That may not have been his intention, but when you boast about an economy with 30 million employed workers generating 60,000 jobs a month, with a GDP growth rate of 1.9 percent, then you’re boasting about negative productivity growth. Back in the days when arithmetic mattered in economic policy, people might have pointed out that job creation of 60,000 a month implies annual employment growth of 2.4 percent. Assuming no changes in average hours worked, this means that productivity in the U.K. is shrinking at 0.5 percent annual rate. Osbourne’s course will have make the UK poorer than Sub-Saharan Africa in a few hundred years.
Of course in a country with large amounts of unemployment and underemployment, like the UK, low productivity is not a bad thing. It allows people to work who would not otherwise have jobs. However it hardly seems cause for the boastful sounding column Osborne had on the WSJ op-ed page. On its current path the UK will just be passing its 2007 level of output some time next year. The IMF projects that the UK will not exceed its pre-crisis GDP on a per capita basis until 2018. In the land of sharply diminished expectations this may look like a great success, but it looks pretty pathetic to people familiar with economic data and history.
Note: number of job holders corrected.
That may not have been his intention, but when you boast about an economy with 30 million employed workers generating 60,000 jobs a month, with a GDP growth rate of 1.9 percent, then you’re boasting about negative productivity growth. Back in the days when arithmetic mattered in economic policy, people might have pointed out that job creation of 60,000 a month implies annual employment growth of 2.4 percent. Assuming no changes in average hours worked, this means that productivity in the U.K. is shrinking at 0.5 percent annual rate. Osbourne’s course will have make the UK poorer than Sub-Saharan Africa in a few hundred years.
Of course in a country with large amounts of unemployment and underemployment, like the UK, low productivity is not a bad thing. It allows people to work who would not otherwise have jobs. However it hardly seems cause for the boastful sounding column Osborne had on the WSJ op-ed page. On its current path the UK will just be passing its 2007 level of output some time next year. The IMF projects that the UK will not exceed its pre-crisis GDP on a per capita basis until 2018. In the land of sharply diminished expectations this may look like a great success, but it looks pretty pathetic to people familiar with economic data and history.
Note: number of job holders corrected.
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That is what millions are asking after reading this piece on the prospects of the recent budget deal in the Senate. At one point the piece tells readers:
“Under the budget deal, spending on defense and nondefense programs would rise from the $967 billion slated for this fiscal year to $1.012 trillion, mitigating the impact of across-the-board spending cuts and allowing congressional lawmakers to draft detailed spending plans for the first time in several years. Spending in fiscal 2015, which begins Oct. 1, would rise from $995 billion to $1.014 trillion. Though total spending would rise $63 billion over 10 years, the measure would trim the deficit slightly.”
Okay folks, can anyone make sense of this one? Let’s see spending for fiscal 2015 would rise from $995 billion to $1.014 trillion, that’s compared with the prior schedule. If we compare actual spending in 2015 with 2014 the increase in nominal dollars is $2 billion. If we assume 2.0 percent inflation, this would imply a drop in real terms of about 1.8 percent. If we assume 2.5 percent GDP growth, then spending would be falling as a share of GDP by around 4.3 percent.
Over the next ten years, with nominal GDP projected to grow more than 60 percent, the near freeze would imply a reduction in the affected areas of federal spending of close to 50 percent. Such cuts may be appropriate for military spending, where the need would presumably be proportionate to the threat posed by potential enemies. However it might be reasonable to expect that spending on research, transportation, and other components of discretionary spending would rise roughly in step with the economy, as they have historically. In this case, the current path of spending implies large cuts.
It’s not likely many readers would have understood that the budget deal implies the continuation and extension of large cuts in domestic discretionary spending relative to its historic path. At the prompting of its public editor, Margaret Sullivan, the NYT committed itself to expressing numbers in a way that is meaningful to its readers. It’s difficult to see any evidence of progress toward this end in this piece on the budget.
