Beat the Press

Dean Baker's commentary on economic reporting


Reassurances on the Housing Bubble

The Times had an interesting piece discussing the impact of more than $1.2 trillion in adjustable rate mortgages resetting in the next two years. The article points out that many homeowners may find their rates increasing by as much as 2 full percentage points when their lock-in period ends on an adjustable rate mortgage.

The article notes that this increase in mortgage payments may cause serious distress for many homeowners and may even lead some to give up their house, especially if it has lost value since the mortgage was issued. However, the article assures us that the situation will not pose any problem for the mortgage banking industry.

How do we know it won’t pose a problem? Well the industry said so. That pretty much settles the case. After all, if they were seriously worried, the representatives of the industry would no doubt be anxious to have their concerns prominently displayed in the New York Times.

I have written on the housing bubble at length (see our site), but I’ll just give two quick items to unsettle the comfortable. First, to make the case that there is no problem, the article comments that “mortgage industry losses of $110 billion spread over several years would amount to a mere 1 percent of the total national homeowners’ equity of $11 trillion.” I am not sure where the $110 billion figure originated, but loses of this magnitude would certainly take a very serious toll on the mortgage banking industry. The relevant denominator is not the amount of homeowners’ equity, but the net worth of the banks in the sector. Without checking the books, I would be confident that their net worth is considerably less than $500 billion. If losses in the sector go over $100 billion, even spread over several years, then it is virtually guaranteed that you will see some major banks facing serious problems.

The other cause for concern is that economists seem to have a very difficult time seeing bubbles or assessing the impact of their collapse. In September of 2000, not one of the 50 “Blue Chip” forecasters predicted a recession in 2001. The lowest growth projection from this group was 2.2 percent. Given the stock market crash was already in progress, it shouldn’t have required too much insight to see problems down the road. I doubt that the quality of economic forecasts has substantially improved in the last six years.


The Conservative Nanny State: LIVE in NYC!

I will be giving a talk on my book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, at Demos next Thursday at noon. The talk is free, as is the book, if you want to download it. You can the details on their website.


Big News: Arithmetic Problems at the Council of Economic Advisors

Economists are supposed to be good at math. It is a great honor for an economist to be appointed as head of the President’s Council of Economic Advisors. For these reasons, it should be big news that the person currently holding this position apparently has problems with simple arithmetic.

According to an article carried by Dow Jones Newswire, Ed Lazear, the current chief of the Council of Economic Advisors, claimed that wage growth “seems to be taking off right now." The article reports Mr. Lazear’s view that workers now seem poised to get substantial real wage gains.

If the article presented Mr. Lazear’s comments accurately, then it missed the real news. Nominal wages are at best just keeping pace with inflation, leaving no room for real wage growth. From June 2005 to June 2006, the average hourly wage increased by 3.9 percent in nominal terms. From May 2005 to May 2006 (the June data is not yet available) the consumer price index increased by 4.1 percent. This means that the real wage fell by roughly 0.2 percent over the last year.

If we focus on just the last three months, nominal wages rose at a 4.5 percent annual rate over the three months April, May, and June compared with the prior three months. This is equal to the annual rate of growth of the CPI in the three months of March, April, and May compared with December, January, and February. In other words, the most recent data indicate that wages may now be just keeping even with inflation.

If wages have slightly trailed inflation over the last year and are just now roughly breaking even, how can President Bush’s chief economist say that wage growth “seems to be taking off?” Mr. Lazear either does not know arithmetic or is not being honest. The fact that he is making a claim so completely at odds with reality should have been big news. (Thanks to PGL for the tip.)

Silliness on the Budget Deficit

The coverage of the debate over the recent budget numbers has been painful. The arguments on both sides have been far removed from reality. The media should have put in the effort to bring the issue back to earth.

