For those young uns out there, Pets.com was the poster child of the craziness of the 90s stock bubble. At the peak of the bubble it had a market valuation in the hundreds of millions of dollars even though it had never made a profit nor any clear way of making a profit.
While most people now recognize the craziness of the stock bubble years, there are some people, apparently including the NYT editorial board, who still do not recognize the craziness of the housing bubble years. Its editorial today calls for stronger measures from the Obama administration in the hope of “restoring home equity,” which in turn it tells readers “is also crucial to getting consumers to spend again.”
Umm, no it is not crucial to getting consumers to spend again since consumers are already spending at a higher than normal rate. The saving rate is currently around 5 percent compared to a pre-bubble average of more than 8 percent. It continues to be the case that consumption is higher than normal, not lower than normal. This corresponds to a situation in which households are putting little aside for retirement. That is especially dangerous when almost all the serious people in Washington want to cut their Social Security and Medicare benefits.
In the short term, the demand lost from the housing bubble will have to be filled by government deficits. In the longer term we will have to get the dollar down to increase exports. This is what Mr. Arithmetic says and no one has ever won an argument with him.
For those young uns out there, Pets.com was the poster child of the craziness of the 90s stock bubble. At the peak of the bubble it had a market valuation in the hundreds of millions of dollars even though it had never made a profit nor any clear way of making a profit.
While most people now recognize the craziness of the stock bubble years, there are some people, apparently including the NYT editorial board, who still do not recognize the craziness of the housing bubble years. Its editorial today calls for stronger measures from the Obama administration in the hope of “restoring home equity,” which in turn it tells readers “is also crucial to getting consumers to spend again.”
Umm, no it is not crucial to getting consumers to spend again since consumers are already spending at a higher than normal rate. The saving rate is currently around 5 percent compared to a pre-bubble average of more than 8 percent. It continues to be the case that consumption is higher than normal, not lower than normal. This corresponds to a situation in which households are putting little aside for retirement. That is especially dangerous when almost all the serious people in Washington want to cut their Social Security and Medicare benefits.
In the short term, the demand lost from the housing bubble will have to be filled by government deficits. In the longer term we will have to get the dollar down to increase exports. This is what Mr. Arithmetic says and no one has ever won an argument with him.
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The NYT discussed Defense Secretary Leon Panetta’s responsibilities and told readers that one of the issues on the table is “the financial health of a debt-ridden country.” It is not clear how the NYT made the determination that the United States is debt ridden. The financial markets seem to disagree with its assessment since they are willing to lend money to the United States at very low interest rates.
The more obvious economic problem is massive unemployment and the fact that the economy is operating far below its potential and is projected to continue to do so long into the future. If the NYT were listing the economic problems facing the country, unemployment might be the more obvious one to mention, but in any case, the sort of speculation that appears in this article is ordinarily left to opinion pages.
The NYT discussed Defense Secretary Leon Panetta’s responsibilities and told readers that one of the issues on the table is “the financial health of a debt-ridden country.” It is not clear how the NYT made the determination that the United States is debt ridden. The financial markets seem to disagree with its assessment since they are willing to lend money to the United States at very low interest rates.
The more obvious economic problem is massive unemployment and the fact that the economy is operating far below its potential and is projected to continue to do so long into the future. If the NYT were listing the economic problems facing the country, unemployment might be the more obvious one to mention, but in any case, the sort of speculation that appears in this article is ordinarily left to opinion pages.
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That is sort of striking since its President Cristina Kirchner seems headed for re-election with a clear majority of the votes. Argentina has also enjoyed the strongest growth over the last decade of any country in Latin America. Nonetheless all 5 of the NYT’s sources in an article discussing the election were critical of Kirchner.
This quote deserves special mention:
“‘This election really seemed to defy the normal rules of politics,’ said Michael Shifter, the president of the Inter-American Dialogue in Washington. ‘But that is what happens when things are going well in the economy and there is a dearth of alternatives.'”
