May 13, 2008
Democratic Plan to Rescue Banks Stalls in Senate
That would not have been an entirely fair characterization of Senator Dodd's housing bill, but neither is it entirely fair to describe the bill as an effort to "rescue homeowners at risk of foreclosure," as the Post does today.
The bill would allow banks to substantially reduce their losses on houses facing foreclosure. The banks would be able to decide which loans it puts up for refinancing. Presumably it would only put in loans on which it anticipated large losses. The appraisal mechanism in the bill is also likely to have many of the new loans guaranteed at bubble-inflated prices, thereby reducing banks' losses on their loans.
Clearly the Democrats understand the ways in which this bill will be beneficial to banks. It is wrong to inaccurate to describe it as simply an effort to rescue homeowners.
--Dean Baker
May 12, 2008
The NYT Calls for Unaffordable Housing
The NYT took a strong position on its editorial page today demanding that President Bush join its effort to keep house prices unaffordable for tens of millions of families. That's right, the NYT wants housing to be unaffordable.
They didn't use this term, but they complained that house prices were falling and they wanted President Bush to sign legislation to keep house prices high. While efforts aimed at keeping the housing bubble from deflating might be beneficial to those looking to sell their homes in the next year or two, they are incredibly bad public policy.
A house price support program will cost the taxpayers billions of dollars, and it will inevitably fail, since high house prices will lead to more construction, which will lead to more oversupply, which will place more downward pressure on prices. Unless the government is willing to spend infinite amounts of money, its house price support program will eventually fail.
The effort to temporarily prop up house prices is also likely to hurt many of the families who it claims to be helping. In many cases, these families will be paying much more in housing costs to stay in a house that they "own," than they would pay to rent a comparable unit. Since the house price will eventually fall, they will never accumulate any equity. Getting moderate income families to divert money from health care and child care to paying a mortgage is not a favor to them.
--Dean Baker
May 11, 2008
Failing to Meet a Pension Obligation Isn't "Like" Breaking a Contractual Promise, It is Breaking a Contractual Promise
The Washington Post has an extraordinarily cavalier attitude toward commitments to workers. Today it has an article in which it reports on the status of public pension funds. At one point it quotes a researcher at the Pew Center on the States as saying that defaulting on the pension funds would make public officials feel "like you are breaking a contractual promise."
Defaulting on pension obligations to workers certainly should make public officials feel like they are breaking contractual obligations, because that is exactly what they would be doing. These workers worked for their pay and their pensions.
While the Post implies that meeting these obligations is a matter of choice for public officials, (earlier the article asserts that fund managers will "have to choose whether to continue paying out or renege on benefits promised to retirees") in reality, they have little choice except declaring bankruptcy. If governments do not meet their legal obligations to retired workers, then the workers will be able to go to court and seize public assets such as the city halls, police and fire stations and schoosl. They will be able to sell off this property to collect the benefits owed them by the governments.
--Dean Baker
May 10, 2008
The United States Has NOT Been a "Remarkably Solid" Place to Put Money
Over the last six years, the United States has been by far the largest beneficiary of foreign aid in the history of the world. Foreigners have been willing to put more than $3 trillion in dollar denominated assets, the vast majority of which provided negative returns (i.e. they lost money) to their foreign holders.
There are reasons why foreigners do put money in the United States, even at a loss, the most obvious of which is that foreign central banks (e.g. China and Japan) want to keep the dollar high against their currency in order to preserve their export markets. For these foreign central banks, the point is not to get a good return on their investment or even the "safety" of their investment, the point is to preserve an export market as part of an economic growth strategy.
However, there is a frequently heard claim, repeated by the NYT today, that foreign investors somehow need to hold dollars because the United States is the safest or most secure place to hold wealth. It is not clear what people are thinking when they make such assertions.
When discussing investments, the term "safe" usually means that the investment will hold its value. Investments in dollars have not held their value over the last six years as the dollar has fallen consistently and sharply over most of this period. The returns in dollars have often been very poor as well (the current ten-year treasury bond rate is less than 4.0 percent), so that investors have not come close to being compensated for the fall in the dollar by high returns. In other words, the dollar has not been and is not a "safe" currency by normal investment standards.
If the claim is that the United States will not disappear as a country, this is almost certainly true, but it is also almost certainly true of dozens of other countries around the world. Even a country like Mexico or Chile is very unlikely to disappear. Furthermore, even when such countries do disappear, such as with the dismantling of the Soviet Union or Czechoslovakia, debts are most often paid in an orderly manner. So the United States hardly stands out by having the expectation of continued existence.