That is what millions are asking after reading this piece on the prospects of the recent budget deal in the Senate. At one point the piece tells readers:
“Under the budget deal, spending on defense and nondefense programs would rise from the $967 billion slated for this fiscal year to $1.012 trillion, mitigating the impact of across-the-board spending cuts and allowing congressional lawmakers to draft detailed spending plans for the first time in several years. Spending in fiscal 2015, which begins Oct. 1, would rise from $995 billion to $1.014 trillion. Though total spending would rise $63 billion over 10 years, the measure would trim the deficit slightly.”
Okay folks, can anyone make sense of this one? Let’s see spending for fiscal 2015 would rise from $995 billion to $1.014 trillion, that’s compared with the prior schedule. If we compare actual spending in 2015 with 2014 the increase in nominal dollars is $2 billion. If we assume 2.0 percent inflation, this would imply a drop in real terms of about 1.8 percent. If we assume 2.5 percent GDP growth, then spending would be falling as a share of GDP by around 4.3 percent.
Over the next ten years, with nominal GDP projected to grow more than 60 percent, the near freeze would imply a reduction in the affected areas of federal spending of close to 50 percent. Such cuts may be appropriate for military spending, where the need would presumably be proportionate to the threat posed by potential enemies. However it might be reasonable to expect that spending on research, transportation, and other components of discretionary spending would rise roughly in step with the economy, as they have historically. In this case, the current path of spending implies large cuts.
It’s not likely many readers would have understood that the budget deal implies the continuation and extension of large cuts in domestic discretionary spending relative to its historic path. At the prompting of its public editor, Margaret Sullivan, the NYT committed itself to expressing numbers in a way that is meaningful to its readers. It’s difficult to see any evidence of progress toward this end in this piece on the budget.
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My friend and co-author Jared Bernstein used his NYT blogpost to defend the Federal Housing Authority (FHA). I am mostly sympathetic to his case. The FHA has played a positive role in the recovery, helping to support the housing market when private funding had largely disappeared. However, I was struck by his reference to a study by Moody’s Analytics which purportedly finds that house prices would have fallen by another 25 percent had the FHA not been there to support the market.
I didn’t actually find the Moody’s study on the FHA, but Jared did link to a paper from the Center for American Progress (CAP), which has the following paragraph:
“It’s difficult to quantify the agency’s exact contribution to our economy in recent years. But when Moody’s Analytics studied the topic in the fall of 2010, the results were staggering. According to preliminary estimates, if the Federal Housing Administration had simply stopped doing business in October 2010, by the end of 2011 mortgage interest rates would have more than doubled; new housing construction would have plunged by more than 60 percent; new and existing home sales would have dropped by more than a third; and home prices would have fallen another 25 percent below the already-low numbers seen at this point in the crisis.”
It is difficult to envision this story. Mortgage interest rates would have doubled without the FHA? Let’s see, the FHA was an important source of demand for mortgages. So we eliminate a big source of demand and then mortgage interest rates double? I wonder what economic theory they are using over at Moody’s. (Anyone relying on Moody’s for an assessment of the housing market should remember that it completely missed the collapse of the housing bubble.)
In the same vein, how do we get a 25 percent further drop in house prices? There were already investors entering the market in large numbers by the end of 2010 with private equity and hedge funds starting to buy up large amounts of housing. If they knew the FHA was leaving the market, is there some reason to believe that they would not have taken advantage of an even greater buying opportunity?
Perhaps Moody’s modeled a surprise disappearance of the FHA from the housing market, where Congress just votes to end its existence at the end of the month. Perhaps we would then see a sharp fallofff in house prices, but it wouldn’t take too long for investors to come in and take advantage of the lower prices. A 25 percent drop in house prices that lasts for 3-4 months would be unfortunate for the people who had to sell in that period, but would not have much impact on the economy.
I think on the whole the FHA has been a net positive for the market and helped many low and moderate income families buy houses. In fact, it is to the FHA’s great credit that it became virtually irrelevant during the peak housing bubble years. It could not compete with the lax standards offered by subprime lenders. But it is better to make an honest case for the agency, not try silly hype of the sort coming from Moody’s and the CAP report.
