President Obama’s odd economic campaign message

President Obama’s odd economic campaign message

President Obama’s economic campaign message is odd. Here is what he’s saying at most campaign events.

  • “There’s almost no economic measure by which we’re not doing better than we were when I took office.”

  • “But people are still anxious. And they’re anxious for three reasons.”

    1. Overseas uncertainty: ISIL + ebola + Russia/Ukraine;
    2. “Although the economy is doing better, wages and incomes have not gone up. And the vast majority of growth, productivity increases, profits, wealth has accrued to folks at the very top of the economic pyramid, and we have not seen wages and incomes for ordinary folks go up for a couple of decades.  And that makes people feel, even if things have gotten better, that they’re still concerned about not only their future but their children’s futures.”
    3. “[T]here’s a sense that things simply don’t work in Washington, and Congress, in particular, seems to be completely gridlocked.”

While true, his first point is a self-centered perspective for someone whose job this month is to support the reelection of his party’s Congressional candidates. If President Obama were running for re-election it might be important to compare today’s economy to that when he first took office. But your typical Democratic candidate for Congress isn’t running on President Obama’s economic record, and that six year time frame is irrelevant to candidates like Michelle Nunn and Alison Lundergran Grimes who have not been part of the past six years of governance+stalemate in DC. President Obama’s analysis centers on progress made during his tenure, while many Democratic Congressional candidates want this campaign to be about anything other than him.

President Obama also implies that because the economy is stronger than it was six years ago it is strong today. That does not necessarily follow, especially given the depth of the 2008-2009 recession. The U.S. economy has been climbing out of that hole for five years but it still has a long way to go.

From the President’s perspective, voters feel economic anxiety principally (only?) because of the decades-long maldistribution of economic growth. But if these distributional trends have been building for decades then it is unlikely they can explain a recent change in sentiment.

I suggest instead that voters’ economic anxiety is justified.

  • In my judgment the U.S. economy is still quite weak (I won’t get into a statistical cherry-picking battle here) and voters know or can sense it. It can of course be simultaneously true that the economy is at the moment weak and that it is nevertheless stronger than it was six years ago. I think that’s the case.
  •  The rate of economic recovery over the past five years has been tepid and voters can feel it. Macroeconomists (including President Obama’s first NEC Director Larry Summers) are debating why the rate of recovery has been so surprisingly slow while the President is boasting about the length of the recovery but ignoring its abnormally slow pace.
  • While GDP growth accelerated significantly in Q2 of this year to a 4.6% annual rate, that’s after a 2.1% decline in Q1. Should a simplistic straight-line projection of the trend assume the 4.6% rate will continue? If so then the future GDP path should look much brighter than it has over the past five years. Should it instead assume the 2.5% average rate over the past two quarters will continue? That would be moderate growth but nothing to write home about given how far we still are from our maximum potential output. Should we be even more pessimistic as Europe and China weaken? Voters might not be as willing to assume strong growth going forward as a President trying to draw an economic happy face the month before Election Day.

I think voters are anxious about the economy because despite five years of GDP growth the recovery has been too slow to make voters feel good. Today the economy is still weak, employment is still low, real wages aren’t growing rapidly, and stronger future growth, while possible, is by no means certain. In short, voters have good reason to feel economic anxiety.

The upside of all this is that ongoing economic weakness creates an opportunity for sound policies to substantially improve medium- and long-term U.S. economic growth. Policymakers have lots of room to improve policy and plenty of upward potential for a much stronger economy if only we can get the right combination of leaders in Washington and policies in place. The downside is we probably have to wait two more years to have a shot at such a leadership arrangement no matter what happens this November 4th.

(photo credit: The White House)

Return of the low down payment zombie

Return of the low down payment zombie

Mr. Melvin Watt runs FHFA, the Federal Housing Finance Agency charged with regulating Fannie Mae and Freddie Mac. Yesterday Mr. Watt said:

To increase access for creditworthy but lower-wealth borrowers, FHFA is also working with the Enterprises to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent.  Through these revised guidelines, we believe that the Enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages … [this] is yet another much needed piece to the broader access to credit puzzle.

Mr. Watt wants to return to the good old days when you could buy a house with 3% down, and in particular he wants poor people to be able to buy a house leveraged 33:1.

This is the return of a terrible idea, a zombie I thought was destroyed when the housing bubble burst. Many homeowners, of all income levels, were too highly leveraged and bought more home than they could afford. They gambled that housing prices would rise forever. Many lost that gamble. They were hurt, their neighbors were hurt, and the financial institutions that held their mortgages were hurt. When the housing bubble burst and financial institutions collapsed, the global economy tanked. Over leverage and tiny down payments (and not just for the poor) contributed significantly to the housing bubble, the financial crisis, and the resulting severe recession.

In May of last year I wrote:

By nominating Mr. Watt the President signals a return to the pre-crisis philosophy of regulating housing finance risk.  That is a huge mistake.  Mr. Watt should not be confirmed to head the FHFA.

There is a tradeoff you get when policies encourages expanding credit. More people are able to buy things they could not otherwise afford, but at the same time more people end up in credit trouble. This balance clearly went too far in the easy credit direction in the late 90s through the late 00s.

In their never-ending quest to be “pro homeownership,” for more than two decades policymakers and elected officials on both sides of the aisle took every opportunity to expand credit and subsidize home buying. The GSEs’ regulatory structure allowed them to ignore the costs and risks of these actions until it all imploded.

