Federal Reserve Board Chairman Ben Bernanke told Congress yesterday that he didn't think that the economy would experience a recession. He also claimed that the collapse of the housing market could fuel inflation by pushing up rents. It would have been useful if the media had provided some background for these assertions.

As far as Mr. Bernanke's assessment of the risk of a recession due to the collapse of the housing bubble, it is worth reminding readers that Mr. Bernanke consistently denied that there was a housing bubble. Even when the bubble began to collapse last year, and the write-offs in the subprime market first began to hit bank's balance sheets, Bernanke insisted that the problems in the housing market would only cause minor problems in financial markets. In short, Mr. Bernanke completely overlooked the housing bubble as a potential source of instability and consistently underestimated the risks it posed even as it began to collapse. Readers would find this background useful in assessing Mr. Bernanke's most recent reassurances.

On the link between inflation and the housing crash, Mr. Bernanke argued that if people who are reluctant to buy homes opt instead to rent, this could push up the price of rental housing, thereby contributing to overall inflation. The problem with this analysis is that it ignores the fact that many unsold ownership units end up as rentals. If the switch from owning to selling is driving up rents by creating a shortage of rental housing, then we should see growth in the number of vacant ownership units. While the percentage of vacant rental units did in fact rise to a record 2.8 percent in the first quarter of 2007 (it had never exceeded 1.9 percent before the current downturn), it has remained pretty much constant over the last year. This implies that the switch from owning to renting is being matched by the number of ownership units being converted to rental units, leaving little net change in the demand for rental units.

--Dean Baker

The NYT had a good piece today on the rapid growth in the number of people who simply turn over their homes to the bank because the mortgage exceeds the value of the home. One of the experts interviewed for the article was Nicholas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University.

Mr. Retsinas is perhaps best known for dismissing the idea that there could be a housing bubble and therefore low and moderate income families should not be reticent to buy homes.

A couple of the pearls of wisdom that followers of Mr. Retsinas would have read are:

"More importantly, it takes concentrated job losses - the likes of which have not been seen during this business cycle - to drive down home prices;" and

"Moreover, when house prices deflate, they do so slowly."

Readers of the NYT would benefit from having a better understanding of the background of the "experts" whose views appear in their articles.

[Thanks to Ben Zipperer for retrieving these gems from the piece.]

--Dean Baker

Why do newspapers insist on telling us that politicians act out of ideological motives? I would guess that they act from political motives -- they do things that win them support from interest groups that can deliver campaign contributions or votes. But the NYT tells us that the dispute over bailing out the banks who are losing their shirts on bad mortgage debt is "a classic ideological clash."

I'm a bit at a loss here. I am not sure what ideology it is that says the government should give tens of billions of dollars to rich bankers who are too dumb to know how to run their business. In any case, the NYT claims the Democrats adhere to this ideology while the Republicans are opposed to it, interesting.

--Dean Baker

There have been numerous articles discussing various proposals that are ostensibly designed to help homeowners with subprime mortgages. Almost none of these articles have bothered to examine whether these families are likely to actually benefit from these measures.

This actually is not a difficult task. There are two questions that will determine whether these homeowners will benefit. First, whether they will accumulate equity and second, how much they will pay in housing costs in their current home as opposed to renting elsewhere.

The numbers imply that most homeowners are almost certain to lose from the bailouts that are supposed to help them. House prices are falling rapidly due to a deflating housing bubble. Since most moderate income homeowners will only be in their home a relatively short period of time, it is very unlikely that they will be there long enough to pay down enough of their mortgage to offset the plunge in prices. In other words, most of the subprime mortgage holders are likely to sell their home owing money to the bank.

The second issue is their annual cost of owning compared to renting a comparable unit. As a result of the unprecedented run-up in house sale prices (rents have increased only slightly more than inflation), the ratio of house prices to rents on comparable units (e.g. different houses in the same development) is about 20 to 1. If a homeowner gets a 6 percent mortgage, and has to pay 1 percent of the value in property taxes and another percent in annual maintenance costs, then the cost of owning is 8 percent of the sales prices. This compares to being able to rent at 5 percent of the sales prices. In this scenario, ownership costs are 60 percent more than the cost of renting. (This is likely a conservative estimate, since subprime mortgage holders are not likely to get a 6 percent mortgage.)

For the population as a whole ownership/rent take up 30 percent of their income. The share is higher for low and moderate income families, but even this 30 percent figure would imply that the 60 percent excess housing costs associated with ownership implies paying an amount equal to 16 percent of family income. In other words, keeping moderate income families as owners given current house prices is equivalent to imposing a 16 percentae point surtax on their income. This is not likely to help their financial situation or their ability to move into the middle class.

It would be helpful if reporters occasionally included some simple analysis of this sort in discussing the various bailout proposals being put forward. This would make it clearer to readers who these proposals are likely to benefit.