Typo corrected — thanks Mark Brucker.
My friend and co-author Jared Bernstein used his NYT blogpost to defend the Federal Housing Authority (FHA). I am mostly sympathetic to his case. The FHA has played a positive role in the recovery, helping to support the housing market when private funding had largely disappeared. However, I was struck by his reference to a study by Moody’s Analytics which purportedly finds that house prices would have fallen by another 25 percent had the FHA not been there to support the market.
I didn’t actually find the Moody’s study on the FHA, but Jared did link to a paper from the Center for American Progress (CAP), which has the following paragraph:
“It’s difficult to quantify the agency’s exact contribution to our economy in recent years. But when Moody’s Analytics studied the topic in the fall of 2010, the results were staggering. According to preliminary estimates, if the Federal Housing Administration had simply stopped doing business in October 2010, by the end of 2011 mortgage interest rates would have more than doubled; new housing construction would have plunged by more than 60 percent; new and existing home sales would have dropped by more than a third; and home prices would have fallen another 25 percent below the already-low numbers seen at this point in the crisis.”
It is difficult to envision this story. Mortgage interest rates would have doubled without the FHA? Let’s see, the FHA was an important source of demand for mortgages. So we eliminate a big source of demand and then mortgage interest rates double? I wonder what economic theory they are using over at Moody’s. (Anyone relying on Moody’s for an assessment of the housing market should remember that it completely missed the collapse of the housing bubble.)
In the same vein, how do we get a 25 percent further drop in house prices? There were already investors entering the market in large numbers by the end of 2010 with private equity and hedge funds starting to buy up large amounts of housing. If they knew the FHA was leaving the market, is there some reason to believe that they would not have taken advantage of an even greater buying opportunity?
Perhaps Moody’s modeled a surprise disappearance of the FHA from the housing market, where Congress just votes to end its existence at the end of the month. Perhaps we would then see a sharp fallofff in house prices, but it wouldn’t take too long for investors to come in and take advantage of the lower prices. A 25 percent drop in house prices that lasts for 3-4 months would be unfortunate for the people who had to sell in that period, but would not have much impact on the economy.
I think on the whole the FHA has been a net positive for the market and helped many low and moderate income families buy houses. In fact, it is to the FHA’s great credit that it became virtually irrelevant during the peak housing bubble years. It could not compete with the lax standards offered by subprime lenders. But it is better to make an honest case for the agency, not try silly hype of the sort coming from Moody’s and the CAP report.
Typo corrected — thanks Mark Brucker.
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You know about that recession that began six years ago following the collapse of the housing bubble? Apparently Robert Samuelson doesn’t. In a column complaining about the new budget deal, Samuelson told readers:
“Recall: The central issue is the mismatch between government’s spending promises and its willingness to tax.”
Those who noticed the recession might think the central issue is that the economy is still operating at a level of output that is close to 6 percent below its capacity according to the Congressional Budget Office. This corresponds to $1 trillion in wasted output each year, with total amount of needless waste now exceeding $5 trillion. It also corresponds to a level of employment that is roughly 8.5 million below trend. This implies lives being ruined as parent can’t properly support their kids and face foreclosure and/or eviction.
If Congress would spend more money (i.e. increase the mismatch between spending and willingness to tax) it could bring the economy back towards potential GDP. In other words, the problem is the opposite of what Samuelson asserts.
While Samuelson goes on to complain about the long-term story with the baby boomers’ retirement raising the cost of Social Security and Medicare, here also he has missed the news. Over the last five years the rate of health care cost growth has slowed sharply. The Congressional Budget Office has already lowered its projections for the cost of Medicare for 2020 by 15 percent. If the slowdown in cost growth continues then the projections will be further adjusted downward.
In other words, much of the projected long-term shortfall has already been addressed. Samuelson just missed it. In the long-term we may need some additional revenue to support an aging population, but it is difficult to believe that the public would not be willing to support higher taxes if they are needed to finance these two incredibly popular programs. However, this is a question that is still many years in the future and there is no reason that Congress needs to worry about it at a time when the country is facing a much more pressing crisis.
