The NYT has an article that discussed the possibility that China’s economy will be less focused on investment and more focused on consumption and improving the quality of life of the Chinese people. It notes the extraordinary share of GDP in China that is devoted to investment and includes a graph that shows in the 1980s both Japan and South Korea also had an extraordinary share of GDP devoted to investment. It then tells readers that:
“Growth in Japan and South Korea started to slow and eventually tumbled after investment peaked. The big question now is when China will run into the same limits, …”
This is not quite right. While Japan did have a sharp slowdown in growth following the collapse of its stock and real estate bubbles in 1990, South Korea has continued to maintain a healthy growth rate following the peak of investment in 1990. The point is important, because the NYT characterization of the situation implies that China faces an inevitable crisis while the experience of South Korea suggests that China could transition to a path of healthy growth that is less driven by investment.
The NYT has an article that discussed the possibility that China’s economy will be less focused on investment and more focused on consumption and improving the quality of life of the Chinese people. It notes the extraordinary share of GDP in China that is devoted to investment and includes a graph that shows in the 1980s both Japan and South Korea also had an extraordinary share of GDP devoted to investment. It then tells readers that:
“Growth in Japan and South Korea started to slow and eventually tumbled after investment peaked. The big question now is when China will run into the same limits, …”
This is not quite right. While Japan did have a sharp slowdown in growth following the collapse of its stock and real estate bubbles in 1990, South Korea has continued to maintain a healthy growth rate following the peak of investment in 1990. The point is important, because the NYT characterization of the situation implies that China faces an inevitable crisis while the experience of South Korea suggests that China could transition to a path of healthy growth that is less driven by investment.
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Michael Gerson used his column today to make a bizarre attack on the NYT’s polling analyst Nate Silver. He complains to readers:
“Silver’s prediction is not an innovation; it is trend taken to its absurd extreme. He is doing little more than weighting and aggregating state polls and combining them with various historical assumptions to project a future outcome to project a future outcome with exaggerated, attention-grabbing exactitude. His work is better summarized as an 86.3 percent confidence that the state polls are correct.”
Actually Silver is doing nothing more than weighting and aggregating state polls and combining them with various historical assumptions. He is very clear on this. Gerson can go to Silver’s website and find in great detail the methodology that Silver uses for weighting various polls based on their past track records. Gerson apparently thinks this is an indictment, complaining about Silver’s precise 86.3 percent probability estimate.
The real problem here is simply that Gerson does not understand what Silver is doing. Silver’s 86.3 percent prediction is premised on the assumption that the polls do not contain a systemic bias and that there is not some event(s) that radically shifts the attitude of the electorate between the last round of polls and the election. With these assumptions we can treat the polls as comparable to the draw of white and black marbles out of a huge jar.
If we take enough draws of 1000 balls (you’re welcome to use a different number) and the average of each of these draws is that 50.5 percent of the marbles are black, we can begin to say with great confidence (which can be specified with many decimal points) that the majority of the marbles in this huge jar are in fact black. This is what Nate is doing. He does adjust the draws — some polls consistently find more white or black marbles than the average of the other polls. Unless these polls have proved to be accurate in these divergences, Nate makes an adjustment for their tendency to find too many white or black balls. This process is the value-added that Nate provides over a simple averaging of the various polls.
This doesn’t guarantee that Nate will prove right. There could be some systemic bias in the polls. This would be comparable to a situation where the black balls are heavier and therefore fall to the bottom and are less likely to be in the draw. The way to argue this case is to present a reason for why the polls could be biased. There are possible stories here: voters with only a cell phone may be undercounted, the assumptions about who is a likely voter may prove wrong, or the polls may be undercounting Spanish speaking voters.
These factors, and others, could lead to a systemic bias in the polls. But if Gerson, or anyone else, thinks this is the issue now, then it is incumbent on them to make the case, not get angry at Silver for using statistical methods.
The real problem is that Gerson just seems to have difficulty with numbers. He concludes his piece by telling readers:
“And so, at the election’s close, we talk of Silver’s statistical model and the likely turnout in Cuyahoga County, Ohio, and relatively little about poverty, social mobility or unsustainable debt.”
