Sept, 2001

“the new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fuelled the stock market bubble.”

Aug, 2002

“While the short-term effects of a housing bubble appear very beneficial—just as was the case with the stock bubble and the dollar bubble—the long-term effects from its eventual deflation can be extremely harmful, both to the economy as a whole, and to tens of millions of families that will see much of their equity disappear unexpectedly. The economy will lose an important source of demand as housing construction plummets and the wealth effect goes into reverse. This will slow an economy already reeling from the effects of the collapse of the stock bubble of 1999, … Unfortunately, most of the nation’s political and economic leadership remained oblivious to the dangers of the stock market and dollar bubbles until they began to deflate. This failure created the basis for the economic uncertainty the country currently faces … [which] will be aggravated further by the deflation of the housing bubble. This process will prove even more painful if the housing bubble is allowed to expand still further before collapsing.”

2003

“I am very pessimistic. We are heading into something in the world which is worse than what we experienced in 1982. It will be the worst recession since the Second World War.”

“The reckless financial policies of leading western powers in the last two decades make it likely that the next seismic debt crisis will be in America, not Argentina. It can be avoided . . . only by serious efforts to bring regulation and balance to the international economy.”

“There will be a collapse in the credit system in the rich world, led by the United States.”

First, Frankel:

Job market confirms end of recession

The recession is over. The last piece has fallen into place, with the BLS announcement that employment rose in March.

Identifying the beginnings and ends of recessions has been difficult in recent decades because the two most important indicators, output and employment, have sometimes behaved differently from each other. Most notoriously, in the recovery that began in November 2001, employment lagged far behind economic growth. If one had gone by the labor market, one might have called it a three year recession. But if one had gone by GDP, one might have wondered whether there was a recession at all.

This time around, the difficulty is not so great. True, the magnitude of job loss after December 2007 was unparalleled since the 1930s. It was severe even relative to the loss of GDP. But contrary to some impressions, the labor market in this recovery has not lagged unusually far behind the rest of the economy. It always lags behind somewhat: due to costs of search, hiring and training, firms wait until the recovery is reasonably well established before adding workers to the payroll. But by either of two criteria, the lag has not been unusually long this time. First, the three months of greatest job loss virtually coincided with the three months of greatest output loss, in the first quarter of 2009, as had also been the the case in the 1991 and 2001 recessions.

By July 2009, job market indicators were showing their first signs of life. Second, with the latest figures, employment changes have now turned positive. This is the more definitive criterion, because a recovery is defined as a period of increasing economic activity. The nine month wait was painful. But the lag between positive income growth (June 2009) and positive job growth (March 2010) turned out to be shorter than in the preceding two recessions (one to two years)…

And here’s Thoma’s response:

“The recession is over”

Jeff Frankel — a member of the NBER Business Cycle Dating Committee — says: The recession is over.

He is basing this conclusion on the recent job market number showing positive employment growth:

…with the latest figures, employment changes have now turned positive. This is the more definitive criterion, because a recovery is defined as a period of increasing economic activity, not a period when economic activity is high. The nine month wait was painful. But the lag between positive income growth (June 2009) and positive job growth (March 2010) turned out to be shorter than in the preceding two recessions (one to two years). …

He may well be right, but I’m waiting for more than one month of somewhat encouraging employment data before coming to that conclusion. It’s always possible that one month is a blip, not a trend. In addition, the conclusion is based upon the fact that labor markets are exhibiting positive growth, but positive growth is all that is required, the strength of the growth is not the determining factor. However, even though growth is positive, it is very sluggish and as David Altig notes, at current rates of job creation, the unemployment rate will still be over 9% a year from now. So this is by no means an “all clear” signal for labor markets.