You know about that recession that began six years ago following the collapse of the housing bubble? Apparently Robert Samuelson doesn’t. In a column complaining about the new budget deal, Samuelson told readers:
“Recall: The central issue is the mismatch between government’s spending promises and its willingness to tax.”
Those who noticed the recession might think the central issue is that the economy is still operating at a level of output that is close to 6 percent below its capacity according to the Congressional Budget Office. This corresponds to $1 trillion in wasted output each year, with total amount of needless waste now exceeding $5 trillion. It also corresponds to a level of employment that is roughly 8.5 million below trend. This implies lives being ruined as parent can’t properly support their kids and face foreclosure and/or eviction.
If Congress would spend more money (i.e. increase the mismatch between spending and willingness to tax) it could bring the economy back towards potential GDP. In other words, the problem is the opposite of what Samuelson asserts.
While Samuelson goes on to complain about the long-term story with the baby boomers’ retirement raising the cost of Social Security and Medicare, here also he has missed the news. Over the last five years the rate of health care cost growth has slowed sharply. The Congressional Budget Office has already lowered its projections for the cost of Medicare for 2020 by 15 percent. If the slowdown in cost growth continues then the projections will be further adjusted downward.
In other words, much of the projected long-term shortfall has already been addressed. Samuelson just missed it. In the long-term we may need some additional revenue to support an aging population, but it is difficult to believe that the public would not be willing to support higher taxes if they are needed to finance these two incredibly popular programs. However, this is a question that is still many years in the future and there is no reason that Congress needs to worry about it at a time when the country is facing a much more pressing crisis.
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Catherine Rampell had an interesting piece on the shortage of primary care physicians. Interestingly the piece never once raises the possibility of facilitating immigration of qualified doctors. It is striking that when industry groups have claimed shortages of nurses, STEM workers, and even farmworkers, immigration has been front and center on the policy agenda. This shows the striking difference in the power of doctors relative to other workers.
Catherine Rampell had an interesting piece on the shortage of primary care physicians. Interestingly the piece never once raises the possibility of facilitating immigration of qualified doctors. It is striking that when industry groups have claimed shortages of nurses, STEM workers, and even farmworkers, immigration has been front and center on the policy agenda. This shows the striking difference in the power of doctors relative to other workers.
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Japan’s new Prime Minister, Shinzo Abe, is quite explicitly taking his country on an economic course that is 180 degrees at odds with the austerity policies being pursued in the United States and Europe. He is committed to major stimulus, which is increasing Japan’s government debt, even though it is already almost three times as large relative to its economy as the U.S. debt. He also got the central bank to commit itself to raising Japan’s inflation rate to 2.0 percent. Japan had been experiencing modest deflation, with prices falling at an annual rate of around 0.5 percent.
If Abe’s path succeeds then it would suggest that the United States and Europe might be going in the wrong direction, with governments needlessly wasting trillions of dollars in potential output and keeping millions of people out of work. The data to date have mostly been positive. For example, Japan’s employment to population ratio has increased by 1.1 percentage points over the last year. This would be the equivalent of 2.8 million additional workers in the United States. Its deflation has stopped and the country now appears to be experiencing a modest rate of inflation. And, contrary to what austerity proponents might have predicted, interest rates have not soared. The interest rate of 10-year government debt is still less than 1.0 percent.
In spite of these positive signs, the NYT seemed to be determined to highlight the negative in an article that focused on Saga, a small prefecture that is far from Japan’s major cities. The article seemed to have a hard time getting its story straight although it does want readers to believe that Abenomics is bad news. The whole theme is that Abe’s spending is just like the stimulus pursued by prior governments which have left Japan with a large debt burden. (Japan’s interest payments are less than 1.0 percent of its GDP, so most of Japan’s population would not be feeling this debt burden.)
At one point the article tells readers:
“Still, with no guarantee the spending bonanza will continue, even construction companies are hesitant to ramp up hiring or investment. A growing number of public construction projects are finding no bidders because of a shortage of workers and machinery.”
