Did You See the "Air of Crisis" Hovering Around the Budget Deficit?

May 15, 2013

15 Mayo 2013

In the wake of the release of the new CBO numbers projecting that the debt-to-GDP ratio is actually projected to fall over the next decade, the Washington Post decided to give us one of its classic deficit/debt fear-mongering stories. The piece could not avoid noting the obvious fact that there is nothing that could remotely pass as a deficit crisis in the immediate future, but it did tell us:

“Policymakers have capped spending on agency budgets, permitted across-the-board spending cuts known as the sequester to take effect, let a temporary cut in the payroll tax expire and raised taxes on the nation’s wealthiest households. They have done nothing, however, to tackle the long-term affordability of Social Security and Medicare, which are projected to be the biggest drivers of future borrowing as the population ages.”

Of course one of the highlights of this and other recent reports has been the sharply lower projected rate of growth of health care spending which was driving the projections of bloated deficits in future years. One factor in the slower projected growth is the Affordable Care Act, so this assertion from the Post is simply untrue.

However the real gem is this line:

“the improvement in the short-term forecast has removed the air of crisis that has hovered around the budget deficit since President Obama took office.”

Wow, an “air of crisis.” And where did this “air of crisis” come from? It surely did not come from financial markets, where investors have shown a willingness to lend the United States government trillions of dollars at very low interest rates in the years since President Obama took office. It certainly did not come from competent economists who were able to recognize that the large deficits were a direct result of the economic collapse in 2008. It also did not come from the millions of people who lost their jobs due to the downturn and looked to government stimulus as the only possible source of demand that could re-employ them.

A more accurate statement might be that:

“the improvement in the short-term forecast has removed the air of crisis around the budget deficit that the Washington Post and its allies have sought to promote since President Obama took office.”

Let’s be serious here, the crisis was invented by people in Washington who have an agenda for cutting Social Security and Medicare. That is as clear as day. The deficit crisis does not actually exist in the world. In the world we have a crisis of a grossly under-performing economy that the Post and its allies have attempted to perpetuate.

In the wake of the release of the new CBO numbers projecting that the debt-to-GDP ratio is actually projected to fall over the next decade, the Washington Post decided to give us one of its classic deficit/debt fear-mongering stories. The piece could not avoid noting the obvious fact that there is nothing that could remotely pass as a deficit crisis in the immediate future, but it did tell us:

“Policymakers have capped spending on agency budgets, permitted across-the-board spending cuts known as the sequester to take effect, let a temporary cut in the payroll tax expire and raised taxes on the nation’s wealthiest households. They have done nothing, however, to tackle the long-term affordability of Social Security and Medicare, which are projected to be the biggest drivers of future borrowing as the population ages.”

Of course one of the highlights of this and other recent reports has been the sharply lower projected rate of growth of health care spending which was driving the projections of bloated deficits in future years. One factor in the slower projected growth is the Affordable Care Act, so this assertion from the Post is simply untrue.

However the real gem is this line:

“the improvement in the short-term forecast has removed the air of crisis that has hovered around the budget deficit since President Obama took office.”

Wow, an “air of crisis.” And where did this “air of crisis” come from? It surely did not come from financial markets, where investors have shown a willingness to lend the United States government trillions of dollars at very low interest rates in the years since President Obama took office. It certainly did not come from competent economists who were able to recognize that the large deficits were a direct result of the economic collapse in 2008. It also did not come from the millions of people who lost their jobs due to the downturn and looked to government stimulus as the only possible source of demand that could re-employ them.

A more accurate statement might be that:

“the improvement in the short-term forecast has removed the air of crisis around the budget deficit that the Washington Post and its allies have sought to promote since President Obama took office.”

Let’s be serious here, the crisis was invented by people in Washington who have an agenda for cutting Social Security and Medicare. That is as clear as day. The deficit crisis does not actually exist in the world. In the world we have a crisis of a grossly under-performing economy that the Post and its allies have attempted to perpetuate.

