Monday, June 28, 2010

Twilight of the Economists

by Ryan McMaken

Cross posted at LRC blog.

The economics profession is experiencing a crisis of legitimacy. Well, not the whole profession, just the mainstream neo-Keynesian part that comprises the majority of the professional economist corps. Austrian economics, on the other hand, is in a state of renaissance since the old Keynesian sloganeering obviously isn't working anymore.

So, in response, an economist who works for the Federal Reserve, Kartik Athreya whines that the economics bloggers are mean and are undermining the real economists with PhD's who sit around with their computer models and debate whether the government should tax everything at a rate of 40 percent or 50 percent.

In reality, this isn't a matter of PhD's, since many brilliant economists from Ludwig von Mises to Joseph Salerno have had PhD's or an equivalent degree. So what Athreya really means is that non-PhD'ed economists -who point out the Olympus-like heights to which the non-Austrians have reached in being wrong about almost everything- should just shut up.

The Screed Against The Bloggers should be recognized as its very own genre of non-fiction now. It is a genre first developed by professional journalists who couldn't stand the fact that they were being upstaged by more informative, balanced and interesting bloggers who were gaining readership at the expense of the "official" organs of public information. Now the economists have joined in the game, and it's just as unseemly.

It is also worth noting, that there is no true real distinction between an economist with a PhD and one without. The National Association of Business Economists is filled with professional economists who lack PhD's but who are paid, professional economists. Yes, the economists with PhD's perhaps make up the majority of the NABE rolls, but Athreya's claim that real economists have PhD's is an arbritary novelty invented by Athreya in an effort to perhaps make himself feel better about all those years spent writing for obscure scholarly journals that no one ever reads.

Tax Credit Pumps Up Latest Home-Buying Bubble

by Ryan McMaken
Cross posted at Mises Economics Blog

Existing home sales did not do as well as expected in May, while new home sales fared even worse.

Last week's new home sales data released by HUD and the Census Bureau revealed yet again the underlying weakness in the housing markets in the United States. New home sales, not to be confused with existing home sales, fell 32.7 percent from April to May. The negative month-over-month change was expected by many in the real estate industry, although most major media outlets called the drop "surprising." The drop surprised no one who was watching to see the response to the expiration of the home buyer tax credit in April.

So, while the April to May drop was expected, the year-over-year drop signaled a significant lack of demand for new housing. From May 2009 to May 2010, new home sales dropped 18.3 percent. This is especially noteworthy since May 2009 was near the bottom of the market following the financial panic of late 2008.

One would be tempted to think that there was no where to go but up when comparing real estate trends to the first half of 2009, but the 18 percent drop put an end to that hope.

Existing home sales fared better. According to data released last week by the National Association of Realtors, existing home sales were up 2.2 percent from April to May and increased 19.2 percent from May 2009 to May 2010. The year-over-year increase from the doldrums of May 2009 was correctly anticipated.

Now, the lackluster performance of home sales in the absence of the homebuyer tax credit has spurred talk of extending the tax credit yet again. Staff at Moody's admits that the proponents of the tax credit had miscalculated how the tax credit would stimulate home buying.

Some supporters had "expected the tax credit to pique buyer interest in a manner that would carry over for months following the credit's expiration." How exactly this was supposed to happen remains a mystery. Real estate agents who work daily with buyers knew that the tax credit was merely cannibalizing buyers from later in the year. In other words, people who were planning to buy in, say, August, moved up their plans to take advantage of the tax credit. There has been very little evidence that the tax credit created any significant number of buyers who hadn't otherwise been considering a home purchase.

Now, with many of the summer's buyers electing to purchase before the end of April instead, the summer is looking to be particularly grim for home purchasing.

The latest real estate bubble isn't much of an argument in favor of a tax credit with the sole purpose of increasing spending on residential real estate. All things being equal, tax credits are good because they mean more control can be exercised by the taxpayer over his or her wealth. However, a tax credit that exists only to convince people to spend more money faster is problematic.

The answer is not to end tax credits, but to make them far more broad. Why do renters not deserve tax credits? And why must one buy a house to get a tax credit? If the Keynesians in government want to really increase spending, shouldn't they just give everyone an $8,000 tax credit? Or they could cut tax rates.