The usual left-right DC housing debate centers on whether one should distort policy to give preferential treatment to poor borrowers. The far left says yes, and many on the right say no. Mr. Watt’s announcement is consistent with the left’s view in that he appears to be considering lowering the down payment requirement for poor borrowers (technically “lower-wealth” borrowers, who will be highly correlated with lower-income borrowers).

But many on the right (including those who opposed aggressive GSE reforms and were quite friendly with Fannie and Freddie pre-crisis) were just as supportive of low down payments as long as they were available to middle- and upper-income homebuyers as well. Think carefully, Congressional Republicans, before you cast stones at your progressive friends on the left. Mr. Watt wants to make it easier for poor people to buy too much house. The problem is the too much house part, not the poor part.

My complaint is not particularly with lowering the GSEs’ down payment requirement for poor borrowers, it’s making this policy change for any borrowers. Policy should not be encouraging or subsidizing (explicitly or implicitly) anyone who buys a house leveraged 33:1, whether he is poor or rich. If policymakers want to encourage homeownership they should encourage responsible homeownership, which means that you have been patient and wise enough to save for a significant down payment.

For many poor people a larger down payment requirement will mean that they either have to buy a smaller house, or work and save longer to afford a bigger down payment, or rent rather than buy. I think all three outcomes are better than encouraging people to buy homes they cannot afford, than gambling (again) that housing prices will always go up, than inflating a new housing bubble, and than creating a new batch of toxic housing-related financial assets based on bad mortgages.

Mr. Watt’s announcement reinforces my view that the GSEs and their regulatory structure should be completely replaced by a purely private housing finance market. Any replacement regulatory structure that allows the government a role in determining the structure of mortgages will be subject to distortion like that which Mr. Watt is about to revive. If the balance of legislative power requires that housing for poor people be subsidized, then the right way to do it is to combine a free market in mortgages with explicit on-budget subsidies for the poor, and with those subsidies targeted at income rather than at making down payments cheaper.

Let’s remember the recent past and not repeat those mistakes anew.

(photo credit: Andrew Becraft)

Defense v. ObamaCare

DEFENSE SECRETARY HAGEL: To close these gaps, the President’s budget will include an Opportunity, Growth and Security Initiative.  This initiative is a detailed proposal that is part of the President’s budget submission.  It would provide an additional $26 billion for the Defense Department in Fiscal Year 2015.

defense v obamacare v2

Source for $88 B number: Congressional Budget Office, “Insurance Coverage Provisions of the Affordable Care Act–CBO’s February 2014 Baseline,” Table 1 (Net cost of coverage provisions for FY 2015).

Message to Governors: Biden v. Obama

Here is VP Biden, speaking this morning to all Governors:

THE VICE PRESIDENT:  It’s great to see you all.  And I don’t know about you all, I had a great time last night and got a chance to actually do what we should be doing more of — talking without thinking about politics and figuring how we can solve problems.

And here is President Obama, speaking at a dinner last Thursday night to just the Democratic Governors:

THE PRESIDENT: Now, unfortunately, state by state, Republican governors are implementing a different agenda.  They’re pursuing the same top-down, failed economic policies that don’t help Americans get ahead.  They’re paying for it by cutting investments in the middle class, oftentimes doing everything they can to squeeze folks who are bargaining on behalf of workers.  Some of them, their economies have improved in part because the overall economy has improved, and they take credit for it instead of saying that Obama had anything to do with it.  I get that.  There’s nothing wrong with that.  But they’re making it harder for working families to access health insurance.  In some states, they’re making it harder even for Americans to exercise their right to vote.

 

Sorry, Heritage, your number is still wrong

I’d like to thank the Heritage Foundation for taking the time and effort to respond to my post, “Eight problems with the Heritage immigration cost estimate.” Heritage’s response, written by Derrick Morgan, is professional and takes a constructive tone. I still disagree with their conclusion, but I appreciate their efforts to make this a discussion rather than the usual screaming matches one finds online.

I’m not sure it adds a lot of value for me to go point-by-point rebutting each of Mr. Morgan’s responses to my original technical points. He is right that we agree in some areas, even though he doesn’t highlight all areas of our agreement. I am sorry to say that where we still disagree his responses have not convinced me to change my original critiques.

While I therefore stand by each point of my original critique, I think it’s most helpful if I highlight a few points on which we agree, and then explain again only the most important reasons why I continue to recommend policymakers ignore this study and its headline number.

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How filibusters work and why they are so rare

How filibusters work and why they are so rare

Last night Senator Rand Paul from Kentucky led a 13-hour filibuster of the nomination of John Brennan to head the CIA. Based on a couple questions from friends I’d like to explain how a filibuster works and why they are so rare.

Background

At almost any point in time the Senate is technically either debating or voting on a yes or no question. Typical questions the Senate considers look like this:

  • Should amendment A by Senator B to bill C be adopted?
  • Should the Senate pass bill C?
  • Should the Senate consent to the nomination of person D to job E?
  • [Now that it has finished F,] Should the Senate next proceed to working on G?

Most questions the Senate considers are debatable. This means that any of 100 Senators, or all of them, can speak about the question for as long as he or she wants.

A few types of questions are non-debatable. As soon as the question is asked, the Senate immediately proceeds to vote on the question. Nominations are debatable questions.

There’s a middle ground as well, used mostly for two types of fiscal policy legislation. The Senate has a fixed amount of total time to debate a budget resolution or a budget reconciliation bill.

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