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Both the NYT and USA Today have convinced themselves that house sales are well below their trend level, with the latter telling us that a 5.5 million annual sales rate of existing homes considered healthy. In fact, we are pretty much back to trend levels of sales. In the mid-90s before the bubble began to distort the market, sales averaged about 3.5 million a year. A simple adjustment for the 15 percent population growth over this period would imply an annual sales rate of 4 million existing homes. That is somewhat below the current 4.5 million sales rate.
The gap between the current sales rate and the trend more than makes up for the continued weakness in new home sales. So, what are these folks talking about?
Both the NYT and USA Today have convinced themselves that house sales are well below their trend level, with the latter telling us that a 5.5 million annual sales rate of existing homes considered healthy. In fact, we are pretty much back to trend levels of sales. In the mid-90s before the bubble began to distort the market, sales averaged about 3.5 million a year. A simple adjustment for the 15 percent population growth over this period would imply an annual sales rate of 4 million existing homes. That is somewhat below the current 4.5 million sales rate.
The gap between the current sales rate and the trend more than makes up for the continued weakness in new home sales. So, what are these folks talking about?
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He didn’t use exactly those words, but that is one implication of his column on Paul Ryan’s decision to not support the Bowles-Simpson deficit plan when he was a member of the deficit commission back in 2010. (Brooks attributes Ryan’s action to his hope for a larger scale overhaul of Medicare. More cynical types might attribute it to his adherence to the Republican dogma of never supporting tax increases.)
Anyhow, fans of the Bowles-Simpson report might recall that it would have first put budget cuts in place in October of 2011. The projected deficit for fiscal year 2013 (Figure 2), which begins on October 1 of this year, is less than 4.0 percent of GDP. The people running around Washington worried about the end of the world fiscal cliff scenario are worried about tax increases and spending cuts that will shrink the deficit to 4.0 percent of GDP as of January 1, 2013.
The timing of the tax increases and budget cuts in the Bowles-Simpson scenario is obviously somewhat different than the fiscal cliff story, and it does assume a stronger growth path than we have actually seen, but it is more than a bit bizarre to see many of the same people who have been screaming about the horror of large deficits now terrified by the horror of large deficit reduction.
Just to be clear, deficits are needed now. There is nothing other than the budget deficit to replace the private sector demand we lost when the housing bubble collapsed. But you don’t get to run around one day screaming the deficits are horrible and then turn around the next day and say we need them; or at least you shouldn’t be able to do this and still expect to be taken seriously.
He didn’t use exactly those words, but that is one implication of his column on Paul Ryan’s decision to not support the Bowles-Simpson deficit plan when he was a member of the deficit commission back in 2010. (Brooks attributes Ryan’s action to his hope for a larger scale overhaul of Medicare. More cynical types might attribute it to his adherence to the Republican dogma of never supporting tax increases.)
Anyhow, fans of the Bowles-Simpson report might recall that it would have first put budget cuts in place in October of 2011. The projected deficit for fiscal year 2013 (Figure 2), which begins on October 1 of this year, is less than 4.0 percent of GDP. The people running around Washington worried about the end of the world fiscal cliff scenario are worried about tax increases and spending cuts that will shrink the deficit to 4.0 percent of GDP as of January 1, 2013.
The timing of the tax increases and budget cuts in the Bowles-Simpson scenario is obviously somewhat different than the fiscal cliff story, and it does assume a stronger growth path than we have actually seen, but it is more than a bit bizarre to see many of the same people who have been screaming about the horror of large deficits now terrified by the horror of large deficit reduction.
Just to be clear, deficits are needed now. There is nothing other than the budget deficit to replace the private sector demand we lost when the housing bubble collapsed. But you don’t get to run around one day screaming the deficits are horrible and then turn around the next day and say we need them; or at least you shouldn’t be able to do this and still expect to be taken seriously.