Credit Rating Agencies Likely to Evade Dodd-Frank Provision to End Conflict of Interest

By Dean BakerDean Baker

May 14, 2013

14 Mayo 2013

One of the key issues in the financial crisis was the fact that mortgage backed securities (MBS), filled with subprime mortgages of questionable quality, managed to get Aaa ratings from the bond-rating agencies. While ignorance and stupidity may explain much of what happens on Wall Street, there were people at the rating agencies who did raise questions about the quality of these securities. In one e-mail at S&P an analyst complained that it would rate an MBS as investment grade if it were "structured by cows." The analyst's complaint was ignored for a simple reason, S&P was making lots of money rating MBS. Senator Al Franken proposed a simple way to eliminate this obvious conflict of interest. He proposed having the issuer use the Securities and Exchange Commission (SEC) as an intermediary in the hiring process. Essentially, this means that the issuer would have to call the SEC when they wanted to have an issue rated and the SEC would then pick the rating agency. This would eliminate the incentive for the rating agency to issue an investment grade rating to get more business. The Franken Amendment passed the senate by a huge 65-34 majority, winning bi-partisan support. (Disclosure: I had written about this sort of reform and discussed it with Franken's staff.) While this might have seemed like a victory for simple common sense, the amendment was largely eviscerated in a conference committee, apparently at the urging of then House Finance Committee Chair Barney Frank. Instead of implementing the amendment, the conference bill called for the SEC to study the issue and make a decision by the end of July, 2012. The SEC is now almost a year late in this process, but apparently is prepared to ignore the rule, with an assist from the Washington Post. In an article discussing the SEC's plans, the Post dutifully repeated statements from the industry groups that were almost complete nonsense, without consulting any of the many experts who could have spoken in support of the Franken proposal.

Trade Deficits and the Dollar

By Dean BakerDean Baker

May 14, 2013

14 Mayo 2013

In prior posts I have often referred to the run-up in the dollar engineered by the Clinton-Rubin-Summers team in the 1990s as being the root of all evils. The point is that their over-valued dollar policy led to a large trade deficit. The only way the demand lost as a result of the trade deficit (people spending their money overseas rather than here) could be offset was with asset bubbles. To fill this demand gap, the Clinton crew gave us the stock bubble in the 1990s and the Bush team gave us the housing bubble in the last decade. In both cases the bubbles crashed with disastrous consequences, the latter more than the former. (It took us almost 4 years to replace the jobs lost in the 2001 recession, so that downturn was not trivial either.) Anyhow, my take away from this story is that, using the advanced economics from Econ 101, we need to get the dollar down. I have made this point in the past and readers have often commented that trade does not appear to be responding as would be predicted from a falling dollar. I would argue otherwise. The graph below shows the non-oil trade deficit measured as a share of GDP against the real value of the dollar. Source: Bureau of Economic Analysis and the Federal Reserve Board

Corporate Boards Are Still Failing

By Dean BakerDean Baker

May 12, 2013

12 Mayo 2013

The median pay for a member of the board of a Fortune 500 company is almost $240,000 a year. This typically involves 4-8 meetings a year. One of the top priorities of the board is supposed to be ensuring that top management doesn’t rip off the company. They have not been doing a very good job as Gretchen Morgenson points out in her column today.

That raises the question of what exactly they get all this money for? Director Watch will be coming soon to a website near you.

The median pay for a member of the board of a Fortune 500 company is almost $240,000 a year. This typically involves 4-8 meetings a year. One of the top priorities of the board is supposed to be ensuring that top management doesn’t rip off the company. They have not been doing a very good job as Gretchen Morgenson points out in her column today.

That raises the question of what exactly they get all this money for? Director Watch will be coming soon to a website near you.

Low Unemployment in Germany: The Story Is Not GDP Growth

By Dean BakerDean Baker

May 11, 2013

11 Mayo 2013

Floyd Norris has a good piece today comparing trends in unemployment rates across countries in the downturn. He notes that Germany alone has seen a drop in its unemployment rate since the downturn began. While he notes that Germany has pursued work sharing policies that have encouraged employers to keep workers on the job working shorter hours, readers may not appreciate the full importance of this policy.

