It must be very hard to get news at Fox on 15th Street. In the Post’s little primer giving “steps of the euro crisis” step number 3 tells us about the end of cheap credit:
“Following the U.S. credit crisis in 2008, Greece reported a huge deficit increase that suddenly made investors worried about its ability to pay back its loans. High deficits in Portugal, Spain and Ireland caused the price of credit to rise in those countries as well.”
This is an interesting story, but it left out an important part of the picture. Spain and Ireland had been running large budget surpluses prior to the downturn. They were running large deficits in 2008 because they had housing bubbles that collapsed and sent their economies plummeting into recession.
Apparently the Post could not find information about these bubbles or the path of government finances in euro zone countries prior to the downturn.
It must be very hard to get news at Fox on 15th Street. In the Post’s little primer giving “steps of the euro crisis” step number 3 tells us about the end of cheap credit:
“Following the U.S. credit crisis in 2008, Greece reported a huge deficit increase that suddenly made investors worried about its ability to pay back its loans. High deficits in Portugal, Spain and Ireland caused the price of credit to rise in those countries as well.”
This is an interesting story, but it left out an important part of the picture. Spain and Ireland had been running large budget surpluses prior to the downturn. They were running large deficits in 2008 because they had housing bubbles that collapsed and sent their economies plummeting into recession.
Apparently the Post could not find information about these bubbles or the path of government finances in euro zone countries prior to the downturn.
Read More Leer más Join the discussion Participa en la discusión
Andrew Biggs, an economist at the American Enterprise Institute, is one of the more serious and careful people arguing conservative positions on policy issues. Nonetheless, he strikes out badly in trying to catch me in a contradiction. (Excuse the self-indulgence, consider this a carryover from my birthday boasts.)
Andrew has a blog post where he apparently believes that he has really got me [thanks gov wonk]. I have authored or co-authored several items recently on public pensions in which I argued that it is almost impossible to imagine scenarios in which pensions get returns on their stock holdings that are markedly worse than what they are assuming in their projections (e.g. here and here).
Andrew has my projected returns as averaging 8.9 percent in the current decade and 8.2 percent in the next two decades. (That’s not quite right, but close enough.) He then pulls out his gotcha, a paper from 2000 in which I projected stock returns of 3.4 percent for the first two decades and 3.5 percent for the 2030s. (In a note he points out that he forgot to add 2.8 percent for the inflation rate assumed by the Social Security trustees, whose assumptions provided the basis for my projections.)
So Andrew has me projected 8.9 percent returns and 8.2 percent returns when I was making projections of 6.4 percent and 6.5 percent back in 2000. Should I be wearing a paper bag over my head for the next year in shame?
Perhaps I should, but not because of Andrew’s discovery. In that 2000 paper I wrote:
“It is reasonable to believe … that stocks are temporarily over-valued, and that price-to-earnings ratios will soon fall back to more normal levels [this is the ratio of stock prices to trend earnings]. However, if this is the basis for assuming that stocks will provide their historic rates of return in the future, it would be necessary to include a large decline in stock prices in the projections.”
Andrew probably missed it, but we did in fact have a large decline in stock prices (two actually) between 2000 and the present. That is why I am now confident that we can expect higher rates of return in the future. In other words, I have been 100 percent consistent in my projections of returns, what has changed is the market itself.
I appreciate Andrew’s efforts to remind everyone that I called the stock bubble back in 2000 (actually first in 1997).
Andrew Biggs, an economist at the American Enterprise Institute, is one of the more serious and careful people arguing conservative positions on policy issues. Nonetheless, he strikes out badly in trying to catch me in a contradiction. (Excuse the self-indulgence, consider this a carryover from my birthday boasts.)
Andrew has a blog post where he apparently believes that he has really got me [thanks gov wonk]. I have authored or co-authored several items recently on public pensions in which I argued that it is almost impossible to imagine scenarios in which pensions get returns on their stock holdings that are markedly worse than what they are assuming in their projections (e.g. here and here).
