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Article Artículo

Fears of Next Financial Crisis Stem from Confusion Over Last One

A NYT article on the seemingly healthy state of the world economy carries the headline, "The economy is humming. Banks are cheering. What can go wrong?" The piece is written as though we need to fear the possibility that another financial crisis is just around the corner. We don't.

It's become popular in the economics profession to highlight the financial crisis as the culprit behind the Great Recession, as opposed to the collapse of the $8 trillion housing bubble. This is very self-serving for economics profession because finance can be complicated. After all, not many people are experts on collaterized debt obligations and all the various risks that can be created if they and other complex derivatives lose value.

By contrast, the housing bubble was a pretty simple story. We had an unprecedented run-up in nationwide house prices that could not plausibly be explained by the fundamentals in the housing market. Rents were following their historic pattern, pretty much rising in step with the overall rate of inflation. And, we already had a record vacancy rate even before the bubble burst. That doesn't fit a story with house prices being driven by the fundamentals of supply and demand in the housing market.

And the bubble was clearly driving the economy. Residential construction hit a record share of GDP in 2005, at almost 6.5 percent. (Normal is around 3.5–4.0 percent.) The $8 trillion in bubble generated housing wealth also led to a consumption boom, with consumption hitting a record high as a share of GDP.

It should have been obvious both that there was a bubble and that there would be no easy way to replace the demand generated by the bubble after it burst. The fact that virtually the entire economics profession failed to recognize the situation is an enormous embarrassment. Therefore, we get the complicated financial crisis story as a cover-up.

The financial crisis story also has the added dividend of justifying the Wall Street bailout. After all, the alternative was a Second Great Depression. No one really has a coherent story as to why we would have been condemned to a Second Great Depression if we let the market work its magic on Goldman Sachs, Citigroup, and the rest, but if we're already in the magical mystery world of financial crisis land, then sure, maybe the curse from letting the big banks go under will condemn us to a decade of double digit unemployment.

CEPR / October 09, 2017

Article Artículo

Washington Post Misleads on Deficits: Democracy Drowns in Ignorance

The Washington Post decided to highlight the Republicans' flip-flop from being a party obsessed with debts and deficits in the Obama years to one that doesn't really care, as long as it can give more tax cuts to the rich. In presenting the background on the deficit and debt, it makes a number of assertions that are likely to mislead readers.

The fourth paragraph tells readers:

"The moves come as the federal deficit, the difference between what the government earns in revenue and spends on programs, is growing more quickly. It will be $600?billion this year and is projected to reach $1.46?trillion in a decade, even without additional policy actions."

This might sound like a rapid jump in the size of the deficit because it is not expressed relative to the size of the economy. In fact, the projections show the deficit rising from 3.6 percent of GDP in 2017 to 5.2 percent of GDP in 2027.

Furthermore, almost the entire increase in the projected deficit is the result of a projected increase in interest payments equal to 1.5 percentage points of GDP. This increase is due the Congressional Budget Office's (CBO) projection that interest rates will be substantially higher in the future than they are today. In this respect, it is worth noting that CBO has consistently been wrong in its interest rate projections since 2010, hugely overstating the extent to which interest rates will rise.

It is also worth noting that another factor driving up projected deficits is the assumption that the Federal Reserve Board will sell off much of its assets so that it will refund substantially less money to the Treasury in future years than it is now doing. Currently, it is refunding about $90 billion annually (0.5 percent of GDP) based on the interest it receives from its assets. This is projected to fall to about 0.2 percent of GDP in a decade. For some reason, the Washington Post, in spite of its concern about deficits, has never mentioned the impact on the deficit of the Fed's decision to sell off its assets.

CEPR / October 08, 2017

Article Artículo

Debatable Propositions: I'm the Greatest Runner in the World and Growth from the Republican Tax Cut Will Raise $1.5 Trillion in Revenue Over the Next Decade

The New York Times took a big leap into a post-modern future with James Stewart's column on tax reform. The piece proposes several changes to the tax code that would fill the gap in revenue created by the tax cuts the Republicans have put on the table.

Before laying out the proposals Stewart tells readers:

"The Republican budget resolution accepts a 10-year revenue shortfall of $1.5 trillion, on the theory that faster economic growth will make up the difference. That’s a debatable proposition, but for purposes of this discussion, let’s accept it."

No, that really is not a debatable proposition, it is just something Republicans say to justify their tax break. They have no evidence that their tax cut can produce anything like this amount of additional revenue from faster growth.

This actually is a well studied topic. For example, see this analysis by Douglas Holtz-Eakin, a Republican economist who headed the Council of Economic Advisers under George W. Bush. It found that, at best, growth could temporarily make up 30 percent of the revenue lost from a tax cut. And this was under a set of assumptions that made the tax cut a net negative for growth over the long-term.

It is irresponsible (fake news?) to imply that something that is obviously not true becomes a "debatable proposition" just because someone in a position of power asserts it to be true.

