Charles Lane on Homeownership: Partly Right

August 04, 2016

04 Agosto 2016

Charles Lane gets the story on homeownership at least partly right in his Washington Post column today. It is not necessarily bad that fewer people are homeowners, if the drop is due to people with very little equity in serious danger of losing their home. It is also worth adding that in an economy where few people can count on stable employment, homeownership is not necessarily a plus, since it can make it more difficult for unemployed workers to move to areas with more jobs.

However Lane gets a few other things badly wrong. He gives readers the happy news on home equity:

“Contrary to entrenched conventional wisdom, however, the ongoing decline of the homeownership rate is actually good news.

“Here’s why: Thanks to recovering real estate values, today’s homeowners as a group have the same equity in their property — roughly 58 percent — that the record-size cohort did back in late 2004, according to the Federal Reserve. Ergo, there’s now more equity, on a per- household basis; current homeowners’ tenure is that much more sustainable and secure.”

This is misleading both because it relies on averages, thereby ignoring distribution, and also 2004 was in fact a really bad year for home equity. If we look at medians, and adjust for age (an important factor in an aging population), the situation does not look so happy.

According to the Federal Reserve Board’s 2013 Survey of Consumer Finance, the most recent one available, the median homeowner between the age of 55 to 64 had an equity stake equal to $54,600. That’s down from $71,000 in 2001 and $81,000 in 1989 (all numbers in 2013 dollars). For those between the ages of 45–54, median equity stake was just $35,900, compares to $52,100 in 2001 and $72,200 in 1989. In the 35–44 age group median equity was $23,200 in 2013, $43,800 in 2001, and $63,500 in 1989.

All these numbers are made worse by the fact that the homeownership rate within each age group was considerably lower in 2013 than in prior years. This means that the median homeowner was considerably higher up in the overall distribution of income in 2013 than in the comparison years. It is also worth noting that people have less wealth outside of their home as well, indicating that they have not opted to invest elsewhere as an alternative to homeownership.

The other item on which Lane misleads readers is the comparison to European countries where the homeownership rate is considerably lower. These countries have much stronger rules protecting renters from eviction and excessive rent increases. This makes their renters much more secure relative to renters in the United States. Given the lack of protection for renters in most areas in the United States, it is understandable that many would see homeownership as the only way to have secure housing.

In any case, Lane is right that it is not necessarily a bad thing that fewer people are shelling out large amounts of money in realtor fees and closing costs on homes that they are unable to keep. Unfortunately, this does not appear to be because people have decided that renting is a better option.

Charles Lane gets the story on homeownership at least partly right in his Washington Post column today. It is not necessarily bad that fewer people are homeowners, if the drop is due to people with very little equity in serious danger of losing their home. It is also worth adding that in an economy where few people can count on stable employment, homeownership is not necessarily a plus, since it can make it more difficult for unemployed workers to move to areas with more jobs.

However Lane gets a few other things badly wrong. He gives readers the happy news on home equity:

“Contrary to entrenched conventional wisdom, however, the ongoing decline of the homeownership rate is actually good news.

“Here’s why: Thanks to recovering real estate values, today’s homeowners as a group have the same equity in their property — roughly 58 percent — that the record-size cohort did back in late 2004, according to the Federal Reserve. Ergo, there’s now more equity, on a per- household basis; current homeowners’ tenure is that much more sustainable and secure.”

This is misleading both because it relies on averages, thereby ignoring distribution, and also 2004 was in fact a really bad year for home equity. If we look at medians, and adjust for age (an important factor in an aging population), the situation does not look so happy.

According to the Federal Reserve Board’s 2013 Survey of Consumer Finance, the most recent one available, the median homeowner between the age of 55 to 64 had an equity stake equal to $54,600. That’s down from $71,000 in 2001 and $81,000 in 1989 (all numbers in 2013 dollars). For those between the ages of 45–54, median equity stake was just $35,900, compares to $52,100 in 2001 and $72,200 in 1989. In the 35–44 age group median equity was $23,200 in 2013, $43,800 in 2001, and $63,500 in 1989.

All these numbers are made worse by the fact that the homeownership rate within each age group was considerably lower in 2013 than in prior years. This means that the median homeowner was considerably higher up in the overall distribution of income in 2013 than in the comparison years. It is also worth noting that people have less wealth outside of their home as well, indicating that they have not opted to invest elsewhere as an alternative to homeownership.