--Dean Baker

The NYT is trying to make my point that the numbers they print about taxes and spending are completely meaningless. How else can anyone explain the fact that in a discussion of an energy bill passed by the House, that eliminates $17 billion in tax breaks for the oil industry and uses the money to promote alternative energy, readers are never told that this sum refers to a ten year period?

If anyone cares, the $1.7 billion in annual taxes is equal to approximately 0.06 of projected spending over the next decade. It comes to about $5.70 per person per year.

The article also should not have printed without response Republican claims that the elimination of the tax break would lead to higher gas prices. In the short-term, supply is almost entirely fixed. This means that the tax increase will come almost entirely out of producers' profits.

--Dean Baker

The banks are very upset over the possibility that Congress may change the law to allow bankruptcy judges to rewrite the terms of mortgage loans as they can other loans when a person declares bankruptcy. Naturally they are pulling out all the stops in making their case. The Washington Post quotes a Bush administration spokesperson saying that the proposed change "is interfering with contracts."

This is an interesting charge to come from the Bush administration and to be associated with the banks. Those old enough to remember may recall the bankruptcy reform of 2005. This bill altered the enforcement of loans in the opposite direction, making it easier for lenders to collect from debtors. It was applied to loans that had already been contracted not just future debt yet to be incurred, in that sense, it interfered with contracts.

Clearly, neither the Bush administration nor the banks, both of whom eagerly supported the bankruptcy reform bill, have any principled objection to interfering with contracts. Their objection seems to be based more on whom the interference is favoring. The reporters covering this issue should have provided readers with this background.

--Dean Baker

It is incredible that the paper can't even discuss the issue. In his discussion of the effect of trade on workers in Ohio, David Leonhardt never even mentions what is indisputably true, recent trade agreements have been designed to shift income from the 70 percent of the workforce without college degrees to the 30 percent of the workforce with degrees, and especially to the small minority with advance degrees.

As Leonhardt correctly notes, NAFTA did little to reduce tariff barriers to imports from Mexico. These were already low. What NAFTA was about was removing all the non-tariff barriers that prevented U.S. firms from locating manufacturing operations in Mexico and exporting their output back to the United States. By putting U.S. manufacturing workers in direct competition with low-paid workers in Mexico, NAFTA lowered their wages.

If Leonhardt and the NYT were interested in free trade, we could ask hospitals what barriers prevent them from hiring Mexican doctors who would be happy to work for one-half of the wages of their U.S. counterparts. We could do the same for law firms, universities, and even newspapers. We could standardize education and professional standards so that Mexican kids could grow up and work as doctors in Los Angeles or lawyers in New York, just as easily as kids born in Chicago or Boston. This would lead to huge gains to the U.S. economy and greater equality in the United States instead of greater inequality.

But, we didn't this. Instead we cut the number of foreign medical residents entering the country in half and changed our licensing procedures to make it harder for foreign doctors to enter the country. Furthermore, it would be illegal for a Wal-Mart University or a Wal-Mart hospital to explicitly bring hire foreign professors or doctors because they are willing to work for much lower wages than their U.S. born (or greencard holding) counterparts. Under the law, these institutions must first try to hire U.S. citizens before they can seek out foreign professionals.

If we had the same laws for manufactured goods, Wal-Mart would have to claim that they had tried to find U.S. made shoes or toys (and failed) before they could import these goods from China. Anyone could recognize that this would be protectionist in the case of manufactured goods, why is it so hard to understand that it is protectionist when applied to highly paid professional services. Surely the best newspaper in the country should be able to find a reporter who can figure this out.

--Dean Baker

USA Today had an article today on the looming doctor shortage. Apparently, no one at USA Today has heard about the global economy. If we eliminated barriers to qualified (they meet our standards) foreign doctors entering the country, and crafted trade deals to facilitate the training and migration of foreign doctors to the U.S. (instead of foreign manufactured goods), the United States would have as many qualified doctors as we want and would pay much less for their services than we do today.

However, the doctors' lobby is far more powerful than the lobby for auto workers and textile workers. Therefore, we continue to impose barriers to foreign doctors and the news media act like they don't even notice.

I will make a preemptive strike to protect this site from unnecessary ignorance. I know that there are many foreign doctors in the country. That proves absolutely zero, as in nothing, as in it is a completely meaningless piece of information. The United States imported vast amounts of apparel in the 80s, yet it had very extensive protection against imports of apparel. To say that we have protections does not mean that we have absolute prohibitions. If we did not have barriers to foreign doctors entering the country, U.S. born doctors would probably be about as common as U.S. made shoes.

[Thanks to Peter Hart, of Fairness and Accuracy in Reporting (FAIR) for this tip.]

