Demand Side Transcript

Today on the podcast, John Casidy on austerity in Britain, Robert Kuttner on the winning hand being played by president Obama, and some thoughts on the housing air quote recovery.

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It’s Official: Austerity Economics Doesn’t Work, by John Cassidy:

With all the theatrics going on in Washington, you might well have missed the most important political and economic news ...: an official confirmation from the United Kingdom that austerity policies don’t work.

In making his annual Autumn Statement to the House of Commons on Wednesday, George Osborne, the Chancellor of the Exchequer, was forced to admit that his government has failed to meet a series of targets it set for itself back in June of 2010, when it slashed the budgets of various government departments by up to thirty per cent. Back then, Osborne said that his austerity policies would cut his country’s budget deficit to zero within four years, enable Britain to begin relieving itself of its public debt, and generate healthy economic growth. None of these things have happened. Britain’s deficit remains stubbornly high, its people have been suffering through a double-dip recession, and many observers now expect the country to lose its “AAA” credit rating.

One of the frustrations of economics is that it is hard to carry out scientific experiments .... But not in this case. Thanks to Osborne’s stubborn refusal to change course—“Turning back would be a disaster,” he told Parliament—what has been happening in Britain amounts to a “natural experiment” to test the efficacy of austerity economics. For the sixty-odd million inhabitants of the U.K., living through it hasn’t been a pleasant experience—

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That austerity has led to recession is undeniable. Despite the Bank of England slashing interest rates and adopting a policy of quantitative easing, consumer and investment spending have remained depressed. Osborne places much of the blame on continental Europe, Britain’s biggest trading partner, but that’s a lame excuse. ... The proper reaction to a negative external shock is to loosen fiscal policy, not tighten it, much less tighten it violently. But Osborne was determined to go ahead with his grisly exercise in pre-Keynesian economics.

... The debt-to-G.D.P. ratio, which Osborne originally said would peak at about seventy per cent, has now hit seventy-five per cent, and it is forecast to come close to eighty per cent in 2015-2016. It was supposed to start falling next year. Now, it is set to keep climbing until at least 2017-2018.

A comparison with what has happened on this side of the Atlantic is illuminating. For the purposes of the natural experiment, the U.S. can be thought of as the control.

and here Cassidy mischaracterizes the American effort as Keynesian stimulus. I guess that depends on what your definition of Keynesian is. If you mean policies that would have been advocated by Keynes or his followers, No. If you mean deficits, Yes. But they are the deficits of the Right. Tax cuts and letting government borrow so as to transfer the money to boost consumer sales. Not jobs nor efforts to reduce consumer debt. Better than intentional austerity, I suppose, but no recipe for recovery. Cassidy fairly notes that the deficit as a percentage of GDP is falling faster in the U.S. than in Britain.

He concludes the article.
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Let’s go over that one more time. Having adopted the policies of Keynes in response to a calamitous recession, the United States has grown more than twice as fast during the past three years as Britain, which adopted the economics of Hoover (and Paul Ryan). Meanwhile, the gaping hole in the two countries’ budgets has declined at roughly the same rate, and next year the U.S. will be in better fiscal shape than its old ally.

Read more:

Better Late Than Never

by Robert Kuttner
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He lays out the optics:

In his budget proposal, the president offered no cuts in Social Security, and only $400 billion over 10 years in Medicare and other savings, money that can be gotten by allowing Medicare to negotiate bulk discounts with drug companies and other administrative savings, without raising the eligibility age or otherwise cutting into benefits.

The Republicans, meanwhile are revealed as the people who would push the economy off a cliff in order to fight for tax breaks for the richest 2 percent; the party that would rather cut benefits in Medicare and Social Security than have the wealthy pay even the relatively low tax rates of the Clinton years.

....

Then Kuttner turns to the policy history

Obama, belatedly, is doing the right thing.

He tried taking big savings out of Medicare in order to finance his Affordable Care Act. The Republicans pilloried him for it.

He tried pivoting to fashionable austerity, appointing the Bowles-Simpson Commission to propose far deeper budget cuts than the economy required. The commission majority report offered a deflationary program of cuts in Medicare, Social Security, and no rate increases on the taxes paid by the rich. Mercifully, the commission failed to get the necessary super-majority for its proposals.

And he tried offering cuts in Social Security and Medicare in order to get a budget deal in 2011 ... But the refusal of the Republicans to consider even a penny of tax increases saved the President from himself.

Now, as a last resort, President Obama has come around to sensible economics and smart politics -- no cuts in social insurance benefits, no backing down on tax hikes for the rich, no deeper deficit cuts until the economy is stronger. His plan even proposes $50 billion in new public investments -- not enough but a big step in the right direction.

What's so heartening is not just that Obama is helping voters appreciate what Republicans really stand for but that he is turning his back on the echo chamber of deficit hysteria ginned up by Wall Street as a way of cutting social insurance and protecting low tax rates on the richest. Seeing Pete Peterson and his corporate deficit-hawk cronies lose this fight is as satisfying as seeing the Republicans lose.

So what happens next? Kuttner offers some scenarios:

The Republicans will continue to huff and puff that it's Obama's fault if taxes go up for everyone. But the fact is that the Senate has already approved a continuation of the Bush tax cuts for the bottom 98 percent -- all the Republican House has to do is concur and Obama will sign the bill into law.