Growth in Germany and the United States have been virtually identical since the beginning of the downturn. While Germany has a large balance of trade surplus, in contrast to the deficit in the United States, its consumption growth has been weaker.

gdp-germany-us-growth-05-20

Source: International Monetary Fund.

Germany is helped in this story by the fact that it has a slower rate of labor force growth, but clearly the difference in growth rates does not explain the fact Germany’s unemployment rate has fallen by 2.5 percentage points while unemployment in the United States has risen by 3.0 percentage points.

Note: correction made –thanks ltr.

Floyd Norris has a good piece today comparing trends in unemployment rates across countries in the downturn. He notes that Germany alone has seen a drop in its unemployment rate since the downturn began. While he notes that Germany has pursued work sharing policies that have encouraged employers to keep workers on the job working shorter hours, readers may not appreciate the full importance of this policy.

Growth in Germany and the United States have been virtually identical since the beginning of the downturn. While Germany has a large balance of trade surplus, in contrast to the deficit in the United States, its consumption growth has been weaker.

gdp-germany-us-growth-05-20

Source: International Monetary Fund.

Germany is helped in this story by the fact that it has a slower rate of labor force growth, but clearly the difference in growth rates does not explain the fact Germany’s unemployment rate has fallen by 2.5 percentage points while unemployment in the United States has risen by 3.0 percentage points.

Note: correction made –thanks ltr.

Reinhart-Rogoff One More Time: Why the 90 Percent Never Should Have Been Taken Seriously

By Dean BakerDean Baker

May 11, 2013

11 Mayo 2013

As a general rule economists are not very good at economics. This is why almost none of them were able to recognize the $8 trillion housing bubble that sank the economy. (No, this isn't bragging, it only took simple arithmetic and basic logic.) Most economists are unable to conceptualize anything that someone with more standing in the profession did not already write about. This is the only reason that the Reinhart-Rogoff 90 percent debt-to-GDP threshold was ever taken seriously to begin with. The point that I have tried to make in the past, apparently with little success, is that debt is an arbitrary number. It is not something that is relatively fixed, like the age composition of the population or the supply of land. The country's debt is something that can and often is easily altered through simple steps. In this way the debt-to-GDP ratio can be thought of as something like the color of a house. Suppose Reinhart and Rogoff told us that people who lived in blue houses had 40 percent less income than people who lived in houses painted other colors. Presumably people would be skeptical of the results, but if their finding was really true, then we would probably want to encourage people in blue colored houses to paint them a different color. In effect, Reinhart and Rogoff were making the same sort of claim about debt and GDP. Let me try to explain this in a way that even an economist can understand it. I have often pointed out that the value of long-term debt fluctuates with the interest rate. I didn't think this is a secret, but apparently few economists have followed what happens to bond prices when interest rates change. The point is that the value of our debt will plummet if interest rates rise, as the Congressional Budget Office and other forecasters expect. This means that we could buy back long-term debt issued today at interest rates of less than 2.0 percent for discounts of 30-40 percent. This would sharply reduce our debt-to-GDP ratio at zero cost. Yes, this is really stupid, but if you believed the Reinhart-Rogoff 90 percent debt cliff, then you believe that we can sharply raise growth rates by buying back long-term bonds at a discount. It's logic folks, it's not a debatable point -- think it through until you understand it.

