The standard story is that subsides cause items to be sold at below market prices. Take away the subsidy and prices rise. Does Lamy not know this or is he just a politician making an argument to advance a policy he favors?
--Dean Baker
[Here's an example of the NYT complaining about subsidies lowering prices in the developing world.]
]]>Well, it was not remarkable, it was irresponsible. The UK government and central bank decided to pursue a policy to promote short-term prosperity by allowing a housing bubble to grow out of control. The bubble is almost certainly much worse in the UK than in the U.S.. According to the article, the price of the median home peaked at almost $370,000. This would be more than 60 percent higher than the price peak in the United States.
It is inevitable that bubbles burst and when they do, they leave governments and central banks with really bad options. The article notes that the Central Bank of England is now torn between trying to fight inflation or fight recession. This was a totally predictable outcome of the crash that the bank should have anticipated.
At one point the article includes the bizarre phrase "unions are agitating for higher wages, even as inflation rose at a 3.3 percent annual rate in May, above the 3 percent upper limit of the Bank of England’s comfort zone (emphasis added)." Unions are presumably pushing for higher wages because inflation is high, that is how workers maintain their living standards.
The article also tells readers that:
"The British government has little leeway to spend its way out of any slump. The public purse is constrained by two rules — the so-called 'golden rule,' in which the government borrows only to invest and not to finance current spending, and the sustainable investment rule, in which public sector debt is to be held stable at 'a stable and prudent level.'”
Most governments don't adopt such rules because they are irresponsible -- they can prevent governments from responding effectively to crises such as this one. The article should have presented the view of an analyst who could have made this point. This situation is comparable to a government that was running its economy into the ground because it had a rule that it would always spend 5 percent of GDP on defense and never raise taxes. Obviously a government can elect to adhere to such rules, but it would be appropriate to present the view of almost any serious economist that such behavior is irresponsible from the standpoint of maintaining a stable economy.
--Dean Baker]]>
Higher interest rates presumably were intended to fight inflation by slowing growth in the European economies, thereby throwing workers out of work and decreasing their bargaining power. One of the main ways in which higher interest rates slow growth is by raising the value of the euro against the dollar and other currencies. This makes U.S. goods cheaper in Europe, causing Europeans to buy more imports rather than domestically produced goods (this also lowers prices, another way to reduce inflationary pressure). The lower dollar also causes raises the price of European exports, causing people in the United States to buy less European exports.
Presumably Mr. Barroso understands such basic economics, but his position seems to be contradictory. This would be comparable to a political leader calling for tax cuts but then complaining about the loss of tax revenue. It would be appropriate to point out such an extraordinary inconsistency to readers.
--Dean Baker]]>
Last year it overstated job growth by 284,000 for the year from March 2006 to March 2007, an average of 24,000 a month. It is likely that this imputation is still overstating job growth. The imputation for April, May, and June was 80,000 more in 2008 than in 2007. Since the economy is almost certainly creating jobs at a slower rate this year than last, it is likely that these numbers will be revised downward in the benchmark revisions. The preliminary data for the benchmark revision will be released with the September unemployment report.
Of course, you can always get the real scoop on the jobs numbers with the CEPR Jobs Byte.
--Dean Baker
]]>The point is that we incur enormous inefficiencies in the form of monopoly pricing and extraordinary enforcement costs, and now this invasion of individual privacy, all in order to get a relatively small amount of money into the hands of creative workers. We can think of much better ways to finance creative work. It would be difficult to imagine a worse system -- will the NYT ever talk about the issue?
--Dean Baker]]>
Economists who understand the economy knew that the credit crisis was far from over back in March, when many ill-informed analysts proclaimed the end of the crisis. It was easy to see that the crisis was not over because the fundamental problem was the collapse of the housing bubble which was and is leading to record foreclosure rates on mortgages. With hundreds of billions of dollars of losses on mortgages, it was inevitable that there would be serious problems for those holding mortgages and mortgage backed securities and their derivatives.
Furthermore, the glut of housing guaranteed loses for builders and defaults on construction loans. With the overbuilding also in the commercial sector, there will be another source of bad loans. In addition, since housing equity was a general fallback for consumers on other loans, such as student loans, credit card debt, and car loans, the loss of equity guaranteed higher default rates on these loans as well. This situation is of course worsened by the job loss that began in December.
This is why serious economists knew that the credit crisis was not over in March.
--Dean Baker ]]>
While it will obviously be worse for Brazil if it doesn't hit this target than if it does, but it is hardly a very ambitious target for a developing country. According to the CIA Factbook, Brazil has a per capita GDP of $9,700, less than one fourth as high as the United States. Typically, we would expect that developing countries will be closing the gap in income with developing countries, however the 2.5 percent per capita GDP growth rate implied by this target would be only slighter faster than the growth rate anticipated in the United States and other wealthy countries. This would imply very little convergence even if Brazil can achieve its target. By comparison, Argentina's per capita GDP is more than one-third higher and has been growing at close to an 8 percent annual rate over the last five years.