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The context is efforts to limit the consumption of sugary soft drinks, which Will assures us will not work and are a waste of government money. Will is appalled that the Centers for Disease Control gave a $3 million grant to the State of Rhode Island to study how procurement strategies in schools and other public institutions can be altered to reduce the consumption of sugary soft drinks.
It would be difficult to determine whether this $3 million grant (approximately 0.00008 percent of federal spending) was well used. However the Center for Disease Control reports that more than one-third of adults are obese, which adds $147 billion a year to national health care costs each year (@ 50,000 times the size of the grant).
While Will is confident that the government cannot do anything to reduce consumption of sugary drinks, it is worth noting that self-reported smoking rates fell from over 40 percent in the 70s to just over 20 percent today. It may not be easy to design a strategy that will be as effective in reducing the consumption of sugary drinks, but given the enormous financial costs and health costs associated with obesity, it is not obviously foolish to use a small portion of the federal budget to experiment with various alternatives.
Does Will think the country would be better off with no cigarette taxes or anti-smoking campaigns, even if it meant that 40 percent of adults were still smoking?
The context is efforts to limit the consumption of sugary soft drinks, which Will assures us will not work and are a waste of government money. Will is appalled that the Centers for Disease Control gave a $3 million grant to the State of Rhode Island to study how procurement strategies in schools and other public institutions can be altered to reduce the consumption of sugary soft drinks.
It would be difficult to determine whether this $3 million grant (approximately 0.00008 percent of federal spending) was well used. However the Center for Disease Control reports that more than one-third of adults are obese, which adds $147 billion a year to national health care costs each year (@ 50,000 times the size of the grant).
While Will is confident that the government cannot do anything to reduce consumption of sugary drinks, it is worth noting that self-reported smoking rates fell from over 40 percent in the 70s to just over 20 percent today. It may not be easy to design a strategy that will be as effective in reducing the consumption of sugary drinks, but given the enormous financial costs and health costs associated with obesity, it is not obviously foolish to use a small portion of the federal budget to experiment with various alternatives.
Does Will think the country would be better off with no cigarette taxes or anti-smoking campaigns, even if it meant that 40 percent of adults were still smoking?
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The NYT had an article that was far more hesitant about the housing recovery than is warranted by the data. In fact, house prices have pretty much stabilized at a normal level, as have existing home sales.
The problem is that the NYT still does not seem to understand that we had a housing bubble, at one point warning readers that:
“She [Michelle Meyer, an economist with Bank of America Merrill Lynch] expected home prices to rise 2 percent annually in 2012 and 2013, with momentum gradually increasing later in the decade. At that rate, the average home price would regain its 2006 peak in 2022.”
Of course there is no more reason to expect house prices to return to their bubble inflated peaks than there is to expect the NASDAQ to rise back to the 5000 level it reached at the peak of the stock bubble. Eventually inflation will cause both markets to pass these peaks, but as the article notes, this will be a long time.
The current level of existing home sales, just under 4.5 million, is very much in keeping with the longer term trend. In the years 1993-1995, before the bubble began to inflate the market, existing homes sales averaged less than 3.5 million.
The piece includes a chart showing building permits that is clearly wrong. The chart shows building permits peaking at well over 2 million a year in the mid-90s and then plunging in the last decade. In fact permits were under 1.5 million annually in the mid-90s. The chart may have been off by a decade.
The piece also includes a reference to the recent rise in prices in Phoenix. It is worth noting that is largely driven by an extraordinary run up in prices in the bottom tier of the market. Prices in this segment of the market have risen at a 47.3 percent annual rate in the last three months. This looks like a speculative bubble.
The NYT had an article that was far more hesitant about the housing recovery than is warranted by the data. In fact, house prices have pretty much stabilized at a normal level, as have existing home sales.
