The Commerce Department release of revised data showing that GDP grew by more than originally reported in the second quarter was generally reported as very positive news. This is striking since the growth rate was only 2.5 percent. (One fifth of this growth was due to more rapid inventory accumulation.)
Most economists estimate the economy’s trend growth rate as 2.2 percent to 2.4 percent. The Congressional Budget Office estimates that the economy is currently operating at almost 6 percentage points below its potential. This means that at the second quarter growth rate it will take between 20 and 60 years to get back to potential GDP.
The Commerce Department release of revised data showing that GDP grew by more than originally reported in the second quarter was generally reported as very positive news. This is striking since the growth rate was only 2.5 percent. (One fifth of this growth was due to more rapid inventory accumulation.)
Most economists estimate the economy’s trend growth rate as 2.2 percent to 2.4 percent. The Congressional Budget Office estimates that the economy is currently operating at almost 6 percentage points below its potential. This means that at the second quarter growth rate it will take between 20 and 60 years to get back to potential GDP.
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A homeowner down the street from me left his dog outside all day in the mid-summer heat. The dog died. Is this supposed to mean that homeowners are irresponsible people who can’t be trusted to keep up a neighborhood and use basic common sense? Apparently in the pages of the NYT it does.
The NYT devoted a whole article to complaints that renters who have moved in to homes that were formerly occupied by owner occupants were bringing down the quality of neighborhoods. The piece is full of anecdotes, including one about a dog being tied to a post in the hot summer sun by a renter.
Many of the comments are absurd on their face. For example, the article has a quote from one complaining homeowner:
“Who’s going to paint the outside of a rental house? You’d almost have to be crazy.”
The obvious answer to the question is the landlord. She should want to paint the outside of a rental house since her property will lose value if it is not properly protected from the elements. There are certainly many landlords who do not properly maintain properties, but there are also many homeowners who don’t properly maintain properties.
The underlying story missed in this article is that the neighborhoods being discussed have become less desirable. That is why house prices have fallen sharply.The renters who are moving in are likely to have lower incomes and less stable jobs than their neighbors. However if the homes were not rented, then they would either sit vacant, or eventually be sold to homeowners with lower incomes and less stable jobs than their neighbors. The piece wrongly implies that the problem is that the people moving in are renters. (Btw, the story about the dog dying in the heat is unfortunately true.)
A homeowner down the street from me left his dog outside all day in the mid-summer heat. The dog died. Is this supposed to mean that homeowners are irresponsible people who can’t be trusted to keep up a neighborhood and use basic common sense? Apparently in the pages of the NYT it does.
The NYT devoted a whole article to complaints that renters who have moved in to homes that were formerly occupied by owner occupants were bringing down the quality of neighborhoods. The piece is full of anecdotes, including one about a dog being tied to a post in the hot summer sun by a renter.
Many of the comments are absurd on their face. For example, the article has a quote from one complaining homeowner:
“Who’s going to paint the outside of a rental house? You’d almost have to be crazy.”
The obvious answer to the question is the landlord. She should want to paint the outside of a rental house since her property will lose value if it is not properly protected from the elements. There are certainly many landlords who do not properly maintain properties, but there are also many homeowners who don’t properly maintain properties.
The underlying story missed in this article is that the neighborhoods being discussed have become less desirable. That is why house prices have fallen sharply.The renters who are moving in are likely to have lower incomes and less stable jobs than their neighbors. However if the homes were not rented, then they would either sit vacant, or eventually be sold to homeowners with lower incomes and less stable jobs than their neighbors. The piece wrongly implies that the problem is that the people moving in are renters. (Btw, the story about the dog dying in the heat is unfortunately true.)
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The New York Times had an article reporting on how the two largest dialysis clinics are lobbying to increase reimbursements from the government. The issue stems from a change in the way the government paid for an anemia drug.
The government had been paying per dosage of the drug. As economic theory predicts, the huge mark-up over the free market price provided by patent monopolies encouraged the massive overuse of the drug. The government swtiched to a flat fee per treatment, which led to a sharp cutback in the drug’s usage. The government is now proposing a cutback in reimbursements based on the fact that this drug is being used in much smaller doses. If the research had been funded in advance and the drug were produced and sold in a free market, this sort of problem never would have arisen.
At one point the article includes the bizarre statement:
“The multibillion-dollar dialysis industry has been accused by medical researchers and former employees of putting a higher priority on profits than on care before ….”
Wouldn’t any reasonable person assume that a corporation will always put profit as its top priority? That is pretty much what they claim to do, so this hardly qualifies as a “accusation.” It’s sort of like accusing a linebacker of tackling quarterbacks.