Yes, it would be great if we had more discussion of poverty and social mobility throughout the campaign and beyond. It’s hard to blame Silver for the lack of such discussion. The pre-Silver elections were not exactly dominated by serious discussions of major national issues. I recall in the 1988 presidential election when the big issues in the race between George H.W. Bush and Michael Dukakis were Willy Horton and the pledge of allegiance.
As far as the third item on Gerson’s list, unsustainable debt, this is where his knowledge of math again fails him. Here is the ratio of interest payments to GDP over the last four decades:
Source: Congressional Budget Office.
As can be seen, the debt burden is very far from unsustainable, the interest burden is near its post-war low. In other words Gerson is angry because he thinks that somehow Silver’s polling analysis has diverted the country from discussing a non-existent problem.
Michael Gerson used his column today to make a bizarre attack on the NYT’s polling analyst Nate Silver. He complains to readers:
“Silver’s prediction is not an innovation; it is trend taken to its absurd extreme. He is doing little more than weighting and aggregating state polls and combining them with various historical assumptions to project a future outcome to project a future outcome with exaggerated, attention-grabbing exactitude. His work is better summarized as an 86.3 percent confidence that the state polls are correct.”
Actually Silver is doing nothing more than weighting and aggregating state polls and combining them with various historical assumptions. He is very clear on this. Gerson can go to Silver’s website and find in great detail the methodology that Silver uses for weighting various polls based on their past track records. Gerson apparently thinks this is an indictment, complaining about Silver’s precise 86.3 percent probability estimate.
The real problem here is simply that Gerson does not understand what Silver is doing. Silver’s 86.3 percent prediction is premised on the assumption that the polls do not contain a systemic bias and that there is not some event(s) that radically shifts the attitude of the electorate between the last round of polls and the election. With these assumptions we can treat the polls as comparable to the draw of white and black marbles out of a huge jar.
If we take enough draws of 1000 balls (you’re welcome to use a different number) and the average of each of these draws is that 50.5 percent of the marbles are black, we can begin to say with great confidence (which can be specified with many decimal points) that the majority of the marbles in this huge jar are in fact black. This is what Nate is doing. He does adjust the draws — some polls consistently find more white or black marbles than the average of the other polls. Unless these polls have proved to be accurate in these divergences, Nate makes an adjustment for their tendency to find too many white or black balls. This process is the value-added that Nate provides over a simple averaging of the various polls.
This doesn’t guarantee that Nate will prove right. There could be some systemic bias in the polls. This would be comparable to a situation where the black balls are heavier and therefore fall to the bottom and are less likely to be in the draw. The way to argue this case is to present a reason for why the polls could be biased. There are possible stories here: voters with only a cell phone may be undercounted, the assumptions about who is a likely voter may prove wrong, or the polls may be undercounting Spanish speaking voters.
These factors, and others, could lead to a systemic bias in the polls. But if Gerson, or anyone else, thinks this is the issue now, then it is incumbent on them to make the case, not get angry at Silver for using statistical methods.
The real problem is that Gerson just seems to have difficulty with numbers. He concludes his piece by telling readers:
“And so, at the election’s close, we talk of Silver’s statistical model and the likely turnout in Cuyahoga County, Ohio, and relatively little about poverty, social mobility or unsustainable debt.”
Yes, it would be great if we had more discussion of poverty and social mobility throughout the campaign and beyond. It’s hard to blame Silver for the lack of such discussion. The pre-Silver elections were not exactly dominated by serious discussions of major national issues. I recall in the 1988 presidential election when the big issues in the race between George H.W. Bush and Michael Dukakis were Willy Horton and the pledge of allegiance.
As far as the third item on Gerson’s list, unsustainable debt, this is where his knowledge of math again fails him. Here is the ratio of interest payments to GDP over the last four decades:
Source: Congressional Budget Office.
As can be seen, the debt burden is very far from unsustainable, the interest burden is near its post-war low. In other words Gerson is angry because he thinks that somehow Silver’s polling analysis has diverted the country from discussing a non-existent problem.
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It’s best to ignore personal slights in Washington and elsewhere, but this one goes beyond my personal feelings. In a review of Nate Silver’s new book, Noam Scheiber notes the effectiveness with which Silver uses data to analyze a wide range of policy issues and then tells us:
“it’s not hard to imagine Silver and his ilk one day letting the air out of an inflating housing bubble.”