Median priced existing single-family home in the Midwest (January 2010): $127,200

Monthly payment with 20% down payment and 5.1% mortgage: $553

Qualifying annual income required to buy a $127,200 home: $26,544

Median annual family income in Midwest: $59,961

Midwest Housing Affordability Index: 225.9%

I’m not sure if that’s a record high for Midwest home affordability, but it seems pretty amazing that: a) the typical Midwest family has more than twice the income necessary to purchase a median priced home, b) the median priced home in the Midwest is so low ($127,200), and c) it’s possible to purchase a median-priced Midwest home with less than $27,000 of household income (assuming a 20% down payment of $25,440).

That would mean that a married couple both working at Wal-Mart full-time (34 hours per week), at an average hourly wage of $9.68, would have household income of about $33,000, almost $6,000 more income than the $27,000 required to buy a median-priced house in the Midwest. Of course, the Wal-Mart couple very likely wouldn’t have the $25,000 down payment, but they wouldn’t necessarily have to buy the median priced home and they wouldn’t necessarily have to put 20% down.

With all of the talk about stagnant or declining wages, increasing income inequality, the disappearing middle class, etc. the fact that the typical household in the Midwest has more than twice the income necessary to buy a typical house suggests that it really can’t be all that bad. As I reported recently, clothing is cheaper than ever before in history (less than 3% of disposable income in 2009), and food is cheaper than ever before (9.6% of disposable income in 2008). With home prices and mortgage rates so low, it’s also likely that housing costs as a share of disposable income are also at historical lows (update to follow).

Former Federal Reserve economist and economics professor Arnold Kling doesn’t like the new health care law. From The Daily Caller:

Health care bill woke a sleeping giant

For many Americans, March 21, 2010, is a date that will live in infamy. Unlike Pearl Harbor or the September 11, 2001, attacks, which offended nearly all Americans, the health care legislation only angered a significant proportion of the population. However, those of us who are outraged are motivated to wage a long fight, and our aims go much further than rolling back this one bill.

The health care legislation represents a culmination of a sequence of unpopular major initiatives from Washington. First, there was Henry Paulson’s massive transfer of wealth from the people most hurt by the financial crisis to some of the people most responsible for it. Next, came the massive, ill-conceived stimulus bill, which was not timely, targeted, or temporary but instead a pure power grab by Washington. Health care legislation is merely the latest straw.

The American people are watching their country being transformed from an exceptional, vibrant free economy to a broken European welfare state, and many of us do not like the direction of change. We may not know exactly what is in the health care legislation (does anyone?), but we know its intent to assert government authority over health insurance. We know that it creates a large entitlement, paid for in large part by unspecified future cuts in Medicare.

Thanks to the projected Medicare cuts, the Congressional Budget Office scores the health care legislation as deficit-reducing relative to current law. However, current law is unsustainable. Medicare spending will have to be cut in the future in order to avoid national bankruptcy. By diverting projected Medicare cuts into a new entitlement, this legislation makes the impending budget crisis in Medicare loom sooner and deeper…

The public probably does not understand this budgetary legerdemain, but their instinct is to distrust Congress. In this case, the populist instinct is valid, and the elitist contempt for ordinary citizens is quite unjustified.

In fact, I believe that the elites have so mistreated the American people that we should declare that a state of war exists between America and Washington. Our goals in this war must go well beyond the repeal of this year’s health care legislation. Here is a list of additional goals that I would propose:

1. End the current bailouts and prevent future bailouts. Starting immediately, limit the Federal Reserve to holding only Treasury instruments. The Fed needs to go back to being a central bank, not a piggy bank.

2. Cut the pay of civilian Federal workers by 10 percent. The private sector is making painful adaptations to hard times. The government needs to start doing what any other organization would do when its revenues are down.

3. Restructure entitlements so that the future path of spending is sustainable. Congressman Paul Ryan’s “road map” is an example of what an honest budget would look like. If Democrats would prefer higher taxes to such a road map, then those taxes should be explicitly budgeted, rather than pretending that the funds for future benefits are going to appear by magic.

The point here is that health care legislation was just one battle. The overall war is larger. After Pearl Harbor, Japanese Admiral Yamomoto is reported to have said, “I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve.” So it should be with us today.

