The Washington Post had a piece noting the rapid growth of automobile production in Mexico that raised the possibility that it would come at the expense of production in the United States. The piece points out that the auto companies now hire new workers in the United States at wages between $14 and $18 an hour.
It is worth noting that if the minimum wage had kept pace with productivity growth over the last 45 years it would be almost $17.00 an hour today. This means that newly hired workers would in many cases be working for less than a productivity indexed minimum wage. The minimum wage had largely tracked productivity growth in the three decades from 1938 to 1968. (The unemployment rate in the last 1960s was less than 4.0 percent.)
The Washington Post had a piece noting the rapid growth of automobile production in Mexico that raised the possibility that it would come at the expense of production in the United States. The piece points out that the auto companies now hire new workers in the United States at wages between $14 and $18 an hour.
It is worth noting that if the minimum wage had kept pace with productivity growth over the last 45 years it would be almost $17.00 an hour today. This means that newly hired workers would in many cases be working for less than a productivity indexed minimum wage. The minimum wage had largely tracked productivity growth in the three decades from 1938 to 1968. (The unemployment rate in the last 1960s was less than 4.0 percent.)
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Rattner shows how a small drug company, Jazz Pharmaceuticals, is making a fortune by charging as much as $60,000 a year for a drug it purchased which is a treatment for narcolepsy. As Rattner outlines, government-granted patent monopolies, by allowing companies to charge prices that can be several hundred or thousand times the free market price, provide an enormous incentive for corrupt practices.
Rattner shows how a small drug company, Jazz Pharmaceuticals, is making a fortune by charging as much as $60,000 a year for a drug it purchased which is a treatment for narcolepsy. As Rattner outlines, government-granted patent monopolies, by allowing companies to charge prices that can be several hundred or thousand times the free market price, provide an enormous incentive for corrupt practices.
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That’s what readers of its editorial on reforming Fannie Mae and Freddie Mac learned today. This is quite literally what the paper said in its partial endorsement of a complex hybrid proposal for a new system of guarantees for mortgage backed securities proposed by Senators Mark Warner and Bob Corker, describing the plan as “an obvious bow to political reality.”
It’s touching that the Post feels the need to bow to the financial industry’s power rather than pushing for more economically efficient systems of mortgage finance. We know that the government can efficiently create a secondary mortgage market as it did with the original Fannie Mae. This was a government owned company that bought and held mortgages.
There were no mortgage backed securities, just mortgages. Why add complexity to the system? If the government is guaranteeing the mortgage it is already on the line for the credit risk involved. Packaging the mortgages into securities allows the government to pass off interest rate risk, but if there is any entity in the world that can bear interest rate risk (i.e. that higher interest rates will reduce the market price of mortgages) it is the federal government, which has no problem holding mortgages until maturity.
But if this route, or simply keeping Fannie and Freddie in their current form as essentially government-owned companies, is off limits, why not just leave it to the private sector. The WAPO warns of less liquidity in the mortgage market and the precarious existence of the 30-year mortgage.
In reference to the first complaint, so what? Why is it an important public policy goal to make it possible for banks to be able to quickly sell 30-year mortgages? If the mortgage market was somewhat less liquid, then that would raise their price somewhat.
This brings us to the second point, that 30-year mortgages have long survived in markets without government support, specifically the jumbo mortgage market. These mortgages are too large to be purchased by Fannie or Freddie. They have typically carried interest rates that are 0.25-0.75 percentage points higher than on the conforming mortgages that Fannie and Freddie can purchase. As an alternative to creating a whole new financial network to lower mortgage rates modestly (by comparison, they have risen by more than a full percentage point in the last three months), why not just make the mortgage deduction more generous for moderate and middle income homeowners?
There also is the other isssue of what’s so great about 30-year mortgages? Presumably the goal of housing policy is make homeownership more affordable, not to promote 30-year mortgages. As Alan Greenspan famously advertised back in 2003, when interest rates on 30-year fixed rate mortgages were near a then 50-year low (thereby helping to foster the boom in exotic adjustable rate mortgages), most homebuyers end up as losers by getting 30-year fixed rate mortgages. They would be better off getting adjustable rate mortgages. This is especially true of people who stay in their home for shorter periods of time, who are likely to be more moderate income homeowners.
So in other words, the Post wants us to bow to political reality to create a whole new system of mortgage guarantees with the idea that we will make it easier for millions of moderate and middle income home-buyers to take out 30-year mortgages that will end up being a waste of money. Apparently it is much easier for a major national newspaper to beat up tens of millions of seniors and current workers and call for cuts to Social Security and Medicare than to throw a little common sense in the face of the financial industry.
