That’s what readers of a Post article discussing the future of Fannie Mae and Freddie Mac would conclude. The piece includes assertions from two experts, David Stevens, president of the Mortgage Bankers Association, and Julia Gordon, the director of housing finance and policy at the Center for American Progress, that 30-year fixed rate mortgages would disappear if the government did not guarantee these mortgages through the GSEs or some other mechanism.
This can easily be shown not to be true by the market in jumbo mortgages. These are mortgages that are too large in value to be insured by the GSEs. A large share of these mortgages are 30-year fixed rate mortgages. Also, while it is less common today, prior to the housing bubble banks did hold a substantial share of their mortgages, typically around 10-20 percent. Since the government was not guaranteeing these mortgages, the banks must have felt the guarantee was unnecessary to get them to issue 30-year fixed rate mortgages.
The issue with Fannie Mae and Freddie Mac is one of the interest rates that people will pay on mortgages, not whether they will exist or not. By having a government guarantee the government is providing a subsidy to homebuyers that comes at the expense of the rest of the economy. The government already provides a subsidy to homebuyers through the mortgage interest deduction, the question is whether it is desirable to provide a further subsidy through this government guarantee.
There is also a question of whether this is the most efficient way to provide the subsidy. The government guarantee can set up a complex system of financial intermediaries that may be difficult to regulate. It may be more efficient to provide any additional subsidy to homeownership through an enhanced tax deduction or credit that would not lead to a bloated financial sector.
These are the issues that should be at the center of the debate over the future of Fannie Mae and Freddie Mac. The Post should have been able to recognize the absurdity of claims about the end of 30-year fixed rate mortgages and have found an expert to clarify this point.
Note: Corrected acronym to “GSE.” Thanks to David Stevens.
That’s what readers of a Post article discussing the future of Fannie Mae and Freddie Mac would conclude. The piece includes assertions from two experts, David Stevens, president of the Mortgage Bankers Association, and Julia Gordon, the director of housing finance and policy at the Center for American Progress, that 30-year fixed rate mortgages would disappear if the government did not guarantee these mortgages through the GSEs or some other mechanism.
This can easily be shown not to be true by the market in jumbo mortgages. These are mortgages that are too large in value to be insured by the GSEs. A large share of these mortgages are 30-year fixed rate mortgages. Also, while it is less common today, prior to the housing bubble banks did hold a substantial share of their mortgages, typically around 10-20 percent. Since the government was not guaranteeing these mortgages, the banks must have felt the guarantee was unnecessary to get them to issue 30-year fixed rate mortgages.
The issue with Fannie Mae and Freddie Mac is one of the interest rates that people will pay on mortgages, not whether they will exist or not. By having a government guarantee the government is providing a subsidy to homebuyers that comes at the expense of the rest of the economy. The government already provides a subsidy to homebuyers through the mortgage interest deduction, the question is whether it is desirable to provide a further subsidy through this government guarantee.
There is also a question of whether this is the most efficient way to provide the subsidy. The government guarantee can set up a complex system of financial intermediaries that may be difficult to regulate. It may be more efficient to provide any additional subsidy to homeownership through an enhanced tax deduction or credit that would not lead to a bloated financial sector.
These are the issues that should be at the center of the debate over the future of Fannie Mae and Freddie Mac. The Post should have been able to recognize the absurdity of claims about the end of 30-year fixed rate mortgages and have found an expert to clarify this point.
Note: Corrected acronym to “GSE.” Thanks to David Stevens.
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Brad Plummer has a useful post showing that with current policy in place we can keep CO2 emissions constant over the next three decades. The piece notes that this would be inadequate to prevent dangerous levels of greenhouse gases in the atmosphere; for that we would need substantial reductions in emissions.
It is worth calling attention to one comment that may mislead readers. At one point the piece tells readers:
“Some of these measures [continuing current policy], such as re-upping the tax credits for clean energy, would require Congress. (And that wouldn’t be free; the recent one-year extension of the wind credit, for instance, will cost $1.2 billion per year for 10 years.)”
It’s unlikely that many readers have a clear sense of how much money $1.2 billion a year is relative to the budget. Spending is projected to average more than $4.7 trillion a year over the next decade. This means that the extension of the clean energy credits would cost less than 0.03 percent of projected spending. This likely would provide more information to readers than the dollar amount.