Yeah, right. It shouldn’t be too hard to imagine since that is what some of us were trying to do from 2002 onward. The remarkable story here is that we were ignored at the time and are apparently still ignored even after the fact by people who have the credentials to write in the NYT.
There is an interesting sociology of knowledge story here. How is that history can be completely rewritten? The problem was not that people were not making the case that we had an unsustainable housing bubble. The problem was that people with authority chose to ignore the people making the case that there was a bubble. And even now they can claim that the people warning about the bubble did not exist.
This works out well for the bubble deniers since it makes it easier to claim the “who could have known?” defense. But it is not true, and it is outrageous that Scheiber could ignorantly write something like this and the NYT book editor could allow it into print.
It’s best to ignore personal slights in Washington and elsewhere, but this one goes beyond my personal feelings. In a review of Nate Silver’s new book, Noam Scheiber notes the effectiveness with which Silver uses data to analyze a wide range of policy issues and then tells us:
“it’s not hard to imagine Silver and his ilk one day letting the air out of an inflating housing bubble.”
Yeah, right. It shouldn’t be too hard to imagine since that is what some of us were trying to do from 2002 onward. The remarkable story here is that we were ignored at the time and are apparently still ignored even after the fact by people who have the credentials to write in the NYT.
There is an interesting sociology of knowledge story here. How is that history can be completely rewritten? The problem was not that people were not making the case that we had an unsustainable housing bubble. The problem was that people with authority chose to ignore the people making the case that there was a bubble. And even now they can claim that the people warning about the bubble did not exist.
This works out well for the bubble deniers since it makes it easier to claim the “who could have known?” defense. But it is not true, and it is outrageous that Scheiber could ignorantly write something like this and the NYT book editor could allow it into print.
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The Washington Post has repeatedly used its news section (e.g here and here) to hype fears about the budget dispute that it likes to call the “fiscal cliff.” (Since the actual impact of waiting until after the end of the year to reach a deal is minor, most objective commentators would not use the term “cliff” to refer to the deadline.) If the consequences of waiting until after the end of the year to make a deal, when the politics shift to President Obama’s favor, can be portrayed as sufficiently dire then the Post presumably hopes that it can force a deal that will be closer to the Republicans’ terms.
It was pushing this line again today with a piece warning of a disaster if Congress does not pass a fix to the alternative minimum tax by the end of the year. The issue is that the tax was not adjusted for inflation for 2012 so many middle income households would be subject to the alternative minimum tax who were not intended to be hit by it.
The piece does its best to overstate the dire consequences for waiting after the end of the year. Most importantly it gives the number of people affected and then gives the average tax additional liability telling us in the second paragraph:
“Unless Congress acts by the end of the year, more than 26 million households will for the first time face the AMT, which threatens to tack $3,700, on average, onto taxpayers’ bills for the current tax year.”
In fact most of these 26 million households would face very limited tax increases, but some taxpayers may find themselves with a substantial increase in liabilities. The piece also warns that if Congress waits until after the end of the year to resolve the issue then refunds could be delayed by a month or two. It then informs readers that many taxpayers use refunds to pay essential bills like gas and electric bills and will risk having service disconnected if they have to wait longer for their refunds. Of course the refunds will go almost exclusively to families with incomes of more than $75,000 a year. It is not likely that many people in this income category are facing the cutoff of utilities.
The piece also raises the risk that many taxpayers may be subject to penalties for failing to withhold based on their higher liability. It would be a very simple matter for Congress to include a provision in any measure passed in January that exempted taxpayers from such penalties.
This is the sort of piece that makes it clear that Post would like to see the budget dispute resolved on conditions favorable to the Republicans. It doesn’t belong in the news section of a serious newspaper.
The Washington Post has repeatedly used its news section (e.g here and here) to hype fears about the budget dispute that it likes to call the “fiscal cliff.” (Since the actual impact of waiting until after the end of the year to reach a deal is minor, most objective commentators would not use the term “cliff” to refer to the deadline.) If the consequences of waiting until after the end of the year to make a deal, when the politics shift to President Obama’s favor, can be portrayed as sufficiently dire then the Post presumably hopes that it can force a deal that will be closer to the Republicans’ terms.