That’s what readers of its editorial on reforming Fannie Mae and Freddie Mac learned today. This is quite literally what the paper said in its partial endorsement of a complex hybrid proposal for a new system of guarantees for mortgage backed securities proposed by Senators Mark Warner and Bob Corker, describing the plan as “an obvious bow to political reality.”
It’s touching that the Post feels the need to bow to the financial industry’s power rather than pushing for more economically efficient systems of mortgage finance. We know that the government can efficiently create a secondary mortgage market as it did with the original Fannie Mae. This was a government owned company that bought and held mortgages.
There were no mortgage backed securities, just mortgages. Why add complexity to the system? If the government is guaranteeing the mortgage it is already on the line for the credit risk involved. Packaging the mortgages into securities allows the government to pass off interest rate risk, but if there is any entity in the world that can bear interest rate risk (i.e. that higher interest rates will reduce the market price of mortgages) it is the federal government, which has no problem holding mortgages until maturity.
But if this route, or simply keeping Fannie and Freddie in their current form as essentially government-owned companies, is off limits, why not just leave it to the private sector. The WAPO warns of less liquidity in the mortgage market and the precarious existence of the 30-year mortgage.
In reference to the first complaint, so what? Why is it an important public policy goal to make it possible for banks to be able to quickly sell 30-year mortgages? If the mortgage market was somewhat less liquid, then that would raise their price somewhat.
This brings us to the second point, that 30-year mortgages have long survived in markets without government support, specifically the jumbo mortgage market. These mortgages are too large to be purchased by Fannie or Freddie. They have typically carried interest rates that are 0.25-0.75 percentage points higher than on the conforming mortgages that Fannie and Freddie can purchase. As an alternative to creating a whole new financial network to lower mortgage rates modestly (by comparison, they have risen by more than a full percentage point in the last three months), why not just make the mortgage deduction more generous for moderate and middle income homeowners?
There also is the other isssue of what’s so great about 30-year mortgages? Presumably the goal of housing policy is make homeownership more affordable, not to promote 30-year mortgages. As Alan Greenspan famously advertised back in 2003, when interest rates on 30-year fixed rate mortgages were near a then 50-year low (thereby helping to foster the boom in exotic adjustable rate mortgages), most homebuyers end up as losers by getting 30-year fixed rate mortgages. They would be better off getting adjustable rate mortgages. This is especially true of people who stay in their home for shorter periods of time, who are likely to be more moderate income homeowners.
So in other words, the Post wants us to bow to political reality to create a whole new system of mortgage guarantees with the idea that we will make it easier for millions of moderate and middle income home-buyers to take out 30-year mortgages that will end up being a waste of money. Apparently it is much easier for a major national newspaper to beat up tens of millions of seniors and current workers and call for cuts to Social Security and Medicare than to throw a little common sense in the face of the financial industry.
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A NYT story on the rise in the euro zone unemployment rate to 12.1 percent noted the sharp differences in unemployment rates across the euro zone and told readers:
“The divergence makes it difficult for the E.C.B. to craft a monetary policy that is appropriate for all members.”
Actually this is not true. The euro zone needs expansion everywhere. It also needs re-balancing with the peripheral countries (e.g. Spain, Greece, and Portugal) becoming more competitive relative to the core countries (e.g. Germany and Austria).
If the ECB pursued more expansionary policy it would directly reduce the unemployment rate in the peripheral countries. It would also lead to somewhat higher inflation in the core countries, making the peripheral countries more competitive. This is exactly the results that we should want to see.
As a political matter this may be difficult because Germans have superstitions about inflation, but that is a political issue. There is no economic reason not to pursue more expansionary policy.
A NYT story on the rise in the euro zone unemployment rate to 12.1 percent noted the sharp differences in unemployment rates across the euro zone and told readers:
“The divergence makes it difficult for the E.C.B. to craft a monetary policy that is appropriate for all members.”
Actually this is not true. The euro zone needs expansion everywhere. It also needs re-balancing with the peripheral countries (e.g. Spain, Greece, and Portugal) becoming more competitive relative to the core countries (e.g. Germany and Austria).
If the ECB pursued more expansionary policy it would directly reduce the unemployment rate in the peripheral countries. It would also lead to somewhat higher inflation in the core countries, making the peripheral countries more competitive. This is exactly the results that we should want to see.
As a political matter this may be difficult because Germans have superstitions about inflation, but that is a political issue. There is no economic reason not to pursue more expansionary policy.
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According to the New York Times drug companies are confused about how requirements for getting drugs approved affect the profitability of their investment decisions. In an article about efforts to increase disclosure of test results it told readers that European Union requirements for full disclosure of test results could discourage drug companies from investing in Europe.
“Others warned that such a policy could discourage drug companies from investing in Europe. ‘If you, on the other hand, say, “You guys are bad actors, we want to cut your prices, we want to take your confidential data and share it with any one of your competitors,” you don’t get the same feeling of encouragement.'”
