Category: Economics

Dean Baker says yet again what, sadly, needs saying yet again.

The Debate Over the Cause of the Debt and Evolution

The NYT had an article discussing President Obama’s plan to set up a commission to propose recommendations for reducing the deficit. At one point the article refers to the debate: “over the nation’s rising debt and its causes and solutions.”

There really is not much basis for debate over the cause of the debt. The debt has grown rapidly in the last two years because of the recession created by the collapse of the housing bubble. The debt would be much lower today if the deficit hawks had not been dominating public debate and distracting attention from the housing bubble in the years when it was growing to dangerous levels.

Over the longer term, the deficits are projected to be unsustainable due to the growth of health care costs in the United States. Since the United States pays for more than half of its health care through public programs like Medicare and Medicaid the failure to fix the health care system will also lead to serious budget problems.

As with evolution, there really is not much room for debate on the factors driving the deficit (the big rise in military spending also was an important factor in the deficits). It is misleading to imply that there is.

—Dean Baker

Over at Angry Bear—it sounds plausible, doesn’t it? But what do I know…

Is China a Bubble?

A friend of mine who does just about all of his business providing a very specific service to selling to companies who do business with China. (And yes, that is as specific as I am willing to be, except to say that right at this moment, the service he provides is extremely tailored toward China.) My friend tells me he believes “China is a bubble” which very much resembles the dot com bubble and the housing bubble. According to him, this is the resemblance – there is no due diligence to speak of on any deal involving China, not from the Chinese and not from the Westerners dealing with them, and all the deals are being done with “other people’s money” and heavily leveraged. …

Kevin Drum:

The Vicious Cycle of Stagnant Wages

Here’s my capsule view of the great financial meltdown of 2008: For the past couple of decades, the benefits of economic growth have gone almost entirely to the rich. But the middle class still wanted to prosper, so the rich loaned them money to continually improve their lifestyles. That worked for a while. And then it didn’t. …

Drum goes on to preview an upcoming book (Fault Lines: How Hidden Fractures Still Threaten the World Economy) by Raghuram Rajan. Amazon says May 20. Here’s the blurb:

Economist Raghuram Rajan warned about the global financial crisis long before it hit, but few listened. Now, as the world struggles to recover, it’s tempting to blame the crisis on just a few greedy bankers who took irrational risks and left the rest of us to foot the bill. In Fault Lines, Rajan argues that serious flaws in the economy are also to blame, and warns that a potentially more devastating crisis awaits us if they aren’t fixed. Can we risk not listening to him a second time?

Rajan shows how the individual choices that collectively brought about the economic meltdown—made by bankers, government officials, and ordinary homeowners—were rational responses to a flawed global financial order in which the incentives to take on risk are incredibly out of step with the dangers those risks pose. He traces the deepening fault lines in a system overly dependent on American consumption to power the world economy and stave off a global downturn; a system where America’s thin social safety net has created tremendous political pressure to keep job creation robust, because jobs are the primary provider of health and other benefits; and where the U.S. financial sector, with its skewed incentives, is the critical but unstable link between an overstimulated America and an underconsuming world.

Rajan demonstrates how inequalities in U.S. incomes, education, and health care are putting all of us into deeper financial peril, and he outlines sensible reforms to ensure a more stable world economy and to restore lasting prosperity.

Richard Posner considers its shortcomings (interesting reading) and ends up saying, “No, but…”:

Should We Jettison GDP As an Economic Measure?

… But it is necessary to emphasize that it is just a starting point. I disagree with economists who say the “recession” ended in the third quarter. The depression (as I think we should call it if only because of its enormous potential political consequences) has caused massive unemployment with all the associated anxieties and hardships, has greatly reduced household wealth, has caused private investment to turn negative, has cost the government trillions of dollars in lost tax revenues and recovery expenditures (TARP, the fiscal stimulus, the mortgage-relief programs, the auto bailouts, etc.), has undermined belief in free markets and altered the line between government and business in favor government, and is threatening a future inflation while deepening our dependence on foreign lenders. To view a change in GDP from negative to positive as signifying the end of a depression (by which criterion the Great Depression ended in 1933 and again in 1938) is to misunderstand the utility of GDP as a measure of economic activity.