Since there is a shortage of workers, then we might conclude that Japan has a fully employed economy, with the stimulus therefore having largely accomplished its goal. But that conclusion would be too quick. Later we are told:
“Saga’s ratio of job offers to job-seekers, a crucial employment measure, continued to stagnate at 0.77 in September. An almost 20 percent jump in construction jobs was not enough to offset a loss of jobs in other sectors, according to the local government. With a tepid labor market, wages have also remained stagnant, as have consumer prices, because of weak demand, according to a November report released by the Fukuoka branch of the Bank of Japan.”
Okay, so now we have a tepid labor market, where there is not enough demand for workers. (By comparison, the ratio of job openings to workers in the United States is 0.36.) A policy that is leading to both too few workers and too many workers must be a really bad policy. As a practical matter, monthly data are generally erratic, which is why economists usually don’t make too much out of monthly changes, especially in a small area like Saga. It would have been far more useful if this piece had presented year over year changes which are considerably more meaningful.
It would have also been useful if this article followed standard practice in the United States and expressed growth numbers at annual rates rather than quarterly rates. The article told readers;
“Overall, growth for the quarter was revised to just 0.3 percent from the previous three months, down from an initial reading of 0.5 percent.”
It is likely that many readers thought these numbers were annual growth rates. As such, these would indeed be low. However, they are in fact quarterly growth rates. Even after the downward revision, Japan’s economy would still have been growing at a 1.2 percent annual rate in the third quarter. Since Japan’s population is shrinking at a 0.1 percent annual rate, while the U.S. population is growing at a 0.7 percent rate, this means that even in this relatively weak quarter (which followed two quarters of strong growth), Japan’s per capita growth rate exceeded the U.S. growth rate over the last three years. Readers who thought these numbers referred to annual growth rates would not be aware of that fact.
Japan’s new Prime Minister, Shinzo Abe, is quite explicitly taking his country on an economic course that is 180 degrees at odds with the austerity policies being pursued in the United States and Europe. He is committed to major stimulus, which is increasing Japan’s government debt, even though it is already almost three times as large relative to its economy as the U.S. debt. He also got the central bank to commit itself to raising Japan’s inflation rate to 2.0 percent. Japan had been experiencing modest deflation, with prices falling at an annual rate of around 0.5 percent.
If Abe’s path succeeds then it would suggest that the United States and Europe might be going in the wrong direction, with governments needlessly wasting trillions of dollars in potential output and keeping millions of people out of work. The data to date have mostly been positive. For example, Japan’s employment to population ratio has increased by 1.1 percentage points over the last year. This would be the equivalent of 2.8 million additional workers in the United States. Its deflation has stopped and the country now appears to be experiencing a modest rate of inflation. And, contrary to what austerity proponents might have predicted, interest rates have not soared. The interest rate of 10-year government debt is still less than 1.0 percent.
In spite of these positive signs, the NYT seemed to be determined to highlight the negative in an article that focused on Saga, a small prefecture that is far from Japan’s major cities. The article seemed to have a hard time getting its story straight although it does want readers to believe that Abenomics is bad news. The whole theme is that Abe’s spending is just like the stimulus pursued by prior governments which have left Japan with a large debt burden. (Japan’s interest payments are less than 1.0 percent of its GDP, so most of Japan’s population would not be feeling this debt burden.)
At one point the article tells readers:
“Still, with no guarantee the spending bonanza will continue, even construction companies are hesitant to ramp up hiring or investment. A growing number of public construction projects are finding no bidders because of a shortage of workers and machinery.”
Since there is a shortage of workers, then we might conclude that Japan has a fully employed economy, with the stimulus therefore having largely accomplished its goal. But that conclusion would be too quick. Later we are told:
“Saga’s ratio of job offers to job-seekers, a crucial employment measure, continued to stagnate at 0.77 in September. An almost 20 percent jump in construction jobs was not enough to offset a loss of jobs in other sectors, according to the local government. With a tepid labor market, wages have also remained stagnant, as have consumer prices, because of weak demand, according to a November report released by the Fukuoka branch of the Bank of Japan.”
