Over at Grasping Reality: Dean Baker on the TPP: Super-Early Monday DeLong Smackdown Watch
Over at Grasping Reality: On Tim Taylor on the “Long Depression” of 1873-1879
Over at Grasping Reality: Today’s Economic History: Tim Taylor: Fear of Cheap Foreign Labor in the Long Depression: 1873-1879
Redistribution, stimulus, and U.S. mortgage interest rates
Redistribution isn’t just about transfers of income up or down the income ladder. It can also be about transfers of value across places as well. Certain U.S. government policies can favor some areas of the country over others, or can shift money from residents of one area to others elsewhere. A new paper released by the National Bureau of Economic Research examines one such policy—the interest rates for mortgages set by the two mortgage finance giants Fannie Mae and Freddie Mac. The setting of these rates by the two government-sponsored enterprises—both now in government receivership—not only redistributes income but also acts as a form of stimulus during economic downtimes
The new paper, by economists Erik Hurst, Benjamin J. Keys, Amit Seru, and Joseph S. Vavra, all of the University of Chicago, zeroes in on the interest rate set by Fannie and Freddie for the mortgage market—a rate that doesn’t vary much at all across the country after accounting for the characteristics of borrowers. This is contrary to the economic expectation that the rate would vary, considering that the probability of the risk of defaulting varies quite a bit across the country. If an economic shock hits an area, the expectation is that the rate increases as borrowers default. But that doesn’t happen.
The authors find that variable mortgage rates based on geography are indeed the case in the private mortgage market, where Fannie and Freddie do not guarantee the mortgages before they are packaged and sold as mortgage-backed securities. It’s by setting the standards and fees they charge to guarantee loans that Fannie Mae and Freddie Mac influence mortgage rates. So why does the rate set by the two mortgage finance giants not vary? The authors chalk it up to political constraints. They detail a few times when Fannie Mae and Freddie Mac tried to increase borrowing costs for areas with higher default risk, back in 2008 and 2012, but then stepped back from the proposals due to protests from industry groups and consumer advocacy groups.
So what’s the economic impact of this redistribution of income via the mortgage interest rate on Fannie- and Freddie-guaranteed mortgages? According to the authors’ calculations, residents in a region with a lower predicted mortgage default pay the equivalent of a one-time tax of $1,000 per household. For a household in a region with a high expected default risk, they get a one-time subsidy of about $800 per household.
In total, this transfer is about $21 billion. That’s a large number, but it’s less than the federal government spent on unemployment insurance in 2014 ($49 billion), according to the authors. But the total per household transfer of $1,800 from low-risk to high-risk regions is about the same size as the tax rebates the federal government sent out to taxpayers in the immediate wake of the 2001 and 2008 recessions to help the economy recover more quickly.
The comparison to the tax rebate checks is apt not only in terms of size but also in terms of its impact. By making sure that rates don’t go much higher during a recession, the setting of mortgage interest rates on a national scale makes it easier for households in high risk areas to borrow and sustain their consumption. It’s a form of automatic stimulus that helps households handle regional economic downturns.
As the authors point out, this paper isn’t a full analysis of the economic impact of the mortgage market or even the role of Fannie and Freddie in the market. But what it does show is that polices we don’t often consider as redistributive do, in fact, change the distribution of income.
Nighttime Must-Read: Michael Hiltzik: Why Use Years-Old Data to Attack Social Security Disability?
This looks very bad for Mark Warshawsky and Ross Marchand: using outdated data that misrepresents the current situation is really not something you want to gain a reputation for doing. I’m interested if there is an alternative explanation they would not tell Hiltzik:
…but referred me to a lengthier treatment he published in Bloomberg’s Pension & Benefits Daily in 2012. First question: Why did Warshawsky and Marchand use case figures from 2008?… Social Security’s own inspector general’s office… found… that the average approval rate has been coming down for years–reaching 56% in fiscal 2013…. Warshawsky and Marchand even allude to… reforms implemented by… Michael Astrue…. In his 2012 piece, Warshawsky… determined that even by 2011 ALJs on average had become significantly stingier. That only makes it harder to explain why the outdated 2008 figure became the linchpin of Monday’s op-ed…. An op-ed that appears to be based on statistics but whose import is political…. Warshawsky and Marchand are right to observe that the disability appeals system needed to be made more efficient and fair…. But calling it ‘a benefit bonanza’? No one thrown out of work by a disability and living on $1,165 month after meeting the program’s stringent approval standards would define it that way.
