Tag: Larry Kudlow

No, Larry Kudlow Is Not an Economist…

Posted on by Brad DeLong

I have only been on the same stage as Larry Kudlow twice in my life. In neither case did he provide any intellectual substance at all. This, a decade ago, was the second time:

Hoisted from the Archives from 2007: I was sitting on the right end of an nine-person panel at the New School Friday morning http://www.cepa.newschool.edu/events/events_schwartz-lecture.htm#webcast. Bob Solow was sitting on the left end–Solow, Shapiro, Schwartz, Rohatyn, Kudlow, Kerrey, Kosterlitz, Hormats, DeLong. Bob Solow expressed concern and worry over the declines in the U.S. savings rate over the past generation. Larry Kudlow, in the middle of the panel, aggressively launched into a rant…

…about how the NIPA savings rate was wrong, about how the right savings rate was the change in household net worth, about how there was no potential problem with America saving too little, that the economy was strong, and that that day’s employment report had been wonderful, and that Paul Krugman had predicted nine out of the last zero recessions, et cetera, et cetera, et cetera.

What is one to do? You watch a guy–Bob Solow–one of the smartest and most thoughtful people I know, having his intellectual impact neutralized by a guy–Kudlow–who really isn’t in the intellectual inquiry business anymore. Kudlow clearly has not thought through the biases and gaps in the household net worth number: if he had, there is no way he could say what he is saying.

On paper, in print, on the screen, one can point out that the employment report was anemic–it was not a bloodletting by any means, but it was a bit disappointing. On paper, in print, on the screen, one can say that there is reason to worry about the decline in housing demand and the possibility that it might trigger a recession.

On paper, on print, on the screen, one can list the seven potential wedges between the NIPA savings rate and the change in household net worth:

  1. There is a gap between the rate of return on the average investment made in a year and the cost of capital, which means that $1 of savings on average produces more than $1 of value.
  2. The NIPA may well understate corporate savings and investment by counting a bunch of investments in organizational form as corporate operating expenses.
  3. All of us free-ride on technological research and development, reaping where we do not sow, gathering where we do not scatter, and profiting where we do not save and invest.
  4. Shifts in the distribution of income away from labor and toward capital increase measured household net worth–which includes the increased expected future profits from capital–but not true household net worth–which also includes the decreased expected future wages of labor.
  5. Declines in interest rates make the future more valuable relative to the present and so raise measured household net worth today–which is measured in today’s dollars–without any outward shift in the true consumption-possibilities frontier.
  6. Government deficits that raise the debt lower national savings but not measured household net worth.
  7. Good news about the future produces windfall gains and bad news windfall losses which alter this year’s household net worth without telling us much about over-all long-run accumulation trends.

On paper, in print, on the screen one can say that reasons (4), (5), and (6) pushing up measured household net worth are reasons to discount that statistic as misleading: they do not reflect any true increase in appropriately-defined wealth. One can say that any increase in household net worth caused by (7) is a transitory phenomenon that tells us little about permanent saving and accumulation patterns. One can say that (1) and (2) affect the level but not the trends of saving, and do not speak to Solow’s worry about the savings-investment rate’s decline. One can say thus that only reason (3)–the effects of the now decade-long computer-and-communications real investment boom on our total wealth–provides a reason to even begin to think about whether Bob Solow’s worries about declining savings as measured by the NIPA are at all overblown.

But there are ninety minutes for a panel with nine people on it. To the audience it looks like two cocksure economists who disagree for incomprehensible reasons. And my ten minute share will come too late to try to referee Solow-Kudlow in any fair, balanced, and effective way.

It’s an un-discourse situation: Kudlow doesn’t acknowledge–may not know–the flaws in his chosen statistic. And I can’t help wonder what Kudlow would be saying if a Democrat were president.

It’s an intellectual Gresham’s Law in action…

What can I do? I can blog about it.

And I can, a decade letter, hoist it from the archives…

Must-Read: Barry Ritholtz: Lending to Poor People Didn’t Cause the Financial Crisis

Posted on by Brad DeLong

Must-Read: One of the forms racism takes in America today is the belief that whenever anything goes wrong it must have given money away to poor, shiftless Black people. Today this song is being reprised by–who else?–Larry Kudlow and Steven Moore.

The very sharp Barry Ritholtz does the intellectual garbage cleanup:

Barry Ritholtz: Lending to Poor People Didn’t Cause the Financial Crisis: “Lawrence Kudlow and Stephen Moore have revived an idea… that really should have been put to rest long ago…

…They lay the blame for the credit crisis and Great Recession on the Community Reinvestment Act, a 1977 law designed in part to prevent banks from engaging in a racially discriminatory lending practice known as redlining. The reality is, of course, that the CRA wasn’t a factor…. Here’s the heart of the Kudlow and Moore case:

The seeds of the mortgage meltdown were planted during Bill Clinton’s presidency. Under Clinton’s Housing and Urban Development (HUD) secretary, Andrew Cuomo, Community Reinvestment Act regulators gave banks higher ratings for home loans made in ‘credit-deprived’ areas. Banks were effectively rewarded for throwing out sound underwriting standards and writing loans to those who were at high risk of defaulting. If banks didn’t comply with these rules, regulators reined in their ability to expand lending and deposits.

They then argue that this was part of a broader campaign to make loans to unqualified low-income folk, which in turn caused the crisis…. The CRA… simply says that if you open a branch office in a low income neighborhood and collect deposits there, you are obligated to do a certain amount of lending in that neighborhood. In other words, you can’t open a branch office in Harlem and use deposits from there to only fund loans in high-end Tribeca. A bank must make credit available on the same terms in both neighborhoods. In other words, a ‘red line’ can’t be drawn around Harlem….

Showing that the CRA wasn’t the cause of the financial crisis is rather easy. As Warren Buffett pal Charlie Munger says, ‘Invert, always invert.’ In this case, let’s assume Moore and Kudlow are correct…. What would that world have looked like?…. (a) Home sales and prices in urban, minority communities would have led the national home market higher, with gains in percentage terms surpassing national figures. (b) CRA mandated loans would have defaulted at higher rates. (c) Foreclosures in these distressed urban CRA neighborhoods should have far outpaced those in the suburbs. (d) Local lenders making these mortgages should have failed at much higher rates. (e) Portfolios of banks participating in the Troubled Asset Relief Program should have been filled with securities made up of toxic CRA loans. (f) Investors looking to profit should have been buying up properties financed with defaulted CRA loans. (g) And Congressional testimony of financial industry executives after the crisis should have spelled out how the CRA was a direct cause, with compelling evidence backing their claims.

Yet none of these things happened. And they should have, if the CRA was at fault…. If that isn’t enough to dismiss the claim, consider this: Where did mortgages, especially subprime mortgages, default in large numbers? It wasn’t Harlem, Philadelphia, Baltimore, Chicago, Detroit or any other poor, largely minority urban area covered by the CRA. No, the crisis was worst in Florida, Arizona, Nevada and California. Indeed, the vast majority of the housing collapse took place in the suburbs and exurbs…. What’s more, many of the lenders that made the subprime loans that contributed so much to the collapse were private non-bank lenders that weren’t covered by the CRA. Almost 400 of these went bankrupt soon after housing began to wobble. I have called the CRA blame meme ‘the big lie’–and with good reason. It’s an old trope, tinged with elements of dog-whistle politics, blaming low-income residents in the inner cities regardless of what the data show…

Let’s see how much of the media picks up on this dog megaphone, and presents it to the public as trustworthy information intermediaries should…