Healthcare, Trade Offs, and the Road Ahead

One thing I have been struck by in watching this debate is how strident it has been, among both proponents and opponents of the legislation. As a weak-willed eclectic, I can see arguments on both sides. Life is full of tradeoffs, and so most issues strike me as involving shades of grey rather than being black and white. As a result, I find it hard to envision the people I disagree with as demons.

Arthur Okun said the big tradeoff in economics is between equality and efficiency. The health reform bill offers more equality (expanded insurance, more redistribution) and less efficiency (higher marginal tax rates). Whether you think this is a good or bad choice to make, it should not be hard to see the other point of view.

I like to think of the big tradeoff as being between community and liberty. From this perspective, the health reform bill offers more community (all Americans get health insurance, regulated by a centralized authority) and less liberty (insurance mandates, higher taxes). Once again, regardless of whether you are more communitarian or libertarian, a reasonable person should be able to understand the opposite vantagepoint.

In the end, while I understood the arguments in favor of the bill, I could not support it. In part, that is because I am generally more of a libertarian than a communitarian. In addition, I could not help but fear that the legislation will add to the fiscal burden we are leaving to future generations. Some economists (such as my Harvard colleague David Cutler) think there are great cost savings in the bill. I hope he is right, but I am skeptical. Some people say the Congressional Budget Office gave the legislation a clean bill of health regarding its fiscal impact. I believe that is completely wrong, for several reasons (click here, here, and here). My judgment is that this health bill adds significantly to our long-term fiscal problems.

The Obama administration’s political philosophy is more egalitarian and more communitarian than mine. Their spending programs require much higher taxes than we have now and, indeed, much higher taxes than they have had the temerity to propose. Here is the question I have been wondering about: How long can the President wait before he comes clean with the American people and explains how high taxes needs to rise to pay for his vision of government?

1. Friedrich Nietzsche, Thus Spoke Zarathustra. While I ultimately didn’t learn much of substance, this book got me very excited about about ideas. Nietzsche’s vision of discovering the truth, whatever is may be, and proclaiming it, no matter how much it offends others, is still with me.

2. Ayn Rand, Atlas Shrugged. An old libertarian adage says that “it usually begins with Ayn Rand,” and in my case it’s true.

3. Ayn Rand, The Virtue of Selfishness. While I ultimately decided that her central arguments were actually incompatible with moral realism, this book nevertheless sparked my obsession with meta-ethics.

4. Murray Rothbard, Man, Economy, and State. It’s full of gross logical errors and sophistry, but still taught me at least half of what I know about econ – and 90% of what I know about how economists ought to write.

5. Ludwig von Mises, Human Action. In terms of pure economics, it’s just a poorly organized (but still beautifully written) version of Rothbard’s MES. But Mises’ implicit political economy made a huge impression on me – and I eventually realized that it’s a lot more empirically grounded than standard public choice.

6. Murray Rothbard, For a New Liberty. This is the book that made me an anarcho-capitalist. It’s got lots of problems, but still amazes me.

7. Paul Johnson, Modern Times. Some of my favorite academic historians don’t take this book seriously, but its broad brush paints a true picture of the 20th century.

8. Julian Simon, The Ultimate Resource. Simon’s amazing empirics burned away my lingering Randian pessimism about the modern world – and converted me to natalism.

9. Richard Posner, Economic Analysis of Law. Reading this book convinced me to start taking neoclassical efficiency analysis seriously. It also rekindled my love of econ right before I had to choose between law school and an econ Ph.D. So thank you, Judge Posner, for helping me make the right choice!

10. Richard Herrnstein and Charles Murray, The Bell Curve. From a young age, I thought that intelligence matters a lot. But several of my favorite K-12 teachers tricked me into abandoning my youthful insight. TBC gave me back my birthright – and persuaded me that econometrics was not a waste of time along the way.

