In his testimony before Congressional today, Ben Bernanke reportedly made an effort to sooth uneasy financial markets. For this he was widely applauded by the business press. But is it the Fed’s job to be soothing financial markets?

Let’s throw out a purely hypothetical scenario. Imagine that the bad news on new home sales, mortgage applications, durable goods orders, and productivity actually translates into an economy that is about go into a recession.

Now let’s suppose that the market has two types of investors. The first type are the high rollers. They move in and out of financial assets on a moment’s notice. Let’s call them “hedge funds.” The second type are naïve investors. They put money into the stock market at regular intervals and let it sit. We’ll call them middle class 401(k) investors.

Okay, now in our hypothetical scenario, because the economy is genuinely facing serious problems, the market is likely to be heading downward in the months ahead. Our hedge fund investors will likely begin to recognize this fact and dump their stock. On the other hand, our middle class 401(k) investors are likely to keep putting new money into the market.

Suppose that Mr. Bernanke recognized that the economy is facing trouble and told Congress that the future looks bleak. The markets would presumably crash, because both the hedge funds and the middle class 401(k) investors would dump their stock. Everyone takes a hit, but the pain would be shared between the hedge funds and the middle class 401(k) investors.

Now, let’s suppose that Mr. Bernanke recognizes bad times ahead, but thinks that it is best to try to calm the financial markets, so he tells Congress that the economy is just fine. While this could be sufficient to assuage the middle class 401(k) investors, the assurances may not be sufficient to calm the hedge fund investors. Suppose they offload their stock over the next few weeks.

In this case, Bernanke’s soothing words would have the effect of keeping the market high while the hedge fund investors offloaded their holdings. The big losers would end up being the middle class 401(k) investors who keep buying into a sinking market.

In this purely hypothetical scenario, it would not be good for Bernanke to soothe financial markets, unless the goal is to redistribute wealth from middle class 401(k) investors to hedge funds. While this scenario may bear no relationship to the actual situation, it is not always true that the Fed should be trying to stabilize financial markets. The press could ask some questions along these lines, instead of just assuming that stable financial markets are always good.

--Dean Baker

Business reporters should ask him this question, since he keeps lumping in Social Security with Medicare and Medicaid as the drivers of large projected deficits in the decades ahead. Of course, the projections show that rising Medicare and Medicaid costs are the main problem, which in turn are driven by projections of exploding health care costs in the private sector. The projected increases in Social Security costs are relatively modest, m measured as a share of GDP, the rise in SS payments is less over the next quarter century than it was over the period from 1965 to 1980.

So, why does Bernanke consistently get it wrong? Is this part of an effort to build political support to cut Social Security or is he just being lazy? Suppose that he had said the problem is the projected increase in the cost of Head Start and Medicare and Medicaid, or maybe the national park maintenance, Medicare and Medicaid. Would reporters just write down Bernanke's assertions and never examine their validity? Is that what they get paid to do?

--Dean Baker

Yes folks, that's right, David Lereah, the chief economist of the National Association of Realtors, and the author of the 2005 bestseller, Why the Real Estate Boom Will Not Bust and How You Can Prfoit From It, says that the worst of the housing slump is behind us.

In the Post's favor, they at least included the views of Mark Zandi, a moderate housing bear, in this one.

--Dean Baker

Listening to NPR and reading the business press commenting on yesterday's Wall Street selloff, I repeatedly see the phrase "look to the fundamentals." This is good advice, but I can't imagine which fundamentals these folks are looking at, since the fundamentals seem to reassure them.

When I look at the fundamentals, I see front and center an unprecedented explosion in house prices. From 1953 to 1995 house prices track the overall rate of inflation closely. From 1995 to the present, house prices have risen by 70 percent in real terms. No one has an explanation for this run-up based on the fundamentals of the housing market. (The lack of any significant run-up in rents seems to disqualify any explanation based on conditions of supply and demand in the housing market.)

This run-up in house prices has created more than $5 trillion in housing wealth. This has spurred an extraordinary consumption boom, pushing the savings rate into negative territory for the first time since the beggining of the Great Depression.

The fundamentals I see are the unraveling of a housing bubble, leading to further declines in the housing sector, and a big hit on consumption, as the fuel of bubble created housing equity disappears. The hope that declining construction and weak consumption would be offset by soaring investment disappeared with yesterday's data showing a sharp drop in durable goods orders. It looks like investment is going the wrong way.

Throw in the fact that rising interest rates in Japan may slow the inflow of foreign capital that has kept long-term interest rates so low and productivity growth appears to have slowed sharply (benchmark revisions next week will push reported productivity growth over the last two years downward) and it's pretty hard to find much positive in this picture.

So, I agree completely with the analysts urging people to focus on the fundamentals, but I just can't see where they find anything positive , perhaps their own salaries?

[addendum -- don't forget price to earnings ratios as one of the fundamentals. The economy may look fantastic, but if the PE is 100, it would be very foolish to hold stock. Current PEs of near 20 against cyclical peak earnings look pretty high.]

--Dean Baker

NYT columnist David Leonhardt notes that the manufacturing sector has slid into a recession and raises the possibility that the rest of the economy might follow suit. To get insight on this topic, he talks to several people who were caught by surprise with the new signs of weakness.

It's always good to talk to the people who were shown wrong and ask them how they assess the situation in light of the new evidence. However, it also might be a good idea to talk to some of the people who were not surprised by the economic weakness. After all, once we accept that the earth revolves around the sun, we don't want to get all our information on astronomy from believers in an earth centered universe. (Here's my own two cents on the economic prospects.)

Just to remind everyone about the accuracy of econometric forecasters and the lack of consequence in this profession for being completely wrong, in the fall of 2000, not one of the fifty "Blue Chip" forecasters saw the 2001 recession coming.

--Dean Baker

The Times ran an article in today's paper reporting that governors want additional funding for the State Children's Health Insurance Program (SCHIP) in order to meet their coverage targets. According to the article, CBO estimates that it would take another $13.4 billion over the years 2008-2013.

I'm sure that this number is very informative to about 20 people reading the NYT. Is $13.4 billion over five years a lot of money? Almost no one except budget wonks have any idea. Maybe the NYT could have written that it would cost about 0.1 percent of projected spending over this five year period ,or about $9 per person per year.

