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Article Artículo

Asset Bubbles that Move the Economy Are Easy to Spot

Matt Yglesias is trying to convince people that we should not be mad at Alan Greenspan, the Bush administration economic policy team, and the economics profession for missing the housing bubble that sank the economy. He says that "financial bubbles are much harder to spot than people realize" and argues that the subsequent history shows that I actually was wrong in identifying a housing bubble in 2002.

There are two important points that need to be made here. First, my claim has always been that identifying asset bubbles that move the economy is in fact easy. This both narrows the scope for observation and also gives us more evidence against which to check the assessment. In terms of narrowing the scope, I would not hazard a guess as to whether there is a bubble in the market for platinum or barley. You would need to do lots of homework about these specific industries and also the prospects for related sectors that could provide platinum or barley substitutes, as well as the industries that use these commodities as inputs.

In looking at the housing market in 2002, it was possible to see that sale prices had diverged sharply from rents. While sale prices had already risen by more 30 percent compared with their long-term trend, rents had gone nowhere. Also, the vacancy rate in the housing market was at record highs. This strongly suggested that house prices were not being driven by the fundamentals. (Weak income growth also seemed inconsistent with surging house prices.) If families suddenly wanted to commit so much more of their income to housing, why wasn't it affecting rents and why were so many valuable units sitting empty?

And, the housing market was clearly driving the economy. Housing construction was reaching a record share of GDP. This was not something that would be expected when most of the baby boom cohort was looking to downsize as kids moved out of their homes. Also, the housing wealth created by the bubble was leading to a consumption boom, driving savings rates even lower than they had been at the peak of the stock bubble.

I'll confess that I did not expect the bubble to continue as long as it did. I learned from my experience with the stock bubble that the timing of the bursting is pretty much unknowable, but it never occurred to me that Greenspan and other financial regulators would allow the proliferation of junk mortgages to the level they reached in 2004–2006, the peak bubble years.

Contrary to the "who could have known?" alibis told by the folks setting policy, the abusive mortgages being pushed at the time were hardly a secret. The financial press were full of accounts of NINJA loans, where "NINJA" stands for no-income, no job, and no assets. Anyone who cared to know, realized that millions of mortgages were being issued that could only be supported if house prices continued to rise. 

Anyhow, it was inexcusable for the folks at the Fed, at the Council of Economic Advisers, and other policy posts to have been blindsided by the bubble and the damage that would be caused by its collapse. If dishwashers had failed so miserably at their jobs, they would all be unemployed today. Fortunately for economists, they don't have the same level of accountability.

Dean Baker / December 03, 2015

Article Artículo

Workers

Five Numbers to Watch in Friday’s Jobs Report

On Friday, the Bureau of Labor Statistics will release its latest jobs report. This month’s report is of special significance given that the Federal Reserve may raise interest rates in mid-December.

News reports typically cite three numbers from each jobs report: the unemployment rate, the number of jobs created, and the number of private-sector jobs created. By themselves, these figures provide an incomplete picture of the labor market. Here are five additional measures worth watching. Hyperlinks have been included so that anyone wishing to check these figures can do so easily on Friday.

CEPR and Nicolas Buffie / December 02, 2015

Article Artículo

Andrew Biggs and the Missing Retirement Money

Andrew Biggs has a piece in Forbes arguing that the standard estimates of retirees income are flawed because they ignore payouts from defined contribution (DC) accounts like 401(k)s and IRAs. Biggs has a point. There is a fundamental asymmetry in the treatment of traditional defined benefit pensions, which send retirees a check every month, and defined contribution pensions from which retirees must make withdrawals. The checks are generally counted as income on our surveys, the withdrawals often are not.

For this reason Biggs is correct to note that measures derived from the Current Population Survey (CPS), which the Social Security Administration uses for its Income of the Aged report, are likely biased downward. The question is how large the bias is. Based on IRS data, Biggs calculates that the correct number for retiree income might be more than 80 percent higher than the income reported by the CPS, an average understatement of almost $6,000 per person. That would be real money.

There are three reasons to think there might be less here than Biggs suggests.

1) Biggs used 2012 as the basis for his calculations, since this was the most recent year for which the IRS provided data on the over 65 population. It turns out that 2012 is a bad year from which to make extrapolations for reasons that every good tax-hating right-winger should know. The tax rate on high-income households was raised in 2013. This means that if you were one of those households, you would probably have wanted to take more from your IRA in 2012 at the lower tax rate.