Afternoon Must-Read: Robert Reich: The Conundrum of Corporation and Nation
…In fact, most Americans have no influence at all…. Most big American corporations have no particular allegiance to America. They don’t want Americans to have better wages…. I’m not blaming American corporations. They’re in business to make profits and maximize their share prices, not to serve America…. Because of the overwhelming clout of American firms on U.S. politics, Americans don’t get nearly as good a deal from their governments as do Canadians and Europeans…. So it shouldn’t be surprising that even though U.S. economy is doing better, most Americans are not…. What’s the answer to this basic conundrum? Either we lessen the dominance of big American corporations over American politics. Or we increase their allegiance and responsibility to America. It has to be one or the other…
Afternoon Must-Read: Noah Smith: A Tech Bubble or Just a Mistake?
…just another day in the financial markets…. A bubble is… where everyone buys at prices they know are inflated because they think they can find… a greater fool out there somewhere. Today’s tech start-up investment frenzy has a very defined chain of resale…. Angels and the crowd funders… venture capitalists… early-stage funders sell when the venture either offer shares to the public or gets acquired…. Initial public offerings are a lot rarer than they used to be… acquired by large companies such as Google, Facebook, Amazon, Apple and Microsoft. So unlike in the 1990s, early-stage investors now know exactly who the most likely end-stage buyers are…. If early-stage investors plan on selling to a ‘greater fool,’ it must be because they think Facebook, Google and the rest are the fools…. Are the big companies making a big mistake?… There seems to be a pretty obvious reason for big tech companies to be paying top dollar for little tech companies: insurance…. All of these companies have to be looking for the next platform with a strong network effect that will draw the eyeballs of the fickle, tech-addicted…. The current situation looks very little like the dot-com bubble of the late ’90s.
Things to Read at Lunchtime on March 11, 2015
Must- and Shall-Reads:
- “The thing is, we’ve been here before. “In the early-to-mid 1990s… unemployment had already fallen to [the estimated NAIRU]. But inflation wasn’t actually rising. So Fed officials made what turned out to be a very good choice: They held their fire, waiting for clear signs of inflationary pressure. And it turned out that the United States’ economy was capable of generating millions more jobs, without inflation…. Are we in a similar situation now? Actually, I don’t know–but neither does the Fed. The question… is what to do in the face of that uncertainty…. To me… the answer seems painfully obvious: Don’t… pull that rate-hike trigger, until you see the whites of inflation’s eyes…” :
- Labor Market Slack and the Affordable Care Act :
- The Pincer Attack on Macro Models :
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TPP at the NAB: “As with many ‘trade’ deals in recent years, the intellectual property aspects are more important than the trade aspects… the US is trying to get radically enhanced protection for patents and copyrights… Hollywood and pharma rather than conventional exporters…. Well, we should never forget that in a direct sense, protecting intellectual property means creating a monopoly–letting the holders of a patent or copyright charge a price for something (the use of knowledge) that has a zero social marginal cost… a distortion that makes the world a bit poorer. There is, of course, an offset in the form of an increased incentive to create knowledge…. But do we really think that inadequate incentive to create new drugs or new movies is a major problem right now? You might try to argue that there is a US interest in enhancing IP protection even if it’s not good for the world, because in many cases it’s US corporations with the property rights. But are they really US firms in any meaningful sense? If pharma gets to charge more for drugs in developing countries, do the benefits flow back to US workers? Probably not so much…. Why, exactly, should the Obama administration spend any political capital–alienating labor, disillusioning progressive activists–over such a deal?”
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Weblogging: “I began blogging… due to dissatisfaction with how economic issues were being presented in the mainstream media…. Blogs have changed this. The reporting today on economic issues is so much better than it was then, and that is due in no small part to the interaction between reporters, the public, and academics willing to blog and put complicated, technical matters into terms that the general public can understand. Reporters have access to a much broader array of informed voices than ever before…. A few people who wrote about economics in the blogosphere, mostly non-economists, have moved on and I wish them the best of luck. But economics blogging isn’t dead, far from it…” : -
Jobs, Automation, Engels’ Pause and the Limits of History: “Median wages and living standards are stagnant… having decoupled from productivity growth for several decades. Income inequality has climbed…. High profits have not been redeployed as significantly more investment. Anecdotal evidence of remarkable new technologies suggests that the effects on the economy will be profound, but it’s not clear how…. Sound familiar?… I’m talking about the UK in the first four decades of the nineteenth century, a period that economic historian Robert C Allen has labeled “Engels’ Pause”…. The lazy-but-common retort to the idea that technological advancement would massively displace workers has long been to accuse the fear-monger of having perpetuated the lump of labour fallacy. Luddites!…” : -
The Fed Under Fire: “Fed officials… while they would prefer not to re-litigate… 2008… their decisions are still not well understood and that officials must do more to explain them…. Fed officials should avoid weighing in on issues that are only obliquely related to monetary policy…. Fed officials should acknowledge that at least some of the critics’ suggestions have merit. For example, eliminating commercial banks’ right to select a majority of each Reserve Bank’s board would be a useful step in the direction of greater openness and diversity. :
The Federal Reserve System has always been a work in progress. What the US needs now is progress in the right direction.”