--Dean Baker

The NYT reports on hostility to programs to intervene in the foreclosure crisis and focuses exclusively on many people's hostility to helping homeowners to get in over their heads. It never discusses hostility to the banks who now hold bad mortgages, who will be the primary beneficiaries of these measures.

It also relies on Nicolas P. Retsinas, the director of the Joint Center for Housing Studies at Harvard University, as one of its main sources. Mr. Retsinas is perhaps best known for dismissing the possibility that there was a housing bubble and encouraging low and moderate income people to buy homes even when they were at bubble inflated prices (discussed here).

--Dean Baker

Just yesterday the NYT editorial board was complaining about the threat of protectionism in discussing Senator Obama and Clinton's trade policies. Today, the editorial board discusses Medicare's financial problems and never once mentions the extent to which this is caused by protectionism.

The basic point is very simple. Every other wealthy country provides high quality health care at a far lower price than in the United States. If we want to lower cost then an obvious way would be to try to take advantage of these lower cost systems. It is easy to develop mechanisms that would allow for Medicare beneficiaries to take advantage of lower cost systems.

The argument for the gains from trade in medical services is exactly the same as the argument for gains from trade in cars and clothes (we can even use the same graph, we just have to relabel the axis), except the benefits are likely to be much larger in the case of medical care. It is inconsistent for the NYT to be so committed to eliminating trade barriers in manufactured goods but willing to tolerate much costly barriers to trade in medical services.

--Dean Baker

I'm serious. In a front page article discussing the economy in Toledo, Ohio in advance of the primary there, the Post comments that: "median home prices here barely top $100,000, yet the city is in the top 20 in the nation in number of foreclosures."

The "yet" should have been an "and." The point is that because home prices have not risen in Toledo, most recent home buyers have little or no equity in their home. This means that they can't borrow against equity to meet mortgage payments, and they don't lose any equity if the bank takes over their home. It would be surprising if they were a high rate of foreclosure if Toledo had just seen a run-up in house prices. It is not surprising to see a high rate of foreclosures in a city where prices have not risen much in recent years.

This article includes other comments about the economy that are misleading or inaccurate. For example, it asserts that the average manufacturing worker in Toledo "earns" $68,000 a year. This figure seems implausible, since it is considerably higher than even the straight-time year-round pay of autoworkers at the domestic manufacturers represented by the UAW. (At $28 an hour, these workers would earn roughly $56,000 a year before over-time is included.) Most likely the $68,000 figure refers to total compensation which includes pension payments, health care benefits, and the employers' side of the payroll tax. It is misleading to compare this figure to earnings.

The article also asserts in reference to trade that "short of erecting trade barriers that many economists and business leaders say would be self-defeating, no one seems to know what to do." Actually, most economists agree that the dollar must fall (as it is currently doing) to bring the trade deficit down to a sustainable level. A lower dollar protects domestic manufacturing in the same way that tariff barriers do. For example, if the dollar falls by 20 percent against the currencies of our trading partners, it has roughly the same impact as if we imposed a 20 percent tariff on all imports and subsidized all our exports with a 20 percent tax credit.

It is remarkable that the article did not include a discussion of the value of the dollar. The rise in the dollar in the late 90s played a central role in the lose of manufacturing jobs in Toledo and elsewhere in the United States. The dollar's decline presents the best prospect for restoring health to the manufacturing sector.

--Dean Baker

This piece does a nice job of dealing with the importance of a mandate that people be insured, the main difference between the two plans. (It could use more discussion of the importance of a good public plan. I'll be looking for that one in a future piece.)

--Dean Baker

A NYT article discussed the impact of the temporary increase of the ceilings for the mortgages that Fannie Mae and Freddie Mac can purchase in areas with high-priced homes. Until the end of the year, the new ceiling in these areas will be as high as $729,750.

The article reports that this should help limit the rate of price decline in some areas in high-priced homes. It is actually not clear how much effect the change will have for two reasons. First, the law as it is written is time-limited. If the ability of these institutions really would in principle have a large effect on the price, then home buyers should be reluctant to pay much more for a home if they believe that the higher caps are temporary. These buyers would realize that they would be selling their home in an environment in which it will be above the caps in place at the time, and therefore would command a lower price. In that case, potential home buyers would adjust their offers accordingly.

The second reason that this temporary increase in the ceiling may not have much effect on prices is that both Fannie Mae and Freddie Mac have a limited amount of capital. If they spend more money buying high-priced mortgages, then they will have less money to buy lower priced houses. This will be especially true if Fannie and Freddie rush to buy mortgages in markets with rapidly falling house prices. In this case, they would see high default rates on the new mortgages and could soon be seriously constrained in their ability to buy up new mortgages.

--Dean Baker

At least they didn't bother to mention it in this article on bailout plans that would have the government guarantee or buy up bad mortgage debt. Given that house prices are now falling at their fastest rate since the Great Depression, it might have been worth considering this possibility.