The problem is that the NYT still does not seem to understand that we had a housing bubble, at one point warning readers that:
“She [Michelle Meyer, an economist with Bank of America Merrill Lynch] expected home prices to rise 2 percent annually in 2012 and 2013, with momentum gradually increasing later in the decade. At that rate, the average home price would regain its 2006 peak in 2022.”
Of course there is no more reason to expect house prices to return to their bubble inflated peaks than there is to expect the NASDAQ to rise back to the 5000 level it reached at the peak of the stock bubble. Eventually inflation will cause both markets to pass these peaks, but as the article notes, this will be a long time.
The current level of existing home sales, just under 4.5 million, is very much in keeping with the longer term trend. In the years 1993-1995, before the bubble began to inflate the market, existing homes sales averaged less than 3.5 million.
The piece includes a chart showing building permits that is clearly wrong. The chart shows building permits peaking at well over 2 million a year in the mid-90s and then plunging in the last decade. In fact permits were under 1.5 million annually in the mid-90s. The chart may have been off by a decade.
The piece also includes a reference to the recent rise in prices in Phoenix. It is worth noting that is largely driven by an extraordinary run up in prices in the bottom tier of the market. Prices in this segment of the market have risen at a 47.3 percent annual rate in the last three months. This looks like a speculative bubble.
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The headline of a front page Washington Post article warned readers:
“Recession imminent if ‘fiscal cliff’ of tax hikes, budget cuts not averted, CBO says.”
Nope, that is not true as all faithful BTP readers know.
The Congressional Budget Office (CBO) projections for a recession are not based on Congress taking action before January 1 when the tax increases and spending cuts first take effect. The CBO projections are based on the assumption that Congress never does anything to offset the scheduled increase in taxes and cuts in spending. If, for example, Congress and the President were to reach a deal that took effect January 15th or 30th, then the vast majority of the negative impact would be avoided. It is very misleading to imply that the CBO projection in some way hinged on having a deal in place by January 1.
At one point the article referred to: “the scheduled deep cut in military spending.” A real newspaper would write this as “the scheduled cut in military spending.”
The headline of a front page Washington Post article warned readers:
“Recession imminent if ‘fiscal cliff’ of tax hikes, budget cuts not averted, CBO says.”
Nope, that is not true as all faithful BTP readers know.
The Congressional Budget Office (CBO) projections for a recession are not based on Congress taking action before January 1 when the tax increases and spending cuts first take effect. The CBO projections are based on the assumption that Congress never does anything to offset the scheduled increase in taxes and cuts in spending. If, for example, Congress and the President were to reach a deal that took effect January 15th or 30th, then the vast majority of the negative impact would be avoided. It is very misleading to imply that the CBO projection in some way hinged on having a deal in place by January 1.
At one point the article referred to: “the scheduled deep cut in military spending.” A real newspaper would write this as “the scheduled cut in military spending.”
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The NYT did what newspapers are supposed to do, it analyzed the impact of the Medicare proposals of President Obama and Governor Romney. It charted out their differences and gave the opinions of some leading experts in the area.
This is important. Reporters should have the time to do this sort of investigation. The overwhelming majority of readers do not have time to evaluate the accuracy of competing claims, which is why the he said/she said reporting that has become standard is so offensive.
The NYT did what newspapers are supposed to do, it analyzed the impact of the Medicare proposals of President Obama and Governor Romney. It charted out their differences and gave the opinions of some leading experts in the area.
This is important. Reporters should have the time to do this sort of investigation. The overwhelming majority of readers do not have time to evaluate the accuracy of competing claims, which is why the he said/she said reporting that has become standard is so offensive.
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David Leonhardt’s latest blog post on increasing inequality is a discussion of globalization. It’s most reasonable except the underlying premise appears to be that globalization is something that just happened.
While this is a common theme in polite circles, it is ridiculous on its phase. Globalization has been by design. Ever hear of the WTO, NAFTA, CAFTA etc.? These are carefully hammered out deals that determine which sectors will exposed to more competition, which sectors will see increased protection (e.g. pharmaceuticals and Disney), and which sectors will largely be left alone.