Alternatively, the NYT could have told readers that the annual cost is a bit less than the cost of 2 weeks of the Iraq war. Or, it could have told readers that the annual cost was equal to about 10 percent of excess profits earned by the pharmaceutical industry because Congress prohibited Medicare from negotiating prices when it designed the new prescription drug benefit.

Any of these ways of describing the spending in dispute would have conveyed information to the vast majority of readers of the NYT. Instead, the NYT chose to print a number that is completely meaningless to almost anyone who will read it.

--Dean Baker

Apparently, former Federal Reserve Board Chairman Alan Greenspan has gone to the other side of the world to issue his first warnings about a potential recession later this year. In a speech in Hong Kong, he warned that the recovery is getting old and that weakening profit margins could be the first sign of an imminent recession. He also assured his audience that the housing market posed no problem for the economy, with a soft landing producing no spillover effects.

Greenspan's comments should warrant some serious media scrutiny. If there is a housing crash driven recession, as some people have predicted, then Greenspan's fingerprints are all over it. He let the housing bubble expand to dangerous levels and ignored the rapid growth in questionable mortgage lending practices. On the other hand, if the business cycle expansion runs its natural course, then no one can blame the former Fed chairman.

As far as this latter view, the current recovery is less than five and a half years old, the 90s expansion lasted for ten full years. The 80s cycle lasted for seven and a half years. It seems a bit pre-mature to claim that the recovery is about to die from old age. The profit margin story can't hold water either. The profit peak in the 90s was in 1997, the economy continued to sustain strong growth for 4 more years.

With mortgage default rates soaring, the sub-prime segment of the mortgage market tightening rapidly, and inventories of unsold homes at near record levels, it is easy to tell a recession story based on the collapse of the housing bubble. It is not clear that Mr. Greenspan can produce a credible alternative story, but his efforts in this direction deserve serious attention nonetheless.

--Dean Baker

According to articles in both the Wall Street Journal and the Financial Times, the Fed may no longer view the non-accelerating inflation rate of unemployment (NAIRU) as a useful tool for guiding monetary policy. The problem seems to be that they don't know where it is and what it means.

This is certainly good news for those of us who have been making this argument for some time. It was very decent of Bernanke and Co. to keep their doubts on the NAIRU doctrine quiet throughout the celebrations of Milton Friedman's life and work.

--Dean Baker

My guess is that they do. Which makes me wonder why market commentators don't seem familiar with the concept. The immediate target of my wrath is Allan Sloan, who was on Market Place radio this morning celebrating the fact that the Wilshire 5000 index (the most broadly based index for publicly traded stocks) had crossed its 2000 peak. While this is true in nominal terms, if you adjust for inflation the Wilshire index is still about 20 percent below its 2000 peak.

I don't attach any great significance to the stock market -- it is a measure of expected profits (insofar as investors are not high on irrational exuberance), not the well-being of the economy. But the media should at least get the numbers right. If someone needs a reason to party, go ahead and celebrate the new high for the Wilshire, but any real comparison adjusts for inflation.

--Dean Baker

That's right folks, the world's richest man stages a guest appearance on the Washington Post's opinion pages, a.k.a. "the coward's corner" for the Post's refusal to print dissenting opinions.

I mention the column to call attention to one bigtime fallacy that Mr. Gates promulgates in this piece and also to his assurances that highly educated workers can still enjoy government protection from international competition in his ideal world. (Okay, it's also fun to beat up on Bill Gates.)

Mr. Gates's myth is that the strong intellectual property laws in the United States are a reason that the country enjoys a competitive edge in innovation over other countries. Apparently, the worldest richest man does not get his logic subjected to scrutiny by the Post's editors.

Under TRIPS and other trade agreements, the vast majority of countries in the world are obligated to give exactly the same intellectual property rights to any innovation, regardless of where the research that led to the innovation actually took place. This means that an innovator in India or Bolivia would enjoy exactly the same patent and copyright protection in the United States, Europe, Japan and almost everywhere else, as an innovator based in Seattle. The strong protections in the U.S. give no reason whatsoever for a firm to locate their research here. A profit maximizing firm would locate their research in the country that has the lowest research costs, regardless of the strength of its intellectual property rules. (Presumably the folks who make these decisions at Microsoft are aware of TRIPS.)

The other reason why I am so fond of Mr. Gates piece is that he argues for more H1B visas to admit highly educated workers, but then adds: "this program has strong wage protections for U.S. workers: Like other companies, Microsoft pays H-1B and U.S. employees the same high levels -- levels that exceed the government's prevailing wage."

There you have it, Bill Gates is assuring the country's highly educated workers that they need not worry about being treated like the country's autoworkers or dishwashers -- the law will ensure that they will not have their wages depressed by foreign competition. Of course, the increased supply of foreign workers does depress wages, but is interesting that such a pillar of the IT era feels the need to assure U.S. professionals that they will not be subjected to international competition.

Regular BTP readers know my view on this one -- we make our less educated workers compete with low-paid workers in the developing world. This has benefitted highly educated workers by driving down the cost of manufactured goods, restaurant meals and other goods and services produced by low-paid workers from the developing world. International competition for the highly educated workers would lower the price of the services they produce and thereby benefit less educated workers. But, the conservative nanny state has to protect the boys and girls with advanced degrees since they are not yet ready for the same sort of international competition faced by autoworkers and custodians.

--Dean Baker

The NYT reported on Friday that the Bush administration's working group on capital market regulation decided that there was no reason to tighten rules for financial disclosure for hedge funds. It might have been useful if they talked to some of the economists/analysts who think that there is some danger to the financial system from having more than $1 trillion floating around in complete secrecy.

At least by his actions, if not his words, Alan Greenspan falls into the camp who believes that they require regulation. Remember, he said that it was necessary for the Fed to intervene in the collapse of the Long-term Capital Hedge Fund in order to protect the financial system.

Perhaps President Bush's working group thought additional regulation was unnecessary based on the court decision that had just been issued, which held that banks could be responsible for the loses suffered by hedge funds for which they act as a prime broker. If the banks that act as the agents for these funds are held liable for the losses their investors suffer, then the banks will themselves impose some real regulation on the funds. Of course, if the money managers that sink millions into funds that they know nothing about were actually held accountable for their investments, then we would have to worry much less about hedge funds.