In short, the decision of so many investors around the world to continue to hold much of their wealth in dollar denominated assets cannot be readily explained by other an interest in returns or the safety of dollar denominated assets. Some other explanation is needed.
My personal guess is that the dollar is safe in that an investment fund manager who loses his/her fund a fortune by investing in dollars does not have to worry about any consequences. For example, many fund managers must have lost 20-30 percent on their funds, measured in euros or Canadian dollars, over the last couple of years. Few, if any, of these managers will be fired for this loss.
On the other hand, if they had incurred similar losses by investing in Argentina or Mexico, they probably would be getting an unemployment check today. Investing in dollar assets provides fund managers with the same right to be stupid that investing in the stock market in the late 90s provided fund managers at the time. Even though it was obvious that such investments would be big losers, the managers that lost their clients billions could just say "who could have known?" and get off the hook.
As long as fund managers know that they can lose their clients a fortune with impunity by investing in dollars, then they will continue to do so. If they are forced to be held accountable for dollar denominated investments in the same way that they are accountable for other investments then they will demand the same returns from investments in the United States that they expect from other investments.
--Dean Baker
Frank-Dodd Bailouts: Arithmetic, Not Ideology
It is remarkable how often reporters/columnists feel the need to assert that political disputes are about ideological issues. Why do they feel the need to make assertions for which there is generally no evidence?
Politicians get elected by getting the support of individuals and groups with power. They don't get elected by being political philosophers.
Contrary to what Gretchen Morgenson (ordinarily a very good reporter) tells NYT readers, the battle over the Frank-Dodd bailout plans is not about ideology. The bills are crafted in ways that make them very friendly to banks. The banks get to decide which loans get put into the program. Presumably they don't make this decision unless they think they will benefit from the bailout.
In addition, the appraisals on which the government's guarantee price is set are based on sale prices, which may still be seriously inflated in the bubble markets. It would have been easy to avoid the problem of inflated appraisals by setting the guarantee price based on a multiple of rents. However, the supporters of these bills chose not to go this route.
At least some of the opposition to these bills is based on the view that giving more taxpayer dollars to banks should not be a higher priority than paying for health care, child care and other important needs. It is not clear what ideological issue is at stake here, since the ideology that we all should pay higher taxes to keep the banks rich has never been well articulated.
--Dean Baker
May 09, 2008
The NYT Likes the House Housing Bill
Readers can infer the NYT's approval based on the "Homeowner Rescue Plan Passed Despite Veto Threat." article's headline Supporters of the plan undoubtedly like to call it a "homeowner" rescue plan, but that does not make it an accurate description of the plan.
This bill, the central feature of which is having the FHA guarantee new mortgages to replace one's currently facing default, would first and foremost be helping the banks who hold bad mortgages. All the checks get written to banks, not homeowners. Banks get to decide which mortgages qualify for the program, not homeowners. Congress also opted not to put in price guarantee restrictions that would have prevented the guarantees being set at bubble-inflated prices.
The headline could have read with at least as much justification "Bank Rescue Plan Passed Despite Veto Threat." This headline involves some very serious editorializing.
--Dean Baker
Congress Acts to Keep Housing Unaffordable
That is an implication of the claim in a Washington Post article that a $7,500 first-time home buyer tax credit is intended to keep house prices from falling. In large parts of the country the housing bubble pushed prices out of the reach of most moderate and middle income families. The correction from this bubble was again making prices affordable. While it is unlikely that this tax credit will actually prevent the market adjustment, it could slow the process.
In any case, the Post should have pointed out the perverse implication of this policy. It is not clear that many voters would approve of congressional efforts to use their tax dollars to keep house prices artificially high.
--Dean Baker
The Public is Too Dumb to Understand the Budget
Or at least reporters are. What on earth would any reader learn about the budget from this AP story on the farm bill that ran in the NYT? The article just reports every item in billions of dollars -- it never gives shares of the budget or per person expenditures -- information that would tell readers whether the spending on this bill is a big deal in terms of the budget or their tax dollars.
More importantly, the article never tells readers that the appropriations are over 5 years. This does make a difference. The NYT would do its readers and the environment a great service if they just saved the trees rather than print budget stories like this.
--Dean Baker
May 08, 2008
Inflation Tales at the NYT
David Leonhardt took advantage of the fact that I was busy to slip in a column assessing the claims that the CPI is seriously understating inflation. Actually he does a pretty good job, but he does glaze over part of the story.