The European Union rules would apply to drugs that are licensed in the EU regardless of where the research was done. Similarly, if research was done in Europe, but the drugs developed were not licensed there, then there would be no requirement that the drug companies disclose their test results.
The linking of investment location decisions to a requirement to disclose test results only makes sense as political blackmail. It has nothing to do with maximizing the companies’ profitability. The NYT should have made this point more clearly to its readers.
According to the New York Times drug companies are confused about how requirements for getting drugs approved affect the profitability of their investment decisions. In an article about efforts to increase disclosure of test results it told readers that European Union requirements for full disclosure of test results could discourage drug companies from investing in Europe.
“Others warned that such a policy could discourage drug companies from investing in Europe. ‘If you, on the other hand, say, “You guys are bad actors, we want to cut your prices, we want to take your confidential data and share it with any one of your competitors,” you don’t get the same feeling of encouragement.'”
The European Union rules would apply to drugs that are licensed in the EU regardless of where the research was done. Similarly, if research was done in Europe, but the drugs developed were not licensed there, then there would be no requirement that the drug companies disclose their test results.
The linking of investment location decisions to a requirement to disclose test results only makes sense as political blackmail. It has nothing to do with maximizing the companies’ profitability. The NYT should have made this point more clearly to its readers.
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Glenn Kessler, the Washington Post’s fact checker, dished out the maximum four pinocchios in reference to ads by Democratic pacs criticizing Arkansas Representative Tom Cotton over his support of the Republican Medicare plan. This is not the first time such ads have drawn four pinocchios from Kessler or comparable criticism from PolitiFact and FactCheck.Org, the other major media political fact checking sites.
The essence of the criticism is that the ad cites complaints against an earlier Medicare plan that was passed by Congress in 2011. The specific allegations in the ad, that the plan “essentially ends Medicare and costs seniors $6,000 a year,” are not accurate in describing the revised plan supported Cotton.
Kessler is correct on this point, but is carrying his case too far. The revised plan would allow seniors to continue to buy into a Medicare-type program, but it provides no guarantee that the size of the voucher (Republicans prefer the term “premium support,” but readers are more likely to know what a “voucher” is, hence my use of the word) would be sufficient to pay for the cost of the Medicare plan. The gap could easily be many thousands of dollars a year.
Furthermore, as Kessler notes, depending on the rules set up for structuring enrollment in the various plans, the Medicare option could easily be the victim of adverse selection. This would mean that only sicker beneficiaries sign up for the Medicare plan, which would raise average costs. This would force the plan to charge a higher premium, which would in turn chase out the more healthy beneficiaries, meaning that the average remaining Medicare enrollee is even sicker. This raises the cost of the plan even further.
This process ends with a collapse of the market for traditional Medicare since no one will be able to afford the plan. While this outcome is certainly not a guaranteed outcome of the Republican plan it is a very real possibility, especially if the program was administered by Republicans who are quite openly hostile to the traditional Medicare plan.
Given that this sort of collapse of Medicare is a very plausible outcome of the Republican plan (if any fact checkers care to dispute this claim, I promise a blogpost of whatever length you like), are Democratic politicians wrong to warn of this risk to one of the country’s most important and popular social programs?
Since there is a long lead time between the passage of the plan and the implementation of the new program, voters could find themselves locking in a program in the next few years that they find very much to their disliking 10 years or so down the road. In this context, it seems entirely appropriate that opponents of the plan should warn of the possible outcomes in as clear terms as possible.
Ideally, they would be careful to focus on the latest plan that the Republicans are now touting and not the prior version, but that seems the less important point. There is a very real risk that Republican plan will end Medicare as we know it. It might be worth a pinocchio or two that these ads get some important facts wrong, but on the big point that would likely get everyone’s attention, they are largely on the mark.
Note:
Politifact and Factcheck.com also criticized the ad.
Glenn Kessler, the Washington Post’s fact checker, dished out the maximum four pinocchios in reference to ads by Democratic pacs criticizing Arkansas Representative Tom Cotton over his support of the Republican Medicare plan. This is not the first time such ads have drawn four pinocchios from Kessler or comparable criticism from PolitiFact and FactCheck.Org, the other major media political fact checking sites.
The essence of the criticism is that the ad cites complaints against an earlier Medicare plan that was passed by Congress in 2011. The specific allegations in the ad, that the plan “essentially ends Medicare and costs seniors $6,000 a year,” are not accurate in describing the revised plan supported Cotton.
Kessler is correct on this point, but is carrying his case too far. The revised plan would allow seniors to continue to buy into a Medicare-type program, but it provides no guarantee that the size of the voucher (Republicans prefer the term “premium support,” but readers are more likely to know what a “voucher” is, hence my use of the word) would be sufficient to pay for the cost of the Medicare plan. The gap could easily be many thousands of dollars a year.