Andrew has my projected returns as averaging 8.9 percent in the current decade and 8.2 percent in the next two decades. (That’s not quite right, but close enough.) He then pulls out his gotcha, a paper from 2000 in which I projected stock returns of 3.4 percent for the first two decades and 3.5 percent for the 2030s. (In a note he points out that he forgot to add 2.8 percent for the inflation rate assumed by the Social Security trustees, whose assumptions provided the basis for my projections.)
So Andrew has me projected 8.9 percent returns and 8.2 percent returns when I was making projections of 6.4 percent and 6.5 percent back in 2000. Should I be wearing a paper bag over my head for the next year in shame?
Perhaps I should, but not because of Andrew’s discovery. In that 2000 paper I wrote:
“It is reasonable to believe … that stocks are temporarily over-valued, and that price-to-earnings ratios will soon fall back to more normal levels [this is the ratio of stock prices to trend earnings]. However, if this is the basis for assuming that stocks will provide their historic rates of return in the future, it would be necessary to include a large decline in stock prices in the projections.”
Andrew probably missed it, but we did in fact have a large decline in stock prices (two actually) between 2000 and the present. That is why I am now confident that we can expect higher rates of return in the future. In other words, I have been 100 percent consistent in my projections of returns, what has changed is the market itself.
I appreciate Andrew’s efforts to remind everyone that I called the stock bubble back in 2000 (actually first in 1997).
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
There are good paying jobs for unskilled people managing pension funds. Floyd Norris reports on how these folks, who get 6-figure salaries, expected to get 8 percent returns even when the price to trend earnings ratio in the stock market exceeded 20 and even 30.
People who know arithmetic could have explained to these managers that this would not be possible. Today many of these pensions are seriously underfunded.
There are good paying jobs for unskilled people managing pension funds. Floyd Norris reports on how these folks, who get 6-figure salaries, expected to get 8 percent returns even when the price to trend earnings ratio in the stock market exceeded 20 and even 30.
People who know arithmetic could have explained to these managers that this would not be possible. Today many of these pensions are seriously underfunded.
Read More Leer más Join the discussion Participa en la discusión
A Washington Post piece on German attitudes towards the crisis in the euro zone at one point refers to the high borrowing costs in Spain and Italy. It then tells readers:
“But in Germany’s view, yields on Spanish bonds — just above 7 percent as of Friday — are indeed with precedent, since Spain borrowed at rates well above 8 percent for most of the 1990s, touching 14 percent at one point. Italy had even higher borrowing costs than Spain in the 1990s.”
While the piece later notes that “many economists” say the comparison is misleading because Spain and Italy had higher inflation (much higher) and growth in the 1990s, this is in fact the view of all economists who know arithmetic. Economists focus on the real interest rate, the difference between the nominal interest rate and the inflation rate. Currently inflation in Spain and Italy is running near zero, which means that the nominal interest rates of above 7 percent translate into real interest rates above 7 percent.
By contrast, inflation in both countries averaged more than 5 percent for the first half of the 1990s. This means that a nominal interest rate of 8 percent would have translated into a real interest rate of around 3 percent.
If Germany has people in positions of responsibility who do not understand the concept of the real interest rate it would be very scary. That would be worthy of a major front page story.
A Washington Post piece on German attitudes towards the crisis in the euro zone at one point refers to the high borrowing costs in Spain and Italy. It then tells readers:
“But in Germany’s view, yields on Spanish bonds — just above 7 percent as of Friday — are indeed with precedent, since Spain borrowed at rates well above 8 percent for most of the 1990s, touching 14 percent at one point. Italy had even higher borrowing costs than Spain in the 1990s.”
While the piece later notes that “many economists” say the comparison is misleading because Spain and Italy had higher inflation (much higher) and growth in the 1990s, this is in fact the view of all economists who know arithmetic. Economists focus on the real interest rate, the difference between the nominal interest rate and the inflation rate. Currently inflation in Spain and Italy is running near zero, which means that the nominal interest rates of above 7 percent translate into real interest rates above 7 percent.
By contrast, inflation in both countries averaged more than 5 percent for the first half of the 1990s. This means that a nominal interest rate of 8 percent would have translated into a real interest rate of around 3 percent.
If Germany has people in positions of responsibility who do not understand the concept of the real interest rate it would be very scary. That would be worthy of a major front page story.