It is not an accident that autoworkers and custodians have to face competition from people willing to work for very low wages from developing countries whereas doctors and lawyers are largely protected from this competition. This was by design. If the folks negotiating trade deals had put the same effort to open up competition in the currently high-paid professions as they did in manufactured goods, we would probably be paying our doctors $100k a year or less. And we would be saving hundreds of billions of dollars a year in health care costs, legal fees and other areas.
But, our trade negotiators were not trying to bring about economic gains at the expense of doctors and lawyers. These are people with whom they identify. They are also people who make large campaign contributions and who have friends and relatives who write news stories in major media outlets. So free trade in professional services was never a topic for trade negotiators. They remain largely protected from international competition and the people who write on economics pretend not to notice.
David Leonhardt’s latest blog post on increasing inequality is a discussion of globalization. It’s most reasonable except the underlying premise appears to be that globalization is something that just happened.
While this is a common theme in polite circles, it is ridiculous on its phase. Globalization has been by design. Ever hear of the WTO, NAFTA, CAFTA etc.? These are carefully hammered out deals that determine which sectors will exposed to more competition, which sectors will see increased protection (e.g. pharmaceuticals and Disney), and which sectors will largely be left alone.
It is not an accident that autoworkers and custodians have to face competition from people willing to work for very low wages from developing countries whereas doctors and lawyers are largely protected from this competition. This was by design. If the folks negotiating trade deals had put the same effort to open up competition in the currently high-paid professions as they did in manufactured goods, we would probably be paying our doctors $100k a year or less. And we would be saving hundreds of billions of dollars a year in health care costs, legal fees and other areas.
But, our trade negotiators were not trying to bring about economic gains at the expense of doctors and lawyers. These are people with whom they identify. They are also people who make large campaign contributions and who have friends and relatives who write news stories in major media outlets. So free trade in professional services was never a topic for trade negotiators. They remain largely protected from international competition and the people who write on economics pretend not to notice.
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The Congressional Budget Office came out with its mid-year budget update. The update included a warning that if the Bush tax cut and the payroll tax cut are both allowed to expire and the cuts from last year’s budget agreement take effect, the economy will sink into recession in 2013 and the unemployment rate will rise to 9.0 percent. The NYT immediately picked up on this warning in a news article on the new projections.
It is important to realize that this projection for a shrinking economy and rising unemployment rate is based on the higher taxes and lower spending remaining in place for a whole year. The failure of Congress and the president to agree to a package by January 1, 2013, by itself, would not lead to this sort of contraction.
If Congress and the president were to work an agreement somewhere in the month of January or even February, it would mean that people would be paying higher taxes for a short period of time. This reduction in disposable income, coupled with the cuts in spending scheduled to take place, would dampen growth. However, if an agreement reached early in the year restored part of the tax cuts and reversed some of the spending cuts, then the impact on the economy would be very limited.
The point is that January 1, 2013 is not a drop dead date. While it would be desirable to have an agreement on tax and spending issues before this date, and in fact as soon as possible, there will be little harm if negotiations continue into next year, as long as a deal is reached before we get too far into the new year.
If the deadline is allowed to pass then it is easy imagine that Congress approves a tax and spending package that prevents a large hit to the economy. If the experts’ assessment proves right and President Obama is re-elected, then it is easy to envision a scenario in which he proposes a tax cut to the new Congress that restores the Bush era rates (or something close to them) for the bottom 98 percent of the income distribution. He could even include a temporary further rate reduction to replace the payroll tax holiday. It would be difficult to envision even a Republican controlled Congress refusing to pass a tax cut for 98 percent of taxpayers, which will also be needed to provide a boost to the economy.
The increase in taxes on the wealthiest two percent would have only a modest impact on demand. Much of this money would have been saved otherwise, so the fact that government is pulling it away in taxes is not likely to have much negative effect on consumption.
