”
Actually the United States has been working hard in international negotiations to increase barriers to trade in the form of patent and copyright protection. These barriers can raise prices of drugs and other products by several thousand percent above their free market price, draining money out consumers’ pockets. The United States has even been encouraging such perverse practices as extending the length of copyright protection retroactively, in effect trying to give people in the past more incentive to produce creative work.
It is also worth noting that it is questionable whether protections against firing have much impact on hiring and growth. According to the OECD, Germany ranks near the top in the strength of its employment protection. It also has the lowest unemployment rate of any major economy. There is little or no correlation between employment and unemployment rates and the strength of employment protections.
A NYT article on the G-20 summit describes the goal of such meetings:
“World leaders would work together to remove the roadblocks to economic progress, including corruption, trade restrictions and regulations that discourage hiring and firing.”
Actually the United States has been working hard in international negotiations to increase barriers to trade in the form of patent and copyright protection. These barriers can raise prices of drugs and other products by several thousand percent above their free market price, draining money out consumers’ pockets. The United States has even been encouraging such perverse practices as extending the length of copyright protection retroactively, in effect trying to give people in the past more incentive to produce creative work.
It is also worth noting that it is questionable whether protections against firing have much impact on hiring and growth. According to the OECD, Germany ranks near the top in the strength of its employment protection. It also has the lowest unemployment rate of any major economy. There is little or no correlation between employment and unemployment rates and the strength of employment protections.
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Hate to be the econ nerd here, but this is the sort of thing that folks writing on economics should get straight. (The failure by econ writers to get such things right is one reason that Jonathan Gruber thinks the public is “stupid.”) Anyhow, Catherine Rampell messes this one up in an otherwise reasonable piece discussing differences in saving rates by age.
The piece notes the negative saving rate reported for people under age 34 and then comments:
“These numbers have inspired various condemnatory headlines and think pieces about my generation’s irresponsible savings deficit. The more sympathetic coverage has at least acknowledged the effects of student loan debt and high youth unemployment, but even those articles came loaded with judgment.”
Paying off student loan debt, just like paying off credit card debt or paying down a mortgage, is a form of saving. If young people are actually paying off large amounts of student debt then they would have a high saving rate, not a low saving rate.
The chart accompanying the column is interesting not only for the breakdowns by age, but because it shows the overall saving rate. It shows that the saving rate is actually relatively low, meaning that people are spending a lot. (This would be even clearer if it went back to years before 1990.)
We have heard endless comments from economists and economic reporters trying to explain why people are not spending following the collapse of the housing bubble. The simplest explanation is that they are spending, albeit not at the same levels as when they had $8 trillion of ephemeral bubble wealth driving their consumption. This is one of those points that is far too simple for economists to understand.
Hate to be the econ nerd here, but this is the sort of thing that folks writing on economics should get straight. (The failure by econ writers to get such things right is one reason that Jonathan Gruber thinks the public is “stupid.”) Anyhow, Catherine Rampell messes this one up in an otherwise reasonable piece discussing differences in saving rates by age.
The piece notes the negative saving rate reported for people under age 34 and then comments:
“These numbers have inspired various condemnatory headlines and think pieces about my generation’s irresponsible savings deficit. The more sympathetic coverage has at least acknowledged the effects of student loan debt and high youth unemployment, but even those articles came loaded with judgment.”
Paying off student loan debt, just like paying off credit card debt or paying down a mortgage, is a form of saving. If young people are actually paying off large amounts of student debt then they would have a high saving rate, not a low saving rate.
The chart accompanying the column is interesting not only for the breakdowns by age, but because it shows the overall saving rate. It shows that the saving rate is actually relatively low, meaning that people are spending a lot. (This would be even clearer if it went back to years before 1990.)
We have heard endless comments from economists and economic reporters trying to explain why people are not spending following the collapse of the housing bubble. The simplest explanation is that they are spending, albeit not at the same levels as when they had $8 trillion of ephemeral bubble wealth driving their consumption. This is one of those points that is far too simple for economists to understand.
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It is bizarre how many people can’t seem to understand that patent and copyright protection are “protection” and not free trade. It doesn’t matter if your friends are the ones who benefit from them or even if you think these forms of protection are good for the economy. They are still forms of protection. By giving firms and/or individuals monopolies, they are 180 degrees at odds with free trade.