--Dean Baker

The Washington Post does it yet again, an article on Venezuela's influence in Latin America refers to the Bush administration's efforts to have a "free trade" agreement with the region. Of course one of the main components of such an agreement would be rules strengthening copyright and patent protection. This is increased protection, not free trade.

Is the Washington Post obligated to use the Bush administration's terminology when it discusses issues? Is there some reason that it can't just be called a "trade" agreement?

--Dean Baker

According to the NYT, President Bush's health care plan would "provide tax breaks for low- and moderate-income workers to buy insurance." Put this line in the big HUH? category. President Bush's plan gives people who buy their own insurance the option to deduct the cost from their taxable income. This provides the biggest tax breaks for higher income workers who are in the highest tax bracket.

In fact, it is no tax break at all for tens of millions of moderate income workers who pay no income tax. These families could take the option of paying less in Social Security taxes, but this would be at the price of large reductions in future Social Security benefits, not necessarily a good deal.

I trust that President Bush's people will demand that the NYT correct its distortion of the President's plan.

--Dean Baker

Politicians excel at creating low expectations so that they can do "better than expected." A Post article yesterday on a new report from the Center for Medicare and Medicaid Services fell completely for the lowered expectations trick.

The article tells readers that drug prices increased less rapidly in 2006 than had been projected, in part because of the new Medicare drug benefit. The article presents this as a success of the benefit, although it does note that critics contend that Medicare could get lower prices if it negotiated directly with the drug industry.

Well, I would love to hear the economic argument as to why Medicare, which would represent a much larger block of consumers than Canada, Australia, or the Veteran's Administration, would not be able to get the same or lower prices than they do. All three pay prices that average 30-50 percent less than the prices paid by the private insurers participating in Medicare Part D. In other words, it is not just critics of Part D that say that Medicare negotiate lower prices -- it is true (unless the Post has some new economic theory that it wants to share with readers).

If the success of Part D is measured against the projected costs from two years ago, then the program is doing well. However, if it is measured against the drug prices paid by Canada or the VA, Part D is doing very poorly. If we had money to burn, maybe we wouldn't mind giving the drug industry an extra $30-$40 billion a year, but given that we have a budget deficit and are making cuts to many important programs, it is reasonable to ask whether the excess payments to the drug industry could go to better uses, even if the excess payments are somewhat lower than had originally been projected.

--Dean Baker

Okay BTP fans, anyone who happens to be near San Francisco can hear me talking about
my book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer.
I'll be at Modern Times Bookstore, 888 Valencia (in the Mission), 7:30 Wednesday evening.

If you can't make it, remember you can always download a free copy or purchase the paperback at www.conservativenannystate.org.

--Dean Baker

We all know that the southern states like to take a hard line on families that fall on hard times and turn to the government for support. Their payments for TANF and other benefits for low income families are far below the national average.

But, if you're a homeowner and live near the coast in Florida, the government is much more generous in dishing out money. The Washington Post reports that Florida has opted to subsidize the insurance for this group, because the private sector would charge exorbitant fees (presumably reflecting the actual risk).

It would have been helpful if this article discussed the dollars and cents a bit more. Specifically, how much money are hardworking Floridians paying to subsidize the mostly wealthy people living in coastal areas, who apparently lack the ability to make it on their own.

--Dean Baker

The NYT editorial page can always be counted on to harshly condemn protection for agriculture or manufactured goods, but when it comes to much larger economic distortions that are generated by copyright and patent protection, the NYT tells its reporters to look the other way.

Today’s article on the development of new software that can detect the presence of copyrighted material on the web provides yet another example of the NYT’s selective protectionism. The article includes no discussion whatsoever of the economic losses that result from imposing copyright protection. Think of the enormous gains to the economy and society if all books and articles, music and video were available to everyone in the world at zero cost over the web. These gains would dwarf any potential gains from eliminating trade barriers in manufactured goods or agricultural products.

In addition, think of how much we would gain by eliminating all the rent-seeking behavior associated with copyright protection. For example, we could have software developers doing productive work, instead of trying to develop software that tracks copyrighted work. We also wouldn’t need legions of copyright lawyers (okay, maybe these lawyers couldn’t do anything productive anyhow).

Also, imagine that creative workers didn’t have to feel boxed in by copyright restrictions. Suppose we gave creative workers the right to write their own version of Harry Potter or Star Wars or any other work they choose. (Actually, I thought the constitution did give them this right [freedom of speech], but the copyright protectionists argue otherwise.)

Creative workers need to be compensated for their work, but copyright is an inefficient and antiquated system. Unfortunately, the NYT and most media outlets (which depend on copyright protection) do not even let the inefficiencies of copyright protection be discussed. This makes the process of promoting alternatives more difficult.

--Dean Baker

Economic analysts are now acknowledging the shake-up in the sub-prime mortgage market. Lenders had used ridiculously lax standards, and a high percentage of recent loans are now at some point in the foreclosure prcoess. However, the conventional wisdom assures us that this will only affect the sub-prime market, not the larger mortgage and housing market. I remain a skeptic.

Consider that nearly 20 percent of the mortgages issued in the last two years fell in the sub-prime category. This is a large segment of the market. Now suppose that many of these borrowers can no longer afford to buy homes or at least must pay much lower prices. The homes that sub-prme borrowers would have otherwise bought are the homes that other potential buyers would be selling. Without the sub-prime buyers, many homeowners looking to move up will be getting far less money for their current home. This will affect what they can pay for their move-up home.

Of course, mortgage lenders across the board are also likely to apply tighter standards, since the secondary market for poor quality loans is contracting now that investors realize that you don't make money on defaulting mortgages (see Gretchen Morgenson's fine piece). So, the bubble will continue to unwind. It remains to be seen how far and how fast, but the sub-prime market market will not collapse and leave everything else standing.

--Dean Baker

The NYT has yet another columnist (Roger Cohen) telling the fairy tale about how the market processes underlying "globalization" led to greater inequality between rich and poor. Of course, people who actually know anything about globalization, know that we have not had a market driven process, but rather one that was explicitly designed to redistribute income upward.