Okay, so now we have a tepid labor market, where there is not enough demand for workers. (By comparison, the ratio of job openings to workers in the United States is 0.36.) A policy that is leading to both too few workers and too many workers must be a really bad policy. As a practical matter, monthly data are generally erratic, which is why economists usually don’t make too much out of monthly changes, especially in a small area like Saga. It would have been far more useful if this piece had presented year over year changes which are considerably more meaningful.
It would have also been useful if this article followed standard practice in the United States and expressed growth numbers at annual rates rather than quarterly rates. The article told readers;
“Overall, growth for the quarter was revised to just 0.3 percent from the previous three months, down from an initial reading of 0.5 percent.”
It is likely that many readers thought these numbers were annual growth rates. As such, these would indeed be low. However, they are in fact quarterly growth rates. Even after the downward revision, Japan’s economy would still have been growing at a 1.2 percent annual rate in the third quarter. Since Japan’s population is shrinking at a 0.1 percent annual rate, while the U.S. population is growing at a 0.7 percent rate, this means that even in this relatively weak quarter (which followed two quarters of strong growth), Japan’s per capita growth rate exceeded the U.S. growth rate over the last three years. Readers who thought these numbers referred to annual growth rates would not be aware of that fact.
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The NYT has an excellent piece on how drug companies have hyped “attention deficit disorder” so that millions of children and a rapidly growing number of adults are now taking drugs to treat the disease. The piece presents the views of several doctors, including one who first identified the syndrome, who complain that the vast majority of these people are not benefiting from taking drugs.
This is yet another example of drug companies pursuing harmful practices in pursuit of patent rents. This is a predictable result of government monopolies that allow drug companies to charge prices that can be over a thousand percent above the free market price.
The NYT has an excellent piece on how drug companies have hyped “attention deficit disorder” so that millions of children and a rapidly growing number of adults are now taking drugs to treat the disease. The piece presents the views of several doctors, including one who first identified the syndrome, who complain that the vast majority of these people are not benefiting from taking drugs.
This is yet another example of drug companies pursuing harmful practices in pursuit of patent rents. This is a predictable result of government monopolies that allow drug companies to charge prices that can be over a thousand percent above the free market price.
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Floyd Norris has a good discussion of the continuing hostility toward the big banks, pointing out that it has a real basis in their behavior. However, toward the ends it includes the strange line:
“We have the giant banks and must live with them.”
Actually, we don’t have to live with the big banks. The Justice Department could pursue anti-trust actions to break them up, the Financial Stability Oversight Council could act to break them up, or Congress could pass new legislation. There is no obvious reason that we need keep the big banks if there was enough political support for downsizing them.
Norris also makes the comment:
“That no top bankers went to jail may be proper — it is not a crime to make stupid mistakes, and much of what happened in the years before the financial crisis was more foolish than venal.”
It is almost certainly true that the bankers were foolish and failed to recognize the housing bubble, but that does not mean that they were not also venal. It is likely that Kenneth Lay and other top executives at Enron really believed in their business model, but that didn’t mean that they were not also committing a wide variety of crimes to keep the company going.
In the case of the banks, while they may have thought that ever rising house prices would make all mortgages good mortgages, this doesn’t mean that they didn’t knowingly pass along fraudulent mortgages in mortgage backed securities and misrepresent their quality to buyers. These acts are crimes, even if the banks may have thought they would have no consequence since the growth of the housing bubble would have ensured that any losses were minimal.
Floyd Norris has a good discussion of the continuing hostility toward the big banks, pointing out that it has a real basis in their behavior. However, toward the ends it includes the strange line:
“We have the giant banks and must live with them.”
Actually, we don’t have to live with the big banks. The Justice Department could pursue anti-trust actions to break them up, the Financial Stability Oversight Council could act to break them up, or Congress could pass new legislation. There is no obvious reason that we need keep the big banks if there was enough political support for downsizing them.
Norris also makes the comment:
“That no top bankers went to jail may be proper — it is not a crime to make stupid mistakes, and much of what happened in the years before the financial crisis was more foolish than venal.”