This is why everyone should be very angry when the NYT told readers that:
“Mr. Obama has made clear he intends to work with congressional Republicans to push for fewer restrictions on trade.”
This is not true. He is going to push for trade deals that will reduce some restrictions and raise others. It is entirely possible that the economic impact of the increased restrictions will exceed the impact of the reductions. (If the NYT has a basis for arguing the opposite, it has not shared it with readers.)
These trade deals will also impose a regulatory structure on a wide range of issues (e.g. the environment, work place safety, privacy) that will supersede domestic laws and regulations. It should be possible to report on these deals accurately.
It is bizarre how many people can’t seem to understand that patent and copyright protection are “protection” and not free trade. It doesn’t matter if your friends are the ones who benefit from them or even if you think these forms of protection are good for the economy. They are still forms of protection. By giving firms and/or individuals monopolies, they are 180 degrees at odds with free trade.
This is why everyone should be very angry when the NYT told readers that:
“Mr. Obama has made clear he intends to work with congressional Republicans to push for fewer restrictions on trade.”
This is not true. He is going to push for trade deals that will reduce some restrictions and raise others. It is entirely possible that the economic impact of the increased restrictions will exceed the impact of the reductions. (If the NYT has a basis for arguing the opposite, it has not shared it with readers.)
These trade deals will also impose a regulatory structure on a wide range of issues (e.g. the environment, work place safety, privacy) that will supersede domestic laws and regulations. It should be possible to report on these deals accurately.
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It seems as though someone must be preventing a discussion of the patent system. The NYT Magazine has a lengthy piece on the slowdown in the development of new drugs. It focuses on one scientist’s struggles to perfect a new treatment for diabetes, a process that is likely to take well over twenty years, even in a best case scenario.
One of the issues that contributed to this delay is the fact that a single scientist held the patent on the original innovation, which meant that no other scientists could contribute to the development process. By contrast, if the research had been funded up front and the government had not granted a patent monopoly, anyone would have been able to offer their expertise to help develop a usable treatment.
This piece provides a useful example of how patent protection can impede the development of drugs compared with alternative funding mechanisms, but the issue is never once mentioned in this piece. Of course ending patent monopolies would also eliminate the incentive of drug companies to push their drugs for inappropriate purposes and to misrepresent their effectiveness and safety. But hey, if the Chinese government doesn’t want the NYT to raise these issues, its readers will never hear about them.
It seems as though someone must be preventing a discussion of the patent system. The NYT Magazine has a lengthy piece on the slowdown in the development of new drugs. It focuses on one scientist’s struggles to perfect a new treatment for diabetes, a process that is likely to take well over twenty years, even in a best case scenario.
One of the issues that contributed to this delay is the fact that a single scientist held the patent on the original innovation, which meant that no other scientists could contribute to the development process. By contrast, if the research had been funded up front and the government had not granted a patent monopoly, anyone would have been able to offer their expertise to help develop a usable treatment.
This piece provides a useful example of how patent protection can impede the development of drugs compared with alternative funding mechanisms, but the issue is never once mentioned in this piece. Of course ending patent monopolies would also eliminate the incentive of drug companies to push their drugs for inappropriate purposes and to misrepresent their effectiveness and safety. But hey, if the Chinese government doesn’t want the NYT to raise these issues, its readers will never hear about them.
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The Washington Post called for further cuts to the Postal Service and implicitly cuts in pay and benefits in an editorial today. There are two points worth noting on its proposed agenda.
First, the Postal Service has already experienced enormous downsizing. It employed more than 900,000 workers in 1999. In the most recent data it employed 587,600, a decline of 35 percent. This downsizing has been associated with substantial gains in productivity, so it is wrong to imply that it has not been changing with the times.
The other point is that the Postal Service could improve its finances by expanding rather than contracting. Specifically, it can return to providing basic banking services, as it did in the past and many other postal systems still do. This course has been suggested by the Postal Service’s Inspector General.
This route takes advantage of the fact that the Postal Service has buildings in nearly every neighborhood in the country. These offices can be used to provide basic services to a large unbanked population that often can’t afford fees associated with low balance accounts. As a result they often end up paying exorbitant fees to check cashing services, pay day lenders and other non-bank providers of financial services.