Leonhardt makes reference to the infamous "Boskin Commission," which appears in his piece as a "committee of academic economists." Actually, this commission was put together by the Senate Finance Committee (under the guidance of Senator Daniel Patrick Moynihan), for the purpose of getting expert support for cutting the annual cost of living adjustment for Social Security. The commission was chaired by Michael Boskin, who had been chair of the Council of Economic Advisers until Bush I. All of the five members of the commission were publicly on record as saying the CPI substantially overstated the true rate of inflation.
The commission's magic number at the end of its deliberations was 1.1, as in the CPI overstated the true rate of inflation by 1.1 percentage points annually. They proposed that Congress set up a committee of wise people (like themselves) who would decide the proper inflation number to index Social Security and other government programs.
Because the members of the commission were all very prominent economists, and they enlisted the support of several other very prominent economists (Martin Feldstein deserves special mention here), the overstatement view was regarded as the consensus in the profession. The Clinton administration signed onto the deal, and the cut likely would have been implemented had it not been for the opposition of the House minority leader Richard Gephardt. (Think Gephardt-Gore and Democratic presidential primaries in 2000 and you have the story.)
Anyhow, it is very encouraging to Stephen Cecchitti, an expert cited in the story, say that the CPI is "about as accurate as anybody is going to get it." The vast majority of the overstatements identified by the Boskin Commission were not corrected. By the assessment of the commission's surviving members the CPI still overstates the true rate of inflation by 0.8 percentage points.
So, it looks like the Boskin commission was wrong after all. So much for expertise in economics.
--Dean Baker
May 07, 2008
Correction: Fannie Mae Was Right
My earlier note misrepresented the new policy announced by Fannie Mae yesterday. They will NOT be allowing homeowners to get further underwater through refinancing as I wrote. Their new policy is to allow people who already owe more than the value of their home to refinance into a lower interest mortgage. This is exactly what we should want banks and other financial institutions to do. It effectively means taking some loss on the current loan in the hope that the homeowner will be able to meet the terms of a new loan.
--Dean Baker
Does the Head of FHA Think That the Housing Market Was Fine Until 2006?
That would seem to be the implication of the views attributed to Brian Montgomery, the FHA commissioner, in a Washington Post article:
"At his FHA office, Montgomery said that the mortgage crisis could have been averted had Congress heeded his pleas to overhaul the FHA in 2006 so his agency could better compete with subprime rivals.
'I'm back here now trying to pick up the pieces, and they're telling me you're just not doing enough,' he said. 'It's a little disingenuous.'"
In reality, by 2006 millions of homeowners had already bought homes at prices that were hugely inflated by the housing bubble, many with subprime mortgages that were rescheduled to reset to much higher rates. These homeowners were certain to lose large amounts of money on their homes and in many cases destined to default on mortgages that they could not afford. While the damage could have been reduced if the Fed, Congress, the FHA and other agencies took steps to stem the growth of the bubble at the time, it was already too late to avoid most of the pain from the housing crash.
The fact that Mr. Montgomery and others in positions of authority did not recognize the housing bubble at the time was due to extraordinary negligence. If the FHA commissioner cannot recognize the bubble, even in retrospect after it has begun to deflate, it really calls into question his fitness for this sort of job. The Post should have sought to determine the extent to which he is in fact uninformed about developments in the housing market.
--Dean Baker
May 06, 2008
It's Not Free Trade, the Yuppies Would Never Tolerate It
Yet again (yeah, it's standard) the WSJ refers to the selective protectionism pursued by the United States in its trade policy as "free trade." Yes, tens of millions of people are upset about policies that are designed to put manufacturing workers in direct competition with low-paid workers in China and Mexico. The trade agreements allow doctors, lawyers, economists and other highly paid professionals to remain largely protected from such competition.
The latter group are obviously knuckle-scraping Neanderthals who fear the global economy. But, this group also has enormous political power, so trade agreements don't get written that make them face competition in the same way as auto or steel workers. It will be a huge step forward when this situation is discussed more honestly in the media.
--Dean Baker
May 05, 2008
High Food Prices or Low Food Prices: What Do We Want?
The WSJ should be asking this question in its analysis of the progress of the new farm bill in Congress. It reports that complaints of White House spokesman Tony Fratto that the bill would be raising food prices when we actually want lower food prices.
Actually, much of the effect of the bill would be to lower food prices. By providing subsides to people engaged in a wide range of farming activities, it is encouraging people to enter farming. This leads to more output in general. On the other hand, the subsidy to ethanol, does directly pull land out of food production and shifts it into the production of biofuels.
The restrictions of importing sugar has the effect of raising sugar prices in the United States, but lowering them for the rest of the world. From the vantage point of people outside the United States, these barriers might be viewed as positive (except in the case of sugar producers).