CEPR / October 05, 2017

Article Artículo

Washington Post Says It's Hard to Get Good Help

Fans of the market believe that when there is a shortage, prices rise to eliminate it. Higher prices cause an increase in supply and reduce demand, bringing the two into balance.

That's a pretty basic story to fans of Econ 101 everywhere. However, when it comes to the pay of workers without college degrees, the Washington Post doesn't believe in markets. It ran a bizarre piece this morning complaining that the recovery efforts from the hurricanes in Texas and Florida were being hurt by a shortage of construction and manufacturing workers. 

The piece really struggles to put together a case for a labor shortage:

"In 2005, Hurricane Katrina wrought about $108 billion in damages. Demand in New Orleans soared for carpenters, electricians and plumbers. Immigrants flocked to the city for the blue-collar work. 

"At the time, the country’s unemployment rate was higher — 4.7 percent when Katrina struck, compared to today’s 4.4 percent. More people were looking for jobs, particularly men. 

"Male participation in the workforce was 73.3 percent in 2005, while today’s is 69.2 percent. Opioid use, now seen as a factor keeping men out of work, wasn't yet regarded as a national crisis, and immigration restrictions weren’t as tight. That made it easier for construction firms to find laborers in a hurry when it came time to fix things up. 

"In contrast, monthly job openings in the United States reached a record high this summer at 6.2 million. Then came the hurricane season's aftermath, adding on to those vacancies as communities began to put themselves back together."

Are we really supposed to believe that a 4.7 percent unemployment rate is a hugely different labor market from a 4.4 percent unemployment rate? As far as the drop in labor force participation, much of this is due to demographics: people have retired. If we look at prime-age workers (ages 25 to 54) the decline in participation rates for men is less than 2.0 percentage points. It is also worth noting that it has risen by roughly half a percentage point in the first eight months of 2017 compared to 2015, suggesting that many of those now counted as out of the labor market would come back if they saw good paying jobs.

If we look at job openings, the labor market does seem somewhat tighter in 2017 than in 2005, but not hugely so. The job opening rate in construction for the first seven months of 2017 has averaged 2.6 percent. That compares to 2.0 percent in the last four months of 2005, but isn't much different from the 2.3 percent rate for 2006.

CEPR / October 05, 2017

Article Artículo

Bernie Sanders, Wealth, and the Washington Post Fact Checker

Earlier this week the Washington Post Fact Checker gave three Pinocchios to Bernie Sanders for saying that the world's six richest people had more wealth than the bottom half. Several people contacted me to complain about the piece. I had originally intended to let it pass because I actually agree with many of the criticisms, but on second thought, this piece applies a level of scrutiny that it never does to claims of other politicians or its own editorial page.

First, I'll make a few quick points on wealth as a measure on inequality. Wealth can fluctuate enormously and often for reasons that really don't tell us much about inequality. When the stock market fell by 50 percent between the bubble peak in 2000 and the trough in 2002 did we become a much more equal society?

Asset prices, and therefore wealth, fluctuate inversely with interest rates. In fact, with bond prices the inverse relationship is definitional. If the interest on 10-year treasury bonds doubles from 2.2 percent to 4.4 percent (roughly its pre-recession level), will the implied plunge in bond prices mean we are more equal?

Also, as the piece points out, the world's poorest people by this measure are not those who are starving and homeless in the developing world, but rather recent graduates of Harvard med school and business school who took out large amounts of debt to pay for their education. I'm afraid I can't shed many tears for these folks.

Finally, what counts as wealth is hugely arbitrary. In the good old days, many workers had defined benefit pensions that helped support them in retirement. At least in the private sector these have been mostly replaced with 401(k) plans and other defined contribution retirement plans. A defined benefit pension would not show up in most measures of wealth whereas a defined contribution pension would. This means we would count someone with $50,000 in a 401(k) plan as having more wealth than someone who would get $30,000 a year in retirement until they die from their pension. That makes no sense.

CEPR / October 04, 2017

Article Artículo

Roger Cohen's Lecture to Catalan's Populists Suffers from Bad Arithmetic

Roger Cohen showed us yet again that it seems our children aren't learning when it comes to basic arithmetic skills. He used his NYT column to lecture the people of Catalan on their bad manners in seeking to become independent of Spain over the objections of both the national government and the European Union.

"The Catalan lurch is of its time. Yes, it’s about Catalan self-determination. But it’s also of a piece with the anti-establishment, anti-elitist, disruption-at-any-cost upheavals that have been buffeting and undermining the postwar liberal order in Europe.

"Of course, it’s precisely that order — embodied in the European Union and by the presence of the United States as an offsetting power in Europe — that over the past four decades has ushered Spain, and Catalonia within it, to a degree of prosperity and democratic stability unimaginable at Franco’s death. Spain is a poster child for European integration. So, of course, is Catalonia.

"But we have entered the Age of Amnesia."

So Cohen says that the European Union and the current world order have ushered in a period of unimaginable prosperity for Catalan and Spain, but the dumb masses just can't remember how bad things were in the bad old days because of their amnesia. Well, let's check the numbers.

CEPR / October 03, 2017