--Dean Baker

I know that no one believed this was possible two years ago, but since prices have been falling across most of the country, and quite rapidly in many markets, reporters might have come to realize that it is in fact possible for house prices to fall. But, apparently falling house prices is still not a concept that many reporters can understand.

If they did realize that house prices could fall then they would be discussing this possibility in the context of the Office of Thrift Supervision's proposal to have the federal government buy up bad mortgages, paying the current market price of the homes. The plan would give the current holders of the mortgage a certificate equal to the difference between the money outstanding on the mortgage and the current value of the home. The reports then tell us that if the house price does not rise back to the amount owed on the mortgage by the time it is sold, then the mortgage holder will eat the loss.

That's fine, but what happens if house prices fall further? I didn't hear this scenario mentioned in Market Place's discussion of the proposal on the radio this morning, or indeed in any other reporting on this proposal.

Those of us who were not surprised by the collapse of the housing bubble fully expect that house prices in most of the country will continue to fall. This means that the government is likely to take large write-downs on mortgages that it purchases based on current market prices. If we put up $90 billion to buy up loans ( a number suggested in a WSJ article earlier this week), the losses could easily be in the $20 billion to $30 billion range.

These losses would be equal to 0.6 percent to 0.9 percent of the budget. This is not a devastating cost, but it's a thousand times as large as many of the earmarks that prompt front page outrage at the Washington Post. Who benefits from this money? Oh yeah, bank CEOs and shareholders would be the main beneficiaries.

--Dean Baker

The Post reports on a plan from the Office of Thrift Supervision [OTS] (one of the regulatory agencies that didn't see the housing bubble) which would have the government buy up millions of underwater mortgages. [Correction: The government would not actually buy the mortgages. Under this plan, the Federal Housing Authority would guarantee the mortgages at the value at which they are purchased by other financial institutions. The potential financial cost to the government is the same, although including private intermediaries undoubtedly adds substantial transactions costs to the scenario in which the government buys the mortgages directly.] The deal is that the government would pay the banks for their underwater mortgages, based on the current market value of the home, and then issue them a certificate for the difference between the current market value and the outstanding amount on the mortgage.

When the home is sold, if the price is high enough, the government gets back what it paid for the mortgage, the bank will recover the value of the certificate, and homeowner will pocket any additional money. Then the Post tells us that "If there's not enough profit to pay off the certificate, the original lender would take a loss."

That is only part of the story. What if there is not enough money to pay off the mortgage held by the government? Guess what? In that case the taxpayers swallow the loss. Guess what? The Post never discussed this possibility.

In a collapsing housing bubble, like the one we are presently seeing, it is very likely that the price of houses sold in two or three years will be considerably lower than prices today. That means that the government could be eating tens of billions of dollars of losses under the OTS plan.

It is incredible that the Post never even discussed this possibility. Can the Post still have reporters who don't know about the housing bubble? Does the Post have reporters who only talk to economists and analysts who still don't know about the housing bubble?

--Dean Baker

The is the question that the NYT should have asked in its discussion of the prospect of stagflation: rising inflation coupled with slow economic growth. The reason that lower Fed rates may not promote growth is that the recent cuts in short-term rates have actually been associated with higher long-term rates. The deal is that investors seem to believe that lower short-term rates will led to a falling dollar and higher inflation, and therefore are demanding higher long-term interests. This means that when the Fed cuts short-term rates it is actually raising rates on mortgages, car loans, and other interest rates that important determinants of economic growth.

This makes the Fed's life far more complicated. It is not clear how it can best promote growth just now. One item is unambiguous: a growing spread between long-term interest rates and short-term rates helps out the banks. Banks borrow money short-term and lend long-term. That means that Fed rate cuts will be good for the banks, even if they don't do much to help the economy.

--Dean Baker

In an article reporting on President Bush's trip to Africa, the NYT told readers that Bush intends to spend $350 million over the next 5 years for treating several chronic diseases that afflict people in Sub-Saharan Africa.

It would have been helpful to readers to put this spending in a context in which it could be more easily understand. The proposal comes to $70 million a year, which is equal to approximately 20 dollars of every million dollars of spending. Alternatively, this spending comes to approximately 23 cents per year for every person in the United States.

--Dean Baker

The Wall Street Journal reported on a new study showing that the price of the 50 top-selling drugs rose an average of 7.8 percent last year. The article discusses efforts to contain drug costs for Medicare beneficiaries by having Medicare negotiate prices directly with the industry.