The other item on which Lane misleads readers is the comparison to European countries where the homeownership rate is considerably lower. These countries have much stronger rules protecting renters from eviction and excessive rent increases. This makes their renters much more secure relative to renters in the United States. Given the lack of protection for renters in most areas in the United States, it is understandable that many would see homeownership as the only way to have secure housing.

In any case, Lane is right that it is not necessarily a bad thing that fewer people are shelling out large amounts of money in realtor fees and closing costs on homes that they are unable to keep. Unfortunately, this does not appear to be because people have decided that renting is a better option.

• Globalization and TradeGlobalización y comercio

The Washington Post-President Obama TPP-Challenge

By CEPRCEPR

August 04, 2016

04 Agosto 2016

It's hard to resist a good challenge and the Washington Post gave us one this morning in an editorial pushing the Trans-Pacific Partnership (TPP). The editorial criticized TPP opponents and praised President Obama for continuing to push the deal. It tells readers: "Mr. Obama refused to back down on the merits of the issues, noting that other countries, not the United States, would do most of the market-opening under the TPP and challenging opponents to explain how 'existing trading rules are better for issues like labor rights and environmental rights than they would be if we got TPP passed.'" Okay, here's how we are better off with existing trade rules than the largely unenforceable provisions on labor and environmental standards in the TPP. 1) The TPP creates an extra-judicial process (investor-state dispute settlement [ISDS] tribunals) whereby foreign investors can sue governments for imposing environmental, health and safety, and even labor regulations. Under the TPP, these tribunals are supposed to follow the far-right wing doctrine of compensating for regulatory takings. This means, for example, that if a state or county restricts fracking for environmental reasons, they would have to compensate a foreign company for profits that it lost as a result of not being allowed to frack or the additional expense resulting from the standards imposed. The ISDS tribunals are not bound by precedent, nor are their decisions subject to appeal. 2) The TPP imposes stronger and longer patent and copyright protection. These protectionist measures are likely to do far more to raise barriers to trade (patent and copyright monopolies are interventions in the free market, even if the Washington Post likes them) than the other measures in the TPP do to reduce them. In addition to the enormous economic distortions associated with barriers that are often equivalent to tariffs of 1000 percent or even 10,000 percent (e.g. raising the price of a patented drug to 100 times the generic price), TPP rules may make it more difficult for millions of people to get essential medicines.

Core Inflation Edges Lower in June

By CEPRCEPR

August 03, 2016

03 Agosto 2016

I probably shouldn’t make too much of a deal about the edging lower part, after all, we’re just talking a few hundredths of a percentage point, but the real issue is that the inflation rate is not edging higher. The Fed has a target of a 2.0 percent average inflation rate for the core personal consumption expenditure deflator. This measure on inflation rate has been well below 2.0 percent ever since the recession began. There had been some evidence that it was rising as the unemployment rate and the labor market tightened.

However, the June data show the core inflation rate at just 1.57 percent over the last year, that is slightly below its reading in prior months. It is very hard to see any story where inflation is about to rise substantially and go above the 2.0 percent target. (And remember, the target is an average, so some period above 2.0 percent is consistent with the target, making up for the years of below 2.0 percent inflation.)

Anyhow, with the inflation rate below the target and showing no signs of accelerating, why would the Fed look to raise rates and slow the economy? If there was a plausible story where inflation could soon pose a serious problem, then a rate hike would be a debatable proposition. But we are in an economy where the labor market continues to show weakness by many measures (low employment rate for prime age workers, high numbers of people involuntarily working part-time, low quit rate, long durations of unemployment spells, and slow wage growth). So what possible basis would the Fed have for raising rates?

I probably shouldn’t make too much of a deal about the edging lower part, after all, we’re just talking a few hundredths of a percentage point, but the real issue is that the inflation rate is not edging higher. The Fed has a target of a 2.0 percent average inflation rate for the core personal consumption expenditure deflator. This measure on inflation rate has been well below 2.0 percent ever since the recession began. There had been some evidence that it was rising as the unemployment rate and the labor market tightened.

However, the June data show the core inflation rate at just 1.57 percent over the last year, that is slightly below its reading in prior months. It is very hard to see any story where inflation is about to rise substantially and go above the 2.0 percent target. (And remember, the target is an average, so some period above 2.0 percent is consistent with the target, making up for the years of below 2.0 percent inflation.)