--Dean Baker]]>
--Dean Baker]]>
Of course the agreement is called a "free trade" agreement, but that is just part of the sales pitch, just like when President Reagan tried to name the MX missile the "peacekeeper" in the hope of making it more appealing to the public.
As BTP readers know, this is not a free trade deal. First, it does not free all trade. It will do little or nothing to make it easier for doctors, lawyers, and other highly educated professionals in Colombia to sell their services in the United States. It also increases some protectionist barriers in the form of copyright and patent protection.
Reporters always complain about having to convey large amounts of information in a limited space. So, if they could just refrain from saying the word "free" in the context of trade discussions, they would be have more space and be more accurately conveying information to their audience.
--Dean Baker]]>
This is wrong. The basis of the foreclosure crisis is that people purchased over-valued homes at bubble-inflated prices. On average, nominal house prices are down almost 20 percent from their bubble peaks. In many areas they are down by 30 percent. In other words, people owe $300,000 on homes that are now worth $200,000.
If house prices had not declined, then the resets would not be an issue. Homeowners could get new mortgages. Furthermore, if the mortgage payments did pose a problem, they would be able to borrow against their equity or simply sell their home and put money in their pocket.
The housing bubble and its subsequent collapse is not a secret. The Post reporters who cover housing should know about it.
--Dean Baker]]>
Steven Beard, a financial analyst, got this completely wrong in a segment on Market Place radio this morning. He noted that the European Central Bank was likely to raise interest rates this week. He then told listeners that they would do this because they were concerned about inflation.
Going back and forth with the host, they noted that one of the main sources of inflation is higher oil prices. They then told listeners that if the dollar falls, then the price of oil rises.
Implication: those dumb European bankers will make their inflation problem worse by raising interest rates because they will have to pay more for oil.
Reality: if the dollar falls by 10 percent against the euro (an exaggeration), then the price of oil measured in dollars will rise by roughly 10 percent. Since Europeans will be getting 10 percent more dollars for each euro, the price they pay for oil will not be changed.
--Dean Baker]]>
The arguments about how a farm price support program are wasteful and counterproductive can also be applied to a house price support program, except the numbers are a couple of orders of magnitude larger in the case of a house price support program. Most agricultural commodities have worldwide markets in the low hundreds of billions, the U.S. housing market is valued at close to $20 trillion (and falling fast).
The plunge in house prices at present is due to the fact that we had an enormous housing bubble, which has gotten some attention in the NYT. The bubble has led to an enormous oversupply of housing, which has shown up as record vacancy rates in both ownership and rental units. This oversupply will continue to put downward pressure on house prices until they get more in line with their long-term trend levels, unless of course the NYT has plans to pull housing off the market and outlaw new construction. (Btw, why do we want high house prices -- is the NYT an advocate of unaffordable housing?)
The reality is that the housing bill in Congress will not stop the price decline, it will just allow the banks to dump some of their bad loans on the government. The time to have prevented the calamity that we are now facing was four, five, or six years ago, before then housing bubble grew to such dangerous levels. But the NYT editorial board could not be bothered by such trivia back then.
The best thing that can be done for those losing their homes right now is to temporarily change the rules on foreclosure to allow moderate income homeowners the option to stay in their homes as renters, as proposed by Representative Raul Grijalva of Phoenix. This plan, which would require no bureaucracy, cost no taxpayer money, and could begin protecting homeowners the day it was passed, has been completely ignored by the NYT in favor of its Rube Goldberg house price support scheme.
btw, the delay in the passage of this bill is likely to prove a huge gift to many of the homeowners who will eventually enter the bailout program. In most of the bubble markets house prices are falling very rapidly. Every month that the program is delayed means a much lower guaranteed price for the new loan, which is the basis for the homeowner's mortgage payment and eventual equity in the home.
For example, in the case of Los Angeles, prices in the bottom tier of the market are falling at the rate of 4 percent a month. With houses at this end of the market selling for an average of $400,000, a one-month delay in entering the program would net a homeowner entering the program $16,000. Now that is what we call asset building.
--Dean Baker]]>
Washington Post gives us another example of would be scary numbers when he tries to warn off regulation of oil prices by referring back to the price controls of the Nixon presidency. Mallaby tells readers that "administering the controls on energy alone took an estimated 5 million man-hours per year."
Are you scared. Let's see, most workers put in 2000 hours a year, so this means that it took 2,500 people to administer energy prices under Nixon. I had never given this one too much thought, but I probably would have guessed something considerably higher. After all, energy accounted for well over 5 percent of GDP and was the most problematic sector of the economy in terms of pushing prices higher. So, containing prices in energy required 2,500 people -- the same number who might occupy a small town in Iraq --that one doesn't scare me. I would not argue for oil price controls (I agree with many of Mallaby's points), but I would caution against being scared away by seemingly big numbers.