While it presents the argument of an analyst saying that Medicare could negotiate sharply lower drug prices, it also presents the assertion of a Bush administration official that Medicare would be unable to negotiate lower prices than the private insurers operating within the Medicare program. It would have been helpful to point out that the Veterans Administration gets prices that average 40 percent less than the prices paid by by the insurers operating within Medicare. There is no obvious reason that Medicare, which represents a much larger share of the market than the VA, would not be able to negotiate prices comparable to the prices negotiated by the VA. In fact, Medicare could even arrange to have the VA negotiate prices on its behalf.

--Dean Baker

The NYT told readers today that "ever since Mr. Clinton’s election as president in 1992, the Democratic Party has been divided over how to balance economic policy between initiatives intended to promote economic growth and those intended to help workers."

This one should have brought a big "huh" from careful readers. While it is possible to design policies that might increase growth but hurt most workers, for example trade agreements that put them into direct competition with low paid workers in the developing world, it is possible to design policies that both increase growth and help workers.

The most obvious example of such a policy was the decision by Alan Greenspan in 1995 to allow the unemployment rate to fall below the conventional estimates of the non-accelerating inflation of unemployment (NAIRU). The NAIRU has been estimated to be in the range of 5.6 percent to 6.4 percent. Allowing the unemployment rate to fall below this level both gave millions of workers jobs, and also allowed wages to grow for the first time since the sixties.

It is also possible to help workers and increase growth by reducing barriers to trade in highly paid professional services, like physicians and lawyers services. In addition, developing more efficient mechanisms to finance pharmaceutical drug research would also hasten growth and aid workers. In short, there is no necessary trade-off between policies that benefit typical workers and policies that promote growth as the NYT article implied.

--Dean Baker

In an article for the born yesterday crowd, the WSJ reported without comment a statement from Credit Suisse explaining that "first-quarter earnings will be reduced by $1 billion from mismarkings and pricing errors by traders which led to the reduction in the value of some asset-backed securities by $2.85 billion."

Typically we would expect that errors are randomly distributed. Roughly half of the errors should lead to understatements of profit and half should lead to overstatements. When the errors all come out on one side in a very big way, we might suspect that the problem is something other than "errors."

--Dean Baker

The Washington Post editorial board is on the war path once again, attacking Barack Obama for suggesting that trade deals like NAFTA have been harmful to the nation's workers. Of course the fact that the pattern of trade in recent years has had a negative impact on the bulk of the U.S. workforce is not really disputed these days by serious economists. The predicted result of exposing less-educated (non-college educated) workers to competition with low-paid workers in the developing world is an upward redistribution of income to the more highly educated workers (e.g. doctors, lawyers, editorial writers) who are still largely protected from such competition.

The dispute among economists at this point is the extent to which trade has been responsible for the upward redistribution of recent decades, not whether it has been a factor. It is also probably true that the high dollar policy initiated in the Clinton-Rubin years was far more important in undermining the wages of less-educated workers than trade deals like NAFTA.

But the Post will tolerate no questioning of its policy of selective protectionism, which it insists on calling "free trade" to make it sound palatable to those harmed by it. The Post has never printed a news story, oped, or editorial that discussed the economic costs of the protections that restrict foreign competition in highly paid services like those provided by doctors, lawyers, accountants, and economists. Yet, the models that show protection in items like clothes and steel are bad are the exact same models that would show that protection for doctors is bad. The main differences are that the cost of protection for doctors is much greater and this protection shifts income upward.

The Post has also never printed a news story, oped, or editorial that discussed the economic costs of the strengthening of patent and copyright protections which has been an important part of recent trade deals. In addition to the direct economic costs, the higher prices for drugs in developing countries that result from stronger patent protection also can impose an enormous cost in lives. But these protections also shift income upward, so they escape the scrutiny of the Post's editorial board.

It is unfortunate that the Post editorial page still has any credibility in discussing trade. After all, when arguing the virtues of NAFTA this crew told readers that Mexico's GDP "has more than quadrupled since 1987." According to the IMF, the correct figure is 84.0 percent. In short, these folks either just make up numbers to support their policy positions or are so utterly lost on economic issues that they could not possibly distinguish a successful policy from a disaster. Either way, a Washington Post editorial has no place in a serious discussion of trade policy.

--Dean Baker

I'm tempted to just lift my blog post from last month, but I'll resist the temptation to be lazy. The basic story is of course the same, there was a sharp jump in import prices again in January. Imports prices overall rose by 1.7 percent, with non-fuel imports rising by 0.7 percent. Import prices are now rising almost everywhere and across the board. Prices of items imported from the EU rose by 1.1 percent last month, from Latin America by 3.6 percent, and from China by 0.8 percent. Prices of goods imported from China have been rising at a 4.4 percent annual rate over the last three months.

This matters because higher import prices will get passed on in higher domestic prices, in other words, inflation is likely to rise. This will make the Fed's choices harder in the months ahead. Efforts to boost the economy with lower interest rates will also feed inflation by lowering the value of the dollar. It was inevitable that the dollar would eventually fall and put the Fed in this situation -- the huge trade deficits of recent years could not be sustained forever -- but this may be a bad time for this source of inflationary pressure to appear.