A postal banking system would provide competition for the private financial system, which undoubtedly explains why so many politicians are unwilling to consider it as a route to addressing the Postal Service’s financial issues. In the past politicians have often intervened to protect the private sector so that it would not lose business to the Postal Service. For example, in 1999 many members of Congress intervened on behalf of FedEx and UPS, who were concerned that they were losing business due to an effective ad campaign by the Postal Service. (They also sued to stop the ad campaign.)
The Postal Service has been placed in a nearly impossible situation where it is expected to be profitable on a strict business basis, but it is prevented from pursuing potentially profitable paths by the political power of the businesses with whom it would be competing. This is the core problem facing the Postal Service which is not mentioned by the Post.
Thanks to Robert Salzberg for calling this one to my attention.
The Washington Post called for further cuts to the Postal Service and implicitly cuts in pay and benefits in an editorial today. There are two points worth noting on its proposed agenda.
First, the Postal Service has already experienced enormous downsizing. It employed more than 900,000 workers in 1999. In the most recent data it employed 587,600, a decline of 35 percent. This downsizing has been associated with substantial gains in productivity, so it is wrong to imply that it has not been changing with the times.
The other point is that the Postal Service could improve its finances by expanding rather than contracting. Specifically, it can return to providing basic banking services, as it did in the past and many other postal systems still do. This course has been suggested by the Postal Service’s Inspector General.
This route takes advantage of the fact that the Postal Service has buildings in nearly every neighborhood in the country. These offices can be used to provide basic services to a large unbanked population that often can’t afford fees associated with low balance accounts. As a result they often end up paying exorbitant fees to check cashing services, pay day lenders and other non-bank providers of financial services.
A postal banking system would provide competition for the private financial system, which undoubtedly explains why so many politicians are unwilling to consider it as a route to addressing the Postal Service’s financial issues. In the past politicians have often intervened to protect the private sector so that it would not lose business to the Postal Service. For example, in 1999 many members of Congress intervened on behalf of FedEx and UPS, who were concerned that they were losing business due to an effective ad campaign by the Postal Service. (They also sued to stop the ad campaign.)
The Postal Service has been placed in a nearly impossible situation where it is expected to be profitable on a strict business basis, but it is prevented from pursuing potentially profitable paths by the political power of the businesses with whom it would be competing. This is the core problem facing the Postal Service which is not mentioned by the Post.
Thanks to Robert Salzberg for calling this one to my attention.
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That is what millions are asking after reading its piece on the financial status of Detroit’s pensions following its bankruptcy. At one point the piece tells readers:
“Contributions to the system will not be nearly enough to cover these payouts, so success depends on strong, consistent investment returns, averaging at least 6.75 percent a year for the next 10 years. Any shortfall will have to ultimately be covered by the taxpayers.”
Actually the returns to the pension do not need to be consistent, they need to be on average 6.75 percent a year. Having a year or two of low or even negative returns does not matter as long as they are offset by years of stronger than average returns. The assumed 6.75 percent nominal return is in fact considerably lower than the long-term average for public pension funds, although given current stock valuations, it may be a bit on the high side. (High price to earnings ratios imply lower future returns.)
It would also have been worth noting the extent of the pension cuts that Detroit workers already incurred. Workers agreed to a 4.5 percent across the board cut in pensions. In addition,they gave up a 2.25 percent annual cost of living adjustment. For a retiree who collects her pension for twenty years, this amounts to an almost 18 percent cut in benefits.
That is what millions are asking after reading its piece on the financial status of Detroit’s pensions following its bankruptcy. At one point the piece tells readers:
“Contributions to the system will not be nearly enough to cover these payouts, so success depends on strong, consistent investment returns, averaging at least 6.75 percent a year for the next 10 years. Any shortfall will have to ultimately be covered by the taxpayers.”
Actually the returns to the pension do not need to be consistent, they need to be on average 6.75 percent a year. Having a year or two of low or even negative returns does not matter as long as they are offset by years of stronger than average returns. The assumed 6.75 percent nominal return is in fact considerably lower than the long-term average for public pension funds, although given current stock valuations, it may be a bit on the high side. (High price to earnings ratios imply lower future returns.)
