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The so-called Government Sponsored Enterprises, Fannie Mae and Freddie Mac, together with the Federal Home Loan Bank, have played a central role in shoring up the housing-finance market since the sub-prime meltdown began. It is not much of an exaggeration to say that they have become the entire market. But the more money they have pumped into housing, the faster their own financial condition has deteriorated. Now investors are ditching Fannie and Freddie stocks; on Thursday shares in Freddie fell nearly 20 per cent, to their lowest since 1991. Anxiety had been building for a while, then worsened suddenly when Bill Poole, a former head of the St Louis Fed, said that Freddie was technically insolvent in the first quarter under mark-to-market accounting (that is, the value of its assets was less than the value of its liabilities).

It is inconceivable that the government would stand aside and let these institutions go down: to say that they are too big to fail hardly does the case justice. Their liabilities are now larger than those of the entire federal government. If regulatory forbearance–the traditional approach to the GSEs–should fail, and the choice comes to standing by or outright nationalisation, it would be the latter in a heartbeat. The question is not whether there would be a bail-out, but how hard the terms would be on creditors and shareholders. (Bear Stearns was not allowed to fail–but its shareholders were crucified.) We may very well discover the value of that fabled “implicit guarantee”. Owners and lenders alike are having second thoughts about it: shareholders are running for the door and lenders have raised their spreads sharply.

Will a recovering housing market come to the GSEs’ rescue? Not for some while yet. Consider what Janet Yellen, boss of the San Francisco Fed, told the UCSD Economics Roundtable this week (via Econbrowser):

Unfortunately, it appears to me that there are at least three reasons for thinking that housing prices have further to fall. First, the ratio of house prices to rents—a kind of price-dividend ratio for housing—still remains quite high by historical standards, despite having fallen from its historical peak reached in early 2006. That suggests that further price declines may be needed to bring housing markets into balance. Second, inventories of unsold homes remain at elevated levels. This “excess supply” of available homes will put downward pressure on housing prices. Indeed, these inventories are likely to directly depress construction activity, since there is little point in building new homes when there is already a large backlog of unsold homes. Third, the futures market for house prices predicts further declines in a number of metropolitan areas this year. In particular, the Case-Shiller composite index for home prices shows a 15 to 20 percent year-over-year decline in the second half of this year. The bottom line is that construction spending and house prices seem likely to continue to fall well into 2009.

In short, the GSEs’ financial condition is going to get worse before it gets better. If it happens, a rescue of Fannie and Freddie would dwarf not only anything seen up to now, but anything even contemplated. This crisis isn’t over.

Even by the dismal standards of these events, this year’s G8 summit in Japan was a wearisome spectacle. I cannot think that what was achieved–nothing–justified the meeting’s doubtless impressive carbon footprint. I think I will remember it mainly for the quotation from IPCC head, R.K. Pachauri, who told reporters (according to the BBC) that the developed countries “should get off the backs of China and India” (and Pachauri wasn’t even at the summit; he was speaking in Delhi). Yes, I understand that he wants the rich countries to move first–but is it wrong to expect anything of the countries which before long will be the world’s biggest GHG emitters? I mean, isn’t the planet in peril, or something?

Aside from that, all you need to read is the all-purpose report on pointless international meetings by the FT’s Alan Beattie, which I saw on Gideon Rachman’s blog, and which deserves the widest possible circulation.

My column on America’s educational assets—diminishing relative to those of other countries, and maybe in absolute terms as well—yielded some suggestions for further reading. Of the ones I’ve had a chance to look at so far, I recommend the following.

Roger Pielke Jr (author of “Honest Broker: Making Sense of Science in Policy and Politics”) directs me to his observations on a new Rand report on competitiveness, which suggests that the situation is far from desperate. I agree, of course: I wasn’t describing an imminent crisis, but a slowly developing threat to future American growth. Roger also notes that intelligent discussion of this issue is more difficult than it need be because of lack of reliable data (a point I touch on, in referring to the debate over high-school graduation rates). This is true, he says, of many issues at the intersection of technology and policy.

Gail Mellow, president of LaGuardia Community College, also sent me a couple of very interesting documents: “Each and All: Creating a Sustainable American Higher Education System” (a lecture to the American Council on Education; look at the charts on page 7), and “Reach Higher, America” (a report from the National Commission of Adult Literacy).

My friend Frank Vogl, publisher of EthicsWorld and a trustee of the Committee for Economic Development, pointed me to this CED paper from 2005, “Cracks in the Education Pipeline“.