If we look at the overall taxable withdrawals from IRAs, there was a drop from $230.8 billion in 2012 to $213.6 billion in 2013. Biggs' extrapolation would have shown an increase in 2013 to roughly $242 billion, an overstatement of more than 13 percent.

Dean Baker / November 30, 2015

Article Artículo

Robert Samuelson Is Frustrated that He Has Not Been More Successful in Promoting Generational War to Distract People from the Money Taken by the Rich

I'm serious, here's how he begins his column (titled "Generational warfare, anyone?") this morning:

"An enduring puzzle of our politics is why there isn’t more generational conflict. By all rights, younger Americans should be resentful. Not only have they been tossed into the worst economy since the 1930s, but also there’s an informal consensus that the government, whatever else it does, should protect every cent of Social Security and Medicare benefits for the elderly. These priorities seem lopsided and unfair."

Yeah, think about that one. We have seen an enormous upward redistribution over the last 35 years. Without this upward redistribution the wages of a typical worker would be more than 40 percent higher today. This money has gone to Wall Street types—you know the folks who sunk the economy and then got us to bail out their banks when the market would have sank them. The money has gone to CEOs who put in their friends as corporate directors. The friends then return the favor by paying the CEOs tens of millions of dollars a year.

The money has gone to drug companies who use their political power to get Congress to give them stronger and longer patent protection and folks like President Obama's trade team to extend this protection around the world. It has gone to doctors and dentists who have used their political power to strengthen the protectionist barriers that ensure them ever higher pay. And it goes to folks like Samuelson's employer, Jeff Bezos, who has pocketed around $4 billion as a result of the exemption of Amazon from the requirement to collect state sales taxes.

But Samuelson and his friends are disappointed and puzzled that they can't get young people angry over their parents' and grandparents' $1,200 a month Social Security check. Life is tough.

Dean Baker / November 30, 2015

Article Artículo

Robert Atkinson and the Washington Monthly's Straw Man About Progressives and Productivity

I am going to submit a piece to the Washington Monthly about how astronomers should support science. After reading Robert Atkinson's Washington Monthly piece on progressives and productivity, I'm convinced its editors would find its thesis compelling.

The Atkinson piece is more than a little annoying since it paints an imaginary image of progressives that exists only in Atkinson's head. Atkinson tells us that progressives should support productivity growth, after first going through some bizarre nonsense on the path of wages and productivity. (Wages have diverged sharply from productivity over the last three decades. This is measured using hourly wages and productivity. Someone would only bring family income into this calculation, as Atkinson does, if they are either confused or dishonest.)

Every progressive I know would very much like to see more productivity growth. The most immediate way to secure more productivity growth would be to have faster economic growth. This is both likely to spur investment and also shift workers from low paying, low productivity jobs to higher paying, higher productivity jobs. This is exactly what happened in the late 1990s when the Fed allowed the unemployment rate to fall to 4.0 percent, ignoring the widely held view in the mainstream of the economics profession that unemployment could not fall below 6.0 percent without leading to spiraling inflation.

Most of the progressives I know are actively leaning on the Fed to not raise interest rates and instead allow the unemployment rate to continue to fall. Where are the centrists and conservatives who supposedly care about productivity on this one? When is Atkinson?

Dean Baker / November 29, 2015

Article Artículo

Randomization In Testing Charter School Effectiveness (see correction)

Susan Dynarski had an interesting piece in the NYT on the relative effectiveness of charter schools in inner city and suburban neighborhoods. She reported on the findings from her own work, as well as others, that charter schools tend to result in higher achievement levels for inner city children, but had no effect on outcomes for children in suburban areas.

While this finding is interesting, it is important to note an important limitation to much of the research that has been done. Dynarski describes the nature of the tests:

"In the case of charter schools, researchers have found an innovative way to overcome selection bias: analyzing the admission lotteries that charters are required to run when they have more applicants than seats.

"Each lottery serves as a randomized trial, the gold standard of research methods. Random assignment lets us compare apples to apples: Lottery winners and losers are identical, on average, when they apply. Any differences that emerge after the lottery can safely be attributed to charter attendance."

Actually the claim that differences in outcomes, "can safely be attributed to charter attendance," is not true. There are two differences between the students who win the lottery and attend a charter school. One is the issue being examined, that they are attending a charter school. The other is that they are being placed in a school where the other students all have parents who were sufficiently motivated to enter their children in a lottery to try to get them in a better school.

Dean Baker / November 28, 2015