Furthermore, as Kessler notes, depending on the rules set up for structuring enrollment in the various plans, the Medicare option could easily be the victim of adverse selection. This would mean that only sicker beneficiaries sign up for the Medicare plan, which would raise average costs. This would force the plan to charge a higher premium, which would in turn chase out the more healthy beneficiaries, meaning that the average remaining Medicare enrollee is even sicker. This raises the cost of the plan even further.
This process ends with a collapse of the market for traditional Medicare since no one will be able to afford the plan. While this outcome is certainly not a guaranteed outcome of the Republican plan it is a very real possibility, especially if the program was administered by Republicans who are quite openly hostile to the traditional Medicare plan.
Given that this sort of collapse of Medicare is a very plausible outcome of the Republican plan (if any fact checkers care to dispute this claim, I promise a blogpost of whatever length you like), are Democratic politicians wrong to warn of this risk to one of the country’s most important and popular social programs?
Since there is a long lead time between the passage of the plan and the implementation of the new program, voters could find themselves locking in a program in the next few years that they find very much to their disliking 10 years or so down the road. In this context, it seems entirely appropriate that opponents of the plan should warn of the possible outcomes in as clear terms as possible.
Ideally, they would be careful to focus on the latest plan that the Republicans are now touting and not the prior version, but that seems the less important point. There is a very real risk that Republican plan will end Medicare as we know it. It might be worth a pinocchio or two that these ads get some important facts wrong, but on the big point that would likely get everyone’s attention, they are largely on the mark.
Note:
Politifact and Factcheck.com also criticized the ad.
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Joe Nocera gets the story mostly right in his skepticism toward a bill put forward by Senators Mark Warner and Bob Corker that would replace Fannie and Freddie with a convoluted system of government guarantees. I would add three points.
First, the 30-year fixed rate mortgage is not necessarily dependent on a government guarantee. In the pre-bubble days banks did hold a substantial portion of the mortgages on their books. They also issued 30-year jumbo mortgages which could not be guaranteed by Fannie and Freddie, so apparently there is a market for these mortgages even without government guarantees.
Second, an important goal of policy in housing finance should be efficiency. In other words, the point is to make it possible for people to buy homes with as few moving parts as possible. This could probably be best accomplished with something like the old Fannie Mae.
In the pre-privatization period, Fannie was a publicly owned company that bought and held mortgages. There were no mortgage backed securities. There is little obvious purpose to move from a government company/agency holding mortgages to a government company/agency guaranteeing mortgage backed securities. In the latter case the government still has the credit risk, it only shields itself from timing risk (fluctuations in interest rates), but that is a risk the government has no problem bearing.
There are political reasons why the old Fannie system might be difficult to reinstate, but we can at least be clear that it would be the most efficient way to manage housing finance. Other methods are political compromises.
Which brings us to the third point, the waste created by these compromises is income to the financial industry: hence the argument for the sort of convoluted system of guarantees in the Warner-Corker bill.
So if we want the most efficient system that is politically feasible, it’s probably best to just shut down Fannie and Freddie altogether. The 30-year mortgage will not disappear, although it may cost somewhat more.
Joe Nocera gets the story mostly right in his skepticism toward a bill put forward by Senators Mark Warner and Bob Corker that would replace Fannie and Freddie with a convoluted system of government guarantees. I would add three points.
First, the 30-year fixed rate mortgage is not necessarily dependent on a government guarantee. In the pre-bubble days banks did hold a substantial portion of the mortgages on their books. They also issued 30-year jumbo mortgages which could not be guaranteed by Fannie and Freddie, so apparently there is a market for these mortgages even without government guarantees.
Second, an important goal of policy in housing finance should be efficiency. In other words, the point is to make it possible for people to buy homes with as few moving parts as possible. This could probably be best accomplished with something like the old Fannie Mae.
In the pre-privatization period, Fannie was a publicly owned company that bought and held mortgages. There were no mortgage backed securities. There is little obvious purpose to move from a government company/agency holding mortgages to a government company/agency guaranteeing mortgage backed securities. In the latter case the government still has the credit risk, it only shields itself from timing risk (fluctuations in interest rates), but that is a risk the government has no problem bearing.
There are political reasons why the old Fannie system might be difficult to reinstate, but we can at least be clear that it would be the most efficient way to manage housing finance. Other methods are political compromises.
Which brings us to the third point, the waste created by these compromises is income to the financial industry: hence the argument for the sort of convoluted system of guarantees in the Warner-Corker bill.
So if we want the most efficient system that is politically feasible, it’s probably best to just shut down Fannie and Freddie altogether. The 30-year mortgage will not disappear, although it may cost somewhat more.
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