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
The Post did readers a great service in providing another example of how the government makes rich people rich. The article is about how a set of drugs intended to anemia, turned out to be both ineffective and potentially harmful.
The two companies that had government-granted patent monopolies on these drugs, Amgen and Johnson & Johnson, gained tens of billions of revenue from these drugs over the last two decades. The article points out that they attempted to conceal evidence that their drugs could be harmful and used their political connections to get politicians to lobby the Food and Drug Administration on their behalf. They also designed a payments system that effectively paid off doctors to use large amounts of their drugs.
This is exactly the sort of corruption that economic theory predicts will result when the government puts an artificial barrier in the market (i.e. a patent monopoly) that allows companies to sell a product at hundreds or even thousands of times their cost of production. It might have been useful if the Post had included the views of an economist who could explain this point to readers.
The Post did readers a great service in providing another example of how the government makes rich people rich. The article is about how a set of drugs intended to anemia, turned out to be both ineffective and potentially harmful.
The two companies that had government-granted patent monopolies on these drugs, Amgen and Johnson & Johnson, gained tens of billions of revenue from these drugs over the last two decades. The article points out that they attempted to conceal evidence that their drugs could be harmful and used their political connections to get politicians to lobby the Food and Drug Administration on their behalf. They also designed a payments system that effectively paid off doctors to use large amounts of their drugs.
This is exactly the sort of corruption that economic theory predicts will result when the government puts an artificial barrier in the market (i.e. a patent monopoly) that allows companies to sell a product at hundreds or even thousands of times their cost of production. It might have been useful if the Post had included the views of an economist who could explain this point to readers.
Read More Leer más Join the discussion Participa en la discusión
Morning Edition had a segment on a change in public pension fund accounting that will show many funds have a much larger shortfall. The piece included comments from a Stanford business school professor, Joshua Rauh, that complained that the discount rate assumed by pension funds assumed that future pension fund returns will be like past returns.
Rauh’s statement to this effect is inaccurate, or at least incomplete. The main question mark in pension fund returns is the return on stock, which typically accounts for 60-70 percent of pension fund assets. While stock returns can fluctuate hugely year to year, over the long-term (like the 30-year time horizon of most pension funds) they are a relatively predictable function of current price to earnings ratios and the rate of growth of the economy.
Given current price to earnings ratios in the market, it would require an unprecedented economic collapse for the market to yield substantially lower returns than what pension funds are now assuming. Ruling out a complete economic collapse might be assuming that the future will be like the past, but this sort of extrapolation is pretty much impossible to avoid.
The piece also wrongly implied that the Governmental Accounting Standards Board (GASB) agreed with Rauh’s assessment in its proposed changes to accounting standards. This is not true. A pension fund that is fully funded using the 8.0 percent discount rate that Rauh criticized would not see any change in its funding status under the new GASB rules. Only pensions that are underfunded by the old accounting standard that would see a change in their calculated level of funding.
Morning Edition had a segment on a change in public pension fund accounting that will show many funds have a much larger shortfall. The piece included comments from a Stanford business school professor, Joshua Rauh, that complained that the discount rate assumed by pension funds assumed that future pension fund returns will be like past returns.
Rauh’s statement to this effect is inaccurate, or at least incomplete. The main question mark in pension fund returns is the return on stock, which typically accounts for 60-70 percent of pension fund assets. While stock returns can fluctuate hugely year to year, over the long-term (like the 30-year time horizon of most pension funds) they are a relatively predictable function of current price to earnings ratios and the rate of growth of the economy.
Given current price to earnings ratios in the market, it would require an unprecedented economic collapse for the market to yield substantially lower returns than what pension funds are now assuming. Ruling out a complete economic collapse might be assuming that the future will be like the past, but this sort of extrapolation is pretty much impossible to avoid.
The piece also wrongly implied that the Governmental Accounting Standards Board (GASB) agreed with Rauh’s assessment in its proposed changes to accounting standards. This is not true. A pension fund that is fully funded using the 8.0 percent discount rate that Rauh criticized would not see any change in its funding status under the new GASB rules. Only pensions that are underfunded by the old accounting standard that would see a change in their calculated level of funding.
Read More Leer más Join the discussion Participa en la discusión