It would be helpful if the analysis sought to assess the the goals of U.S. agricultural policy and whether this bill was helping to meet them.
--Dean Baker
May 04, 2008
If the People Running Banks Are This Dumb, the Press is Missing an Unbelievable Story
I confess to not having the highest opinion of the Wall Street crew, but look at what the WSJ said about thinking among analysts of the mortgage market:
"The question now is: Even though the delinquency rates are climbing, will the loans follow the same path as in previous years? In 2000 and 2001, for instance, the growth in the 60-day delinquency rate slowed when those subprime loans were about three years old and peaked after a little more than four years, then started to fall."
Get me a baseball bat, I've got to beat some sense into these people's heads. If you go 3 years out from 2000 or 2001, home prices had appreciated by close to 30 percent as a nationwide average. In many of the big subprime markets, home prices had close to doubled. When the price of a home doubles, homeowners accumulate equity -- lots of it. If a homeowner has equity, they don't default on a mortgage. They either borrow against their equity or they sell the home and put money in their pocket.
Contrast that situation with the present. Home prices are now down nationwide by close to 10 percent from their year ago levels. In many of the big subprime markets they are down by more than 20 percent. Furthermore, prices are falling rapidly. In another year or two years, most recent homebuyers in these markets will still have negative equity and possibly a lot of negative equity.
Now do we think that default patterns three years out on mortgages issued in 2000 will look like default patterns three years out on mortgages issued in 2006? Is there anyone really stupid enough to ask this question who is actually employed and paid money by a financial institution? If so, that is an unbelievable scandal. The media should find out if anyone who is so completely out to lunch is in a position of responsibility and run a front page article on the astounding incompetence of high-paid people in finance.
--Dean Baker
Do Clinton and McCain Share "Instincts" or Focus Groups?
I attribute the fact that both Senator Clinton and Senator McCain proposed suspending the gas tax for the summer to focus groups results uncovered by their consultants. New York Times columnist David Leonhardt attributes this coincidence to their common instincts.
Actually, that is a bit unfair. Leonhardt examines the economic positions taken by Senators Clinton and Obama to assess their instincts on economic issues. This looks like another venture in mind-reading. Both Senator Clinton and Senator Obama are politicians, and in fact are very successful politicians. Successful politicians are by definition good at saying things that get them votes.
It is reasonable to believe that their statements on economic issues primarily reflect what they view to be popular political positions. It is not clear that their statements reveal much about their instincts.
In this respect, it is worth noting that President Clinton ran his 1992 campaign on a promise of public investment, emphasizing spending on education, training, and infrastructure. Once in office, he actually cut these areas of these budget (measured as a share of GDP). He placed his primary focus on deficit reduction. It is not clear what one could have said about President Clinton's economic instincts based on his statements during the campaign or more importantly if his instincts had anything to do with the policies he pursued while in office.
--Dean Baker
May 03, 2008
"It's the Principle:" Front-Page Mind Reading at the Washington Post
The Washington Post has a major front page article today telling readers that President Bush is pushing for his principles in his last year in office. Among the examples it cites are his efforts to open the Arctic National Wildlife Reserve to oil exploration and getting the Colombia trade agreement approved by Congress.
Are these fundamental matters of principle for President Bush? As an alternative explanation, the opening of the wildlife refuge has long been a top goal of the oil industry, an interest group with whom President Bush has close ties. The Colombia trade agreement if being pushed by the pharmaceutical industry and other powerful groups with whom President Bush also has close ties. Presumably, these powerful lobbies appreciate President Bush's efforts to promote these policies and will be more likely to reward Republican candidates with their support as a result.
Is President Bush pushing these policies because they are deeply held philosophical positions or because he is trying to promote the interests of his political backers? I don't know the answer to this question, but neither does the Post. So why does it have a major front article making assertions that it does not know to be true?
--Dean Baker
Posted at 07:34 AM
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May 02, 2008
One-Month's Wage Data Do Not Mean Anything
The monthly wage data is very erratic, it often takes large jumps or falls flat. For example, in April 2006 it reportedly rose by 11 cents, while it was flat the following month. Similarly it jumped 10 cents in October of 2005 but then rose by 1 cent the following month. This is why economists largely ignore unusual movements in the monthly wage data. Instead they focus on wage changes over longer periods, like three month averages. Reporters should do the same.
It is also worth noting in this report that nearly all the employment growth reported in the household survey was among young workers between the ages of 18 and 24. This could be a problem of seasonal adjustment or it could indicate that students feel more need to work because of difficulty getting loans. (Employment among 18-19 year olds jumped an incredible 7.5 percent in the month.) This item should have received more attention in reporting on the April employment report.