Incidentally, Ben Wildavsky at the Kauffman Foundation also drew my attention to this education blog (which I hadn’t seen before: Ben says it’s good, and I shall read it from now on). It links to my column and asks, before going on to make a couple of fair points, whether I’m anti-American. Please! I’m an ardent Americanophile and indeed a would-be American–all the zeal of a convert, as my (American) wife will confirm.

A startling and profoundly important fact about the US economy has received surprisingly little attention. The educational quality of the country’s workers is starting to decline – not just relatively (because other countries are catching up and moving ahead) but also, for the first time, in absolute terms. Over the coming years, baby-boomers departing from the labour force will have better educational qualifications than the younger workers replacing them. If the ultimate source of an economy’s ability to grow and prosper is its human capital, the US is in trouble.

For decades the educational quality of the US labour force surged. In 1940, less than 5 per cent of the population aged 25-64 had at least a four-year college education. By 2000, the proportion had increased to nearly 30 per cent. Successive generations of workers improved on the educational attainments of their predecessors. Retiring workers were replaced by better-educated youngsters. This remorseless accumulation of human capital helped fuel the country’s postwar growth. According to at least one authoritative study, it was the principal driver.

This trend came to a halt with workers now aged 55-59. Younger cohorts are no better educated than these soon-to-retire boomers. Broadly speaking, educational quality has topped out – and on at least one measure, it is actually deteriorating. In 2006, Americans aged 55-59 collectively possessed more masters degrees, professional degrees and doctorates than Americans aged 30-34. This impending loss of educational capital is entirely outside the country’s experience.

The remainder of this column can be read here. Please post comments below.

Austan Goolsbee (a senior economic adviser on the Obama team) and Jack Kemp talked about the economy, under Walter Isaacson’s direction. Kemp returned again and again to taxation, accusing Obama of planning a big tax increase. Goolsbee said no, almost all taxpayers will get a tax cut—and the proposed rise in capital gains tax, especially deplored by Kemp, would still leave the rate in the low twenties, which had been consistent with rapid growth and a booming stockmarket in the past. Goolsbee had much the better of this argument. (Although it would have been more accurate to say that under Obama’s plan, rather than getting an entirely new cut, almost all taxpayers will retain the one they have already had, courtesy of George W. Bush. This sounds less bold, of course, and clashes a little with the idea that the Bush tax cuts were an unmitigated crime.)

Goolsbee denied that Obama had any plan to apply the full rate of payroll tax to incomes over $250,000, something the campaign has not been too clear about. Rates of 3-5% had been looked at, he said. Goolsbee was at his least persuasive in my view, in seeming to oppose any kind of stockmarket-based “personal retirement account” supplement to Social Security. Equities are too risky, he said. Even as an add-on?

Continue reading "Notes from Aspen 4"

David Kennedy and John Yoo, with Jeffrey Rosen moderating, discussed “The Presidency and the Constitution”. It was brave of Yoo–a principal architect of the Bush administration’s constitutional-law doctrines–to appear in front of an audience as hostile to the White House as the liberal Aspen crowd. He did well, partly I think through seeming like a normal, even likeable, human being, something few in the audience were prepared for. As one questioner put it towards the end (I’m paraphrasing), “You don’t seem like Darth Vader at all.”

Continue reading "Notes from Aspen 3"

On the Creative Capitalism website, Brad DeLong attacks Milton Friedman’s position on the social responsibility of business as “weak toast”–an expression I was unfamiliar with, but a good one which I intend to start using. Friedman famously argued that it was better for shareholders to decide what good causes to support than have managers of the companies they own decide for them. Brad asks, why?

Continue reading "Creative capitalism 2"

In a new column for National Journal, I discuss an article by Isabel Sawhill and Emily Monea of the Brookings Institution, which calls for America’s “intergenerational contract” to be rewritten:

The current contract, Sawhill and Monea say, was written in the 1930s when Social Security was born, revised in the 1960s with the addition of Medicare and Medicaid (which pays nursing home benefits), and then revised again in the current decade with passage of the prescription drug benefit.

The authors point out that this contract takes several things for granted: that workers will continue to retire at 65; that most seniors are too poor to support themselves in retirement or to pay for their own health care; and that younger Americans are, on average, better off than elderly Americans. Those assumptions, they argue, need to be challenged.

The poverty rate among the elderly (partly thanks to Social Security, of course) fell from 35 percent in 1959 to 9 percent in 2006. The poverty rate among working-age households is much higher, at 13 percent.

Some 80 percent of the elderly own their own homes, and three-quarters of those have paid off their mortgages. Social Security and Medicare have succeeded almost too well. The fiscal cost of that success keeps rising, and it is falling on working-age Americans who feel beleaguered–and who in many ways are worse off than the contract’s beneficiaries.