A Partisan Post, You Have Been Warned

Last night I read a post by Brad DeLong that made me so mad I had trouble falling asleep. (Not at DeLong, mind you.)  There’s really nothing unusual in there — hysteria about the deficit, people who voted for the Bush tax cuts and the unfunded Medicare prescription drug benefit but suddenly think the national debt is killing us, political pandering — but maybe it was the proverbial straw.

First, let me say that I largely agree with DeLong here:

“I am–in normal times–a deficit hawk. I think the right target for the deficit in normal times is zero, with the added provision that when there are foreseeable future increases in spending shares of GDP we should run a surplus to pay for those foreseeable increases in an actuarially-sound manner. I think this because I know that there will come abnormal times when spending increases are appropriate. And I think that the combination of (a) actuarially-sound provision for future increases in spending shares and (b) nominal balance for the operating budget in normal times will create the headroom for (c) deficit spending in emergencies when it is advisable while (d) maintaining a non-explosive path for the debt as a whole.”

Now, let me tell you what I am sick of:

1. People who insist that the recent change in our fiscal spending is the product of high spending, without looking at the numbers, because their political priors are so strong they assume that high deficits under a Democratic president must be due to runaway spending. And it’s not just Robert Samuelson.

2. People who forecast the end of the world without pointing out why the world is ending. Here’s Niall Ferguson, in an article entitled “An Empire at Risk:”

“The deficit for the fiscal year 2009 came in at more than $1.4 trillion—about 11.2 percent of GDP, according to the Congressional Budget Office (CBO). That’s a bigger deficit than any seen in the past 60 years—only slightly larger in relative terms than the deficit in 1942.”

But does he mention that the reason for the 2009 deficit is lower tax revenues due to the financial crisis and recession? No.

Here’s Ferguson on the 10-year projection:

“Meanwhile, in dollar terms, the total debt held by the public (excluding government agencies, but including foreigners) rises from $5.8 trillion in 2008 to $14.3 trillion in 2019—from 41 percent of GDP to 68 percent.”

Does he mention that, as early as January 2008, that number was projected to fall to 22%, and the majority of the change is due to lower tax revenues? No.

3. People who posture about our fiscal crisis who voted for the Bush tax cuts — shouldn’t shame require them to keep silent?

4. People who say, like Judd Gregg, “after the possibility of a terrorist getting a weapon of mass destruction and using it against us somewhere here in the United States, the single biggest threat that we face as a nation is the fact that we’re on a course toward fiscal insolvency,” as if this is a new problem, when it’s been around since 2004 (see Figure 1) — when, I might add, Judd Gregg was a member of the majority.

(Tell me, was Niall Ferguson forecasting the end of the American empire in 2004, when everything he says now about long-term entitlement spending was already true? That’s a real question.)

5. People who say that we can’t pass health care reform because it costs too much, ignoring the fact that the CBO projects the bills to be roughly deficit neutral, ignoring the fact that the Senate bill has received bipartisan health-economist support for its cost-cutting measures, and ignoring the fact that our long-term fiscal problem is, and always has been, about health care costs (see Figure 2).

6. People who say the Obama administration is weak on the deficit (Ferguson refers to Obama’s “indecision on the deficit”, and he is gentle by Republican standards), when by tackling health care costs head-on — and in the process angering their political base — they are doing the absolute most important thing necessary to solve the long-term debt problem.

7. People who cite “financial ruin” purely, absolutely, incontrovertibly as a political tactic to try to kill health care reform (courtesy of DeLong and Brian Beutler):

8. Joe Lieberman.

By James Kwak

Krugman. We all know this, I’m sure, but a reminder can’t hurt. 300,000 new jobs a month for five years, just to make up lost ground.