--Dean Baker
Does CNN Work for Clinton or Do they Just Not Know Economics?
CNN told its audience that Clinton's elimination of the gas tax for the summer would save consumers $30. This is not true. Since the supply of gas is more or less fixed, refineries are likely to be running at capacity, the price is determined by demand. This means that if the government eliminates the tax, the price will stay the same. The only difference is that the $18.4 cent a gallon will go to the oil companies rather than the government.
That is why economists call Clinton's tax cut a gift to the oil industry, unfortunately CNN missed the story.
--Dean Baker
May 01, 2008
Stagnant European Living Standards: Can the NYT Say Profits?
The NYT had an article about how middle class Europeans are now seeing the sort of stagnating incomes that families in the U.S. have experienced for the last three decades (the NYT doesn't make the comparison). Remarkably, it says almost nothing about the causes and what it does say is quite confused.
As in the United States, most of Europe has seen an upward distribution of income over the last three decades. However, unlike the U.S., much of the upward redistribution in Europe has gone to profits (profit shares have been stagnant or even declined somewhat over the last decade in the U.S.). This fact is never mentioned in the article.
The article also cites France's 35-hour workweek as a cause of stagnating wages. If workers get the same take home pay, but work ten percent fewer hours, then this implies a higher living standard, since they have more leisure time. This is very different from a situation in which take home pay stays the same when hours have not been reduced.
--Dean Baker
April 30, 2008
How Does the Washington Post Know What Senator McCain Believes?
The Post tells us that:
"McCain's belief in the power of the free market to meet the nation's health-care needs sets up a stark choice for voters this fall in terms of the care they could receive, the role the government would play and the importance they place on the issue."
Well, we all know the nature of the health care program that Senator McCain has put forward, but how do we know that this has anything to with his "belief in the power of the free market?" I know that Senator McCain might say that his health care program is based on his beliefs, but sometimes politicians are not truthful (maybe someone should let the Post's reporters in on this secret).
If Senator McCain really had a strong belief in the power of the free market he would be yelling about the enormous distortions created by patent protection for prescription drugs, which allows drugs to sell for hundreds of times their competitive market price. He would also be yelling about the professional and licensing barriers that allow doctors in the United States to get paid almost twice as much as their counterparts in West Europe. He also would be upset the barriers that make it difficult for people in the United States to seek cheaper care overseas through their insurers.
Since Senator McCain has never raised any objections about these obstacles to the operation of a free market in health care (or about the billions being given to billionaires by Bernanke), his commitment to a free market seems questionable.
Let me suggest an alternative hypothesis. Senator McCain and the Republicans receive large contributions from people connected with the insurance and pharmaceutical industries, both of which might see their profits slashed by serious health care reform. Since it is difficult for a politician to say that they oppose health care reform because they want to defend the interests of their powerful friends, Senator McCain finds it much easier to say that he is motivated by his belief in a free market.
I don't know that my alternative hypothesis is true, but the Post's reporters do not know that it isn't true. Rather than make assertions that they cannot support, the Post should simply report on what Senator McCain says and does. They don't know what he thinks, and they mislead the Post's readers when they imply that they do.
--Dean Baker
Would Changing the U.S. Tax Code Prevent Jobs From Leaving Indiana, Or Is Senator Clinton Speaking Nonsense?
I would say that Senator Clinton is mostly speaking nonsense, but the more important point is that NPR listeners would have heard this reported as an effort to help Indiana workers, along with cutting the gas tax over the summer. They never raised any question as to whether this was a serious policy proposal.
My reason for saying that the tax code is largely irrelevant to firms' decisions to move jobs overseas is that any tax preferences tend to be a very small factor in location decisions. Firms ship jobs overseas because they can pay workers $1 an hour, instead of $20 an hour in the U.S. They are some quirks here and there in the tax code that can provide frosting for firms that ship jobs overseas, but there are also quirks that encourage them to keep jobs here.
If President Clinton devotes a whole 8-year term to eliminating the quirks, it would probably make less difference to jobs in Indiana than a 1 percent decline in the value of the dollar. Of course the value of the dollar soared by close to 30 percent during the Clinton presidency, leading to millions of jobs being shipped overseas.
Let's hypothesize that changing the tax code has little or no effect on jobs being shipped overseas, just as cutting the gas tax will have little or no effect on the price of gas this summer. What does that mean about what Senator Clinton was telling working people in Indiana yesterday? Would NPR listeners have any idea of what Senator Clinton was doing with working people in Indiana? Probably not, NPR had to devote much of its air time to Reverend Wright.