It was pushing this line again today with a piece warning of a disaster if Congress does not pass a fix to the alternative minimum tax by the end of the year. The issue is that the tax was not adjusted for inflation for 2012 so many middle income households would be subject to the alternative minimum tax who were not intended to be hit by it.
The piece does its best to overstate the dire consequences for waiting after the end of the year. Most importantly it gives the number of people affected and then gives the average tax additional liability telling us in the second paragraph:
“Unless Congress acts by the end of the year, more than 26 million households will for the first time face the AMT, which threatens to tack $3,700, on average, onto taxpayers’ bills for the current tax year.”
In fact most of these 26 million households would face very limited tax increases, but some taxpayers may find themselves with a substantial increase in liabilities. The piece also warns that if Congress waits until after the end of the year to resolve the issue then refunds could be delayed by a month or two. It then informs readers that many taxpayers use refunds to pay essential bills like gas and electric bills and will risk having service disconnected if they have to wait longer for their refunds. Of course the refunds will go almost exclusively to families with incomes of more than $75,000 a year. It is not likely that many people in this income category are facing the cutoff of utilities.
The piece also raises the risk that many taxpayers may be subject to penalties for failing to withhold based on their higher liability. It would be a very simple matter for Congress to include a provision in any measure passed in January that exempted taxpayers from such penalties.
This is the sort of piece that makes it clear that Post would like to see the budget dispute resolved on conditions favorable to the Republicans. It doesn’t belong in the news section of a serious newspaper.
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That’s what readers of his column today would inevitably conclude. After all, Friedman called President Obama’s support of the health care reform plan pushed by the Heritage Foundation in the mid-90s a “leftward initiative.”
Clearly Friedman is very confused about the shape of the American political spectrum. He repeatedly refers to the plan put forward by Morgan Stanley director Erskine Bowles and former Senator Alan Simpson to cut Social Security and Medicare for middle class retirees “centrist.” In fact, polls consistently show that the vast majority of people across the political spectrum strongly oppose cuts to these programs. The Bowles -Simpson cuts only seem to enjoy support from a small group of elites in political and financial circles. That does not make them centrist.
On a non-economic point, Friedman argues that if the Republicans lose a second election to Obama then it will force the party to change, pointing to the change in the Democratic Party after it lost consecutive elections to Ronald Reagan. In fact, the Democrats lost three consecutive elections, with George H.W. Bush defeating Michael Dukakis in 1988.
That’s what readers of his column today would inevitably conclude. After all, Friedman called President Obama’s support of the health care reform plan pushed by the Heritage Foundation in the mid-90s a “leftward initiative.”
Clearly Friedman is very confused about the shape of the American political spectrum. He repeatedly refers to the plan put forward by Morgan Stanley director Erskine Bowles and former Senator Alan Simpson to cut Social Security and Medicare for middle class retirees “centrist.” In fact, polls consistently show that the vast majority of people across the political spectrum strongly oppose cuts to these programs. The Bowles -Simpson cuts only seem to enjoy support from a small group of elites in political and financial circles. That does not make them centrist.
On a non-economic point, Friedman argues that if the Republicans lose a second election to Obama then it will force the party to change, pointing to the change in the Democratic Party after it lost consecutive elections to Ronald Reagan. In fact, the Democrats lost three consecutive elections, with George H.W. Bush defeating Michael Dukakis in 1988.
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Steven Davidoff used a Dealbook column to defend the investment banks behavior in selling collaterized debt obligations (CDOs) filled with bad mortgages. While he does make an important point, he glides over some clearly improper and possibly illegal behavior on the part of the banks.
Davidoff notes that the CDOs in question were sold to people who certainly should have been sophisticated investors and who were clearly warned that Goldman Sachs and other banks were not acting as investment advisers in the deal. In other words, the buyers were people managing hundreds of millions or even billions of dollars in assets, who were given explicit warnings that the sellers were not recommending the assets as a good investment.
Given that these people were paid six or even seven figure salaries, it was reasonable to expect that they would do their homework and independently seek to evaluate the quality of the assets they were buying. If they did not independently assess the quality of the assets then they are the ones most immediately to blame, not the sellers.