11. Steve Landsburg, The Armchair Economist. This slim volume taught me that economic puzzles are everywhere. If Posner rekindled my love of econ, Landsburg’s delightful book poured an endless supply of gasoline on the fire.

12. Donald Wittman, The Myth of Democratic Failure. This is the book that awoke me from my dogmatic public choice slumbers – and (negatively) inspired all of my work on voter irrationality. It’s a gift.

13. Geoffrey Brennan and Loren Lomasky, Democracy and Decision. This neglected work finally explained why, contrary to orthodox public choice, basic economics implies radical differences between consumer and voter behavior.

14. Judith Harris, The Nurture Assumption. Harris sucked me into the exciting world of behavioral genetics – and got me thinking about the implications for the meaning of life.

15. Thomas Reid, Essays on the Intellectual Powers of Man. Mike Huemer sold me on the philosophy of common sense years before I actually read EIPM. But I was still shocked at how persuasively Hume’s obscure contemporary solved all the main problems of philosophy. Or to be more precise, Reid developed a philosophical technique for dissolving any philosophical problem whatever.

From The Journal of Private Enterprise, an extract from the paper “Homer Economicus: Using The Simpsons to Teach Economics.”

Bureaucrats and bureaucracy

As Gwartney, Stroup, Sobel and Macpherson (2003, 135) state, “Economic analysis suggests a strong tendency for bureaucrats and public-sector employees to favor expanding their budgets beyond what would be considered economically efficient.” The Simpsons episode titled “Trash of the Titans,” provides a great example of this tendency. After getting into an argument with the garbage men and refusing to apologize, Homer decides to run for Sanitation Commissioner. Running on the slogan “Can’t someone else do it?” Homer wins and institutes a sanitation program that does just about everything for the residents of Springfield, from collecting diapers inside the house to cleaning their ties. This excessive spending leads to the following exchange between Homer and Mayor Quimby.

Quimby: Simpson, you idiot! You spent your entire year’s budget in a month! Your department’s broke!

Homer: [panics) Uh...oh no! Wait! I think I've got the perfect solution.

Quimby: You'd better! 'Cause those garbage men won't work for free!

Homer: D' oh!

Later, Homer and Marge are going over the sanitation department's expenses to figure out how he could have spent so much in such a short
period of time.

Homer: Oh... [the previous commissioner] was right! I’m crashing and burning! Crashing and burning!

Marge: How could you spend 4.6 million dollars in a month?

Homer: They let me sign checks with a stamp, Marge! A stamp!

Although a bit over the top in that few (if any) bureaucrats are as stupid as Homer is portrayed to be, this episode of The Simpsons does provide a humorous beginning to a discussion of the incentives facing bureaucrats and bureaucracies.

In Wikipedia’s entry on Keynes, the section “Economics: out of favour 1979–2007” is followed by “Economics: the Keynesian resurgence of 2008–2009.”

So, with governments desperately trying to manage the fall-out from the recent capitalist implosion with courses of action anathema to free-market types, what’s a libertarian to do?

Well, for one, the dream still lives on at the EconTalk podcast, which hosts discussions on all types of economic, business, and financial topics, from a libertarian perspective. A sampling:

• Barry Ritzholtz on Bailouts, the Fed, and the Crisis – The CEO, author, and blogger discusses the history of bailouts in recent times, beginning with Lockheed and Chrysler in the 1970s. What is the role of the Fed in discouraging prudence through its efforts to keep asset prices and the stock market at high levels?
• Larry White on Hayek – The George Mason economics professor discusses the business cycle theory of Friedrich von Hayek of the Austrian School of economics and his intellectual battle with economist John Maynard Keynes.
• Clifford Winston on Market Failure and Government Failure -The Brookings Institution scholar posits that government regulation often fails to meet its objectives and that “idealized theories of government intervention based on textbook theories of market failure are not the way regulation turns out in practice.”
• Michael Belongia on the Fed – The former St. Louis Federal Reserve economist discusses the inner workings, politics, and economics of the Fed, how “power and politics play in Federal Reserve decision-making,” and how “various Fed chairs used their power to suppress dissent.”