It would also have been worth noting the extent of the pension cuts that Detroit workers already incurred. Workers agreed to a 4.5 percent across the board cut in pensions. In addition,they gave up a 2.25 percent annual cost of living adjustment. For a retiree who collects her pension for twenty years, this amounts to an almost 18 percent cut in benefits.
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Zachary Goldfarb raises this possibility in a Wonkblog post today. Certainly there is evidence that many voters were unhappy about stagnating incomes, and the payroll tax increase associated with the end of the payroll tax holiday in 2013 contributed to this stagnation.
However as a practical matter, it appears that few people noticed the tax increase at the time it took place. While 28.9 percent of respondents correctly answered a poll saying that their payroll tax was increased in 2013, 19.8 percent said that their taxes were increased in 2014, when there was actually no change in their tax rate. If the 2014 answer gives us the percentage of the population who would have said their taxes increased regardless of what happened, less than 10 percent of the population recognized the tax increase in 2013.
The implication is that voters were upset about income stagnation. The tax increase contributed to this stagnation (although it was just reversing a prior tax cut), but the tax increase was not directly the cause of voter anger because people did not know about it.
The piece also at one point dismisses the idea of any further tax cuts, commenting:
“given the long-term fiscal problems facing Washington, that seems fanciful.”
Actually the sharp downward revisions to projections of health care cost growth in recent years had made the projected deficits even for the long-term considerably smaller than they had been prior to the downturn. There is no economic reason that these projected deficits should preclude stimulus to the economy now, even though many may use them as a political excuse for their opposition.
Zachary Goldfarb raises this possibility in a Wonkblog post today. Certainly there is evidence that many voters were unhappy about stagnating incomes, and the payroll tax increase associated with the end of the payroll tax holiday in 2013 contributed to this stagnation.
However as a practical matter, it appears that few people noticed the tax increase at the time it took place. While 28.9 percent of respondents correctly answered a poll saying that their payroll tax was increased in 2013, 19.8 percent said that their taxes were increased in 2014, when there was actually no change in their tax rate. If the 2014 answer gives us the percentage of the population who would have said their taxes increased regardless of what happened, less than 10 percent of the population recognized the tax increase in 2013.
The implication is that voters were upset about income stagnation. The tax increase contributed to this stagnation (although it was just reversing a prior tax cut), but the tax increase was not directly the cause of voter anger because people did not know about it.
The piece also at one point dismisses the idea of any further tax cuts, commenting:
“given the long-term fiscal problems facing Washington, that seems fanciful.”
Actually the sharp downward revisions to projections of health care cost growth in recent years had made the projected deficits even for the long-term considerably smaller than they had been prior to the downturn. There is no economic reason that these projected deficits should preclude stimulus to the economy now, even though many may use them as a political excuse for their opposition.
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The NYT likely misled readers in the concluding paragraph of an article on projections for enrollment in the health care exchanges next year. It concluded:
“In a brief analysis of coverage trends, the Department of Health and Human Services said Monday that ‘most of the new marketplace enrollment for 2015 is likely to come from the ranks of the uninsured,’ rather than from people who previously bought insurance on their own outside the exchanges.”
Actually, people routinely go between being uninsured and insured primarily because they find and leave jobs that provide insurance. Every month roughly 4.4 million workers leave a job. Many of these workers are leaving jobs with insurance and becoming uninsured. If these people sign up for the exchanges after going two or three months without insurance, should they be viewed as uninsured or as people who previously had insurance from another source? It’s not clear that this distinction is very meaningful.
The NYT likely misled readers in the concluding paragraph of an article on projections for enrollment in the health care exchanges next year. It concluded:
“In a brief analysis of coverage trends, the Department of Health and Human Services said Monday that ‘most of the new marketplace enrollment for 2015 is likely to come from the ranks of the uninsured,’ rather than from people who previously bought insurance on their own outside the exchanges.”
Actually, people routinely go between being uninsured and insured primarily because they find and leave jobs that provide insurance. Every month roughly 4.4 million workers leave a job. Many of these workers are leaving jobs with insurance and becoming uninsured. If these people sign up for the exchanges after going two or three months without insurance, should they be viewed as uninsured or as people who previously had insurance from another source? It’s not clear that this distinction is very meaningful.
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