However, Davidoff does glide over a key misrepresentation in at least one case. The synthetic CDO Abacus, that Goldman Sachs sold to its clients, was put together by John Paulson who was shorting the CDO. In this case, Goldman presented itself to its clients as a neutral party not, as was actually the case, an agent for the person shorting the CDO. This was a fundamental misrepresentation.
If there were similar misrepresentations in the other cases Davidoff notes, then the banks deserve to be held at least partially responsible for the losses incurred. Sophisticated buyers should do the homework for which they are being paid very generous salaries. However this failure does not excuse misrepresentations that border on fraud by the sellers.
There is one other important point in this story worth noting. All the bad news from the housing bubble was already baked in at the point where these deals were made. The bubble peaked in the summer of 2006 and was headed down by the start of 2007. The economic collapse would have occurred regardless of whether or not these CDO deals took place. These deals simply affected the distribution of the losses among the big players. They did not cause the losses to occur.
Steven Davidoff used a Dealbook column to defend the investment banks behavior in selling collaterized debt obligations (CDOs) filled with bad mortgages. While he does make an important point, he glides over some clearly improper and possibly illegal behavior on the part of the banks.
Davidoff notes that the CDOs in question were sold to people who certainly should have been sophisticated investors and who were clearly warned that Goldman Sachs and other banks were not acting as investment advisers in the deal. In other words, the buyers were people managing hundreds of millions or even billions of dollars in assets, who were given explicit warnings that the sellers were not recommending the assets as a good investment.
Given that these people were paid six or even seven figure salaries, it was reasonable to expect that they would do their homework and independently seek to evaluate the quality of the assets they were buying. If they did not independently assess the quality of the assets then they are the ones most immediately to blame, not the sellers.
However, Davidoff does glide over a key misrepresentation in at least one case. The synthetic CDO Abacus, that Goldman Sachs sold to its clients, was put together by John Paulson who was shorting the CDO. In this case, Goldman presented itself to its clients as a neutral party not, as was actually the case, an agent for the person shorting the CDO. This was a fundamental misrepresentation.
If there were similar misrepresentations in the other cases Davidoff notes, then the banks deserve to be held at least partially responsible for the losses incurred. Sophisticated buyers should do the homework for which they are being paid very generous salaries. However this failure does not excuse misrepresentations that border on fraud by the sellers.
There is one other important point in this story worth noting. All the bad news from the housing bubble was already baked in at the point where these deals were made. The bubble peaked in the summer of 2006 and was headed down by the start of 2007. The economic collapse would have occurred regardless of whether or not these CDO deals took place. These deals simply affected the distribution of the losses among the big players. They did not cause the losses to occur.
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I’m not kidding. If you get through the excess verbiage in his column, the main point is that President Obama hasn’t moved to cut Social Security and Medicare in his first term. This is what Brooks means when he says:
“get our long-term entitlement burdens under control, get our political system working, shift government resources from the affluent elderly to struggling young families and future growth,”
and by his later call for “sacrifice.” Of course Brooks doesn’t really mean “affluent” elderly. We know that Brooks and his political allies question whether even people earning above $250,000 a year are affluent when it comes to tax cuts. If the cuts in Social Security and Medicare were restricted to this group then we would barely need to change the projections for these programs. There are so few seniors with incomes above this cutoff that whether or not they get Medicare and Social Security makes almost no difference to the financial health of these programs.
Brooks wants to see Obama cut benefits for retired nurses, school teachers, truck drivers and other middle class workers. That is the only way to produce real savings in these programs. And, in spite of indicating a willingness to make cuts in these programs, Obama has not delivered in his first term. So just as many Democrats were disappointed that President Bush hadn’t provided universal health care or taken steps to curb global warming in his first term, David Brooks is upset that President Obama has not cut Social Security and Medicare.
(Btw, just in case anyone was wondering, more pain for the middle class is not necessary as Brooks asserts. As every budget wonk knows, the problem is simply fixing our broken health care system. If our per person health care costs were anywhere close to costs in other wealthy countries, we would be looking at long-term budget surpluses, not deficits.)