It is almost certainly true that the bankers were foolish and failed to recognize the housing bubble, but that does not mean that they were not also venal. It is likely that Kenneth Lay and other top executives at Enron really believed in their business model, but that didn’t mean that they were not also committing a wide variety of crimes to keep the company going.
In the case of the banks, while they may have thought that ever rising house prices would make all mortgages good mortgages, this doesn’t mean that they didn’t knowingly pass along fraudulent mortgages in mortgage backed securities and misrepresent their quality to buyers. These acts are crimes, even if the banks may have thought they would have no consequence since the growth of the housing bubble would have ensured that any losses were minimal.
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The Washington Post ran a piece implying that new rules on mortgage issuance will exclude large numbers of potential homebuyers from the market. The piece fundamentally misrepresented the issues. The rules cover the mortgages that can be placed in mortgage backed securities without banks being required to keep a 5 percent stake.
If a bank believes that a mortgage is in fact a good mortgage, in spite of not complying with the rules, then keeping a 5 percent stake carries minimal cost. Furthermore, banks have typically held 10-20 percent of their mortgages. If they consider a mortgage to be a good mortgage, then they would not mind holding it as an asset for the life of the mortgage. It is likely the case that mortgages that do not comply with the new rules will carry a higher interest rate, but that is appropriate for mortgages that face a higher risk of default.
In short the real issue here is simply that higher risk buyers are likely to pay higher interest rates on their mortgages. This is what would be expected in a market economy.
The Washington Post ran a piece implying that new rules on mortgage issuance will exclude large numbers of potential homebuyers from the market. The piece fundamentally misrepresented the issues. The rules cover the mortgages that can be placed in mortgage backed securities without banks being required to keep a 5 percent stake.
If a bank believes that a mortgage is in fact a good mortgage, in spite of not complying with the rules, then keeping a 5 percent stake carries minimal cost. Furthermore, banks have typically held 10-20 percent of their mortgages. If they consider a mortgage to be a good mortgage, then they would not mind holding it as an asset for the life of the mortgage. It is likely the case that mortgages that do not comply with the new rules will carry a higher interest rate, but that is appropriate for mortgages that face a higher risk of default.
In short the real issue here is simply that higher risk buyers are likely to pay higher interest rates on their mortgages. This is what would be expected in a market economy.
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In his Washington Post column this morning, Ezra Klein dismisses the problem of inequality and argues that progressives should instead focus on unemployment. While he will get no argument from me on the need to focus on unemployment, the idea that this is a separate issue from inequality is seriously misplaced.
Ezra gets to this spot by first dismissing the idea that inequality harms growth. He is certainly right that the evidence is less conclusive than we might like, but I would attribute that largely to the reluctance of the economic profession to even consider this possibility.
For example, Ezra notes my friend and co-author Jared Bernstein’s conclusion that it is difficult to find a link between rising inequality and weaker consumption in the data. This is true, but the obvious reason is that the decades of rising inequality have also been the decades of the stock market and housing market bubbles.
Standard economic theory predicts that these bubbles would increase consumption, a story that fits the data well. Consumption as a share of income hit highs (i.e. savings rates reached lows) at the peaks of both the stock and housing bubbles. Consumption fell sharply following the collapse of both bubbles.
If we just do some simple arithmetic we can get an idea of the size of the effect of the upward redistribution of 10 percentage points of disposable income from the bottom 80 percent to the top 1 percent. If we assume that the bottom 80 percent would have spent 95 percent of this income and the top 1 percent would only spend 75 percent, then the difference would be 20 percentage points or 2 percent of disposable income.
This would translate into a loss of demand of 1.6 percentage points of GDP. That is what would have to be made up by larger budget deficits, trade surpluses, or a flood of investment. We certainly had much larger budget deficits on average over the last three decades than we did in prior decades so that can make up the shortfall in demand, although we also had much larger trade deficits making the problem worse.