Brad Plummer has a useful post showing that with current policy in place we can keep CO2 emissions constant over the next three decades. The piece notes that this would be inadequate to prevent dangerous levels of greenhouse gases in the atmosphere; for that we would need substantial reductions in emissions.
It is worth calling attention to one comment that may mislead readers. At one point the piece tells readers:
“Some of these measures [continuing current policy], such as re-upping the tax credits for clean energy, would require Congress. (And that wouldn’t be free; the recent one-year extension of the wind credit, for instance, will cost $1.2 billion per year for 10 years.)”
It’s unlikely that many readers have a clear sense of how much money $1.2 billion a year is relative to the budget. Spending is projected to average more than $4.7 trillion a year over the next decade. This means that the extension of the clean energy credits would cost less than 0.03 percent of projected spending. This likely would provide more information to readers than the dollar amount.
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Okay, neither part of that one is exactly right. According to the Census Bureau the unadjusted rate of homeownership in the first quarter of 2013 dropped by 0.4 percentage points to 65.0 percent. The seasonally adjusted rate edged down by 0.1 percentage point to 65.2 percent. This may not be a “plunge” exactly, but either way you would have to go back to 1995 to find a lower rate of homeownership. (Can we get Alan Greenspan out here to give us another lecture on the glories of subprime and other innovative mortgages?)
It’s also not quite right that no one noticed. There are some business reporters who have heard of the Census Bureau. Mark Lieberman had a piece highlighting the new data.
Okay, neither part of that one is exactly right. According to the Census Bureau the unadjusted rate of homeownership in the first quarter of 2013 dropped by 0.4 percentage points to 65.0 percent. The seasonally adjusted rate edged down by 0.1 percentage point to 65.2 percent. This may not be a “plunge” exactly, but either way you would have to go back to 1995 to find a lower rate of homeownership. (Can we get Alan Greenspan out here to give us another lecture on the glories of subprime and other innovative mortgages?)
It’s also not quite right that no one noticed. There are some business reporters who have heard of the Census Bureau. Mark Lieberman had a piece highlighting the new data.
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The Washington Post is one of the most ardent supporters of the policy of selective protectionism. This policy is designed to redistribute income upward by deliberately putting less educated workers in direct competition with low-paid workers in the developing world, while maintaining or increasing protectionist barriers that prevent highly educated professionals like doctors and lawyers from facing the same sort of competition. The predicted and actual result of this policy has been to redistribute income upward to the protected class.
In order to advance this agenda the Post routinely publishes pieces that attempt to conceal the extent to which the current pattern of trade has hurt manufacturing workers and the whole segment of the labor force that might compete with these workers for jobs. Today it gives readers a segment “dispelling myths about manufacturing.” Myth # 2 is:
“Trade and offshoring drove the decline in manufacturing in the U.S.”
The piece then tells us the real culprit is productivity growth, not trade. It blames the rapid productivity growth of the years 2000-2010 for the loss of more than 5.5 million manufacturing jobs over the period.
The data suggest a different story. Productivity growth in manufacturing is not new. The 3.3 percent annual rate of growth over this period was impressive, but it’s not hugely different from the 2.7 percent rate the country experienced from 1950 to 1979. In that period manufacturing employment increased by 30.6 percent, from 14.8 million to 19.3 million.
The modest difference in productivity growth in these two periods explains only a tiny portion of the difference in employment outcomes. The fact that the United States had a surplus in trade in manufacturing items throughout the first period, while it saw huge growth in its trade deficit in the second period, explains far more of the difference in outcomes.
The Washington Post is one of the most ardent supporters of the policy of selective protectionism. This policy is designed to redistribute income upward by deliberately putting less educated workers in direct competition with low-paid workers in the developing world, while maintaining or increasing protectionist barriers that prevent highly educated professionals like doctors and lawyers from facing the same sort of competition. The predicted and actual result of this policy has been to redistribute income upward to the protected class.
In order to advance this agenda the Post routinely publishes pieces that attempt to conceal the extent to which the current pattern of trade has hurt manufacturing workers and the whole segment of the labor force that might compete with these workers for jobs. Today it gives readers a segment “dispelling myths about manufacturing.” Myth # 2 is:
“Trade and offshoring drove the decline in manufacturing in the U.S.”