It really should not have been hard to find someone who has positive things to say about President Kirchner. It appears that the NYT is relying on a narrow range of sources who are more in tune with Argentina’s creditors than the majority of the Argentine population.
The article at one point comments negatively about the state of Argentina’s economy, noting that growth is expected to slow to 4.6 percent next year. This rate would still be almost a full percentage point faster than the average growth rate in Brazil over the last decade. Brazil is described as a positive contrast to Argentina in the article.
That is sort of striking since its President Cristina Kirchner seems headed for re-election with a clear majority of the votes. Argentina has also enjoyed the strongest growth over the last decade of any country in Latin America. Nonetheless all 5 of the NYT’s sources in an article discussing the election were critical of Kirchner.
This quote deserves special mention:
“‘This election really seemed to defy the normal rules of politics,’ said Michael Shifter, the president of the Inter-American Dialogue in Washington. ‘But that is what happens when things are going well in the economy and there is a dearth of alternatives.'”
It really should not have been hard to find someone who has positive things to say about President Kirchner. It appears that the NYT is relying on a narrow range of sources who are more in tune with Argentina’s creditors than the majority of the Argentine population.
The article at one point comments negatively about the state of Argentina’s economy, noting that growth is expected to slow to 4.6 percent next year. This rate would still be almost a full percentage point faster than the average growth rate in Brazil over the last decade. Brazil is described as a positive contrast to Argentina in the article.
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Workers work for pay. Most of the country understands this fact, but apparently the reporters and editors at National Public Radio do not. A Morning Edition segment [sorry, no link yet] on the impact that Alabama’s crackdown on illegal immigrants is having on the ability of farms in the state to get workers never once mentioned the wages being offered for this work.
The piece repeated complaints by farmers that they could not get citizens or green card holders to work in their fields because the work is too hard. The inability to get workers presumably reflects the pay being offered. For example, if the farmers were offering $40 an hour plus health care benefits, then they would likely be able to fund people willing to work in their fields.
Of course offering higher wages would make most of these farms unprofitable, but it is not true that people in the United States are literally unwilling to do farm work. The question is the wage at which they would be willing to work.
Workers work for pay. Most of the country understands this fact, but apparently the reporters and editors at National Public Radio do not. A Morning Edition segment [sorry, no link yet] on the impact that Alabama’s crackdown on illegal immigrants is having on the ability of farms in the state to get workers never once mentioned the wages being offered for this work.
The piece repeated complaints by farmers that they could not get citizens or green card holders to work in their fields because the work is too hard. The inability to get workers presumably reflects the pay being offered. For example, if the farmers were offering $40 an hour plus health care benefits, then they would likely be able to fund people willing to work in their fields.
Of course offering higher wages would make most of these farms unprofitable, but it is not true that people in the United States are literally unwilling to do farm work. The question is the wage at which they would be willing to work.
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During the run-up of the housing bubble the Washington Post’s main and often exclusive source in stories on the housing market was David Lereah, the chief economist for the National Association of Realtors and the author of the 2005 bestseller, Why The Real Estate Boom Will Not Bust and How You Can Profit From It. A front page article in today’s newspaper indicates that its understanding of the housing market has not improved much.
Many of the basic facts in the article are wrong. For example, it tells readers that, “a quarter of all homeowners are ‘underwater,'” owing more than their homes are worth. In fact, the correct statement is that a quarter (actually 22.5 percent in the Core Logic piece that is linked to in the piece) of mortgage holders are underwater. Since roughly one-third of all homes do not carry a mortgage, this translates into about 16 percent of all homeowners.
The piece also tells readers that:
“Housing prices remain near a crisis low. Millions of people are deeply indebted, owing more than their properties are worth, and many have lost their homes to foreclosure or are likely to do so. Economists increasingly say that, as a result, Americans are too scared to spend money, depriving the economy of its traditional engine of growth.”
Actually, rather than being near a crisis low, house prices can be better described as still being about 10 percent above their trend level. If the Post has some reason to believe that the fundamentals in the housing market justify this divergence from a 100-year long trend in nationwide house prices it should have discussed it in this article.