Casey Mulligan on Work Sharing

By Dean BakerDean Baker

May 10, 2013

10 Mayo 2013

Casey Mulligan used his Economix blog post to discuss the topic of work sharing. It's always good to see work sharing get some attention and Mulligan raises many of the right issues. I will correct a couple of points. Mulligan tells readers: "It is also possible that work-sharing would reduce employment by making jobs less attractive to people who desire full-time work. One reason that people sometimes justify commuting long distances to work or enrolling in demanding training programs – trucking and nursing are two such occupations — is that they expect to recoup those cost by taking advantages of opportunities to earn extra by working long hours." Neither of these claims is quite right. Long commutes are a disincentive to short workdays, but one could easily imagine shorter working hours being associated with fewer working days rather than shorter work days. (Anyone hear of a 4-day week, say 4 days at 8-9 hours per day?) Of course, if most workers had fewer week days then we would all enjoy shorter commutes. The other point about fewer hours providing less incentive to train for jobs needs two important qualifications. First, if work sharing is a short-term alternative to layoffs, then it does not imply a reduction in average hours. It would simply reduce the risk of being unemployed and replace it with an increased risk of being forced to work fewer than desired hours. If we assume that most workers are risk averse, this should increase the desirability of training for jobs since there will be a lower probability of being out of work altogether. If we follow the route of Western Europe and have shorter work years (they work on average about 20 percent less than us), then it is important to keep in mind that no one is literally being prevented from working. In other words, in countries where the average work year is 1500 hours, no one arrests truck drivers or nurses who want to work extra hours. If they want to find a second part-time job in addition to their normal full-time job they are free to do so, just as many people in the United States work at more than one job.

Homeownership and Unemployment: Not So Fast

By Dean BakerDean Baker

May 10, 2013

10 Mayo 2013

Folks have been asking me about a new study showing a strong link between homeownership and unemployment. The study finds a long-term of elasticity of the unemployment rate with respect to homeownership close to 1. This means that if the homeownership rate in a state doubles then we should expect its unemployment rate to double. For the country as a whole, since the homeownership rate has risen by roughly 20 percent from its 1950 level we should expect the unemployment rate to be roughly 20 percent higher, after controlling for other factors.

These are striking results, but even as a critic of the cult of homeownership, I am not buying. The paper does include many tests for robustness, so there is no simple story of cherry-picking the data. But there are important questions of reverse causation. Suppose that states have weak economies so that many people leave for states with more job opportunities.

In this story the state losing people is likely to have a higher homeownership rate (homeowners are less likely to move) and the state getting people is likely to have a lower homeownership rate since the new arrivals are less likely to be homeowners. The study tries to control for this issue by having lags of up to 5 years, but it is certainly possible that trends in economic growth and stagnation are longer than this. It might have been useful to try lags of 10 years.

It is also striking that the states with the largest increase in homeownership are all in the south. If there was a rise in unemployment in these states was this a regional effect or due to homeownership? Including a regional variable might be helpful to see how it affects the results. In the same vein, immigrants are likely to be associated with both a lower unemployment rate (immigrants go to areas with jobs) and a lower rate of homeownership (recent immigrants don’t own homes). I may have missed it, but it doesn’t look like immigrant status is one of the control variables in the regressions.

One finding that may have a simple explanation is their finding that in the years 2000-2010 there was a strong tie between commute times and homeownership. I’ll be a bit of a cynic here. Areas like Los Vegas and Phoenix were booming in the bubble years, these states saw substantial increases in homeownership. This was probably associated with an increase in commute times. The bust and drop in homeownership was especially pronounced in these areas. My guess is that they also saw a drop in average commute times. I don’t know if this is really the story, but at first glance that would be my guess.

Anyhow, I can believe that homeownership has some negative impact on employment. There is the story of reducing mobility. This can be exaggerated (people do rent out homes and couples separate for work), but surely it is not zero. Also, policies that favor homeownership, like the mortgage interest deduction, undoubtedly pull capital away from productive investment. However, the relationships found in this paper seem too large to be plausible.

So chalk me up as a skeptic on this one, but it is an interesting paper that deserves serious consideration.

Note:

It is interesting to see that the union density variable in these regressions is always negative and sometimes significant. This would suggest that higher union density is associated with lower unemployment rates. Much as I might like to say this is the case, my guess is that something else is at work.

States like Michigan and Ohio saw the percentage of workers in unions fall at the same time they lost hundreds of thousands of jobs in the auto and related industries. This could give the sort of correlation found in these regressions. This is the same sort of reverse causation that I suspect we see with homeownership and unemployment rates.