A new deal needs to be struck, they say. But what should be the terms of this revised compact? And what are its chances, politically? You can read the column here (the link expires in a fortnight).

I meant to say something about Walt Mossberg’s session (on Tuesday) on “The Future of the Internet and the Rise of the Cell Phone”–though I acknowledge a slight impediment, having arrived late to find the session packed out and impossible to get into. Sources tell me it was about how devices like the iPhone constitute an entirely new computing platform, and are as momentous a turning point as the PC was in its day.

Well, sure. As a devoted reader of Mossberg’s Personal Technology column in the WSJ, I was already familiar with that notion. Like the throngs of listeners overflowing into the hallway, I expect, I never miss his column, even though I cannot remember a single occasion when it told me something I didn’t already know. (There must have been some; they just don’t spring to mind.) Do not misunderstand me: Mossberg’s popularity is entirely deserved. There is something very satisfying about reading an engaging, straightforward, intelligible treatment of familiar facts. It is a rare treat. They should teach that in journalism school.

A disappointment for me on Wednesday was the cancellation of the session on “The Dumbing Down of American Culture: Fact or Fiction?”, apparently due to the non-appearance of some of the speakers. I had been looking forward to listening to the always interesting and multi-faceted Joel Achenbach (the putative moderator) navigate that terrain. I was curious to know if anybody would attempt to argue that American culture is not being dumbed down. What might such an argument look like? Next time, I hope. In the meantime, there is Joel’s blog.

All the speakers–Sandra Day O’Connor, Judith Kaye, Ted Olson, and Stephen Carter– showed up for “How Do We Choose Our Judges?” Concern was expressed about the dangers of judicial elections–which 39 states now hold. (As an illustration of the dangers of mixing election money and the courts, Olson recounted the remarkable tale of West Virginia’s chief justice, who was pictured vacationing on the French Riviera with a CEO whose company had a case pending before the court.) But the discussion moved quickly to the appointment of Supreme Court judges. Carter would prefer the justices to be less visible. He deplores confirmation hearings and thinks that televising the court (as suggested by Olson, since people who see the court in action usually have a higher opinion of it) would be a disaster. To make them visible is to subject them to political pressure, Carter believes: they should be kept apart from politics, which means apart from the public.

Would making justices less visible make them less political? I don’t know that it would. Politics and the court are hard to keep apart. The decisions the justices have to make are often politically freighted, and sometimes politically momentous: it cannot be any other way. Given this, a public confirmation process seems desirable–and so does televising the court. Shrouding the court in secrecy is just too undemocratic. I think you get the right kind of court not through invisibility, but through judicial modesty. It falls to the president to nominate justices inclined to exercise a particular kind of restraint–capable, that is, of deferring to elected politicians when the law’s meaning is disputed, and when they (the justices) are themselves closely divided.

I’m in Aspen for the Ideas Festival. I’ll write a daily note, updated now and then, on things that strike me as interesting.

One thing that already keeps coming up—in this environment rich in high-tech executives and entrepreneurs—is the unfathomable bone-headedness of a US immigration policy that discriminates against the skilled. Intel’s Craig Barrett railed against this at a session last night and University of Maryland’s Dan Mote picked the theme up again this morning. What other country, Dan asked, deports its freshly minted science PhDs? Every PhD should come with a green card attached, he said.

A session featuring Sean Wilentz on his new book about the Age of Reagan disappointed me. I wanted to know how a card-carrying liberal commentator came to conclude that Reagan was a great president. He dealt with this perfunctorily at the beginning—saying (a bit oddly, I thought) that he wrote the book as a historian, thus using only a part of his brain, and setting his prejudices to one side. Are we to conclude that he writes his political commentary with the other part of his brain, letting his prejudices rip and suppressing his sense of historical detachment and disinterestedness? Anyway, I came away with no sense at all of why he thought Reagan was a great president despite (on Wilentz’s view) being wrong about most things.

A session on “Where will the next technological breakthroughs come from?”, featuring the aforementioned Dan Mote, was valuable even though the panel ignored that interesting question entirely. The brilliant Danny Hillis (pioneer of parallel processing) described three levels of innovation: building blocks (lasers, microprocessors), products that bundle them together (iPods, etc), and adaptation to innovations of the second kind (think of the way the telephone transformed business and society). Intriguing to think of the third level as itself a kind of innovation. America has great strengths in this area of adaptation—a flexible and relatively lightly regulated economy, an ability to reinvent itself—but perhaps some weaknesses too, at least as compared with rising Asia. Installed infrastructure can make adaptation difficult. In some ways it helps to have a blank slate—the better to leapfrog a technology (think of the way rural India and Africa are moving directly from no phones to cellphones).