If globalization was purely market driven, we would have removed the barriers that prevent smart people in Mexico, China, and India from working as professionals in the United States. If globalization was purely market driven, we would have eliminated the antiquated patent system of financing drug research, which makes life-saving drugs unaffordable and creates enormous economic distortions. If globalization was purely market driven, we would have promoted efficient 21st century models for financing creative and artistic work and software design, instead of tightening the patent and copyright protections that make Bill Gates and the entertainment industry rich.

If globalization had been purely market driven, most of the world would have seen much more rapid growth and had greater equality -- and the NYT wouldn't need to fill its opinion pages with columnists telling fairy tales on globalization.

--Dean Baker

Parade Magazine had a two page spread this weekend warning their tens of millions of readers of the evils of drug counterfeiting. While the article correctly pointed out the risks, the article never discussed the obvious solution -- a free market.

Government patent monopolies allow the pharmaceutical industry to charge prices that can be ten or even a hundred times the actual cost of production. This provides enormous incentives for people to manufacture unauthorized copies of patented drugs. Given these incentives, the United States government will be no more able to stamp out unauthorized copies of patented drugs than the Soviet Union was in banning black market sales of blue jeans. Any believer in free markets should recognize this fact. If you get rid of the patent monopoly, Wal-Mart will sell all drugs for $4 a prescription, and the incentive for counterfeiting disappears overnight.

Of course, we do need to finance drug research, but the patent system is an incredibly corrupt and inefficient mechanism for accomplishing this goal. If the pharmaceutical industry were not so powerful, more economists would be researching alternative mechanisms and the media and the politicians would be looking for ways to move beyond this relic of the feudal system.

[Just to fill in some numbers here, according to the Centers for Medicare and Medicaid Services, the country is projected to spend almost $240 billion on prescription drugs this year. If these drugs were sold as generics, the savings would be around $170 billion. Pharma claims that it does about $40 billion in research. According to the FDA and Pharma's own data, about two-thirds of this research goes to developing copycat drugs. This means that we pay an extra $170 billion for our drugs, in order to finance about $14 billion in research into breakthrough drugs.]

--Dean Baker

The headline of the Post's article on Fed Chairman Ben Bernanke's testimony before the House Financial Services Committee tells readers that "Bernanke Rebuffs Frank on Rate Cut." According to the article, Frank had pressed Bernanke about the possibility of a rate cut, given projections from the Fed and elsewhere of slowing growth and rising unemployment.

The article reports that Bernanke rejected the suggestion, citing the need to remain vigilant against inflation. The article implies that Bernanke's position is based on a solid body of economic research: "Bernanke's remarks partly reflect years of research that has debunked the idea of a long-term trade-off between unemployment and inflation." Actually, Mr. Frank was not proposing that the Fed lower rates with the idea that there would be a long-term trade-off between inflation and unemployment, he was suggesting that the Fed could lower rates and thereby lower unemployment, with no clear impact on inflation.

This is exactly the path that Alan Greenspan followed in the mid-90s when he allowed interest rates to stay low and the unemployment rate to continue to fall even though the unemployment rate was already below 6.0 percent, the generally accepted estimate for the NAIRU (non-accelerating inflation rate of unemployment) at the time. The Greenspan experiment refuted the prevailing economic views about the relationship between inflation and unemployment. At this point, there is no widely accepted body of research on this topic . It is inaccurate to imply to readers that Mr. Bernanke is relying on a large body of research in rejecting suggestions for a rate cut. He isn't.

--Dean Baker

The Census Bureau reported that housing starts fell 14.3 percent between December and January and now stand 37.8 percent below their year ago level. I always caution about making too much of a single month's data and housing starts are an especially erratic number. Still, it is worth noting that the sharp declines in starts were in the South and West, regions that were not affected by any obvious bad weather for the month.

The reporters who write-up this release will no doubt speak with many analysts who will express their surprise at this sharp downturn. It would be helpful if they also sought out the views of analysts who were not surprised. Presumably being right does not disqualify someone from being cited in news reporting.

--Dean Baker

Yep, that was the comment of David Lereah, the chief economist of the National Association of Realtors, and the author of the 2005 bestseller, Why the Real Estate Boom Will Not Bust -- and How You Can Profit From It.

The news is that the median house sale price was down 2.7 percent in the 4th quarter of 2006 from its year ago level. That's a decline of about 5.2 percent in real terms. While Mr. Lereah is convinced that this price decline (which he insisted would not occur) is a bottom, other analysts might point to the record 2.7 percent vacancy rate for ownership units in the 4th quarter, a rate that is 50 percent higher than the vacancy rate of 2 years ago. (The vacancy rate had never previously reached 2.0 percent.) Other analysts might have also pointed to the fact that the inventory of unsold homes is 25 percent higher than at the same point less year. Other analysts may have also noted that mortgage lenders are sharply cutting back their lending in the wake of soaring mortgage delinquency and foreclosure rates.

But readers of the Wall Street Journal wouldn't know this information because the WSJ apparently didn't think it was necessary to speak to anyone other than the chief economist of the National Association of Realtors.

--Dean Baker

Robert Samuelson uses his secure position within the Coward's Corner (a.k.a. the Washington Post opinion pages, dubbed the "coward's corner" for the Post's refusal to print dissenting opinions on this issue) to take a sideways swipe at Social Security. Samuelson makes the valid point that transfer payments have grown rapidly as a share of the federal government budget over the last four decades.

The dishonest part of the story is in the graph accompanying the article. The graph shows that "Social Security and other payments to individuals" rose from 21 percent of the budget in 1956 to 59 percent of the budget in 2006. The deceptive part of the story is that the "other payments" accounted for the vast majority of this increase. While Social Security went from 7.8 percent of spending in 1956 to 20.6 percent in 2006, "other payments" went from 12.8 percent of spending to 38.4 percent of spending over the same period. The bulk of these other payments are the main government health care programs, Medicare and Medicaid.

So, once again we get a health care cost problem being portrayed as a Social Security problem. Welcome to the Coward's Corner.

--Dean Baker

It is understandable that the proponents of the current trade agenda would try to assuage critics by promising to help those who lose their jobs from trade. These are the most obvious and hardest hit victims of this trade policy. However, the vast majority of the victims are those who see their wages fall as a result of the impact of being placed in competition with workers in the developing world who are willing to work for low wages.