On the spending side, the cuts of roughly $50 billion from both domestic discretionary and the military will have a negative impact on jobs and growth. It is worth noting in this respect that cuts to the domestic side will almost certainly lead to more job loss than cuts to the military budget. The latter tends to be more capital intensive, so fewer workers are employed per dollar of spending.
While these cuts in spending will clearly slow the economy, this is presumably what Congress wanted when it insisted on spending cuts last year. In other words, it is bad economic policy, but it seems to be the economic policy that Congress insisted on, so this portion of the “cliff” really should not be a surprise to anyone.
Finally, it is worth noting that many of the same people who claim that the stimulus did not create jobs are touting the risk to the economy from the fiscal cliff. It is pretty hard to imagine an economic theory where a cutback in spending leads to a loss of jobs, but an increase in spending doesn’t create jobs. In other words, anyone who believes that the stimulus did not create any jobs should not be concerned about the fiscal cliff. By their theory of the economy, it won’t have any impact.
The Congressional Budget Office came out with its mid-year budget update. The update included a warning that if the Bush tax cut and the payroll tax cut are both allowed to expire and the cuts from last year’s budget agreement take effect, the economy will sink into recession in 2013 and the unemployment rate will rise to 9.0 percent. The NYT immediately picked up on this warning in a news article on the new projections.
It is important to realize that this projection for a shrinking economy and rising unemployment rate is based on the higher taxes and lower spending remaining in place for a whole year. The failure of Congress and the president to agree to a package by January 1, 2013, by itself, would not lead to this sort of contraction.
If Congress and the president were to work an agreement somewhere in the month of January or even February, it would mean that people would be paying higher taxes for a short period of time. This reduction in disposable income, coupled with the cuts in spending scheduled to take place, would dampen growth. However, if an agreement reached early in the year restored part of the tax cuts and reversed some of the spending cuts, then the impact on the economy would be very limited.
The point is that January 1, 2013 is not a drop dead date. While it would be desirable to have an agreement on tax and spending issues before this date, and in fact as soon as possible, there will be little harm if negotiations continue into next year, as long as a deal is reached before we get too far into the new year.
If the deadline is allowed to pass then it is easy imagine that Congress approves a tax and spending package that prevents a large hit to the economy. If the experts’ assessment proves right and President Obama is re-elected, then it is easy to envision a scenario in which he proposes a tax cut to the new Congress that restores the Bush era rates (or something close to them) for the bottom 98 percent of the income distribution. He could even include a temporary further rate reduction to replace the payroll tax holiday. It would be difficult to envision even a Republican controlled Congress refusing to pass a tax cut for 98 percent of taxpayers, which will also be needed to provide a boost to the economy.
The increase in taxes on the wealthiest two percent would have only a modest impact on demand. Much of this money would have been saved otherwise, so the fact that government is pulling it away in taxes is not likely to have much negative effect on consumption.
On the spending side, the cuts of roughly $50 billion from both domestic discretionary and the military will have a negative impact on jobs and growth. It is worth noting in this respect that cuts to the domestic side will almost certainly lead to more job loss than cuts to the military budget. The latter tends to be more capital intensive, so fewer workers are employed per dollar of spending.
While these cuts in spending will clearly slow the economy, this is presumably what Congress wanted when it insisted on spending cuts last year. In other words, it is bad economic policy, but it seems to be the economic policy that Congress insisted on, so this portion of the “cliff” really should not be a surprise to anyone.
Finally, it is worth noting that many of the same people who claim that the stimulus did not create jobs are touting the risk to the economy from the fiscal cliff. It is pretty hard to imagine an economic theory where a cutback in spending leads to a loss of jobs, but an increase in spending doesn’t create jobs. In other words, anyone who believes that the stimulus did not create any jobs should not be concerned about the fiscal cliff. By their theory of the economy, it won’t have any impact.
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