--Dean Baker
The Economists Who Didn't Expect to See a Recession Expect It To Be Brief
That's what NPR told listeners this morning. Actually, NPR just told us that the experts expect the recession to be brief, they didn't tell us that their experts didn't have a clue as far as seeing the recession coming. Given the track record of NPR's records maybe they could better used their air time talking about something else.
For the record, non-surprised economists noticed the data from the Case-Shiller indexes that was released yesterday. These indexes showed that house prices were falling at close to a 25 percent annual rate over the last quarter. If this rate of price decline continues, it will imply a lose of close to $6 trillion in real housing wealth over the course of the year. This will lead to large cutbacks in consumption, millions of additional foreclosures, much more turmoil in financial markets, and many more surprised economists.
The good news is that economists don't have to worry about losing their jobs or even getting a pay cut when they mess up.
--Dean Baker
April 29, 2008
Bush Was Riding High on Claims of Solid Job Growth
That is what the NYT says, although it's not clear what they meant. Job growth has actually been pretty bad through most of President Bush's time in office, so what does it mean that he was riding high on claims of solid job growth?
Here's the rate of job growth for the administrations since 1960:
Kennedy-Johnson 3.27%
Nixon-Ford 4.93%
Carter 3.06%
Reagan 2.06%
Bush I 0.60%
Clinton 2.38%
Bush II 0.59%
So President Bush comes in dead last in job creation, even falling behind his dad's dismal record. So, is the NYT pulling our leg when they say he was riding high? Are they making reference to the use of illicit substances? Or is this just a really badly informed article?
--Dean Baker
April 28, 2008
The NYT Allows Senator Clinton to Lie to Hard-Hit Middle-Class Families and Older Americans
Senator Clinton joined Senator McCain in calling for the temporary elimination of the 18.4 cent a gallon gas tax over the summer. While the article notes that, "environmentalists and many independent energy analysts" share Senator Obama's view that the elimination of the tax would save consumers little, it still asserts that, "his position allowed Mrs. Clinton to draw a contrast with her opponent in appealing to the hard-hit middle-class families and older Americans who have proven to be the bedrock of her support."
Actually, almost all economists would agree that the tax cut proposed by Senators Clinton and McCain would save consumers nothing. With the supply of gas largely fixed by the capacity of the oil industry (they claim to be running their refineries at full capacity), the price will not change in response to the elimination of the tax. The only difference will be that money that used to go to the government in tax revenues will instead go to the oil industry as higher profits.
If Senator Clinton is able to use this proposal to draw a contrast with Senator Obama in expressing concern for middle-class families it could only be attributable to the extraordinary incompetence of the reporters who are covering the campaign. While typical middle-class families may not have the time and background to realize that Senator Clinton's proposal would not save them any money, reporters do.
The fact that Senator Clinton, like Senator McCain, sought to deceive them with a bogus tax cut should have been the main theme of today's election reporting.
[Addendum: The Post does what newspapers are supposed to do.]
--Dean Baker
Vacancy Rates Hit New Record
This one is in the preemptive strike category. Reporters should pay attention to the new Census Bureau data on vacancy rates and homeownership.
In the first quarter, the vacancy rate on ownership units hit 2.9 percent. Before the recent crash, the vacancy rate on ownership units had never exceeded 1.9 percent. The rental vacancy rate also rose, although at 10.1 percent it is still slightly below the record of 10.4 percent set in the first quarter of 2004. Not surprisingly, the West showed the biggest increase in vacant ownership units, with the rate rising from 2.6 percent last year to 3.2 percent this year.
The seasonally adjusted ownership rate stood at 67.9 percent, 1.2 percentage points below the peak of 69.2 percent in the first quarter of 2005. For blacks the picture looks considerably worse. The homeownership rate fell to 47.1 percent, 1.7 percentage points below the peak of 48.8 percent reached in the first quarter of 2005. This is the lowest rate of homeownership for blacks since 1999, which is of course well before the surge in subprime lending.
The data in this report are big news and deserve attention.
--Dean Baker
April 26, 2008
NYT On the War Path for Bush-Clinton-Bush Trade Agenda
The NYT really really likes trade deals like NAFTA, CAFTA, and the deal with Colombia currently being pushed by President Bush. This is the only thing that readers can conclude based on a largely incoherent editorial devoted to trade.