The impact of trade on the wages of less educated workers, for which the proponents of current trade policies have no agenda (of course the downward pressure on their wages is the point of the trade policy) should be the focus of policy and news reporting, not the chosen topic of the pushers of current U.S. trade policy.

--Dean Baker

USA Today makes the mystery of stagnant wages a bit more mysterious than necessary. In an article today, it asks why wages for most workers have been stagnant even with the unemployment rate at a relatively low 4.5 percent.

Well, real wages are actually growing now, at a rate of around 1.0 percent annually. Given the rise in health care costs and some necessary adjustments to get from reported productivity to what I call "usable productivity" (this reflects differences in deflators and the fact that you can't eat depreciation) this is about what we should expect.

The story here seems to be that with current labor market conditions (weak unions and pressure from trade), most workers will only be in a position to see rising wages when the labor market has gotten fairly tight. It was not tight in the years 2000-2005, hence no wage gains. That's not very mysterious, but also not very good news for most workers.

--Dean Baker

I don't get excited one way or the other about foreign direct investment (FDI) in the U.S. It doesn't scare me, but I also don't see it as necessarily any great boon. Investment is generally good (it increases productivity and growth), and that includes foreign investment.

For this reason, I mostly find the Bush administration's effort to hype the virtues of FDI in the Economic Report of the President (ERP) entertaining. When the press buys the hype, it is disappointing. So, the WSJ shouldn't have uncritically bought the line that FDI helps "finance the large trade deficits."

Time for some basic accounting. The trade deficit is caused by an over-valued dollar. When people buy imported products at Wal-Mart, its because they cost less than domestically produced goods, that's pretty straightforward. The reason they cost less is because a high dollar makes imports cheap. This is all really simply.

FDI gets into the story because when foreign corporations want to invest in the U.S., they need to get dollars. This means that they increase the demand for dollars, and push the value of the dollar higher. This increases the trade deficit. Let's get the causation straight in this story.

This causation gets to one other point raised in the ERP and the article. The ERP notes the declining share of FDI in U.S. investment. There is a very simple explanation for this. If foreign firms recognize that the U.S. trade deficit is unsustainable (as everyone does) and that it will eventually lead to a large fall in the value of the dollar, then they would rightly be reluctant to invest heavily in a currency that is about to decline in value. It would make much more sense to put off your investment until the dollar does fall. In other words, no big surprise here.

--Dean Baker

That seems to be what the conservative Tax Foundation is claiming according to US News columnist James Pethokoukis. The column cites a study by the Tax Foundation, which in turn refers to a report by the Congressional Research Service (CRS) that blames the windfall profit tax for reducing domestic production by 3 to 6 percent.

Well, if U.S. production was reduced by 3 to 6 percent for 5 years, this would have lowered total output by between 500 million and 1 billion barrels over this period. (This assumes annual domestic production of about 3.3 billion barrels a year.) Of course, if we didn't pump the oil out of the ground back in the late 70s and early 80s, that means it is still in the ground available for future use. That sounds good to me.

The other major indictment of the tax was that it raised much less revenue than had been projected. The key to this part of the story was that oil prices collapsed in 1982. I'm not sure that anyone wants to attribute this collapse to the windfall profit tax (higher prices means reduced demand), but if that's the claim, I'm not sure that many people would have been upset with the outcome.

More seriously, the piece asked why we should have a windfall tax on oil but not Google. I'll leave others to debate the true value of Google (I wouldn't buy the stock for $460 a share), but the point is that the oil industry has gotten rich as a result of a set of unexpected events that pushed up oil prices for the rest of us, and profits for them. They are getting $60 a barrel for oil that they had expected to sell profitably at $30 a barrel. They will continue to produce just as much oil if they had a portion of their unexpected profits taxed away and rebated to consumers in some manner (or used to promote conservation or alternative energy). The industry will probably invest less in finding new oil with a windfall profit tax, but if we want to move to cleaner sources of energy, and conservation, this may not be a bad thing.

While there is probably never a pure rent (meaning someone gets paid more than necessary to get them to provide a good or service), rents are generally a good place to look for revenue. The distortions from a well-designed windfall profits tax are almost certainly lower than the distortions from income or sales taxes. If we can substitute a windfall profits tax for more distortionary taxes, we are almost certainly coming out ahead.

I'll leave others to argue about the justice of the tax, but I will note that industries have no trouble begging the government for help when events beyond their control cost them money (e.g. the airline bailout post 9-11).

--Dean Baker

The WSJ tells us that the Bush administration (apparently ignoring recent data) believes that high rates of productivity growth will continue unless the country becomes protectionist. Well, as should be clear to anyone who follows the economy at all, the U.S. economy is already highly protectionist. For example, it is very difficult for foreign doctors to practice medicine in the United States (although it is very easy for them to work as dishwashers or cabdrivers -- no protectionism there). That is why doctors in the U.S. earn twice as much as doctors in Europe. Similar protections inflate earnings for other highly educated professionals.

We also have an enormously distorted drug market because of patent protection. We spend close to $250 billion a year (close to 1.9 percent of GDP) on prescription drugs. If we didn't give drug companies patent monopolies, we would probably be paying less than $50 billion a year. Think of all the incredible waste associated with dealing with these high drug prices. In addition to all the people who don't get the drugs they need we have huge numbers of people employed in insurance companies, doctors' offices, pharmacies, and elsewhere in the health care sector because drugs are expenseive and therefore we have to regulate their use. If economists cared about efficiency, they would be troubled by this waste.

--Dean Baker

The Washington Post devoted a lengthy page 3 article to discussing the cuts to Medicare and Medicaid proposed in President Bush’s new budget. The article failed to give readers the context that would tell them how important these items are in the federal budget. The CBO baseline shows that Medicare and Medicaid combined are projected to account for 22.9 percent of total spending this year and 26.2 percent of spending in 2012. Or, expressed on an average family of four basis, Medicare and Medicaid spending comes to about $8,300 for a family of four in 2007 and $11,300 for a family of four in 2012. In other words, this is real money.

But the bigger sin in this piece is the failure to explain the meaning of President Bush’s most important cut to these programs. President Bush wants to eliminate the indexing for the income cutoff after which means-testing would apply to Medicare benefits. Currently, the threshold is set at $80,000 for an individual and $160,000 for a couple. Setting means-testing for those earning above these levels would only affect the highest income elderly, but if the cutoffs are not indexed for inflation, as President Bush proposes, then more middle income people would soon be affected.