First, the White House’s claim that the recent growth in revenue show that the tax cuts have somehow paid for themselves, by increasing growth, is laughable. If we go back to 2001, before the economy had the benefit of President Bush’s tax cuts, CBO projected the economy to grow by 20 percent between 2000 and 2006. On its current path, growth over this period is projected to be 16.7 percent. (CBO’s growth projections are constructed to average in the effect of recessions, so the 2001 recession should not affect this story. Furthermore, even the White House’s growth projections do not show the economy ever catching up to the path projected by CBO in 2001. In other words, the White House’s economists don’t believe that the tax cuts have had any substantial impact on growth.)

Getting to tax revenue, CBO’s projection of revenue for 2006 was more than 20 percent higher (adjusted for inflation) than the White House’s latest figure. In other words, the economy is behind its pre-tax cut growth path and its way behind its pre-tax cut revenue path. Users of arithmetic know that the tax cuts did not come anywhere close to paying for themselves.

The fact that tax revenues are coming in somewhat higher than expected this year is explained largely by the strong stock market performance last year and the resulting increase in capital gains tax revenue. There is always a large random component to tax collections. Arguing about the budget situation based on these random fluctuations is like drawing conclusions on global warming based on yesterday’s weather.

On the other side, the claim by Democrats that Bush is bankrupting the country are also a bit hysterical. The deficit is larger than it should be, and giving tax breaks to the rich was not the country’s most pressing need, but the current deficit is not that large by historic standards. (By the way, it would be more honest and help the hysteria case if the Democrats started using the on-budget deficit, which adds in the $195 billion borrowed from Social Security.)

The reason why the hysteria on the deficit seems so misplaced is that the current account deficit is so much larger. It was running at an $834 billion annual rate in the first quarter of 2007, nearly three times the size of the unified budget deficit and more than 50 percent larger than the on-budget deficit. Of course, the villain in the case of the current account deficit is the high dollar policy that had its origins in the Clinton-Rubin era. This fact makes the current account deficit less interesting to Democrats, but doesn’t change the extent to which it should concern economists or people interested in doing serious reporting on the economy.


Noble Lies to Promote Korean Trade Agreement?

The prospect of a new trade agreement with the United States has prompted mass opposition within South Korea, as demonstrated by large and angry protests. The International Herald Tribune (IHT) appears to be rising to the occasion, going all out to push the new pact.

The article includes a variety of facts that are supposed to demonstrate the need for the trade agreement. It begins by noting that South Korea’s growth “averaged a torrid 8 percent a year in the 1970’s and 1980’s, has slowed in recent years.” Wow, they can’t sustain an 8 percent growth rate – disaster looms. In fact, South Korea’s per capita GDP growth has been averaging about 3 percent a year over the last few years. This is very good for a country with European standards of living. (Post NAFTA Mexico would be euphoric if it ever achieved this growth rate.)

The article then reports that Korea’s share of the U.S. export market has fallen to 2.6 percent from 3.3 percent a decade ago. And this is supposed to matter, why?

Then the article tells readers that Korea faces challenges like “a rapidly declining birth rate and an aging population,” Hmmmm, less crowding and longer life expectancies, this is really frightening.

And the kicker – “economists say the country must restructure its economy to keep growing for the long term.” Sure – I would like to find one economist who claims that Korea is about to stop growing if it doesn’t “restructure” in the manner advocated in this article. There are no economists cited in the article who offer this opinion.

The fact is that South Korea is an incredible success story. It went from Sub-Saharan living standards in the 50s to European living standards at present. It succeeded by pursuing policies that defied the conventional wisdom among economists. That’s too bad for the economists who apparently do not understand development. Their ignorance is not Korea’s problem, or at least it is not Korea’s problem as long as they are not able to impose their policies on the country.

Oh yes, the IHT felt the need to call the trade pact a “free trade” agreement.

The "Social Security and Medicare" Syndrome

Many of the stories on the reduction in the 2006 budget deficit have correctly focused on the fact that the long-term deficit picture still looks pretty awful. However, they have badly misled readers about the reason for the deficit problem. The standard line is that "Social Security and Medicare" costs will explode as the baby boomers retire (e.g. this NYT piece).