The jobs deficit

It was truly amazing the way last week’s employment report was hailed by many people as a sign that our troubles are over. Here we are, having suffered huge job losses, and needing to make up the lost ground — and a report showing that we’re still losing jobs, but not as fast, is grounds for celebration?

Anyway, I thought it might be useful to create a sort of benchmark for the level of job growth that would really count as good news. I start from the fact that we’ve lost about 8 million jobs since the recession began — that’s the official number plus the preliminary estimate of the coming benchmark revision. I then take EPI’s estimate that we need to add 127,000 jobs a month. EPI points out that when you put these numbers together, they say that to return to pre-crisis unemployment within two years we’d have to add 580,000 jobs a month. That’s not going to happen.

But let’s set a more modest goal: return to more or less full employment in 5 years –which means seven lean years of depressed employment. To keep up with population growth over those 7 years, the United States would have had to add 84 times 127,000 or 10.668 million jobs. (If that sounds high, bear in mind that we added more than 20 million jobs over the 8 Clinton years). Add in the need to make up lost ground, and we’re at around 18 million jobs over the next five years — or 300,000 a month.

So that’s a useful benchmark. Even if we add 300,000 jobs a month, we’re looking at a prolonged period of suffering — a huge cost from the Great Recession. So that’s kind of a minimal definition of success. Anything less than that, and it’s bad news. It sort of puts that wonderful report that we only lost 11,000 jobs in perspective, doesn’t it?

This is the abstract of Brent White’s paper “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis“.

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

Here’s the tail of Felix Salmon’s post on the subject.

The world’s largest guilt trip

… White goes on to enumerate an astonishingly long list of institutions, up to and including the president himself, which are speaking with a single voice on this question, and saying that paying an underwater mortgage in full is the morally correct thing to do. Hank Paulson did it, despite the fact that he would have fired anyone at Goldman who behaved similarly; Neil Cavuto likened people who walk away from their mortgages to people who would have “quit” and handed over Europe to the Nazis.

Even Gail Cunningham, of the National Foundation for Credit Counseling, declared in an interview on NPR that “Walking away from one’s home should be the absolute last resort. However desperate a situation might become for a homeowner, that does not relieve us of our responsibilities.” If you’re thinking of walking away, you’ll almost certainly do so while overcoming enormous feelings of guilt. And where there’s guilt, there’s belief in dire consequences:

Most people simply do not believe they will escape punishment for their moral transgressions. Guilt and fear of punishment go together. Thus, the notion that one will suffer great consequences for walking away from one’s financial obligations not only seems possible, but feels quite right. It just can’t be that one can walk away from their mortgage with no significant consequence. As such, people rarely question apocalyptic descriptions of foreclosure’s consequences.

The result is a system tilted enormously in favor of institutional lenders who exist in a world of morality-free contracts, and who conspire to lay the world’s largest-ever guilt trip on any borrower who might think about joining them in that world. It’s asymmetrical, it’s unfair, and it’s about time that homeowners started being informed that a ding to their credit score is not the end of the world; that no one would expect a capitalist company to behave in the way that individuals are being told to behave; and that their options are in fact broader than they might believe. White’s paper is the perfect place for them to start their reading.

From a recent post at FireDogLake:

No comment necessary.

John Schmitt, via Dean Baker. This seems of a piece with my previous Meg Whitman post.

Here we go:

Casey Mulligan Swings and Misses

University of Chicago economist Casey Mulligan has a post today at the New York Times Economix blog where he seems to argue that the current push for statutory paid sick days in the United States is ignoring the role of economic incentives. According to Mulligan, workers in countries with generous paid sick day policies stay home because of “incentives, and not the flu”.

I don’t think Mulligan has been following the U.S. debate on paid sick days very closely. The U.S. debate is very serious about incentives. The current system — which does not require employers to provide paid sick days and leaves upwards of 50 million workers without paid sick days — gives strong incentives to workers to go to work sick, lowering productivity and potentially spreading illness.