Undoubtedly, most of the increase in oil prices is real. Is some of it due to speculation? It seems almost impossible for me to believe it isn't. There are sharp movements in oil and other commodities. These sharp movements are not just responses to changes in underlying supply demand. Inevitably speculation exaggerates these moves.
In response to the question of where is the oil being stored. First, with a product with highly inelastic demand, we don't need very much oil to be pulled off the market to affect the price. But the obvious place that the oil would be stored is in the ground. Do we know exactly how much oil would be pumped at $140 a barrel, if producers anticipated it would rise no higher? Obviously the rate of current production will depend on future price expectations of price. That doesn't make for a grand conspiracy of speculators, but it does mean that the expectation of higher prices in the future can lead to higher prices in the present.
This doesn't mean we should have price controls or ban speculation. My policy recommendations would be to tax the speculation. We tax casino gambling, why not tax gambling in financial assets? We could easily raise over $150 billion a year on a comprehensive set of financial transactions taxes. We could even use the money to pay for a cut middle class income taxes.
For oil, how about a windfall profit tax? We can use the money to pay for tax cuts for energy conserving home improvement. Will that reduce the amount of investment in new drilling for oil? Probably, but we can almost certainly do more to influence the energy market in the future through conservation.
--Dean Baker ]]>
Some of the discussion is reasonable. Several countries in Europe, like France and the Scandinavian countries, have adopted work and child care arrangements that make it easier to raise kids in two worker families. Other countries, like Italy and Spain, lag badly in this regard. Certainly it makes sense to have policies that allow workers the option to raise children without extreme hardship.
But, let's say we adopt these policies and populations still decline. Why should we fear being able to go to beach and not fighting for a place to put a blanket? Will the world collapse if we go to work and there are no traffic jams? And, should we be upset that it will be easier to reduce greenhouse gas emissions if there are fewer of us emitting?
The article seems to rely on some loon tune economics to make the prospect of declining populations seem like a serious problem. For example, it warns about rising rates of retirees to workers. Guess what, we have had rising rates of retirees to workers for the last century. Why on earth would anyone think that this is some sort of crisis? (The article actually tells us how much Germany and Britain's populations would have to increase to keep the ratio of retirees to workers constant. I suppose that is interesting trivia, but why on earth would anyone care?)
The implication that we will have no workers to care for our elderly, or alternatively that future generations of workers would face some crushing tax burden can be seen to be ridiculous with the most basic economic analysis. As one commentator quoted in the piece notes, there is a large amount of unemployed and underemployed labor in Europe. This could be put to work in the event that there was a labor shortage.
Once underutilized labor was fully employed, we would expect to see workers go from less needed jobs to more highly valued jobs. That means fewer people working in restaurants, as house cleaners in hotels and homes, and working the midnight shift at convenience stores. I still don't see the crisis.
Note that as the labor shortage develops, wages get bid up. So our impoverished young people will be earning really high wages. They also will pay much less for housing. In the U.S., rent averages 30 percent of expenditures. It can often be 40-50 percent in highly populated areas. In our declining population scenario, rents will fall since there will be an excess supply of housing.
So, our impoverished young people will be getting high wages because of the labor shortage and paying low rent because of the glut of housing. Yes, but their taxes will rise. Excuse me, but this sort of argument is tripe and it has no place in a serious newspaper. Standard projections for the growth rate of wages show that the rise in before tax wages should easily outpace the impact of any tax increases necessitated by a higher ratio of retirees to workers. There is no plausible story in which demographic pressures will cause future generations of workers to have lower standards of living than we do today.
(The article even puzzles over the question as to whether we can have economic growth with a declining population. The correct answer is, "why would anyone care?" Suppose the population is falling by 2.0 percent annually and the GDP is falling 1.0 percent a year. This translates in per capita GDP growth of 1.0 percent a year. What is the problem with that?)
It would be useful if the NYT would have an editor with some knowledge of economics review a piece like this before turning over 10 pages in the Sunday Magazine.
--Dean Baker ]]>
Of course, anyone who had sold back then could buy into the market today and be almost 20 percent richer. Did we know that the market would fall at the time? Well, we can never know the timing of the market for certain. Even if we had a perfect chart of what the economy will do over some future period of time, we can't know that some moron with access to hundreds of billions of dollar will not buy hugely overpriced stock and keep its price from falling, but we can have some basis for our assessments of the market.
Last fall there was good reason to believe that the market would drop from what have since turned out to be peak levels, because the vast majority of economists were still insisting that housing meltdown was not a big deal. Those of us who recognized the seriousness of the loss of close to $5 trillion in housing bubble wealth (and rising) thought it likely that these losses would be a serious hit to the economy and corporate profits, and presumably also to the stock market.
It would have been appropriate for Fox , as well as other media outlets wishing to present investment advice, to seek out divergent views. Those who listened to the Fox experts have just lost much of their retirement savings.
--Dean Baker]]>