I’m not kidding. If you get through the excess verbiage in his column, the main point is that President Obama hasn’t moved to cut Social Security and Medicare in his first term. This is what Brooks means when he says:
“get our long-term entitlement burdens under control, get our political system working, shift government resources from the affluent elderly to struggling young families and future growth,”
and by his later call for “sacrifice.” Of course Brooks doesn’t really mean “affluent” elderly. We know that Brooks and his political allies question whether even people earning above $250,000 a year are affluent when it comes to tax cuts. If the cuts in Social Security and Medicare were restricted to this group then we would barely need to change the projections for these programs. There are so few seniors with incomes above this cutoff that whether or not they get Medicare and Social Security makes almost no difference to the financial health of these programs.
Brooks wants to see Obama cut benefits for retired nurses, school teachers, truck drivers and other middle class workers. That is the only way to produce real savings in these programs. And, in spite of indicating a willingness to make cuts in these programs, Obama has not delivered in his first term. So just as many Democrats were disappointed that President Bush hadn’t provided universal health care or taken steps to curb global warming in his first term, David Brooks is upset that President Obama has not cut Social Security and Medicare.
(Btw, just in case anyone was wondering, more pain for the middle class is not necessary as Brooks asserts. As every budget wonk knows, the problem is simply fixing our broken health care system. If our per person health care costs were anywhere close to costs in other wealthy countries, we would be looking at long-term budget surpluses, not deficits.)
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The Washington Post told readers that:
“the sharp improvement visible in the survey of households in the September jobs numbers may turn out to be a overly positive statistical aberration. An additional 872,000 people reported having a job in September’s household survey, which does not square with the amount of hiring that employers reported.”
While this is true for the September numbers, the data look less anomalous if we take into account that the household survey reported a fall in employment of 314,000 jobs in the prior two months. The total employment growth of 559,000 reported over the last three months is not very different from the 437,000 job growth reported over this period in the establishment survey. (It is still likely the unemployment rate will rise this month — this rate of job growth is not consistent with a sharp drop in the unemployment rate.)
The Washington Post told readers that:
“the sharp improvement visible in the survey of households in the September jobs numbers may turn out to be a overly positive statistical aberration. An additional 872,000 people reported having a job in September’s household survey, which does not square with the amount of hiring that employers reported.”
While this is true for the September numbers, the data look less anomalous if we take into account that the household survey reported a fall in employment of 314,000 jobs in the prior two months. The total employment growth of 559,000 reported over the last three months is not very different from the 437,000 job growth reported over this period in the establishment survey. (It is still likely the unemployment rate will rise this month — this rate of job growth is not consistent with a sharp drop in the unemployment rate.)
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The Census Bureau reported this week that housing vacancy rates in the third quarter were substantially lower than their year ago level. The vacancy rates for rental units fell from 9.8 percent in the third quarter of 2011 to 8.6 percent this year. The vacancy rate for ownership units from 2.4 percent to 1.9 percent. (There are roughly twice as many ownership units as rental units.) The third data quarter data indicates that the housing market is substantially tighter than it was 2-3 years ago, even though vacancy rates are still well above pre-bubble levels.
It is remarkable that the vacancy data receive so little attention. These data were one of the ways that economists could have recognized the housing bubble. While house prices were going through the roof in the years 2002-2006, the vacancy rate was continually hitting new records. Concepts taught in advanced economics classes indicate that the price of items in excess supply are not supposed to be rising. It was therefore not reasonable to expect the run-up in house prices to be sustained given the large amounts of vacant housing available. The reduction in the excess supply is consistent with other data showing a recovering housing market.
The Census Bureau reported this week that housing vacancy rates in the third quarter were substantially lower than their year ago level. The vacancy rates for rental units fell from 9.8 percent in the third quarter of 2011 to 8.6 percent this year. The vacancy rate for ownership units from 2.4 percent to 1.9 percent. (There are roughly twice as many ownership units as rental units.) The third data quarter data indicates that the housing market is substantially tighter than it was 2-3 years ago, even though vacancy rates are still well above pre-bubble levels.
It is remarkable that the vacancy data receive so little attention. These data were one of the ways that economists could have recognized the housing bubble. While house prices were going through the roof in the years 2002-2006, the vacancy rate was continually hitting new records. Concepts taught in advanced economics classes indicate that the price of items in excess supply are not supposed to be rising. It was therefore not reasonable to expect the run-up in house prices to be sustained given the large amounts of vacant housing available. The reduction in the excess supply is consistent with other data showing a recovering housing market.
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