This is incredibly misleading. Social Security costs will rise modestly -- the projected increase in SS measured as a share of GDP from 2005 to 2030 is less than the increase from 1960 to 1985. The real culprit in the story, as every serious reporter knows, is Medicare. And the reason that Medicare costs are projected to explode is that the U.S. health care system is broken.

In other words, the deficit stories should be talking about how the exploding cost of the U.S. health care health system will devastate the budget and the economy. People should demand that the reporters get this simple point right and stop telling scare stories on Social Security.


Credit Card Debt Soars in May

The initial reports on the Fed's release of consumer credit data for May focused on the slow 2.4 percent annual rate of growth reported for the month. This reporting misses the boat.

There are two major components to consumer credit. The non-revolving component is primarily car loans. This component fell at a 2.0 percent annual rate, reflecting weak car sales.

The other component is revolving credit. This is primarily credit card debt. This component rose at 9.9 percent annual rate in May. This is a sharp acceleration from earlier this year, when revolving debt was actually declining.

It is always possible that a single month's data is simply an aberation and will be reversed next month. But if this proves to be the beginning of a trend, then the story goes like this: home prices have stopped rising and may even be declining in some places. This means that people can no longer sustain their consumption with by withdrawing equity from their homes. Therefore, many people are turning to credit card borrowing as a way to sustain their consumption and in some cases to make their mortgage payments. (Many adjustable rate mortgages taken out in 2003 are being reset at much higher rates now.) If this story is true, then the May report on consumer debt is a sign of growing stress in consumer finances.

And, You Can Read More ......

For those who want to read more of my ramblings, I am guest blogging at the Drum Major Institute this week.

The Washington Post Argues for More High-Skilled Immigrants

Okay, I tricked you. The Washington Post ran an article reporting that the wages of high-skilled workers in the Washington area are rising far more rapidly than the wages of less-skilled workers. It attributes this fact primarily to technology that has reduced the demand for less-skilled workers.

Those who believe in market forces would see rising wages as evidence of a labor shortage. In other contexts (e.g. nurses, construction workers, custodians etc.) the Post has reported that the country needs immigrants to deal with such labor shortages. Surprisingly, this article did not include any discussion of the need for more high skilled immigrants.

In fairness, the article did conclude with a brief discussion of immigration and its impact on wages. It does not attempt to reconcile the claim that wages for less-skilled workers are being driven down by technology with the claim that the country is sufficiently short of such less-skilled workers, that it desperately needs immigrants.

Let me head off one attempt at reconciling these claims. Some of the jobs frequently done by immigrants at present (e.g. construction work and manufacturing jobs in food processing) used to be relatively well-paying jobs. So it is not true that immigrants simply took the lowest paying jobs that no one else would do.


The NYT Magazine on Immigration

The NYT magazine had a pretty good piece summing up the state of the academic debate on the impact of immigration on the labor market. I have two quick observations.

The piece, like the literature, largely ignores the impact of immigration on housing costs. This is important, because housing is a large chunk of people’s expenditures, especially those of low wage workers, who are the focus of the discussion. Examining wages across cities and regions provides little insight if we don’t adjust for differences in housing costs, since housing accounts for close to 40 percent of the consumption of low income families.

A casual glance at the data suggests that there is a real issue here. Certainly housing costs have risen far more rapidly in cities with heavy concentrations of immigrants (e.g. San Diego, Los Angeles, Miami) than those with few immigrants (e.g. Cleveland, St. Louis, Detroit).

Second, the article is rather cavalier in its treatment of high end immigration. The author notes in passing that if the country was flooded with immigrant writers then he would get lower pay for his gigs. Well, we could design the policy that way. The article is debating the appropriateness of having less educated workers subjected to more competition from people from the developing world and largely concludes that the benefits to more educated workers are sufficiently large, that the less-skilled should be willing to bear the cost.

Needless to say, if a less-skilled worker got the opportunity to write a piece for the NYT magazine, he/she would come to the same conclusion about opening the doors to more high-skilled immigrants. The article implicitly accepts the idea that writers and other high end workers will never be subjected to the same international competition as low end workers because they have so much political power. This is quite likely true, but let’s be clear about the role of power in this story.