In twenty years, a single person at the same point in the income distribution as someone earning $40,000 today would be subject to the means-test. In forty years, about the point where Social Security is first projected to face a shortfall, a single person at the same point in the income distribution as someone earning $20,000 today would face means-testing for Medicare.

In other words, under President Bush’s proposal, much of the middle-class will have their Medicare means-tested before Social Security is even projected to face a funding shortfall. This should be big news, but this fact is not even mentioned in the article.

David Broder, commits the same sin in the Coward’s Corner [a.k.a. the Washington Post opinion pages – a section known for its unwillingness to present alternative views on this issue].

--Dean Baker

John Edwards jumped ahead of the other designated major candidates in proposing a detailed plan to get to universal coverage. (Representative Dennis Kucinich has put forward a universal Medicare plan, but the media have largely opted to ignore his candidacy.)

This is a serious plan. What I find most interesting (agreeing with Paul Krugman) is the proposal to create a public Medicare type system that any individual or employer can buy into. [Cheap political advice for the Edwards campaign: hype this item to the moon as a small business friendly proposal. Small businesses hate to deal with insurers who can raise their premiums by ridiculous amounts, especially if one of their workers develops a serious illness.] This sets up a head to head competition between the public system and private insurers. We should all benefit from this sort of competition.

Thus far the media has barely reported at all on any of the substance of this campaign. There is still a long way to go before anyone casts a vote, but it's never too early to start talking about substance. I know almost nothing about what any of the presidential candidates in 2004 had to say about health care. Maybe that's because most of them didn't say anything. But this time, we already have one very substantive proposal on the table. It deserves the media's attention, as do the responses of the other candidates.

--Dean Baker

Britain privatized its train system under Margaret Thatcher. Tony Blair continued and extended the policy even though it had failed to improve service and lower cost. The NYT reports today that the train system is still poorly run, but neglects to mention the privatization experiment.

--Dean Baker

The NYT had an article today on that big dilemma: if we want to slow global warming, we will have to do something about the growth of greenhouse gas emissions in developing countries like China and India. The article makes it all sound so difficult. These countries refuse to agree to limits, because they point out that on a per capita basis they emit much less than rich countries. And, it is emissions from rich countries over the last 200 years that are primarily responsible for the problem in the first place.

This is all true. The part that the article never mentioned is the idea that rich countries can pay poor countries to restrict their emissions. This notion is poorly formulated as part of the Kyoto agreement with the "Clean Development Mechanism." However, it easy to design a more serious proposal.

The basic point is very simple. Many of the cheapest ways to reduce emissions would come from changing the development path of countries like China and India. However, these countries will not endure this expense themselves, for obvious reasons. But, if we care about global warming, then we would pay them to reduce their emissions or at least slow the growth rate.

Maybe we don't want to cough up the bucks and are just willing to live with global warming, but this is not an insoluable problem and the NYT should not present it as one.

--Dean Baker

I apologize to BTP regulars for repeating myself, but since the confusion on the topic of the trust fund persists, I am afraid I must give another brief lecture on the Social Security trust fund.

Under the law (which is what is binding here), the fact that Bush or anyone else may have spent the Social Security surplus makes no difference whatsoever. The trust fund holds the same number of bonds as if every cent of the surplus were saved. So, unless Congress votes to default on the government bonds held by the trust fund, then we should think about Social Security's future as though the all the money in the trust fund is there for it to be used, because under the law it is.

Now, things could change and Congress could vote to default on the bonds held by the trust fund, but this seems unlikely given the popularity of the program. To date, not one of the 535 members of Congress has publicly advocated default on the bonds held by the trust fund, which is no doubt because such a default would lead to public outrage. The outrage would likely be even greater if the default were to be voted in 10-15 years when the share of retirees in the population will be even larger than it is today.

So, unless the reporters know something that they are not reporting (in which case they should probably be fired), they should be discussing Social Security's finances as though current law is followed, which means the bonds in the trust fund are fully honored. In this scenario, the program can pay all scheduled benefits until 2046 according to the Congressional Budget Office.

--Dean Baker

It doesn't seem that they do, based on a front page article in today's paper on the war and the economy. The article comments that "the oldest boomers turn 60 [sic] this year. There is no sign of a political consensus on changing Social Security, which has expanded since Roosevelt launched it, or on making more affordable Mr. Johnson's health-care programs."

Of course there is no obvious reason that anyone should be looking to change a program that is fully solvent for the next 39 years according to the most recent projections from the Congressional Budget Office. To build the case for fear, the article then commits the old "Social Security and Medicare sin" commenting that "Social Security, Medicare and Medicaid already consume 36 cents of every dollar that the government spends, about $1.2 trillion this year, and are growing faster than the economy as a whole."

As regular BTP readers all know by now, the projections of rapidly rising costs are driven by projections of rapidly rising health care costs. Responsible journalists would see this as evidence of the pressing need for reforming the health care system, especially since the United States is the only country that faces this sort of projected explosion in health care costs (people are aging everywhere).

--Dean Baker

The NYT says they are. A budget article reports that in bargaining over the budget, "the issues most often mentioned that might entice Democrats to the bargaining table with the administration would be a package to finance future Social Security benefits, possibly combined with a curb on some benefits."

If this is true, and we start from the premise that Democrats actually support Social Security, then it implies that the Democrats have no idea whatsoever what they are talking about.

The numbers on Social Security are very clear. According to the Congressional Budget Office, the program can pay all scheduled benefits for the next 39 years, with no changes whatsoever. Given the basic soundness of the program, why on earth would a party committed to defending Social Security agree to cuts to Social Security and possibly other concessions, when full funding for the program is already guaranteed under the law for more than 3 and a half decades after President Bush leaves the White House.

Of course it's not clear that any Democrats are actually as poorly informed about the finances of Social Security as the article implies, because the article doesn't actually identify any Democratic members of Congress who hold the view it ascribes to the party. In other words, like the WMDs in Iraq, this is another story that depends on people without names (PWN).