In any case, this was a big release that deserved much more attention than it was generally given, although the WSJ gets credit for taking notice.

--Dean Baker

Robert Pear has written many good pieces on health care policy at the NYT over the years, but he has a disturbing tendency to attribute grand ideological motives to politicians when their behavior can just as easily be explained by crass political calculations. He did this yet again when he described a proposal by President Bush for a series of cuts in the Medicare program as "advancing the Republican vision of a larger private role in the health care system."

Do we really think that there is a group of Republican political philosophers (presumably chaired by President Bush) that contemplates the ideal health care system? Perhaps something like that exists, but it seems at least as plausible that Republican elected officials know that they have gotten lots of campaign contributions in recent years from the pharmaceutical and insurance industries and that they are expected to work for their money, hence the interest in expanding the private sector's role in Medicare.

The NYT doesn't have to tell its readers every day that the Republicans are stooges for these powerful lobbies, but it also should not be in the business of tell readers that they are not stooges, but rather are acting out of ideological conviction. Of course we don't know their true motives, so let's just leave the speculation out of news articles.

--Dean Baker

The budget deficit has been somewhat larger in recent years than it should have been but very few economists see this as a crisis. Over the long-term, the budget is projected to face serious problems but, as the Congressional Budget Office has pointed out, this is primarily due to the projected increase in health care costs.

Since the government pays for approximately half of national health care costs through Medicare, Medicaid and other public sector programs, if health care costs follow the projected path, then it will lead to major fiscal problems for the federal government. Of course, if health care costs rise as projected, the increase will also have a devastating impact on the private sector. The moral of the story to any serious analyst is that the United States must get its health care costs under control; something that every other wealthy country has managed to do.

Unfortunately, there is a whole army of deficit fear mongers who have tried to use the projected explosion of health care costs as a pretext for cutting important government programs like Social Security. One of the generals in this army is Peter Peterson, an incredibly rich investment banker who has garnered tens of millions of dollars of tax breaks that allowed him to pay a lower tax rate on his earnings than school teachers and firefighters pay on their earnings. Peterson was most recently in the public eye for lobbying Congress to protect the "fund manager tax subsidy."

However when he is not lobbying Congress to protect the tax break that has allowed him and other very wealthy people to evade billions of dollars of taxes, Mr. Peterson is lobbying Congress to cut Social Security. He has repeatedly told audiences that "I don't need my Social Security" (after getting hundreds of millions in tax breaks, who would?), which he then uses as a justification for cutting Social Security benefits for tens of millions of workers who have paid for them.

Mr. Peterson started the Concord Coalition, which has cutting Social Security as a top agenda item. He is also starting a new foundation devoted to this purpose. His track record earned him a solo appearance on Bill Moyers Journal a few years back, in which he got the opportunity to go his tirade against Social Security and other government programs without any correction from experts who understood the issues. Moyers again opened his show tonight to deficit fear mongers, again without any rebuttals from experts with knowledge of the issues.

Just to note a few of the misleading comments from the piece:

1) it pointed out that we ran deficits in 31 of the last 35 years and implied that this is a serious problem. In fact, the country can run deficits every single year forever. What matters is the size of the deficits and whether the debt is rising relative to GDP. The U>S. ran deficits in almost every year from 1945 to 1980, yet its ratio of debt to GDP fell from 117.5 percent to 33.5 percent. We could have stayed on this track indefinitely.

2) The piece made a big point of telling viewers that the debt is now $9 trillion "with a 't'." It is likely that most viewers know how to spell "trillion." This is a silly scare tactic that has no place in a serious discussion. The relevant question is the size of the deficit relative to GDP, which is now almost $15 trillion, also with a "t."

3) The piece said that if we don't fix our budget situation then the government may not have enough money to pay Social Security benefits. Actually Social Security is supported by a designated tax that is projected by the Congressional Budget Office to keep the program fully funded until 2046 with no changes whatsoever. The idea of not paying Social Security benefits is presumably a favorite of the advocates that Moyers put on his show. They could have said, with at least as much accuracy, that the government would not have the money to repay the bonds held by investors. If the country ever does face a genuine fiscal crisis, this is likely to be at least as popular a fix to its problems. Of course, the wealthy would prefer a default on Social Security to a default on government bonds.

Presumably Moyers is genuinely confused about the nature and causes of the country's deficit problems, but this is no reason to have such unbalanced shows. If he really believed that Peterson and his fellow deficit fear mongers are right, then they should have the opportunity to prove their case in open debate. After all, this is supposed to be public TV, not the Investment Bankers' Nightly News Hour.