Anyhow, with the inflation rate below the target and showing no signs of accelerating, why would the Fed look to raise rates and slow the economy? If there was a plausible story where inflation could soon pose a serious problem, then a rate hike would be a debatable proposition. But we are in an economy where the labor market continues to show weakness by many measures (low employment rate for prime age workers, high numbers of people involuntarily working part-time, low quit rate, long durations of unemployment spells, and slow wage growth). So what possible basis would the Fed have for raising rates?

Thomas Friedman Gives Hillary Clinton Economic Advice, Gets Confused

By CEPRCEPR

August 03, 2016

03 Agosto 2016

Many folks remember Thomas Friedman as the person who argued that Germany would insist that Greeks work less as a condition of getting new loans. They may also remember him as the person who doesn't know that in a free market, when an item is in short supply, the price is supposed to rise. This is why he can continually complains about shortages of skilled labor even though the pay of skilled workers is not rising. Economics may not be Friedman's strong suit, but he is back at it again today complaining that Hillary Clinton doesn't have an economic growth strategy. He notes that she is promoting infrastructure investment, both as a way to generate demand and also provide a basis for further growth, but then argues that her pledge to give small businesses easier access to credit will come up short: "To do that, though, would run smack into the anti-bank sentiment of the Democratic Party, since small community banks provide about half the loans to small businesses, and it is precisely those banks that have been most choked by the post-2008 regulations. We need to prevent recklessness, not risk-taking." Okay, so Thomas Friedman is arguing that the big problem facing small businesses is that they can't get credit, and the main reason for that is those nasty Dodd-Frank regulations that are handcuffing community bankers. That's an interesting argument. Let's see if that fits what the small businesses themselves say. The National Federal of Independent Businesses has been surveying small businesses for more than thirty years. Here's the latest statement on credit conditions from its June report:

Robert Samuelson and the Second Great Depression Crap

By CEPRCEPR

August 01, 2016

01 Agosto 2016

Hey folks, I saved you all from a Martian invasion, you really should be thankful. And Robert Samuelson says we were saved from a second Great Depression by the actions of the Federal Reserve Board. Yes, both claims are lies, but Samuelson's lie is more transparent than my lie. The point here is a simple one, we know how to get out a depression. It's called "spending money." We got out of the last Great Depression by spending lots of money on fighting World War II. But guess what, the economy doesn't care what we spend money on, it responds in the same way. So if we instead had spent 20 percent of GDP on building highways, housing, hospitals, and providing education and child care it also would have led to double-digit economic growth and below 3.0 percent unemployment. So anyone who claims that we risked a second Great Depression if the Fed and the Treasury Department had not saved the Wall Street banks is saying that the politicians in Washington are too brain dead to figure out how to spend money even when the alternative is double-digit unemployment. Note that tax cuts count in this story too. So the second Great Depression argument is that the Democrats and Republicans could not possibly figure out a mix of tax cuts and spending that would provide a large boost of demand to the economy. I will confess to not having a great deal of respect for most politicians, but I have seen many of them tie their shoes. I find it more than a bit far-fetched to claim that they would not ever (a second Great Depression implies years of double-digit unemployment, not just a short downturn) figure out that they need to agree to a package of tax cuts and spending to boost the economy. Anyhow, this proposition is at the core of the second Great Depression claim, so if you don't think that the members of Congress are complete morons, then you can't believe the second Great Depression story. The point is important because in the fall of 2008 we had the option to clean out the Wall Street cesspool in one fell swoop by allowing the market to work its magic. Most, if not all, of the major Wall Street banks would be out of business.

Higher Interest Rates, not Entitlement Spending, Is Cause of Projected Rise in Budget Deficit

By CEPRCEPR

August 01, 2016

01 Agosto 2016

A NYT article on the prospects for the federal budget deficit under the next president told readers:

“Even without new spending, the federal budget deficit is expected to rise. By 2020, the Congressional Budget Office estimates, the deficit will hit nearly $800 billion, or about 3.7 percent of expected economic output, as increasing entitlement costs for retiring baby boomers take their toll on federal coffers.”

Actually, the main reason the deficit is projected to rise is the Congressional Budget Office’s (CBO) projection that interest rates will rise. As a result if higher interest rates, the net interest burden is projected to rise by 1.4 percentage points of GDP between 2016 and 2020 (Summary Table 1). This increase is divided into a 0.9 percentage point rise in interest payments and a 0.5 percentage point drop in revenue that the Fed refunds to the Treasury from the interest it receives on the bonds it holds.

The implication is that if the Fed doesn’t raise interest rates and sell off its assets then we would not see this rise in the interest burden or the size of the budget deficit. On this point, it is worth noting that CBO has consistently overstated the rise in interest rates since 2010. It appears to have done so again in its 2016 projections.