--Dean Baker

Practicing the better late than never news philosopher, the Wall Street Journal stepped ahead of the pack by noting the record vacancy rate of ownership units that the Commerce Department reported last Monday. Since the impact of this record vacancy rate on the housing market will be felt for some time, it's not too late for the reporters who missed the story to make amends.

--Dean Baker

In fact, President Bush does propose phasing out Medicare in his new budget, if the NYT got its facts right. According to this article, President Bush proposes to change the rules on the means-testing of Medicare benefits, so that the income current cutoffs of $80,000 for individuals and $160,000 for couples are not indexed.

This means that over time, more and more of the senior population would have to pay premiums that largely cover the cost of their Medicare. In other words, Medicare will no longer be government provided health care for most of the elderly population.

How fast will the benefits phase out? Well in roughly twenty years, the means-testing would be hitting singles who are the same point in the income distribution as someone earning $40,000 a year today, and couples earning $80,000. In forty years, the point at which Social Security is first projected to face a shortfall, the means-testing would be hitting singles who are at the same point in the income distribution as someone earning $20,000 a year today, and couples earning $40,000. In other words, under President Bush's proposal many middle income elderly people would face the loss of their Medicare subsidy before Social Security faces any funding shortfall. A bit further out, and only the poor would still recieve any subsidy through the Medicare program.

After Social Security, Medicare is the country's largest social program. When a president proposes phasing it out, it should be big news. Why aren't the reporters covering it?

--Dean Baker

This seems obvious to me, but maybe that's because I grew up in Chicago under the first Mayor Daley. But Daley jokes aside, does anyone really believe that politicians attain high office based on their political philosophies, in this country?

Politicians get ahead by making deals with rich and powerful people. Just listen to the pundits tell us that it will take 50-100 million dollars to win the Democratic presidential nomination. Does anyone think that political philosophies get you 50-100 million dollars? That's just not serious.

The immediate reason for my anger is that an otherwise excellent NYT piece on government contracting under the Bush administration felt the need to tell readers that the massive increase in the use of private contractors under President Bush is due to " a philosophy that encourages outsourcing almost everything government does."

Okay, the reporters think that President Bush is motivated by his political philosophy. My alternative explanation is that the people who make a fortune on these government contracts are disproportionately political allies and contributors to President Bush and other prominent Republicans. I don't have the time to muster the evidence to backup my case, but they present no evidence whatsoever to back up their contention. (What would count as evidence for them, an assertion from a politician about his philosophy?)

Anyhow, it is very difficult to see how this speculation about President Bush's political philosophy adds anything to this article.

--Dean Baker

It’s budget season, which means that we can expect to see the papers filled with articles about tax and spending plans that come attached to numbers like “million” “billion” and “trillion.” Since the vast majority of newspaper readers (even the highly educated ones) don’t often have occasion to play with such numbers, most of them will get little or no information from these articles, even if they read them. Of course, many readers will wisely skip these pieces, knowing that they will provide them with no useful information.

I apply the strict “net gain” standard to budget reporting. The net gain standard is that a typical reader should be better informed about the budget and tax/spending priorities after reading the piece than before they started.

The Post’s article on President Bush’s request for another $245 billion for the wars in Iraq and Afghanistan does not meet the net gain standard. The piece tells us that President Bush will ask for another $100 billion for fiscal 2007 and $145 billion for fiscal 2008. Is this a lot or a little? Most readers probably have some sense that this is big money, but how about telling them that the 2008 request is equal to approximately 5 percent of total spending, or maybe $2,000 for a family of four.

The article then tells readers that President Bush is proposing a 1 percent increase in non-defense discretionary spending. There are probably about 50 budget wonks that can assign any meaning to this information. In fact (if I understand the proposal correctly), President Bush is proposing that non-defense discretionary spending will be cut by around 2 percent in real terms. As a result of inflation, government salaries and other expenses will rise by around 3 percent in 2008 compared to 2007. This means that to employ the same number of people and provide the same level of services, we would need approximately 3 percent more money, not 1 percent. (We also might need more government services in an economy that is projected to be 3 percent larger.) For those who don’t keep up on such things, non-defense discretionary spending includes items like education and training, funding for national parks, research on energy conservation, and veterans’ benefits -- information not included in the article.

Since I'm on the topic of beating up on the Post's budget reporting, let me also call attention to a bit of excessive gullibility in Friday's story on the Senate's minimum wage bill ("Senate Adds Tax Breaks to Minimum Wage Bill," 2-1-07;A1 [sorry, no links, the Post's website is not being cooperative]). This article reported that the tax breaks would help "businesses that would be hardest hit by the minimum-wage increase."

Some qualifications would have been in order here like "businesses that Republicans claim would be hardest hit by the minimum-wage increase." I haven't studied the tax breaks closely, but according to the article, one of the tax breaks is an accelerated depreciation schedule for investments by small businesses. That does not seem obviously designed to help businesses that would be affected by the higher minimum wage.

--Dean Baker

A news article in the washington Post insists that President Bush's health care tax break, which would lead to large cuts in the Social Security benefits received by low wage workers, is progressive. It tells readers that the White House can't understand why Democrats aren't interested.

As I wrote before, I question whether the plan was ever intended to be taken seriously, but one implication is that low wage workers could lose much of their Social Security income. The basic story is that the Bush plan refunds Social Security tax payments on the first $15k of wages for workers who have a family insurance policy. For a worker earning $20k a year, this would mean most of their SS taxes would be refunded, but they would also see their benefits cut by close to 60 percent when they retire. In other words, this proposal would imply a massive change to the SS system, with the greatest impact on the benefits received by low wage workers.

If the Post reporters can't understand why Democrats aren't biting, maybe they need to do some more homework.

--Dean Baker

After reading the reporting on the January job numbers, it seems that not many economists pay attention to the weather. If they did, they might have been somewhat more pessimistic on the January employment numbers. By itself, 111,000 is not a bad performance, especially when it follows two months in which the economy added more than 400,000 jobs. But, it seems likely that the January figure was inflated by extraordinary good weather across the Northeast and Midwest over the reference period. (The survey asks the number of employees on the payroll for the pay period that includes January 12th.)

While we always look at seasonally adjusted data to assess the economy, there actually are very large fluctuations in employment and output associated with the weather. Typically, bad winter weather in the Northeast and Midwest leads to large falloffs in employment in some sectors like construction and restaurant employment. However, the seasonal adjustment factors offset this effect.