In any case, the fact that we didn’t have solid evidence on this issue should not be as surprising as Ezra suggests. While some of us have long warned of this scenario, leading economists like Paul Krugman and Larry Summers have just recently begun to take seriously the possibility of secular stagnation. For decades the profession has treated it as an article of faith that there could not be sustained shortfalls in demand so inadequate consumption due to the upward redistribution of income could not possibly be a problem.
However the other side of the unemployment inequality issue is possibly more important. One of the main points of Jared and my new book is that unemployment is a main cause of inequality. This is because when more people get hired it disproportionately benefits those in the bottom half and especially the bottom fifth of the income distribution.
These are the people who are most likely to get jobs. And those with jobs will also have the opportunity to work longer hours. And, a tight labor market will create conditions in which workers at the bottom will have more bargaining power. Walmart and McDonalds will be paying workers $15 an hour if that is the only way that they can get people to work for them.
For this reason, the high unemployment policy that Congress is pursuing with its current budget policy is a key factor in the upward redistribution of income that we have seen in the last three decades. This means that people concerned about inequality should be very angry over budgets that don’t spend enough to bring the economy to full employment (also an over-valued dollar). So Ezra is absolutely right that progressives should be yelling about unemployment, but inequality is a very big part of that picture.
In his Washington Post column this morning, Ezra Klein dismisses the problem of inequality and argues that progressives should instead focus on unemployment. While he will get no argument from me on the need to focus on unemployment, the idea that this is a separate issue from inequality is seriously misplaced.
Ezra gets to this spot by first dismissing the idea that inequality harms growth. He is certainly right that the evidence is less conclusive than we might like, but I would attribute that largely to the reluctance of the economic profession to even consider this possibility.
For example, Ezra notes my friend and co-author Jared Bernstein’s conclusion that it is difficult to find a link between rising inequality and weaker consumption in the data. This is true, but the obvious reason is that the decades of rising inequality have also been the decades of the stock market and housing market bubbles.
Standard economic theory predicts that these bubbles would increase consumption, a story that fits the data well. Consumption as a share of income hit highs (i.e. savings rates reached lows) at the peaks of both the stock and housing bubbles. Consumption fell sharply following the collapse of both bubbles.
If we just do some simple arithmetic we can get an idea of the size of the effect of the upward redistribution of 10 percentage points of disposable income from the bottom 80 percent to the top 1 percent. If we assume that the bottom 80 percent would have spent 95 percent of this income and the top 1 percent would only spend 75 percent, then the difference would be 20 percentage points or 2 percent of disposable income.
This would translate into a loss of demand of 1.6 percentage points of GDP. That is what would have to be made up by larger budget deficits, trade surpluses, or a flood of investment. We certainly had much larger budget deficits on average over the last three decades than we did in prior decades so that can make up the shortfall in demand, although we also had much larger trade deficits making the problem worse.
In any case, the fact that we didn’t have solid evidence on this issue should not be as surprising as Ezra suggests. While some of us have long warned of this scenario, leading economists like Paul Krugman and Larry Summers have just recently begun to take seriously the possibility of secular stagnation. For decades the profession has treated it as an article of faith that there could not be sustained shortfalls in demand so inadequate consumption due to the upward redistribution of income could not possibly be a problem.
However the other side of the unemployment inequality issue is possibly more important. One of the main points of Jared and my new book is that unemployment is a main cause of inequality. This is because when more people get hired it disproportionately benefits those in the bottom half and especially the bottom fifth of the income distribution.
These are the people who are most likely to get jobs. And those with jobs will also have the opportunity to work longer hours. And, a tight labor market will create conditions in which workers at the bottom will have more bargaining power. Walmart and McDonalds will be paying workers $15 an hour if that is the only way that they can get people to work for them.
For this reason, the high unemployment policy that Congress is pursuing with its current budget policy is a key factor in the upward redistribution of income that we have seen in the last three decades. This means that people concerned about inequality should be very angry over budgets that don’t spend enough to bring the economy to full employment (also an over-valued dollar). So Ezra is absolutely right that progressives should be yelling about unemployment, but inequality is a very big part of that picture.
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