--Dean Baker

An article in the NYT discusses GM's plan to replace its current workforce with new hires. According to the article, the average hourly wage of the current workforce is $28 an hour, the new hires would get $14 an hour. The NYT then tells us that: "Including benefits and retiree health care costs, each worker who leaves under the buyout program and is replaced by someone on the lower pay scale would save G.M. about $48 an hour, or nearly $100,000 a year."

Okay, does anyone think that the health care and pension benefits of an autoworker average $34 an hour? That comes to $68,000 per year, for a 2000 hour work year. In fact, since new workers would still get some wage and pension benefits, the cost of these benefits for current workers would have to be even greater than $68,000.

Obviously, the NYT has committed the sin (encouraged by the auto companies) of averaging its liabilities for retired workers over the hours worked by the current workforce. This is a very misleading figure because GM is obligated to make these payments regardless of how many workers it currently employs. It is also misleading because the current workers do not see this money, so it is not their compensation.

--Dean Baker

By my count, the term "free trade" made 12 appearances in a front page business section article discussing political opposition to new trade deals. Of course the article is not referring to "free trade" (many of these deals increase protectionism in the form of tighter copyright and patent protection), so it could have been more accurate and saved space by just using the word "trade."

The article also gets the key issues wrong. The main impact of the trade liberalization from recent trade deals has been on wages, not jobs. The structure of the selective protectionism pursued in U.S. trade policy, in which highly educated professionals (e.g. doctors and lawyers) are largely protected from international competition, while less-educated workers are deliberately placed in competition with low-paid workers in the developing world, lowers the wages of less-educated (non-college educated) workers.

That is the main reason that most of the country has opposed recent trade deals. The Post should at least be able to accurately present the main predictions of economics on trade.

--Dean Baker

The Post examines the economic positions of Senators Clinton and Obama in a front page article today. At one point it notes that both candidates want to eliminate the special tax break that allows fund managers to pay a tax rate of just 15 percent on most of their compensation. It reports that they get this tax break on "millions of dollars of income."

Actually, they get this tax break on billions of dollars of income, not millions. In any given year, many individual fund managers earn more than $100 million (sometimes more than $1 billion) that qualifies for this special tax break. CBO estimated that the elimination of this tax break could raise several billion in additional tax revenue each year (between 0.1 percent and 0.2 percent of total revenue).

--Dean Baker

The NYT reported on a measure that would extend copyright protection in Europe from 50 years to 90 years. While it reported comments from the beneficiaries of this protectionism, it did not include any comments from opponents or estimates from economists of the cost to consumers or its impact on economic growth.

--Dean Baker

The Washington Post took its crusade against earmarks to the front page yesterday, highlighting the earmarks supported by the leading presidential candidates. Obviously the Washington Post really really doesn't like earmarks, but is there any reason that the general public should share its obsessions?

The article never puts the size of the earmarks discussed into any context, thereby leading readers to wrongly believe that congressional earmarks are a major factor in the federal budget and the deficit. For example, it could have described the earmarks supported by Obama as 0.003 percent of the federal budget or alternatively their cost is 30 cents per person in tax dollars per year.

Another useful metric is the cost of the wars in Iraq and Afghanistan. The earmarks supported by Senator Obama are equal to 0.05 percent of the cost of these wars. The money committed to these earmarks would fund the wars for about 5 hours.

--Dean Baker

The Washington Post tells us that new measures to counteract the recession have become necessary "as the scale of the crisis has become more apparent." Actually, the scale of the crisis was apparent long ago to any competent economist.

The collapse of an $8 trillion housing bubble has an enormous impact on the economy. The potential lost wealth comes to $110,000 for every homeowner. It is equal to almost 60 percent of GDP. The real news is that so many people involved in designing economic policy apparently didn't notice this bubble. The Post's reporting on the economy would be improved if it did not rely exclusively on economists who somehow managed not to see this enormous bubble.

--Dean Baker

Apparently not. In an article discussing a proposal to have the Federal Housing Authority buy up tens of billions of dollars worth of bad subprime loans, the WSJ did not include the views of a single person who thought this was a bad idea. Isn't there anyone in the WSJ's Rolodex who thinks that raising taxes on nurses and firefighters to give money to millionaire and billionaire bankers is not a good idea?

--Dean Baker

The Wall Street Journal reported that "a comforting reading on consumer spending eased some worry about the possibility of a recession and inspired a shopping spree in tech shares." USA Today's headline told readers that "surprise gain in retail sales drives stocks higher."

What was the good news that sent the markets soaring? The Commerce Department reported that retail sales rose by 0.3 percent from December to January. Well, this is not exactly great, but it was better than expected. But those who care about details would have noticed that higher food and gasoline sales accounted for almost 80 percent of even this modest growth. Pulling out spending in these two areas (which was most likely driven by higher prices, not increased demand), retail sales rose by a grand total of 0.07 percent in December, or 0.8 percent on annual basis.

