November 30, 2011 · 1 Comments
By Dean Baker:
Okay boys and girls, today’s lesson is in arithmetic. Arithmetic is very important if we want to do economics. If we don’t know arithmetic, then we won’t be able to notice $10 trillion stock bubbles or $8 trillion housing bubbles. That could lead to really bad mistakes in economic policy.
Today’s lesson in arithmetic is necessary because the NYT told us in an article on President Obama’s latest program to help underwater homeowners:
“Mr. Ballew [the chief economist at Nationwide Insurance] said that if 10 million more people refinanced and saved an average of $200 a month, that would work out to be about $240 billion a year of additional spending power in the economy.”
Let’s try this one out. If a homeowner saves $200 a month, since there are 12 months in a year, this means that she will save $2,400 over the course of a year. If one million homeowners took advantage of this deal, that would mean savings of $2.4 billion a year. (There are a thousand millions in a billion.) If 10 million homeowners took advantage this deal, then the savings would be ten times as large, or $24 billion.
That’s right, the number is $24 billion, not $240 billion. Twenty four billion is equal to about 0.16 percent of GDP. If households spent all of their savings it would provide a boost to GDP that may be just large enough to be noticed. By contrast, if they spent most of $240 billion, it could lift GDP by close to 2 percentage points, which would lower the unemployment rate by roughly 1.0 percentage point. This difference is the reason why people who do work on economic issues should know arithmetic.
It is also worth correcting a statement that appears later in the article:
“an increasing number of economists worry that depressed housing prices and underwater borrowers are holding back a broader recovery.”
Actually, the United States does not have depressed housing prices. According to the Case Schiller national house price index, inflation adjusted house prices are still more than 9 percent above their 1996 level. The problem was that the country had a housing bubble that is now mostly deflated. The problem is not a depressed housing market.