Also, consumption continues to be higher than normal relative to disposable income, not lower, as this quote asserts. The saving rate is currently hovering near 5 percent, compared to a post-war pre-bubble average of more than 8 percent. Consumption is down relative to its bubble peaks, but this is easily explained by the loss of close to $7 trillion in housing bubble wealth and $6 trillion in stock market wealth, not being too scared to spend.
Source: Bureau of Economic Analysis.
The article also includes the bizarre and unsourced assertion that:
“Behind the scenes, Geithner had grave concerns that if courts could change the terms of mortgage loans after the fact, banks would be less likely to lend, reducing the availability of credit in the financial system.”
It is certainly possible that Geithner claims that allowing bankruptcy judges to alter mortgages would reduce lending, but the Post has no way of knowing that he actually believed this. As a practical matter, it is difficult to see why it would have much impact on lending, although it would undoubtedly reduce bank profits.
During the run-up of the housing bubble the Washington Post’s main and often exclusive source in stories on the housing market was David Lereah, the chief economist for the National Association of Realtors and the author of the 2005 bestseller, Why The Real Estate Boom Will Not Bust and How You Can Profit From It. A front page article in today’s newspaper indicates that its understanding of the housing market has not improved much.
Many of the basic facts in the article are wrong. For example, it tells readers that, “a quarter of all homeowners are ‘underwater,'” owing more than their homes are worth. In fact, the correct statement is that a quarter (actually 22.5 percent in the Core Logic piece that is linked to in the piece) of mortgage holders are underwater. Since roughly one-third of all homes do not carry a mortgage, this translates into about 16 percent of all homeowners.
The piece also tells readers that:
“Housing prices remain near a crisis low. Millions of people are deeply indebted, owing more than their properties are worth, and many have lost their homes to foreclosure or are likely to do so. Economists increasingly say that, as a result, Americans are too scared to spend money, depriving the economy of its traditional engine of growth.”
Actually, rather than being near a crisis low, house prices can be better described as still being about 10 percent above their trend level. If the Post has some reason to believe that the fundamentals in the housing market justify this divergence from a 100-year long trend in nationwide house prices it should have discussed it in this article.
Also, consumption continues to be higher than normal relative to disposable income, not lower, as this quote asserts. The saving rate is currently hovering near 5 percent, compared to a post-war pre-bubble average of more than 8 percent. Consumption is down relative to its bubble peaks, but this is easily explained by the loss of close to $7 trillion in housing bubble wealth and $6 trillion in stock market wealth, not being too scared to spend.
Source: Bureau of Economic Analysis.
The article also includes the bizarre and unsourced assertion that:
“Behind the scenes, Geithner had grave concerns that if courts could change the terms of mortgage loans after the fact, banks would be less likely to lend, reducing the availability of credit in the financial system.”
It is certainly possible that Geithner claims that allowing bankruptcy judges to alter mortgages would reduce lending, but the Post has no way of knowing that he actually believed this. As a practical matter, it is difficult to see why it would have much impact on lending, although it would undoubtedly reduce bank profits.
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The Post’s Outlook section featured a piece by Roberto Suro and Marcelo Suarez-Orozco, a public policy and anthropology professor, respectively that purports to examine a paradox on the public’s view on immigration. The piece tells readers:
“But our public disagreements are matched by private conflicts. When it comes to immigration, we are not only a divided nation — we have a divided brain.
“The national ambivalence is evident. A Gallup survey this year found that a majority of Americans, 53 percent, said it was ‘extremely important’ for the government to halt the flow of illegal immigrants at the border. Yet an even larger majority, 64 percent, said that illegal immigrants already in the country should be allowed to remain and become U.S. citizens if they meet certain requirements.”
If there is a conflict in these views it is difficult to see what it is. It is difficult to understand how someone could want to see the flow of illegal immigrants continue. The people coming over the border under current conditions risk death in the desert, as well as being robbed or even killed by the coyotes who bring them over. Once in the country they live in an underworld with limited access to health care and education for their children and facing a constant fear of deportation.