The business elite, through the corporate-funded campaign "Fix the Debt" campaign, will continue to warn about the perils of the automatic tax hikes and spending cuts -- the dreaded fiscal cliff -- and press the two parties to meet each other halfway.

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If Obama hangs tough and the budget briefly goes "over the cliff" in the form of automatic tax increases for everyone and mandated indiscriminate spending cuts that risk sending the economy back into recession, the Republicans are at last set up to take the blame that they richly deserve.

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The risk is that when the negotiations finally get to the end game, and Republicans are forced accept the tax deal, Obama may succumb to pressure to cut Social Security and Medicare, so that he can say that he, too, gave ground on issues that were difficult for his party. The risk is that he will listen to his inner bipartisan.

Now some thoughts on housing.

The real economy perspective is that housing will not recover until the enormous mortgage debt that still lurks there is written down to the value of the house. The value of the house is a function of jobs and incomes. The financial economy perspective is that by a combination of low interest rates and starving investors of yield in less risky assets, the Fed can inflate the value of housing as a financial investment back to some bubble level.

Bill McBride, formerly known as Calculated Risk, came out of the housing market of California. He had a recent post, let's see, here,

Some Bullish 2013 House Price Forecasts

J.P. Morgan Chase & Co. expects U.S. home prices to rise 3.4% in its base-case estimate and up to 9.7% in its most bullish scenario of economic growth. Standard & Poor’s, which rates private-issue mortgage bonds, on Friday said it expects a 5% rise in 2013.

The J.P. Morgan analysts boosted their base-case estimate from 1.5% ...

McBride counters, "I think house prices will increase further in 2013 based on supply and demand (there is little supply, however I think it is possible that inventory will bottom in 2013), but I doubt we will see a 9.7% price increase next year on the repeat sales indexes.

The WSJ's Nick Timiraos makes an amusing comment on Twitter: "All these analysts forecasting monster home price gains were forecasting moderate declines a few months ago."

And McBride, as apparently all economists are wont to do, reminds you that he is never wrong

At the beginning of the year, the consensus was that house prices would decline for at least another year. When I posted The Housing Bottom is Here in early February, many people were surprised. How views change!

True to the role of being a recovery denier, Demand Side denies the housing recovery, as well. Our view is in the Pacific Northwest, but it is not just the weaker sales prices here that are different than McBride's world.

"Recovery" is a term we are told does not refer to the level, but to the direction of change. That is, in the business cycle there is peak, recession, trough, recovery, and you can throw in expansion. If your economy is improving, you are in recovery, no matter that the level of GDP or jobs or in this case house prices is below – far below – previous levels.

But the business cycle is broken. The housing market is not responding to supply and demand, except as it is jinned up by public policy. Increased demand in the last half of 2012 will fade, we fear, because the fundamentals are absent.

Why is there demand in housing? Because the Fed under Ben Bernanke is obsessed with housing. Zero percent interest rates for the past four plus years. Trillions of dollars in direct purchases of mortgage securities. Jawboning at every opportunity. I say they are obsessed with housing, but that is not quite true. They are obsessed with housing as a financial security, not housing as a place to live. Their object is not to make houses affordable to people. Their object is to keep the price as high as possible by keeping the financing as low as possible and by pushing investors into this arena. This, they hope, will give some value to the mortgages on banks' books and in their own portfolio.

McBride's tight supply is something we heard repeated here in Seattle last week. Inventories at low levels. On the other hand, we heard that banks are not foreclosing, nor listing properties they own, and homeowner can stay in their houses for a year without getting a letter from the bank. Meanwhile those at or near negative equity are holding on. After all, if they sell, they most likely want to buy somewhere else. And without at least 20% equity, they don't have the down payment. This is shadow inventory that is going to depress any significant rise in prices.

And a word about prices. While the sticker price is low but rising, two other prices are more salient. Both are related to affordability. One, Is the price really low if you cannot afford the downpayment or qualify for the loan? It used to be all you needed to do was fog a mirror and you could get a loan. Now you need a Warren Buffet credit score. Secondly, Is the sticker price the appropriate price to watch? In the real world, we look at the monthly payment. That monthly payment, if you qualify for a loan, is still dropping because of dropping interest costs. Still going down. Still deflating.

So, housing recovery? Prices bottomed? We've heard it before. Three years running it led Demand Side's year-end account of events widely reported that never really happened. Will it appear again this year? Along side, perhaps, the recovery of the economy?

We'll see

Today's podcast brought to you by pragmatism.

It is considerably frustrating to watch bad economics destroy human lives and lead us further and further from real recovery. The economics of austerity rules in official D.C. and on Wall Street. That is, economics in favor of austerity, in favor of cooking the planet, in favor of frivolous privte goods at the expense of essential public goods. Why is the ECB's Mario Draghi a person of the year?

We just don't have time for things that don't work. And what greater irony or bigger joke on the future to have hysteria force people out of Medicare and no concern at all about the destruction of the livable planet. The climate deficit is growing exponentially. The social insurance deficit is an ant on an elephant. Yet