The piece then tells us the real culprit is productivity growth, not trade. It blames the rapid productivity growth of the years 2000-2010 for the loss of more than 5.5 million manufacturing jobs over the period.
The data suggest a different story. Productivity growth in manufacturing is not new. The 3.3 percent annual rate of growth over this period was impressive, but it’s not hugely different from the 2.7 percent rate the country experienced from 1950 to 1979. In that period manufacturing employment increased by 30.6 percent, from 14.8 million to 19.3 million.
The modest difference in productivity growth in these two periods explains only a tiny portion of the difference in employment outcomes. The fact that the United States had a surplus in trade in manufacturing items throughout the first period, while it saw huge growth in its trade deficit in the second period, explains far more of the difference in outcomes.
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In a Bloomberg column, Matthew Klein gives a brief discussion of errors in New Zealand GDP numbers that he claims supports Reinhart-Rogoff over their critics at the University of Massachusetts, Thomas Herndon, Michael Ash, and Robert Pollin (HAP). However the numbers he gives do not support his case.
He claims that the UMass trio relied on mistaken numbers from the Maddison Project, which is generally taken as an authoritative source on GDP. However, Klein claims that the data given for New Zealand for the years in question is mistaken. After quoting from the UMass paper he tells readers:
“That sounds pretty damning but it turns out that on the New Zealand question, at least, it’s Reinhart and Rogoff who are right, and Herndon, Ash and Pollin are wrong.”
Klein refers us to data from Statistics New Zealand for 1946-1950, the five years in question:
“According to Statistics New Zealand, the economy grew by 3.0 percent in 1946, 0.4 percent in 1947, and 3.2 percent in 1948. New Zealand’s GDP shrunk by 5 percent in 1949 and then grew by 5 percent in 1950.”
Let’s see that comes to an average growth rate for these five years of 1.32 percent. This is somewhat less than the 2.58 percent average that HAP got using the Maddison Project data, but Klein’s number is far closer to the HAP average than the -7.9 percent growth figure for New Zealand that Reinhart and Rogoff used in their calculations.
It’s not clear how this shows Reinhart and Rogoff are right about New Zealand and Herndon, Ash, and Pollin are wrong.
Addendum:
I just checked with Michael Ash and he confirmed that the data in their paper all came from the Reinhart-Rogoff spreadsheet. Insofar as this data is wrong, the fault lies with Reinhart and Rogoff, not Herndon, Ash, and Pollin.
In a Bloomberg column, Matthew Klein gives a brief discussion of errors in New Zealand GDP numbers that he claims supports Reinhart-Rogoff over their critics at the University of Massachusetts, Thomas Herndon, Michael Ash, and Robert Pollin (HAP). However the numbers he gives do not support his case.
He claims that the UMass trio relied on mistaken numbers from the Maddison Project, which is generally taken as an authoritative source on GDP. However, Klein claims that the data given for New Zealand for the years in question is mistaken. After quoting from the UMass paper he tells readers:
“That sounds pretty damning but it turns out that on the New Zealand question, at least, it’s Reinhart and Rogoff who are right, and Herndon, Ash and Pollin are wrong.”
Klein refers us to data from Statistics New Zealand for 1946-1950, the five years in question:
“According to Statistics New Zealand, the economy grew by 3.0 percent in 1946, 0.4 percent in 1947, and 3.2 percent in 1948. New Zealand’s GDP shrunk by 5 percent in 1949 and then grew by 5 percent in 1950.”
Let’s see that comes to an average growth rate for these five years of 1.32 percent. This is somewhat less than the 2.58 percent average that HAP got using the Maddison Project data, but Klein’s number is far closer to the HAP average than the -7.9 percent growth figure for New Zealand that Reinhart and Rogoff used in their calculations.
It’s not clear how this shows Reinhart and Rogoff are right about New Zealand and Herndon, Ash, and Pollin are wrong.
Addendum:
I just checked with Michael Ash and he confirmed that the data in their paper all came from the Reinhart-Rogoff spreadsheet. Insofar as this data is wrong, the fault lies with Reinhart and Rogoff, not Herndon, Ash, and Pollin.