If there is a conflict between wanting to see this flow of illegal immigration replaced by a legalized flow, and wanting for the people who have already made lives for themselves in the U.S. to be offered a path to citizenship, it is difficult to see what it is.
The Post’s Outlook section featured a piece by Roberto Suro and Marcelo Suarez-Orozco, a public policy and anthropology professor, respectively that purports to examine a paradox on the public’s view on immigration. The piece tells readers:
“But our public disagreements are matched by private conflicts. When it comes to immigration, we are not only a divided nation — we have a divided brain.
“The national ambivalence is evident. A Gallup survey this year found that a majority of Americans, 53 percent, said it was ‘extremely important’ for the government to halt the flow of illegal immigrants at the border. Yet an even larger majority, 64 percent, said that illegal immigrants already in the country should be allowed to remain and become U.S. citizens if they meet certain requirements.”
If there is a conflict in these views it is difficult to see what it is. It is difficult to understand how someone could want to see the flow of illegal immigrants continue. The people coming over the border under current conditions risk death in the desert, as well as being robbed or even killed by the coyotes who bring them over. Once in the country they live in an underworld with limited access to health care and education for their children and facing a constant fear of deportation.
If there is a conflict between wanting to see this flow of illegal immigration replaced by a legalized flow, and wanting for the people who have already made lives for themselves in the U.S. to be offered a path to citizenship, it is difficult to see what it is.
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The New York Times used an article on Rhode Island’s pension system to denounce “the nation’s profligate ways,” which it warns will catch up with us. Newspapers are supposed to leave such editorializing to the opinion pages.
In fact there is good reason to believe that the nation’s obsession with frugality is now catching up with us. The country lost close to $1.4 trillion in annual demand due to the collapse of the housing bubble. In the short term this can only be replaced by larger government deficits. However, because politicians in Washington do not want larger deficits, the economy is operating at close to 6 percent below its potential GDP and millions of workers are needlessly unemployed or underemployed. Since there is very limited support for the unemployed in the United States, this situation is a disaster for the millions of people facing it.
The article also gets some of the facts on state and local pensions wrong. It tells readers:
“By conventional measures, state and local pensions nationwide now face a combined shortfall of about $3 trillion. Officials argue that, by their accounting, the total is far less.”
Actually, the conventional measure to impute pension liabilities implies a shortfall of $1 trillion. Many economists are insisting in using a discount rate that implies the larger $3 trillion figure. If state and local governments actually adopted this discount rate and used it to guide policy, then it would mean large tax increases in the present, so that little or no money had to be contributed to pensions in the future. It is difficult to see how this would be good public policy.
The piece then complains that:
“But with pensions, hope often triumphs over experience. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their of 8.25 percent; the real number for the last decade is about 2.4 percent.”
This statement is incredible because it is precisely because pensions had a low return in the last decade that it is reasonable to assume a higher return in the future. The big issue in pension accounting is stock returns. These will depend on the price to earnings ratio. At the start of the last decade the price to earnings ratio in the stock market was over 30. This implied that returns would be very low over any long period since stocks cannot possibly give their historic average 10 percent return (7 percent real), when the price to earnings ratio is already at such inflated levels. (This paper that I co-authored with Christian Weller provides a discussion of this issue.)
However, now that the market has fallen sharply relative to trend earnings, it is again plausible that stocks will provide 10 percent nominal returns in the decades ahead. In fact, it is almost impossible to describe a scenario in which the market provides a return that is substantially below this level.
The New York Times used an article on Rhode Island’s pension system to denounce “the nation’s profligate ways,” which it warns will catch up with us. Newspapers are supposed to leave such editorializing to the opinion pages.
In fact there is good reason to believe that the nation’s obsession with frugality is now catching up with us. The country lost close to $1.4 trillion in annual demand due to the collapse of the housing bubble. In the short term this can only be replaced by larger government deficits. However, because politicians in Washington do not want larger deficits, the economy is operating at close to 6 percent below its potential GDP and millions of workers are needlessly unemployed or underemployed. Since there is very limited support for the unemployed in the United States, this situation is a disaster for the millions of people facing it.