Should Be Aware of:
- Looking for Hungry Grizzlies—on Purpose
- ACA Troofers Uncover Another Conspiracy :
- “People who use… ‘food stamps’ tend to make healthier food choices than those who don’t use SNAP…. To impose the easy virtue of the well-to-do on the poor is to request the most stressed and vulnerable members of society to display impossible moral heroism…. If the problems plaguing poor communities persist after poverty is drastically reduced, that would seem an appropriate time to pursue the matter of a better ‘moral vocabulary’…. But before that conversation can happen, the obvious solution to the ‘chaos’ Brooks observes among poor communities is to reduce poverty, and let its moral quandaries resolve on their own.” :
- “Why do I keep harping on this?, I’ve said this before and I’ll say it again: Journalism is important. Eternal vigilance is the price of liberty. The press is the fourth branch of government. So, yeah, it’s worth banging on this. As a statistician, I see no embarrassment at being irritated when a prominent journalist [like David Brooks] throws around fake-o numbers that just happen to advance his political agenda. It’s tacky tacky tacky, and if he’s going to have the bad taste to go on about morality like this, then, yeah, damn straight I’ll call him on it.” :
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Anaphoric definiteness in the ACA: “In the phrase ‘an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act’ the definite expression ‘the State’ is used anaphorically. Its antecedent is the phrase ‘a State’ in ‘health plans offered in the individual market within a State.’ The anaphoric relation enforces a legal requirement that the state that the health plans plans are offered in be the same state as that which set up the enrolling Exchange…. If an indefinite had been used instead (or, as some have suggested, the disjunct ‘…or the federal government’), the required relationship between the health-plan offering State and constraints on its Exchange would be broken. A plan could be offered in one state and (theoretically) enrolled in by an exchange set up by another. In fact, each of the eight uses of the phrase ‘an Exchange established by the State…’ in the ACA involves such an anphoric use… the idiom favored by Congress to set up this kind of linked requirement…. This required anaphoric relation — specifying, for example, that the state establishing procedures for ensuring childhood coverage is the state whose exchange is providing coverage – makes a crucial contribution to the meaning of the statute, and provides a rationale for the inclusion of the phrase ‘…established by the State…’ in these eight passages in the statute…. The participle ‘established’ came along for the ride. But the crucial thing was that a relation should be set up between an Exchange and a (previously mentioned) State.” : -
Why Is the GOP-led Congress Making Such a Hash of Foreign Policy?: “Armed with a pretty strong midterm election performance, the GOP-controlled Congress came to power with legitimate policy disagreements with the president and some legitimate gripes about the process…. It wasn’t just Republicans, either…. And yet, over the past two months, the Republican-controlled Congress has managed to go from one blunder to another…. It takes real effort for people, such as Les Gelb, David Ignatius, Fred Kaplan, Richard Haass, Phil Zelikow et al, to get off their bipartisan fence and blast one party for acting recklessly on foreign policy–and yet Sen. Tom Cotton’s letter has managed to pull it off. And how has the GOP reacted to all of this?… Some doubling down… [but also] reports that many GOP members of Congress are surprised and a bit chagrined by the blowback…. If the GOP response ranges from sheer denial of a problem to ‘¯_(ツ)_/¯’, that’s a sign that they’re not serious at all about foreign policy…. Let me suggest three drivers: 1) The executive branch has a structural advantage on foreign policy…. 2) Congress ain’t what it used to be. These kinds of stunts would have been vetoed by party leaders in Congress even a decade ago…. But an awful lot of the GOP Senate caucus is new… and you have the old bulls, such as Sen. John McCain saying things like, ‘I saw the letter, I saw that it looked reasonable to me and I signed it, that’s all. I sign lots of letters.’ Which is code for, ‘what was in that letter again?’ 3) To get ahead in the GOP, you need to be a disruptor…. The effect such stunts have on foreign policy are secondary…. Two months into the new Congress, the GOP has squandered what was supposed to be a political and policy advantage for them. And they’ve squandered it badly.” :
Other Things Going on This Week So Far Over at Equitable Growth
Things I would have written about or at least noted at greater length, if I did not have a cold:
- Job Opportunities: Development Manager
- Labor market slack and the Affordable Care Act – Washington Center for Equitable Growth* : How to get high-achieving, low-income students into selective schools – Washington Center for Equitable Growth :
- The U.S. job skills mismatch and up-skilling – Washington Center for Equitable Growth :
- taxes and fairness in an era of high inequality :
- Bringing data to retirement discussions – Washington Center for Equitable Growth :
- The racial wealth gap we hardly talk about: What happens in retirement :
- On Deval Kurtis: ‘Publicly Funded Inequality’ :
- Job Growth for Hispanics Is Outpacing Other Groups :
Next task: to administer “correction” to my laptop until it no longer tries to autocorrect “Boushey” to “Bushy” and “Zipperer” to “Zippered”…
Morning Must-Read: Barry Eichengreen: The Fed Under Fire
…their decisions are still not well understood and that officials must do more to explain them…. Fed officials should avoid weighing in on issues that are only obliquely related to monetary policy…. Fed officials should acknowledge that at least some of the critics’ suggestions have merit. For example, eliminating commercial banks’ right to select a majority of each Reserve Bank’s board would be a useful step in the direction of greater openness and diversity. The Federal Reserve System has always been a work in progress. What the US needs now is progress in the right direction.