Among the comments that could leave readers wondering is the dismissal of an estimate that trade with poor countries increased the gap between college and non-college educated workers by 7 percent in the last quarter century, because "but the wage gap has widened by more than six times that amount over that period." Assuming half on each side, this estimate implies that trade with poor countries lowered compensation for a typical full-time non-college educated workers by more than $1,400 a year (3.5 percent of $40,000). Does the NYT have a policy that would give every non-college educated worker another $1,400 per year? If so, I'm sure that many readers would be anxious to see it. (It is also important to note that the estimate cited from Josh Biven does not include the impact of trade with rich countries, nor secondary effects like the impact of trade on unionization rates.)
The article also trivializes the 400,000 jobs a year lost to trade over the last decade by pointing out that the economy loses 15 million jobs a year. Okay, the 400,000 jobs lost is a NET number. This is the total jobs lost to trade after netting out the total number of jobs created due to increased exports. The 15 million job loss figure is a GROSS number. The NYT editorial writers must know the difference between the two and they must know that the comparison is completely bogus. If they want a net number to which to compare the jobs lost to trade, the NYT can use total job creation. This has averaged just under 1.3 million annually. In other words, the jobs lost to trade are equal to more than 30 percent of job creation over the last decade. Does that seem trivial?
To really top matters off, the NYT tells us that: "According to economists at the Peterson Institute for International Economics, increased trade since World War II has added about 10 percent to American national income." It is not clear what this estimate has to do with the issues at hand. No one is advocating that the United States not trade. The vast majority of the gains in this estimate are attributable to patterns of trade that have nothing to do with NAFTA, CAFTA, and other recent trade deals, so why does the NYT drag it into this debate.
The NYT seems to support these trade agreements much more as a matter of religion rather than based on any serious assessment of their economic impact. It is true that many people have exaggerated the impact of these deals; the over-valued dollar has probably done more to depress the wages of non-college educated workers than 100 NAFTAs. But the basic story, that the pattern of trade promoted by recent presidents has had a negative impact on the living standards of large segments of the U.S. population, is undoubtedly true. The only real question is the size of the impact.
This doesn't mean that simply reversing these trade deals is the best route to pursue, although a continued decline in the value of the dollar would be extremely helpful. I have argued that the best path going forward is to remove the barriers that protect highly educated workers like doctors, lawyers, and journalists from international competition. This would lead to both more economic growth and greater equality in the distribution of income.
Unfortunately, the NYT refuses even to discuss free trade in highly paid professional services. Like the last three administrations, the NYT supports selective protectionism, not free trade. Basically, the current trade agenda is about favoring the people who hire nannies (and construction workers, painters, gardeners etc.) against the people who work at those jobs. We could easily construct trade agreements, even "free trade" agreements, that favored less educated workers. But the folks calling the shots, including the NYT editors, want to preserve their protection.
--Dean Baker
Did Robert Rubin Jeopardize Financial Stability to Protect Goldman Sachs?
That is what he claims, according to the NYT. The NYT reports that Rubin claims that he was considering imposing stricter margin requirements on futures trading when he was leaving Goldman Sachs to take a top position in the Clinton administration. According to the article, Rubin claims he abandoned the plans when the Chicago Board of Trade told him “we will make sure Goldman Sachs never trades another future on the C.B.O.T. if this went ahead.”
A spokesperson for the company that now owns the C.B.O.T. denies that any such threat was ever made, but this is an incredibly important news story. The implication is that a top official in the Clinton administration, who subsequently became Treasury Secretary, altered regulatory policy based on a threat made against his former firm.
If such a threat was actually made, then it should have been reported to the F.B.I. and some people connected with the C.B.O.T. should be sitting in jail right now. If Mr. Rubin was actually prepared to alter regulatory policy to serve his former firm, then he clearly had conflicts of interest that made him unqualified to hold a top government position.
This issue merits investigation not only to determine whether Robert Rubin acted improperly, but also to determine whether it is common practice for government officials to alter policy to serve the interests of their former employers. The fact that Robert Rubin would have no qualms claiming to the NYT that he dropped a regulatory proposal to protect Goldman Sachs, suggests that such behavior is common.
--Dean Baker
The Government Debt Needs a Denominator
The U.S. debt was much larger in 1975 than in 1945, at the end of World War II, yet the country was much less burdened by debt. The U.S government debt is more than 200 times as large as Zimbabwe's government debt, yet Zimbabwe is far more heavily burdened by debt.
If these statements seem paradoxical, they shouldn't. To assess the indebtedness of a nation (or a person or corporation), you must know their income. A debt figure in itself will provide little information. One million in debt would be a very big deal to most of us. It would be virtually invisible to Bill Gates.