That is why a loss of 295,000 jobs in construction was reported as a gain of 22,000 in the seasonally adjusted data. Similarly, a loss of 196,000 jobs in restaurant employment was translated into a gain of 21,000 in the seasonally adjusted data.

These seasonal adjustments are essential to making sense of our data, but what happens when people don’t get laid off because a construction site is shut for two weeks due to heavy snow? Or, what happens when restaurants continue hiring because it is not too cold for people to go out for dinner in early January? In these cases, our seasonal adjustment factors would be overcorrecting.

This is likely what happened this January. How big is this effect? We’ll find out when we get the February data.

[Late addition: The final version of the NYT article included comments about the weather from Goldman Sachs economist Jan Hatzius. Of course, you can always get the real story about the state of the economy from CEPR data bytes.

--Dean Baker

A New York Times article discussing President Bush's plans to cut Medicare and Medicaid spending notes that Democrats are likely to oppose these plans. At one point, it reports that Democrats in Congress want to save money by reducing payments to the private insurers that operate within the Medicare program, because they claim that Medicare overpays these plans.

Actually, that is not just a claim of the Democrats. The Medicare Payments Advisory Commission, a non-partisan governmental commission, concluded that Medicare pays an average of 11 percent more per beneficiary for people enrolled in the Medicare Advantage program than for people in the traditional fee for service Medicare program.

It would be helpful if the NYT would distinguish between partisan claims and the assessments of presumably neutral bodies. In this case, Democrats in Congress are advocating a policy that is based on the assessment of a panel of experts, not just their own assertions.

--Dean Baker

The NYT editorial board continued its dogmatic pursuit of selective free trade in its lead editorial this morning. The piece includes typical spin tactics, using arguments or claims that they presumably know are misleading. Here are my three favorites:

1) The U.S. is the world leading exporter, therefore we gain from trade -- Put this in the big "huh?" department. On an exchange rate basis (the appropriate measure here), the U.S. is more than twice as large as the next biggest economy. We better be the world's largest exporter, or we're a basket case.

2) U.S. tariff reductions benefit poor countries like Bangladesh and Cambodia -- This is a yes and no story. Bangladesh and Cambodia have benefitted from being able to export to the United States. But, one of the things that protects their export markets are the restrictions on imports from China. A paper called the New York Times had some good articles on this issue a couple of years ago. The multi-fiber agreement that assigned import quotas by country ended in 2005, and imports from China quickly began to displace production in countries like Bangladesh and Cambodia. The U.S. quickly negotiated temporary caps on exports from China that last through 2008, thereby leaving some space for exports from poorer countries. Are these caps on Chinese exports free trade?

The other misleading part of this story is that much of the U.S. trade agenda is not focused on reducing barriers but rather on increasing protection for U.S. patents and copyrights. These restrictions raise the prices that people in developing countries have to pay for drugs and other products. Maybe the NYT editorial board can explain how developing countries are benefitted by trade agreements that make it impossible for many of their citizens to afford life-saving drugs.

3) The workers who lose their jobs because of trade need more assistance -- This one wins the prize in being misleading. The NYT editorial board presumably knows that the vast majority of workers who get hurt by trade are not the ones who directly lose their job due to import competition, but rather the tens of millions of workers who stay on the job but get lower wages because they now have to compete with imports produced by low wage workers. That is the way markets work.

The NYT is playing a game of three-card Monte here. They are distracting readers from the real issue: trade has been an important factor in lowering the wages for large segments of the U.S. workforce over the last quarter century. Those who lose their job directly because of import competition are the ones most affected, but this is a very small minority of the actual number of workers impacted by the current pattern of trade.

The NYT views on trade will be taken more seriously when they adopt a consistent standard, instead of their current support for selective protectionism. When they call for measures that subject doctors, lawyers, and other highly paid professionals to the same international competition as autoworkers and textile workers face, then they will have a coherent position. And, they will also have to evaluate the patent and copyright protection that the U.S. wants to impose on the developing world by the same standard as other forms of protection.

Until the NYT is prepared to adopt a consistent position on trade, their editorials should be viewed as presenting a brief for making the wealthy wealthier.

-- Dean Baker

It is well-known that political figures often use inaccurate terms to describe their views and their policies. For example, the Soviet bloc countries usually referred to themselves as “peoples’ democracies.” This did not mean that the Soviet bloc governments represented the people, or that their leaders were committed to democracy, and reporters recognized this fact. No competent reporter ever described the Romanian dictator Nicolai Ceausescu, as a committed democrat.

In the same vein, simply because someone calls themselves a “free-trader” does not mean that they are committed to free trade. However, the Post tells us today that the Hamilton Project, an initiative started by Citigroup executive and former Treasury Secretary Robert Rubin, “aims to rebuild the social safety net without interfering with international trade and the free market.”

Is that so? Where is the Hamilton Project’s proposal for freeing trade in highly paid professional services so that it is as simple for a hospital to hire a qualified doctor from India as it is for Wal-Mart to buy shoes from China (and the hospital can explicitly hire the foreign doctor because she works for less money)? I couldn’t find that one on their website.

I also don’t see any proposals to eliminate copyright and patent protections, both of which create far larger economic distortions than any trade barriers the United States has imposed on manufactured goods in the last quarter century. Actually, when they held power during the Clinton years, the Hamiltonians sought to increase these protectionist barriers, putting conditions in trade agreements that could increase the price that developing countries have to pay for prescription drugs by several hundred percent.

In short, I don’t see anything in the Hamiltonian agenda that can accurately be identified as “free trade.” I see an agenda that aims to put less-educated workers in the United States in direct competition with low-paid workers in the developing world, while largely protecting doctors, lawyers, economists and other highly paid professionals. (Get the fuller story in the non-copyright protected book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer.)

Anyhow, I understand why the Hamiltonians want to call themselves “free-traders.” It sounds good – everyone likes freedom. But, no one died and gave them control over the English language. Reporters should not accept self-descriptions as truth. Just give readers the facts and let them make up their own mind on who is a free-trader.

--Dean Baker

Rex Nutting shows that there is at least one reporter that pays attention to this important data series on the state of the country's housing market.

--Dean Baker