The Debate Over the Trans-Pacific Partnership: Focus
It is foolish to debate whether a trade agreement that has not yet been negotiated is a good idea and should be ratified.
Such a debate should properly begin only once there is something to analyze.
But here we are, so…
A few words about benefits from the Trans-Pacific Partnership, should it be successfully negotiated, in response to Paul Krugman:
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Paul Krugman says that the potential net gains from freer trade in services and (secondarily) agriculture as estimated by Petri, Plummer and Zhai of 0.5% of GDP “seem high to him”. Suppose that they are half that. In a Pacific region whose GDP is now approaching $30 trillion/year, that is $75 billion/year. Capitalize that at 4%/year and we get a net addition to world wealth of $3 trillion. That is indeed a very small number relative to the wealth of the world both now and discounted into the future. But that is a rather large number compared to other things the U.S. government might do this year. So why not grab for it?
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Improvements in international monetary arrangements with respect to keeping exchange rates where they ought to be would also be valuable–if they could be successfully negotiated.
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I do not think anybody is arguing quantitatively that TPP would put downward pressure on real wages in the United States of a large enough magnitude to offset the value of the $3 trillion wealth machine. If they are making such an argument, I would like to see it.
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Paul Krugman claims that the other major effect–besides the $3 trillion wealth machine–is that the intellectual property protections make the world poorer and transfer a significant amount of wealth from the sick and the entertainment consumers of emerging markets to first-world plutocrats. But is this in fact true? And what are the numbers?
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However, the big reason that Paul is not in support of the TPP that may be comes at the end: “Why, exactly, should the Obama administration spend any political capital–alienating labor, disillusioning progressive activists–over such a deal?” The argument here is that in the long run America will be better off if there is a more unified liberal base more enthusiastically behind the Democratic Party, and that that outweighs whatever the small and uncertain net benefits of TPP might be.
I would agree that it would have been good from the perspective of Obama’s political and policy goals for him to have framed the TPP debate differently. It should be the business of McConnell and Boehner to pass the enabling legislation through the House and the Senate. It should be a requirement from Obama that they also come up with sufficient additional legislative sweeteners to make it worth his while to sign it–given labor and anti-globalizer opposition. The question should be not: “Can Obama round up the votes for ratification?”
The question, rather, should be: “can Boehner and McConnell come up with sufficient legislative sweeteners for labor and progressives to elicit a signature?” That kind of forward-looking legislative-procedural chess, however–attaching all kinds of sweeteners to the enabling legislation and threatening a veto if they do not stick–has never been the Obama administration’s long suit.
TPP at the NABE: “As with many ‘trade’ deals in recent years, the intellectual property aspects are more important than the trade aspects…
:…the US is trying to get radically enhanced protection for patents and copyrights… Hollywood and pharma rather than conventional exporters…. Well, we should never forget that in a direct sense, protecting intellectual property means creating a monopoly–letting the holders of a patent or copyright charge a price for something (the use of knowledge) that has a zero social marginal cost… a distortion that makes the world a bit poorer. There is, of course, an offset in the form of an increased incentive to create knowledge…. But do we really think that inadequate incentive to create new drugs or new movies is a major problem right now? You might try to argue that there is a US interest in enhancing IP protection even if it’s not good for the world, because in many cases it’s US corporations with the property rights. But are they really US firms in any meaningful sense? If pharma gets to charge more for drugs in developing countries, do the benefits flow back to US workers? Probably not so much…. Why, exactly, should the Obama administration spend any political capital–alienating labor, disillusioning progressive activists–over such a deal?