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All those people who thought the government puts Warren Buffett to shame in picking winning companies must be embarrassed after reading Charles Lane’s column in the Washington Post this morning. Lane told readers what a disaster Fisker Automotive proved to be, an electric car company that received $529 million in low-interest loans from the government in 2009. The company is now at the edge of bankruptcy.
Lane tells us that that the mistake was compounded by the fact that the loan made it easier for Fisker to attract private capital:
“All told, Fisker attracted $1.1?billion in private investment, the vast majority of which took place after it got the DOE loan. …
“In other words, that’s more than a billion dollars in capital that can’t create jobs elsewhere in the economy — but might have, if the government had not propped up and promoted Fisker.”
There are two important points here. First, the economy was in a free fall in 2009. There was a ton of capital available for investment. The idea that the $1.1 billion that Fisker attracted from private investors was somehow pulled away from other investments is fanciful at best. In more normal times there is an argument that government subsidized loans are pulling capital away from other areas of the economy. That was not a plausible story in 2009 nor is it a plausible story now. (We have a way of measuring this problem, it’s called “interest rates.”)
The other point is that it was inevitable that Obama’s green energy program would produce some losers. So does Warren Buffett’s investment portfolio. If Lane felt the same way about Berkshire Hathaway as he does about the government’s investments he would be running columns telling us that Warren Buffett is inept because of his large investments in the oil company ConocoPhillips at the peak of the boom in oil prices in 2008.
Government investments in promoting technology will always be a mixed bag with both winners and losers. Anyone who wants to look at the question seriously would have to look at all the companies that received support and do a cumulative cost-benefit analysis. This assessment would be broader than just the return on investment, it would also look at spillover effects. (Ever hear of the Internet?) Such an analysis would have to take into account timing. For example, the opportunity cost of investments made in 2009 was close to zero since the resources would have otherwise been wasted.
However government programs of this sort will always have to deal with the enormous ideological bias of the media. This means that it is inevitable that they will face a Charles Lane who will find a loser to highlight and tell people:
“The Fisker debacle proves once again that, in the immortal words of former White House economist Larry Summers, ‘government is a crappy VC.'”
For this reason, caution in such programs is well-advised.
All those people who thought the government puts Warren Buffett to shame in picking winning companies must be embarrassed after reading Charles Lane’s column in the Washington Post this morning. Lane told readers what a disaster Fisker Automotive proved to be, an electric car company that received $529 million in low-interest loans from the government in 2009. The company is now at the edge of bankruptcy.
Lane tells us that that the mistake was compounded by the fact that the loan made it easier for Fisker to attract private capital:
“All told, Fisker attracted $1.1?billion in private investment, the vast majority of which took place after it got the DOE loan. …
“In other words, that’s more than a billion dollars in capital that can’t create jobs elsewhere in the economy — but might have, if the government had not propped up and promoted Fisker.”
There are two important points here. First, the economy was in a free fall in 2009. There was a ton of capital available for investment. The idea that the $1.1 billion that Fisker attracted from private investors was somehow pulled away from other investments is fanciful at best. In more normal times there is an argument that government subsidized loans are pulling capital away from other areas of the economy. That was not a plausible story in 2009 nor is it a plausible story now. (We have a way of measuring this problem, it’s called “interest rates.”)
The other point is that it was inevitable that Obama’s green energy program would produce some losers. So does Warren Buffett’s investment portfolio. If Lane felt the same way about Berkshire Hathaway as he does about the government’s investments he would be running columns telling us that Warren Buffett is inept because of his large investments in the oil company ConocoPhillips at the peak of the boom in oil prices in 2008.
Government investments in promoting technology will always be a mixed bag with both winners and losers. Anyone who wants to look at the question seriously would have to look at all the companies that received support and do a cumulative cost-benefit analysis. This assessment would be broader than just the return on investment, it would also look at spillover effects. (Ever hear of the Internet?) Such an analysis would have to take into account timing. For example, the opportunity cost of investments made in 2009 was close to zero since the resources would have otherwise been wasted.
However government programs of this sort will always have to deal with the enormous ideological bias of the media. This means that it is inevitable that they will face a Charles Lane who will find a loser to highlight and tell people:
“The Fisker debacle proves once again that, in the immortal words of former White House economist Larry Summers, ‘government is a crappy VC.'”