It is worth noting the amount of money the government pays for dialysis. The article puts it at $32.9 billion a year. (CEPR’s really cool budget calculator shows this to be just less than 1.0 percent of federal spending.) This amount is more than 40 percent of what the federal government spends on food stamps each year.
The New York Times had an article reporting on how the two largest dialysis clinics are lobbying to increase reimbursements from the government. The issue stems from a change in the way the government paid for an anemia drug.
The government had been paying per dosage of the drug. As economic theory predicts, the huge mark-up over the free market price provided by patent monopolies encouraged the massive overuse of the drug. The government swtiched to a flat fee per treatment, which led to a sharp cutback in the drug’s usage. The government is now proposing a cutback in reimbursements based on the fact that this drug is being used in much smaller doses. If the research had been funded in advance and the drug were produced and sold in a free market, this sort of problem never would have arisen.
At one point the article includes the bizarre statement:
“The multibillion-dollar dialysis industry has been accused by medical researchers and former employees of putting a higher priority on profits than on care before ….”
Wouldn’t any reasonable person assume that a corporation will always put profit as its top priority? That is pretty much what they claim to do, so this hardly qualifies as a “accusation.” It’s sort of like accusing a linebacker of tackling quarterbacks.
It is worth noting the amount of money the government pays for dialysis. The article puts it at $32.9 billion a year. (CEPR’s really cool budget calculator shows this to be just less than 1.0 percent of federal spending.) This amount is more than 40 percent of what the federal government spends on food stamps each year.
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Robert Samuelson wrote about the recent downturn in financial markets in several major developing countries in response to the rise in long-term interest rates in the United States. While he notes that this is not likely to lead to a larger crisis given the current circumstances in the developing world, he concludes his piece by telling readers:
“Every major financial crisis of the past 20 years has begun with some relatively minor event whose significance seemed isolated: weakness of the Thai baht in the summer of 1997; trouble in the market for “subprime” U.S. mortgages in 2007; Greece’s misreporting of its budget deficit in 2009. Could this be ‘deja vu all over again’?”
It is worth making an important distinction between these crises. The subprime mortgage market was a small part of a much larger story, a serious bubble in the U.S. housing market that was driving the economy. For some bizarre reason, the Fed and most other economists did not recognize this situation even as the bubble was already rapidly deflating. (Many do not understand it even today.) The Greek situation was a story of serious imbalances in the euro zone with the southern countries running massive current account deficits that could not be corrected because of the common currency.
By contrast, the East Asian situation was largely a case of a crisis of confidence that was aggravated into something much bigger through mismanagement by the I.M.F. and folks at Treasury like Larry Summers. The current situation looks much more like the East Asian situation.
There is no inherent problem with capital flowing from rich countries to the more rapidly growing developing countries, that is what the textbooks say is supposed to happen. The real problem will be if the I.M.F.-Summers mistakes of the past are repeated.
Robert Samuelson wrote about the recent downturn in financial markets in several major developing countries in response to the rise in long-term interest rates in the United States. While he notes that this is not likely to lead to a larger crisis given the current circumstances in the developing world, he concludes his piece by telling readers:
“Every major financial crisis of the past 20 years has begun with some relatively minor event whose significance seemed isolated: weakness of the Thai baht in the summer of 1997; trouble in the market for “subprime” U.S. mortgages in 2007; Greece’s misreporting of its budget deficit in 2009. Could this be ‘deja vu all over again’?”
It is worth making an important distinction between these crises. The subprime mortgage market was a small part of a much larger story, a serious bubble in the U.S. housing market that was driving the economy. For some bizarre reason, the Fed and most other economists did not recognize this situation even as the bubble was already rapidly deflating. (Many do not understand it even today.) The Greek situation was a story of serious imbalances in the euro zone with the southern countries running massive current account deficits that could not be corrected because of the common currency.
By contrast, the East Asian situation was largely a case of a crisis of confidence that was aggravated into something much bigger through mismanagement by the I.M.F. and folks at Treasury like Larry Summers. The current situation looks much more like the East Asian situation.
There is no inherent problem with capital flowing from rich countries to the more rapidly growing developing countries, that is what the textbooks say is supposed to happen. The real problem will be if the I.M.F.-Summers mistakes of the past are repeated.
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A NYT story on how demographic change seems to be helping Democrats in Virginia noted as an offsetting factor that mining areas are increasingly Republican. According to the Bureau of Labor Statistics, Virginia has 10.700 people employed in mining and logging. This is less than 0.3 percent of the state’s labor force. It is unlikely that this group will have much impact on the outcome of 2013 election.
A NYT story on how demographic change seems to be helping Democrats in Virginia noted as an offsetting factor that mining areas are increasingly Republican. According to the Bureau of Labor Statistics, Virginia has 10.700 people employed in mining and logging. This is less than 0.3 percent of the state’s labor force. It is unlikely that this group will have much impact on the outcome of 2013 election.