A NYT article on the prospects for the federal budget deficit under the next president told readers:

“Even without new spending, the federal budget deficit is expected to rise. By 2020, the Congressional Budget Office estimates, the deficit will hit nearly $800 billion, or about 3.7 percent of expected economic output, as increasing entitlement costs for retiring baby boomers take their toll on federal coffers.”

Actually, the main reason the deficit is projected to rise is the Congressional Budget Office’s (CBO) projection that interest rates will rise. As a result if higher interest rates, the net interest burden is projected to rise by 1.4 percentage points of GDP between 2016 and 2020 (Summary Table 1). This increase is divided into a 0.9 percentage point rise in interest payments and a 0.5 percentage point drop in revenue that the Fed refunds to the Treasury from the interest it receives on the bonds it holds.

The implication is that if the Fed doesn’t raise interest rates and sell off its assets then we would not see this rise in the interest burden or the size of the budget deficit. On this point, it is worth noting that CBO has consistently overstated the rise in interest rates since 2010. It appears to have done so again in its 2016 projections.

Greg Mankiw Argues that Protectionism Is Likely to Become Increasingly Dominant As More People Take His Economics Classes

By CEPRCEPR

July 30, 2016

30 Julio 2016

The elite types have noticed that the masses are not happy about the economic agenda that they have crafted. Since the elites can’t imagine that the problem has anything to with the fact that their agenda is designed to redistribute income from the masses to the elites, they turn to psychological explanations. In this vein, Greg Mankiw, a Harvard professor and former chief economist to George W. Bush, used his NYT column to discuss voters’ attitudes toward trade agreements like NAFTA and the Trans-Pacific Partnership (TPP). The research he highlights finds that attitudes towards trade don’t seem to depend on a person’s direct economic stake in trade but rather their perception of how trade affects the economy. It turns out that the latter is highly correlated with education. Those with college degrees generally believe that trade agreements have been good for the economy and support them, while those with less than college degrees generally believe trade has been harmful and therefore oppose them. Mankiw sees this as good news for the long-term, since as more people graduate college a higher percentage will support trade deals. Remarkably, the analysis Mankiw relies upon never asked about the location of the respondents, or at least this is not reported. That might have mattered, since a factory worker in an area that has lost a large number of jobs to imports, like Pennsylvania, may be expected to have a more negative attitude toward trade than a factory worker in an area where the economy is relatively healthy, like California. This is likely to be the case even if we controlled for more narrow industries.

• Globalization and TradeGlobalización y comercio

NYT Does Impassioned Pitch for TPP in Its News Section

By CEPRCEPR

July 30, 2016

30 Julio 2016

The NYT gave an analysis of changing attitudes towards trade agreements that completely misrepresented the key issues at stake. The headline pretty much said it all, “both parties used to back free trade. Now they bash it.”

In fact, the current round of deals being negotiated, most importantly the Trans-Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Pact (TTIP) have little to do with a conventional free trade agenda of lowering tariff barriers and eliminating quotas. With few exceptions, these barriers are already low or have been eliminated altogether.

Rather these deals are about putting in place a regulatory agenda that is being designed to foster corporate interests. The deals provide a backdoor around the normal legislative process, since many of these measures would not receive the support of democratically elected officials.

The agreements are also protectionist in important ways, making patent and copyright protections stronger and longer. (It doesn’t matter if you like these government granted monopolies, they are still protectionist.)

These deals are being largely negotiated in secrecy, with most of the input coming from top corporate executives. Then they are pushed on to the American public as all or nothing propositions, with the proponents arguing not only the economic merits, but rather claiming they are a geo-political necessity.

In the case of the TPP, the Obama administration is now contending that the defeat of the agreement would be devastating to efforts to maintain an alliance of countries to contain China. If this is in fact true, then it is understandable that the public would be outraged over the administration’s decision to let corporate interests get all sorts of special favors included in a deal that the administration now says is essential for national security.

It is incredible that the NYT tried to present the current debate as a narrow one over traditional issues of trade and protection. This is obviously not the case and there are no shortage of experts who could have explained this fact to its reporter. A good place to start would be the Nobel Prize-winning economist Paul Krugman, who also happens to be a NYT columnist. Joe Stiglitz, another Nobel Prize-winning economist, could have also explained the nature of these trade agreements to its reporter.

It would be great if the paper tried to do serious reporting on trade rather than just repeating long outdated nonsense about free traders vs. protectionists.