The article also gets some of the facts on state and local pensions wrong. It tells readers:
“By conventional measures, state and local pensions nationwide now face a combined shortfall of about $3 trillion. Officials argue that, by their accounting, the total is far less.”
Actually, the conventional measure to impute pension liabilities implies a shortfall of $1 trillion. Many economists are insisting in using a discount rate that implies the larger $3 trillion figure. If state and local governments actually adopted this discount rate and used it to guide policy, then it would mean large tax increases in the present, so that little or no money had to be contributed to pensions in the future. It is difficult to see how this would be good public policy.
The piece then complains that:
“But with pensions, hope often triumphs over experience. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their of 8.25 percent; the real number for the last decade is about 2.4 percent.”
This statement is incredible because it is precisely because pensions had a low return in the last decade that it is reasonable to assume a higher return in the future. The big issue in pension accounting is stock returns. These will depend on the price to earnings ratio. At the start of the last decade the price to earnings ratio in the stock market was over 30. This implied that returns would be very low over any long period since stocks cannot possibly give their historic average 10 percent return (7 percent real), when the price to earnings ratio is already at such inflated levels. (This paper that I co-authored with Christian Weller provides a discussion of this issue.)
However, now that the market has fallen sharply relative to trend earnings, it is again plausible that stocks will provide 10 percent nominal returns in the decades ahead. In fact, it is almost impossible to describe a scenario in which the market provides a return that is substantially below this level.
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Mankiw told readers that:
“to maintain current levels of taxation, we will need to substantially reduce spending on the social safety net, including , , and the new health care program sometimes called Obamacare.”
Actually, all we have to do is to fix our private health care system. If per person health care costs in the United States were the same as in any other wealthy country we would be looking at huge budget surpluses, not deficits. However, the physicians, the hospitals, the drug companies and other providers are incredibly powerful interest groups. They try to ensure that their over-payments, relative to other countries, are not even discussed in debates over budget policy.
Mankiw also errors in comparing the U.S. to Greece. Even in the worst case scenario, where financial markets get freaked over the deficit, the comparison would be to Zimbabwe. Unlike Greece, the United States has its own currency. In the event that the financial markets would not buy up U.S. government bonds, the Fed could do so directly.
This raises a risk of inflation, but if it is just a case of financial markets getting irrational jittery, then the United States need not be troubled. Of course for Greece and other countries without their own currency, it is every bit as bad when fears in the financial market have no basis in reality as when they do. There is nothing that the government can do to counteract them.
Mankiw told readers that:
“to maintain current levels of taxation, we will need to substantially reduce spending on the social safety net, including , , and the new health care program sometimes called Obamacare.”
Actually, all we have to do is to fix our private health care system. If per person health care costs in the United States were the same as in any other wealthy country we would be looking at huge budget surpluses, not deficits. However, the physicians, the hospitals, the drug companies and other providers are incredibly powerful interest groups. They try to ensure that their over-payments, relative to other countries, are not even discussed in debates over budget policy.
Mankiw also errors in comparing the U.S. to Greece. Even in the worst case scenario, where financial markets get freaked over the deficit, the comparison would be to Zimbabwe. Unlike Greece, the United States has its own currency. In the event that the financial markets would not buy up U.S. government bonds, the Fed could do so directly.
This raises a risk of inflation, but if it is just a case of financial markets getting irrational jittery, then the United States need not be troubled. Of course for Greece and other countries without their own currency, it is every bit as bad when fears in the financial market have no basis in reality as when they do. There is nothing that the government can do to counteract them.
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The NYT did some mind reading to better serve its readers telling us that businesses “consider” a law requiring a 3 percent withholding on federal contracts to ensure tax compliance to be “burdensome.” The reason for this withholding is that many businesses cheat on their taxes. The government loses tens of billions of dollars a year to businesses who do not pay the income tax they owe.