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The Washington Post seems to have made it a goal to get everything possible about the housing market wrong. Its article today on the Case-Shiller June price index attributed the slower price growth in part to higher interest rates. This makes no sense.
The Case-Shiller index is an average of three months data. The June release is based on the price of houses that were closed in April, May, and June. Since there is typically 6-8 weeks between when a contract is signed and when a sale is completed these houses would have come under contract in the period from February to May. This is a period before there was any real rise in interest rates.
Interest rates first exceeded their winter levels at the end of May and then increased more in June and July. We will first begin to see a limited impact of higher interest rates in the Case Shilller index in the July data and the impact of the rise will not be fully apparent until the October index is released.
The Washington Post seems to have made it a goal to get everything possible about the housing market wrong. Its article today on the Case-Shiller June price index attributed the slower price growth in part to higher interest rates. This makes no sense.
The Case-Shiller index is an average of three months data. The June release is based on the price of houses that were closed in April, May, and June. Since there is typically 6-8 weeks between when a contract is signed and when a sale is completed these houses would have come under contract in the period from February to May. This is a period before there was any real rise in interest rates.
Interest rates first exceeded their winter levels at the end of May and then increased more in June and July. We will first begin to see a limited impact of higher interest rates in the Case Shilller index in the July data and the impact of the rise will not be fully apparent until the October index is released.
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That was the missing sentence in a Washington Post article on the battle over the debt ceiling. The article referred to the 2011 battle that brought the country within days of hitting the legal limit on borrowing. It told readers:
“Many economists say that episode led to uncertainty that harmed the economy.”
It’s hard to find evidence for this assertion in the data. The economy grew at a 2.3 percent annual rate in the second and third quarters of 2011, the period most immediately affected by the crisis. This is slightly higher than its 1.9 percent rate over the last three years. Non-residential investment, the category of spending that might be most responsive to such fears, rose at a 13.3 percent annual rate over these two quarters.
There also was no evidence of a lasting effect on the credibility of the government as a debtor. The interest rate on Treasury bonds plummeted following the crisis (they should have risen if people were fearful), although this was primarily due to the euro-zone crisis. When investors became fearful about the future of the euro they turned to Treasury bonds as a safe alternative.
That was the missing sentence in a Washington Post article on the battle over the debt ceiling. The article referred to the 2011 battle that brought the country within days of hitting the legal limit on borrowing. It told readers:
“Many economists say that episode led to uncertainty that harmed the economy.”
It’s hard to find evidence for this assertion in the data. The economy grew at a 2.3 percent annual rate in the second and third quarters of 2011, the period most immediately affected by the crisis. This is slightly higher than its 1.9 percent rate over the last three years. Non-residential investment, the category of spending that might be most responsive to such fears, rose at a 13.3 percent annual rate over these two quarters.
There also was no evidence of a lasting effect on the credibility of the government as a debtor. The interest rate on Treasury bonds plummeted following the crisis (they should have risen if people were fearful), although this was primarily due to the euro-zone crisis. When investors became fearful about the future of the euro they turned to Treasury bonds as a safe alternative.
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Andrew Sorkin used his Dealbook column to tell readers that the 2008 bailout “worked.” That is of course true if the definition of success is to keep the Wall Street banks in business and operating as they had prior to the crisis. It is far less apparent that the bailout worked from the standpoint of the economy as a whole.
The piece presents comments from then Treasury Secretary Henry Paulson expressing the concern that if bailout money had been tied to real conditions, such as a plan to break up the large banks and real restrictions on executive compensation, then the non-troubled banks would not have taken it. The obvious response would be “who cares?”
If a bank that wasn’t troubled didn’t take the bailout money, there is no obvious reason that should have bothered anyone. For some reason media outlets have not chosen to discuss the 180 degree shift in policy between the TARP bailout in the fall of 2008 and the stress tests in March of 2009. Under the TARP bailout, Paulson tried to conceal the condition of each bank insisting that all the large banks take bailout funds whether they needed them or not.
By contrast, the stress tests were ostensibly designed to expose the condition of each bank, showing the extent to which it was vulnerable as a result of the collapse of the housing bubble. If the stress tests were the right policy, then the TARP secrecy was the wrong policy.
It is also important to note that TARP was actually a small portion of a much larger bailout. The Fed made trillions of dollars of short-term loans available to banks at below market interest rates. The Federal Deposit Insurance Corporation also allowed for large amounts of long-term borrowing. In addition, the government’s actions made the implicit “too big to fail” policy quite explicit. Investors came to accept that in the post-Lehman period the federal government would not allow another major bank to fail.
