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Government

United States

Sen. Cornyn Unfairly Maligns Consumer Watchdog Agency

On the third day of Brett Kavanaugh’s Supreme Court confirmation hearing, Senator John Cornyn trotted out what has become a staple GOP criticism of the nation’s consumer watchdog agency, the Consumer Financial Protection Bureau. The agency, Cornyn lamented, has “vast powers to get into the personal financial information of every American… really more authority than we would ever give any of our intelligence agencies.” It’s a charge that has been echoed by several of his compatriots on the right, including Chairman of the Senate Committee on Banking, Housing and Urban Affairs, Mike Crapo.

The Consumer Financial Protection Bureau has drawn the ire of Wall Street executives and their allies on Capitol Hill since its inception. Formed in the wake of the 2007-08 financial crisis as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, the Bureau is tasked with regulating financial products and services and protecting consumers from abusive practices by financial institutions. This has resulted in the return of nearly $2 billion to customers who were duped by credit card companies and refunds of over $60 million to Americans extorted by debt collectors.

CEPR and Hayley Brown / October 03, 2018

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Getting Serious About Debt and Deficits: The Deficit Hawks Did Enormous Harm to Our Kids

I have pasted below a post from Patreon page. I had planned to wait a little longer, but this NYT piece convinced me to post it now.

Debt and Deficits, Again

With the possibility that the Democrats will retake Congress and press demands for increased spending in areas like health care, education, and child care, the deficit hawks (DH) are getting prepared to awaken from their dormant state. We can expect major news outlets to be filled with stories on how the United States is on its way to becoming the next Greece or Zimbabwe. For this reason, it is worth taking a few moments to reorient ourselves on the topic.

First, we need some basic context. The DH will inevitably point to the fact that deficits are at historically high levels for an economy that is near full employment. They will also point to a rapidly rising debt-to-GDP ratio. Both complaints are correct, the question is whether there is a reason for anyone to care.

Just to remind everyone, the classic story of deficits being bad is that they crowd out investment and net exports, which makes us poorer in the future than we would otherwise be. The reason is that less investment means less productivity growth, which means that people will have lower income five or ten years in the future than if we had smaller budget deficits. Lower net exports mean that foreigners are accumulating US assets, which will give them a claim on our future income.

Debt is bad because it means a larger portion of future income will go to people who own the debt. This means that the government has to use up a larger share of the money it raises in taxes to pay interest on the debt rather than for services like health care and education. Or, to put it in a more Keynesian context, there will be more demand coming from people who own the debt, which means the government would need higher taxesnto support the same level of spending than would otherwise be the case.

There is an important intermediate step in the deficit-crowding out story that is worth stating explicitly. The Federal Reserve Board could opt to keep interest rates low by buying up debt directly. The assumption in the crowding out story is that the Fed allows interest rates to rise or even deliberately raises them, presumably because it is concerned about inflation.

If there is no basis for inflationary concerns, there is no reason that the Fed could not simply keep interest rates low in spite of a large deficit, and therefore prevent any crowding out. The question then is whether a budget deficit is pushing the economy up against its limits, leading to inflationary pressures. When we look at the various sources of demand in the economy, there are two reasons for thinking that a larger budget deficit would be needed today to sustain something close to full employment than would have been true four decades ago.

CEPR / September 26, 2018

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Response to Bernanke On the Bubble Versus Financial Crisis Story of the Great Recession

Ben Bernanke responded to Paul Krugman's post last week, which agreed with my argument that the main cause of the Great Recession was the collapse of the housing bubble rather than the financial crisis. Essentially, Bernanke repeats his argument in the earlier paper that the collapse of Lehman and the resulting financial crisis led to a sharp downturn in non-residential investment, residential investment, and consumption. I'll let Krugman speak for himself, but I see this as not really answering the key questions.

I certainly would not dispute that the financial crisis hastened the decline in house prices, which was already well underway by September of 2008. It also hastened the end of the housing bubble-led consumption boom, which again was in the process of ending already as the housing wealth that drove it was disappearing.

I'll come back to these points in a moment, but I want to focus on an issue that Bernanke highlights, the drop in non-residential investment following the collapse of Lehman. What Bernanke seemed to have both missed at the time, and continues to miss now, is that there was a bubble in non-residential construction. This bubble essentially grew in the wake of the collapsing housing bubble.

Prices of non-residential structures increased by roughly 50 percent between 2004 and 2008 (see Figure 5 here). This run-up in prices was associated with an increase in investment in non-residential structures from 2.5 percent of GDP in 2004 to 4.0 percent of GDP in 2008 (see Figure 4).

This bubble burst following the collapse of Lehman, with prices falling back to their pre-bubble level. Investment in non-residential structures fell back to 2.5 percent in GDP. This drop explains the overwhelming majority of the fall in non-residential investment in 2009. There was only a modest decline in the other categories of non-residential investment.

CEPR / September 22, 2018