All you Ron Paul renegades and von Mises votaries — check out the archive here.

These numbers, represented in billions of 2010 dollars, were taken from the non-partisan Congressional Budget Office.

As you can see, the two tax cuts increased the deficit about $1.8 trillion dollars, while the proposed health care bill will actually modestly decrease the deficit. As one of the main anti-health care bill criticisms is its cost, this is a potentially effective talking point. (Plus, both of the tax cut bills passed via the reconciliation process, the proposed path to passage for the health care bill and the subject of a major to-do between the two political parties.)

But not everyone is buying the argument. Two responses to the post on the site:

You betray your agenda in that you are using statistics to lie.

These are not even remotely similar and your facile comparision is misleading. You juxtapose two laws that are mostly tax cuts (which allow people to keep more of what they earn) with a tax increase and spending bill.

Yes, I will stipulate that the Republicans were irresponsible by cutting taxes without also cutting spending, but they were at least starting from a position of small surpluses. It isn’t immoral to return some of that income to those that produced it.

The CBO score for the (health care bill) is also horribly misleading. It omits the “doctor fix” and is frontloaded with deficit reduction before the expanded benefits kick in. Tax increases start immediately and ramp up ahead of outlays until they take the lead in 2016.

In addition, I find it hard to take the cost estimates from 2015-2019 at face value. Every single expansion of government involvement in health care has ended up costing more than the initial estimates. I fail to see why this would be different…

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This analysis is BS. It basically states that the health care act doesn’t hurt the deficit. However, a lot of the taxes are back end loaded (read, never going to be enacted) and the other taxes to pay for this cover 10 years, to provide services for 4 or 6 years, meaning it takes twice as many taxes per year to cover the costs on an annualized basis, meaning this really is all a bunch of BS and going to result in additional huge deficits. Especially since there are no real cost control measures.

One argument, relating to the Bush-era tax cuts:

It is true that President Bush proposed, and in 2001 and 2003 the Congress passed and President Bush signed into law significant tax cuts, and that those tax cuts were not offset by spending cuts or tax increases. If President Obama believes that enacting these tax cuts without offsetting their deficit impact was profligate, then why is he proposing to do the same thing? His budget proposes to change the law to extend all of the Bush tax cuts except those Team Obama mislabels as “for the rich.” He is not proposing offsets for those tax cuts he would extend. It is inconsistent to argue that Bush was irresponsible when he did it, and that Obama is responsible when he does the same thing.

Jonathan Chait of The New Republic wrote a rebuttal to Hennesey called “Rehabilitating Bush.” On Hennessey’s above-mentioned issue of the tax cuts, Chait writes:

This is sophistry. First of all, Hennessey waves off the portion of the Bush tax cuts that only benefit people making more than $250,000 a year, but there’s a lot of money there, so Obama’s determination to let them expire represents a significant difference with Bush.

Now, it’s true that Obama is keeping in place the tax cuts that benefit people who make under $250,000. But to equate that decision with enacting the tax cuts in the first place is absurd. Both public opinion and the political system have a huge bias toward the status quo. Once the Bush tax cuts were in place, anybody opposing them became a tax hiker. Hennessey understands perfectly well that Obama could easily maintain Clinton-era tax rates on the middle class if Bush had never cut taxes. Since Bush did cut taxes, restoring those rates in the face of unwavering GOP opposition would be a near-impossible task for Obama.

Now, Hennessey has responded in a new post. Regarding the overall strategy of continuing to cast blame on the Bush administration, he writes:

Even if I were to grant Team Obama’s characterization of what they inherited, they have the power to propose solutions. With enormous supermajorities in the House and Senate and a reconciliation process, they have the power to enact policies to improve the outcome, even if Republicans don’t play ball. They have so far not done so. I believe that at some point, failing to even propose policy solutions to a problem you argue you inherited makes the problem yours. Inaction is a choice which accrues responsibility over time.