All of these forms of government assistance to the banks could have come with conditions. Most, if not all, of the major banks would have had little choice to accept them since the alternative would have been bankruptcy. Paulson and Democratic leadership in Congress decided not to impose any real conditions on access to bailout funds, a policy continued in the Obama presidency.
Andrew Sorkin used his Dealbook column to tell readers that the 2008 bailout “worked.” That is of course true if the definition of success is to keep the Wall Street banks in business and operating as they had prior to the crisis. It is far less apparent that the bailout worked from the standpoint of the economy as a whole.
The piece presents comments from then Treasury Secretary Henry Paulson expressing the concern that if bailout money had been tied to real conditions, such as a plan to break up the large banks and real restrictions on executive compensation, then the non-troubled banks would not have taken it. The obvious response would be “who cares?”
If a bank that wasn’t troubled didn’t take the bailout money, there is no obvious reason that should have bothered anyone. For some reason media outlets have not chosen to discuss the 180 degree shift in policy between the TARP bailout in the fall of 2008 and the stress tests in March of 2009. Under the TARP bailout, Paulson tried to conceal the condition of each bank insisting that all the large banks take bailout funds whether they needed them or not.
By contrast, the stress tests were ostensibly designed to expose the condition of each bank, showing the extent to which it was vulnerable as a result of the collapse of the housing bubble. If the stress tests were the right policy, then the TARP secrecy was the wrong policy.
It is also important to note that TARP was actually a small portion of a much larger bailout. The Fed made trillions of dollars of short-term loans available to banks at below market interest rates. The Federal Deposit Insurance Corporation also allowed for large amounts of long-term borrowing. In addition, the government’s actions made the implicit “too big to fail” policy quite explicit. Investors came to accept that in the post-Lehman period the federal government would not allow another major bank to fail.
All of these forms of government assistance to the banks could have come with conditions. Most, if not all, of the major banks would have had little choice to accept them since the alternative would have been bankruptcy. Paulson and Democratic leadership in Congress decided not to impose any real conditions on access to bailout funds, a policy continued in the Obama presidency.
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Robert Samuelson repeats two common myths in his discussion of the battle over the successor to Ben Bernanke as Fed chair. He tells readers that the 2001 recession was mild by historical standards and that Bernanke might have prevented another Great Depression with his actions in 2008-2009.
While the length and severity of the official recession in 2001 would imply that it was mild, at the time it was the longest period without job growth since Great Depression. Arguably the Fed was up against the zero bound with its monetary policy as it reduced the federal funds rate to 1.0 percent for two years. While there was still room to go further since the rate was still above zero, most economists see little additional benefit from the drop from 1.0 percent to 0.0 percent. In fact, many economists have said that the European Central Bank was against the zero lower bound when it had lowered its overnight rate to 1.0 percent.
It’s difficult to see how anything Bernanke did or did not do in 2008-2009 could have condemned the country to another Great Depression, defined as a decade of double digit unemployment. The United States eventually got out of the last Great Depression through the massive spending associated with World War II. There is no economic reason that the United States cannot undertake the same sort of spending today.
If Bernanke had allowed a complete financial collapse (putting the Wall Street banks forever out of our misery), the government could have begun to pump up the economy the next day with a massive burst of spending. If there were political obstacles, these could have been overcome by telling people that spending on education, infrastructure, energy conservation and other areas was necessary to protect us from an invasion by Martians, as Paul Krugman has suggested.
Robert Samuelson repeats two common myths in his discussion of the battle over the successor to Ben Bernanke as Fed chair. He tells readers that the 2001 recession was mild by historical standards and that Bernanke might have prevented another Great Depression with his actions in 2008-2009.
While the length and severity of the official recession in 2001 would imply that it was mild, at the time it was the longest period without job growth since Great Depression. Arguably the Fed was up against the zero bound with its monetary policy as it reduced the federal funds rate to 1.0 percent for two years. While there was still room to go further since the rate was still above zero, most economists see little additional benefit from the drop from 1.0 percent to 0.0 percent. In fact, many economists have said that the European Central Bank was against the zero lower bound when it had lowered its overnight rate to 1.0 percent.
It’s difficult to see how anything Bernanke did or did not do in 2008-2009 could have condemned the country to another Great Depression, defined as a decade of double digit unemployment. The United States eventually got out of the last Great Depression through the massive spending associated with World War II. There is no economic reason that the United States cannot undertake the same sort of spending today.
If Bernanke had allowed a complete financial collapse (putting the Wall Street banks forever out of our misery), the government could have begun to pump up the economy the next day with a massive burst of spending. If there were political obstacles, these could have been overcome by telling people that spending on education, infrastructure, energy conservation and other areas was necessary to protect us from an invasion by Martians, as Paul Krugman has suggested.
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