Further Note:

Danny Blanchflower, a co-author of the paper, notified me that he ran a regression that included a variable for the southern states to pick up any regional effect. He said that this actually made the results stronger, so clearly their findings are not driven by some peculiarity of the south that led to both higher rates of homeownership and higher rates of unemployment in the region.

Folks have been asking me about a new study showing a strong link between homeownership and unemployment. The study finds a long-term of elasticity of the unemployment rate with respect to homeownership close to 1. This means that if the homeownership rate in a state doubles then we should expect its unemployment rate to double. For the country as a whole, since the homeownership rate has risen by roughly 20 percent from its 1950 level we should expect the unemployment rate to be roughly 20 percent higher, after controlling for other factors.

These are striking results, but even as a critic of the cult of homeownership, I am not buying. The paper does include many tests for robustness, so there is no simple story of cherry-picking the data. But there are important questions of reverse causation. Suppose that states have weak economies so that many people leave for states with more job opportunities.

In this story the state losing people is likely to have a higher homeownership rate (homeowners are less likely to move) and the state getting people is likely to have a lower homeownership rate since the new arrivals are less likely to be homeowners. The study tries to control for this issue by having lags of up to 5 years, but it is certainly possible that trends in economic growth and stagnation are longer than this. It might have been useful to try lags of 10 years.

It is also striking that the states with the largest increase in homeownership are all in the south. If there was a rise in unemployment in these states was this a regional effect or due to homeownership? Including a regional variable might be helpful to see how it affects the results. In the same vein, immigrants are likely to be associated with both a lower unemployment rate (immigrants go to areas with jobs) and a lower rate of homeownership (recent immigrants don’t own homes). I may have missed it, but it doesn’t look like immigrant status is one of the control variables in the regressions.

One finding that may have a simple explanation is their finding that in the years 2000-2010 there was a strong tie between commute times and homeownership. I’ll be a bit of a cynic here. Areas like Los Vegas and Phoenix were booming in the bubble years, these states saw substantial increases in homeownership. This was probably associated with an increase in commute times. The bust and drop in homeownership was especially pronounced in these areas. My guess is that they also saw a drop in average commute times. I don’t know if this is really the story, but at first glance that would be my guess.

Anyhow, I can believe that homeownership has some negative impact on employment. There is the story of reducing mobility. This can be exaggerated (people do rent out homes and couples separate for work), but surely it is not zero. Also, policies that favor homeownership, like the mortgage interest deduction, undoubtedly pull capital away from productive investment. However, the relationships found in this paper seem too large to be plausible.

So chalk me up as a skeptic on this one, but it is an interesting paper that deserves serious consideration.

Note:

It is interesting to see that the union density variable in these regressions is always negative and sometimes significant. This would suggest that higher union density is associated with lower unemployment rates. Much as I might like to say this is the case, my guess is that something else is at work.

States like Michigan and Ohio saw the percentage of workers in unions fall at the same time they lost hundreds of thousands of jobs in the auto and related industries. This could give the sort of correlation found in these regressions. This is the same sort of reverse causation that I suspect we see with homeownership and unemployment rates.

Further Note:

Danny Blanchflower, a co-author of the paper, notified me that he ran a regression that included a variable for the southern states to pick up any regional effect. He said that this actually made the results stronger, so clearly their findings are not driven by some peculiarity of the south that led to both higher rates of homeownership and higher rates of unemployment in the region.

Post Continues Jihad Against Social Security and Medicare

By Dean BakerDean Baker

May 10, 2013

10 Mayo 2013

The Washington Post continued to use its news section to advance its agenda for cutting Social Security and Medicare. It headlined an AP article on how these programs have not been cut by the sequester, “entitlement programs thrive amid gridlock, shifting money from younger generations to older.”