Policymakers won't do this, however, because they fear that people would use such an open-ended tax credit or reduction to save money or pay off debt, which is totally unacceptable for the Paul Krugmans of the world.

Politics explains a lot in this case also since renters simply don't enjoy a powerful lobby as do the real estate agents, mortgage brokers and home builders. Thus, tax "breaks" are written to subsidize a single industry rather than provide relief for the taxpaying population overall.

Even if the tax credit were extended again, it would not produce any income growth or job growth any more than did the last extension of the credit. Without job creation and income growth, there will not be any sustainable increases in demand for home buying. Despite many claims to the contrary, demand for real estate will improve when the economy produces jobs and income growth, and not the other way around.

The need for actual job growth will especially be seen among younger home buyers, or lack thereof. One of the ways that the home buying bubble was sustained during the last decade was to make home purchasing available to younger and younger segments of the population. Job creation during the bubble allowed for wildly optimistic estimates of future job prospects and earning power for twenty-something who then looked to homebuying as the next logical step. Combined with incredibly low requirements for down payments and credit histories, 25-year-olds were buying up houses.

Today, with unemployment among twenty-somethings at 25 percent, and with income growth near zero, there is nowhere from where to draw new households looking to buy houses. The tax credit can be extended, but like so many of the "stimulus" efforts that have been used in the last two years, this one may have run out of steam.

Personal Income Rises With Government Spending

by Ryan McMaken

Cross posted at Mises Economics Blog.

Personal income information released this week by the Bureau of Economic Analysis shows total personal income increasing 0.4 percent, or $54 billion, from April to May 2010. Year over year, personal income is up 1.6 percent, or $191 billion. In spite of recent growth, total personal income is still down $24.4 billion, or 0.2 percent, from the peak reached during May of 2008.

In short, personal income has gone nowhere over the last two years as it plummeted $479 billion, or 3.9 percent, from May 2008's peak to March 2009's nadir. It has generally increased each month since.

Now that personal income has nearly recovered to where it was during the peak time, it is important to look at where the income has come from.

Job creation has been extremely weak since 2008. More than 7 million jobs have been lost, and as new high school and college grads have entered the work force, there simply haven't been enough jobs to provide for growth in the work force. Hence, unemployment hovers near 10 percent, and job creation in the private sector is essentially zero.

So, how is it that income growth has recovered? The answer lies in what is included in the income numbers. Total personal income statistics include wages earned, whether from public-sector or private-sector jobs, and will also include wages from government-funded stimulus jobs such as highway construction and other similar projects.

But more important for our analysis here is the fact that personal income totals also include "personal current transfer receipts" which include "benefits received by persons for which no current services are performed." Such benefits show up as personal income in the form of Medicare, food stamps, unemployment compensation, public assistance and a variety of other forms of income.

While personal income peaked in 2008, then crashed and slowly recovered, income in the form of transfer receipts have only increased. At the same time that personal income fell 0.2 percent from May 2008 to May 2010, personal current transfer receipts increased 12.2 percent. During those two years, as personal income saw a net decrease of 24.4 billion, transfer receipts increased 244.3 billion.

Indeed, a look at the last ten years shows that transfer receipts increased far more, both in absolute terms and in percentage increases, during the last two years than during any previous economic downturn dating back at least to 1959. (Although, there are almost certainly would have been very large increases in transfer receipts had they been measured during the New Deal.)

Today, the Dow rallied on news that personal income had grown faster than spending and that households were beginning to save more. This would be excellent news if this income had been produced by increases in wealth and income in the private sector, but unfortunately, increased personal income, while not totally due to public sector spending, has been largely buoyed by public sector spending, and has been a very significant portion of the growth in income that is now being trumpeted as proof that the recovery is taking hold.

However, as long as income growth is largely dependent on public-sector spending, growth is just a matter of income being redistributed from net tax payers to tax receivers, which is largely why personal income continues to improve in spite of only very small gains in private-sector employment. Ultimately, however, economic "growth" that is driven by mere transfer payments, cannot be growth founded any any true creation of wealth.