Some people may be familiar with the requirement for withholding taxes, since they work for a living and employers are obligated under the law to have withholding. This requirement for government contractors is similar, except that it is almost certain to be lower than their actual tax liability.
However, the NYT told readers that businesses consider it burdensome to have to actually pay their taxes. It did not bother to tell readers why this withholding was there in the first place. In fact, the repeal of this provision can be viewed as a shameless pander to small businesses by politicians seeking their support in the next election.
The NYT did some mind reading to better serve its readers telling us that businesses “consider” a law requiring a 3 percent withholding on federal contracts to ensure tax compliance to be “burdensome.” The reason for this withholding is that many businesses cheat on their taxes. The government loses tens of billions of dollars a year to businesses who do not pay the income tax they owe.
Some people may be familiar with the requirement for withholding taxes, since they work for a living and employers are obligated under the law to have withholding. This requirement for government contractors is similar, except that it is almost certain to be lower than their actual tax liability.
However, the NYT told readers that businesses consider it burdensome to have to actually pay their taxes. It did not bother to tell readers why this withholding was there in the first place. In fact, the repeal of this provision can be viewed as a shameless pander to small businesses by politicians seeking their support in the next election.
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One of the items that many of the forecasters warning of a double dip held up as evidence was the drop in Philadelphia Fed’s manufacturing index in September. It showed a reading of -17.5, which is definitely pretty bad. While the index, like most indexes, does generally move in step with the overall economy, the Philadelphia Fed’s coverage is a relatively narrow slice of the country (mostly eastern Pennsylvania and New Jersey). Since this reading was out of line with most other data, it seemed more likely that the Philadelphia Fed number was an anomaly rather than it was picking up information not seen elsewhere.
The October Philadelphia Fed index was released yesterday. The reading was a moderately healthy 8.7. It doesn’t seem that this one received as much attention as the negative reading from last month. It would have been interesting to interview the double-dip forecasters to ask whether they had revised their assessment.
The other important data released yesterday was the weekly unemployment claims number, which again came in just over 400,000. This does not suggest strong growth, but it does suggest some amount of job creation, rather than the job loss we would see in a recession.
None of this should be seen as celebratory. The economy looks to be growing in a range of 2-3 percent. This is roughly fast enough to keep even with the growth of the labor force. That implies that we are making zero progress in putting people back to work.
Unfortunately, because many economists misread the economy and raised the specter of a double-dip, this slow growth is likely to be seen as good. It isn’t and the double-dippers have done the country a serious disservice by creating a set of incredibly low expectations against which economic performance is now being measured. And the media deserve much of the blame for being suckered.
One of the items that many of the forecasters warning of a double dip held up as evidence was the drop in Philadelphia Fed’s manufacturing index in September. It showed a reading of -17.5, which is definitely pretty bad. While the index, like most indexes, does generally move in step with the overall economy, the Philadelphia Fed’s coverage is a relatively narrow slice of the country (mostly eastern Pennsylvania and New Jersey). Since this reading was out of line with most other data, it seemed more likely that the Philadelphia Fed number was an anomaly rather than it was picking up information not seen elsewhere.
The October Philadelphia Fed index was released yesterday. The reading was a moderately healthy 8.7. It doesn’t seem that this one received as much attention as the negative reading from last month. It would have been interesting to interview the double-dip forecasters to ask whether they had revised their assessment.
The other important data released yesterday was the weekly unemployment claims number, which again came in just over 400,000. This does not suggest strong growth, but it does suggest some amount of job creation, rather than the job loss we would see in a recession.
None of this should be seen as celebratory. The economy looks to be growing in a range of 2-3 percent. This is roughly fast enough to keep even with the growth of the labor force. That implies that we are making zero progress in putting people back to work.
Unfortunately, because many economists misread the economy and raised the specter of a double-dip, this slow growth is likely to be seen as good. It isn’t and the double-dippers have done the country a serious disservice by creating a set of incredibly low expectations against which economic performance is now being measured. And the media deserve much of the blame for being suckered.
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