Of course, offering paid sick days also gives workers incentives to take time off when they are not sick. But, there is nothing in Mulligan’s post that says where we should set the optimal level. He doesn’t even make a case that the most generous systems in Europe are too generous, just that they lead to more sickness absences in some cases. For all we know, after we factor in the cost of contagious diseases, the most generous European systems might still be too stingy.

To make his point about the effect of incentives, Mulligan features the following graph from a recent IMF paper:

Mulligan, however, has made very selective use of the original IMF graph:

In the original, Denmark, Germany, and seven other countries with more generous statutory paid sick days policies all have lower sickness absence rates than the United States. A really interesting question is: how is it that these countries are able to provide both guaranteed paid sick days and lower sickness absence rates? (And why didn’t Mulligan include these countries in his graph?)

This would be just another boring example of media ignorance, except that Sorkin is billed as “a financial columnist for The New York Times. Or maybe that’s not news after all.

Let’s See, Low Interest Rates Mean that Investors Have Trust

Somehow the world got turned upside in a Vanity Fair excerpt of a book on the financial crisis by NYT reporter Andrew Ross Sorkin. Sorkin, in outlining the dimensions of the financial breakdown following the collapse of Lehman, tells readers: “Treasury bills were trading for less than 1 percent interest, as if they were no better than cash, as if the full faith of the government had suddenly become meaningless.”

Actually, the full faith of the government suddenly was a really big deal. Interest rates of less than 1 percent meant that investors were willing to sacrifice interest payments precisely to take advantage of the full faith of the government. Investors were looking for security, not returns, and at that time, they considered government bonds to be very secure.

Thanks to Ken Broomfield for the tip.

—Dean Baker

Another Dean Baker classic.

The New York Times Does Not Like the European Welfare State

The New York Times is unhappy because it doesn’t seem likely that Europe’s governments will dismantle their welfare state. The problem is that people in Europe like the welfare state and democratically elected governments seem intent on putting the wishes of their electorate over the desire of the New York Times and the experts it chose to consult for this article.

The article begins by telling readers that: “two years ago, Europe was growing more rapidly than the United States, and the Old Continent finally seemed prepared to tackle longstanding economic challenges like rigid labor markets, runaway government spending and a rapidly aging population.”

In fact, these “longstanding challenges” do not really exist. Europe did not suffer from “runaway government spending,” most countries had relatively modest budget deficits prior to the economic crisis. Over the long-term, the United States is projected to face far worse budget problems than Europe because of its out of control health care spending.

Its “rigid labor markets” did not prevent Europe from experiencing labor productivity growth that was comparable to that of the United States. It also managed to run current account surpluses, instead of unsustainable deficits, like the United States.

Europe’s population is aging more rapidly than the United States, in part because its people enjoy longer life expectancies. It is not clear why the NYT views this as a problem.

The article is full of complaints that Europe’s governments are not following the NYT’s agenda. For example , without any substantiation the NYT tells readers that: “just when it is needed most, the political will to address Europe’s bigger economic problems seems absent, according to many experts across the region and around the world.” It’s not clear what “just when it is needed most” could possibly mean in this context.

The article later complains that: “In Germany, Angela Merkel, who was elected last month to a second term as chancellor, has also avoided taking on the country’s powerful unions and its regional banks. She has embraced the “social market economy” and has insisted there is no alternative to relying on exports rather than consumers to drive growth.”

It’s not clear what the problem is. Economists view exports as a form of investment. Rich countries, like Germany, are supposed to run trade surpluses, lending money to poor countries to finance their development. The NYT apparently wants Germany to siphon money away from poor countries, as the United States does, leaving them with fewer resources to finance their development.

It would have been useful if the article had included the views of someone associated with Europe’s labor unions or an economist more familiar with recent research on European labor markets.

—Dean Baker