For this reason, caution in such programs is well-advised.
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In an article about problems with the implementation of Obamacare the NYT tells readers:
“Uncertainty over the law’s future hung over employers and investors throughout 2012. ‘It impeded the recovery,’ said the economist Mark Zandi.”
It’s difficult to see what this uncertainty would be and who exactly would be affected. The vast majority of large firms, the ones who employ more than 50 people and would face new obligations under the Affordable Care Act (ACA), already provide workers with health insurance. There seems little basis for the often expressed concern that firms can put themselves over the line by hiring a 50th worker, given the fact that firms can fire workers at any time for no reason in the United States. The firms that don’t provide health care seem especially unlikely to be worried about dismissing a worker in order to avoid costs imposed by the ACA. (There is also a large amount of turnover, so a firm near the threshold could almost certainly quickly fall below the 50 person cutoff through attrition.
News reports have routinely repeated assertions from economists about uncertainty affecting the economy which have subsequently proven to be without foundation. For example, there were numerous reports in the business press last fall which claimed that uncertainty over the “fiscal cliff” was leading firms to delay investment. As it turned out, investment grew at a 13.2 percent annual rate in the fourth quarter of 2012. It grew at just a 2.1 percent rate in the first quarter of 2013.
When reporters present economists’ assertions about uncertainty having an impact on the economy they should press them for evidence for this claim. That could prevent news stories from misleading readers in the future.
In an article about problems with the implementation of Obamacare the NYT tells readers:
“Uncertainty over the law’s future hung over employers and investors throughout 2012. ‘It impeded the recovery,’ said the economist Mark Zandi.”
It’s difficult to see what this uncertainty would be and who exactly would be affected. The vast majority of large firms, the ones who employ more than 50 people and would face new obligations under the Affordable Care Act (ACA), already provide workers with health insurance. There seems little basis for the often expressed concern that firms can put themselves over the line by hiring a 50th worker, given the fact that firms can fire workers at any time for no reason in the United States. The firms that don’t provide health care seem especially unlikely to be worried about dismissing a worker in order to avoid costs imposed by the ACA. (There is also a large amount of turnover, so a firm near the threshold could almost certainly quickly fall below the 50 person cutoff through attrition.
News reports have routinely repeated assertions from economists about uncertainty affecting the economy which have subsequently proven to be without foundation. For example, there were numerous reports in the business press last fall which claimed that uncertainty over the “fiscal cliff” was leading firms to delay investment. As it turned out, investment grew at a 13.2 percent annual rate in the fourth quarter of 2012. It grew at just a 2.1 percent rate in the first quarter of 2013.
When reporters present economists’ assertions about uncertainty having an impact on the economy they should press them for evidence for this claim. That could prevent news stories from misleading readers in the future.
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A front page Washington Post article (print edition) had the headline “in impatient Europe, some see more debt as answer.” It would be interesting to know on what basis the Post has determined that Europeans are impatient. Would it, for example, consider Americans impatient because they voted Jimmy Carter out of office when the economy was doing poorly in 1980 or George H.W. Bush in 1992? It is common for people to be upset by economic policies that are causing recessions and high unemployment, this might better be called “common sense” than “impatience.”
The article also editorializes in the second paragraph, describing Europe as the “debt-ridden continent.” It would be at least as appropriate to describe it as the unemployment-ridden continent” given the double-digit unemployment in many countries. It also questionable whether “debt-ridden” is an accurate description since in many countries the interest burden is not especially high. Arguably this is the best measure of the burden of the debt.
A front page Washington Post article (print edition) had the headline “in impatient Europe, some see more debt as answer.” It would be interesting to know on what basis the Post has determined that Europeans are impatient. Would it, for example, consider Americans impatient because they voted Jimmy Carter out of office when the economy was doing poorly in 1980 or George H.W. Bush in 1992? It is common for people to be upset by economic policies that are causing recessions and high unemployment, this might better be called “common sense” than “impatience.”
The article also editorializes in the second paragraph, describing Europe as the “debt-ridden continent.” It would be at least as appropriate to describe it as the unemployment-ridden continent” given the double-digit unemployment in many countries. It also questionable whether “debt-ridden” is an accurate description since in many countries the interest burden is not especially high. Arguably this is the best measure of the burden of the debt.
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