In assessing the presidential candidates' various commitments, the NYT reports that they would add at least $5.7 trillion to the national debt over the next decade. This implies an increase of a bit more than 60 percent over the current level of indebtedness, which is a bit over $9 trillion. Since the economy is projected to grow by approximately 55 percent over this period, the growth in debt implies an increase in the ratio of debt to GDP of about 3 percentage points.
That is more debt than I would like to see, but not exactly a disaster. More importantly, since the NYT gives no data on GDP, the article provides little basis for assessing the potential damage posed by running deficits of the magnitude projected.
It is a very simple matter to include debt to GDP ratios in stories such as this. They should be there.
--Dean Baker
April 25, 2008
The NYT Discovers High-Priced Textbooks, but Misses Cause
The NYT editorialized against textbook companies charging outrageous prices for their texts, but it failed to get to the roots of the problem.
Textbooks are expensive because of the way in which the government finances their production, it grants copyright monopolies. Copyrights were undoubtedly great policy for the 16th century when they when they first came into existence, but they are not very well suited for the Internet Age.
Suppose that the government instead contracted with textbook publishers to produce textbooks, with the condition that everything they produce is in the public domain and can be freely copied or transmitted over the Internet. In this case, the cost of a textbook would be reduced to the printing cost. Professors could freely select chapters from different texts, where they felt it was appropriate, without requiring students to buy multiple texts. And, there would be no incentive to make pointless changes just to create a new edition.
Of course publishers would still be free to operate under the current copyright system and charge $200 for their their textbooks, they just might find it a bit harder to compete with books that are as good or better that can be downloaded for free off the web.
This would take some additional tax money, but we can just pull out of the subsidies that we give to college students to allow them to pay for textbooks. It's time for a little bit of serious economic thinking at the NYT.
(Thanks to a BTP regular for calling this one to my attention.)
--Dean Baker
How Does the Post Know that Bush Was Skeptical of Government?
In the middle of an informative piece explaining how President Bush's effort to privatize many government functions did not save money, the Post tells readers that "Bush entered office with a deep skepticism of government. He saw competitive sourcing as a way to improve agencies' performance."
Is that right? How does the Post know that President Bush had a "deep skepticism" of government? How does it know that he thought outsourcing jobs to the private sector would really improve performance?
Yes, President Bush said these things, but does the Post think that politicians really believe everything they say? Would a president who has a deep skepticism of government be so anxious to invade and occupy two different countries in his first two years in office?
Maybe President Bush really does have a deep skepticism of government, but let me suggest an alternative explanation. President Bush received considerable political support from companies that hoped to make lots of money from government contracts.
I don't know if my alternative explanation is right, but the Post doesn't know that their explanation is right either, unless they are mind readers and can know President Bush's true thoughts. How about if they just told their readers what President Bush said and who profited from his actions and let their readers make their own judgments about his motives?
--Dean Baker
NPR Does the Fraternity Ritual at Budget Time
NPR reported on the battle in Congress over the reauthorization of the farm bill. They told us that it will cost $280 billion over 5 years.
Okay, they did their job -- the fraternity handshake. I know that NPR has a very well-educated audience, but not one in a hundred of their listeners could make any sense of this number. As they brush their teeth and drink their morning coffee, would they think anything different about this bill if NPR had said the bill would cost $28 billion or $2.8 trillion over five years?
Would it have been so difficult to tell listeners that the bill is projected to cost about 1.9 percent of projected spending over the next five years, or approximately $190 per person per year? Was there really no time top include information that could have informed listeners as to the importance of this program to the total budget and/or people's tax bills?
--Dean Baker
April 23, 2008
What Makes Spending the Problem?
David Leonhardt tells readers that the long-term budget problem facing the country is spending, not taxes, based on the projected costs of Medicare and Medicaid. Of course, the reason why the costs of these programs are projected to explode is that health care costs in the United States are projected to explode.
This would seem to suggest that the problem is health care, not spending. The country has to fix its health care system. Or, if the government is too incompetent or corrupt to fix the health care system we could simply outsource much of our health care to countries that have more efficient health care systems.
Unfortunately, the protectionists in Washington and in the media are doing their best to prevent the idea of free trade in health care services from even being discussed.
--Dean Baker
April 21, 2008
Rebuilding Loan Loss Reserves Hurts Bank Profits
This is another one in the "who could have known?" category. The WSJ reports that stock analysts were apparently surprised that the profits of Bank of America and other banks would be hurt by the need to replenish loan loss reserves.
If the stock analysts were really surprised on this one, then you have to wonder what these folks do for a living.
--Dean
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