The headline and the article wrongly imply that cuts to programs will benefit the young and increase economic growth. This is not true. The proximate cause for these cuts is a decision by political leaders to have lower budget deficits. The headline would have more accurately read “pursuit of deficit reduction is taking away money from young.”

The notion of a shift to older generations is especially bizarre because none of the programs benefiting the elderly have been expanded notably in recent years. (The Medicare drug benefit is being made more generous, but the cost is covered by reduced payments to drug companies.) The assertion of a redistribution to the elderly would be like claiming there has been a redistribution to people living in North after reporting on a crop failure in the South. Certainly the fact that the South is worse off means that the North is relatively better off, but to describe this as a redistribution to the North is highly misleading, as is the claim of a redistribution to the elderly.

Also, even within whatever deficit targets are set one could just as credibly say that there has been a redistribution from children to Wall Street banks since the Wall Street banks are using their political power to block any effort to tax their financial speculation. Such a tax could easily cover the cost of the programs that are now being cut. The Post has decided not to frame the issue this way.

The Washington Post continued to use its news section to advance its agenda for cutting Social Security and Medicare. It headlined an AP article on how these programs have not been cut by the sequester, “entitlement programs thrive amid gridlock, shifting money from younger generations to older.”

The headline and the article wrongly imply that cuts to programs will benefit the young and increase economic growth. This is not true. The proximate cause for these cuts is a decision by political leaders to have lower budget deficits. The headline would have more accurately read “pursuit of deficit reduction is taking away money from young.”

The notion of a shift to older generations is especially bizarre because none of the programs benefiting the elderly have been expanded notably in recent years. (The Medicare drug benefit is being made more generous, but the cost is covered by reduced payments to drug companies.) The assertion of a redistribution to the elderly would be like claiming there has been a redistribution to people living in North after reporting on a crop failure in the South. Certainly the fact that the South is worse off means that the North is relatively better off, but to describe this as a redistribution to the North is highly misleading, as is the claim of a redistribution to the elderly.

Also, even within whatever deficit targets are set one could just as credibly say that there has been a redistribution from children to Wall Street banks since the Wall Street banks are using their political power to block any effort to tax their financial speculation. Such a tax could easily cover the cost of the programs that are now being cut. The Post has decided not to frame the issue this way.

It's So Hard to Find Good Help: Businessweek Edition

By Dean BakerDean Baker

May 10, 2013

10 Mayo 2013

Businessweek tells us that homebuilders would be building more homes, if only they could find qualified construction workers. Hmmm, that must mean that wages for construction workers are soaring as the shortage causes employers to bid up wages in an effort to grab workers away from competitors or hold on to their current workforce.

That’s not what the data say. According to data from the Bureau of Labor Statistics, after adjusting for inflation the average hourly wage in construction has risen by just 0.9 percent in the five years from 2007 to 2012. Note that this a total increase of 0.9 percent over these five years, not an annual increase. If there is a labor shortage, it’s not showing up in wages for some reason. (Of course the unemployment rate for construction workers was reported at 13.2 percent in April, which also does not seem to indicate a labor shortage.)

The more obvious explanation for the fact that construction remains depressed is the near record vacancy rates. Presumably many of these empty homes will have to be filled before builders get more aggressive about building new ones.

Businessweek tells us that homebuilders would be building more homes, if only they could find qualified construction workers. Hmmm, that must mean that wages for construction workers are soaring as the shortage causes employers to bid up wages in an effort to grab workers away from competitors or hold on to their current workforce.

That’s not what the data say. According to data from the Bureau of Labor Statistics, after adjusting for inflation the average hourly wage in construction has risen by just 0.9 percent in the five years from 2007 to 2012. Note that this a total increase of 0.9 percent over these five years, not an annual increase. If there is a labor shortage, it’s not showing up in wages for some reason. (Of course the unemployment rate for construction workers was reported at 13.2 percent in April, which also does not seem to indicate a labor shortage.)

The more obvious explanation for the fact that construction remains depressed is the near record vacancy rates. Presumably many of these empty homes will have to be filled before builders get more aggressive about building new ones.