Still cheering? Let's add in the December numbers. Over the last two months, retail sales, excluding food and beverages and gasoline, are down by 0.6 percent. This is a 3.6 percent annual rate of decline. (Of course this is in nominal dollars, these numbers are not adjusted for inflation.)

I wonder what is seen as bad news on Wall Street.

--Dean Baker

Who would have thought?

At one point the article notes the rapid rise in delinquency and foreclosure rates among prime mortgages, noting that almost 4 percent of all prime loans were in one or the other category last September. It is worth noting that the delinquency and foreclosure rates are far higher among recently issued prime mortgages, with some series showing rates of close to 10 percent for mortgages issued in 2007. The overall rate is held down by the large number of old prime mortgages that have been largely paid off. In many ways, the recent prime loans are the better comparison with the subprime market, because there are relatively few old subprime loans in existence.

--Dean Baker

Every year or so, the NYT feels obligated to print a piece of nonsense masquerading as economics from W. Michael Cox, the senior Vice-President of the Dallas Federal Reserve Bank. The first item in this series that I recall was a piece that argued that there was great mobility in the United States because those in the bottom quintile at any point in time were likely to move up to higher quintiles, including even the top quintile, in future years.

This looked very impressive until you found our that Cox used all adults in his sample, not just prime age people, as serious economists would do. This means that the law students and medical students, who are likely to be low income this year, are the basis for much of Cox's upward mobility story, since they will have relatively high incomes when they are lawyers and doctors.

This year's nonsense concerns consumption. Cox tells us that there is much less inequality in consumption than income, so therefore we should not really be concerned about inequality. I won't go through all the problems in Cox's analysis (there are many). I will just point out that the data set that he uses, the consumer expenditure survey (CEX) is not very well-suited for this sort of analysis.

The CEX misses a great deal of consumption. This can readily be seen by simply looking at the aggregate statistics. The average after-tax income reported in the survey is $58,101. Average consumption expenditures are $48,398. This implies a savings rate of 16.7 percent. The National Income and Product Accounts data show a savings rate of less than 1 percent. This suggests that the CEX is missing a great deal of consumer expenditures, which makes this sort of analysis very dubious.

You may wonder why the NYT would print columns from someone with such a consistent reputation for getting things wrong. I guess that is the price that we pay for having a regular column from Paul Krugman. Too bad they can't find a conservative who could at least make an honest argument.

--Dean Baker

These are not good days for the dominant "who could have known?" school of economics. First, they missed the housing bubble. Since it has started to unravel, they have continually understated the size of the fallout. Only now are most economists beginning to acknowledge that the economy is virtually certain to be thrown into a recession from the collapse.

Fortunately, the media do not hold economists responsible for their failures. The NYT gives us yet another example of non-accountability. At the very end of an article warning that the impact of the housing collapse is likely to be substantial, the NYT reports "The German finance minister, Peer Steinbrück, said members agreed that write-offs at banks related to subprime mortgages could reach $400 billion, about four times estimates just a couple of months ago."

Being off by 300 percent might be considered a serious problem in other lines of work, but apparently not for economists. For the record, I expect total losses for the financial sector to approach $1 trillion.

--Dean Baker

President Bush boasted yesterday that his economic policies had led to a record 52 months of consecutive job growth. The WSJ dutifully reported the boast. It didn't bother to point out that President Bush has the worst record on job growth of any post-war president, with the most recent jobs report pushing the rate of job growth in his administration below the dismal record under his dad.

The economy creates jobs. It's just like the sun rising. Unfortunately, people are more familiar with the pattern of sun rises than they are with economic trends, that is why reporters are supposed to explain to readers that boasts like the one made by President Bush are ridiculous. I have pasted below the rate of annual job growth under the presidents since 1960:

Kennedy-Johnson -- 3.3%
Nixon-Ford -- 1.9%
Carter -- 3.0%
Reagan -- 2.1%
Bush I -- 0.6%
Clinton -- 2.4%
Bush II --0.6%

(Source: Bureau of Labor Statistics.)

If reporters actually did some analysis and pointed out the reality behind such nonsense boasts, then politicians like President Bush would not make them.

--Dean Baker

In an article comparing the collapse of the U.S. housing bubble to the collapse of the Japanese stock and housing bubbles in 1990, the NYT notes that house prices have fallen by 10 percent and "most economists expect a further decline of 10 to 15 percent."

It is worth reminding readers that "most economists" completely missed the housing bubble and never expected prices to fall at all. Unless they have vastly improved their understanding of the housing market in the last year, their predictions about house prices are probably not worth very much.

The economists who did actually recognize the housing bubble expect that most of the run-up in house prices relative to trend levels will be reversed in the next couple of years. This implies a real price decline of about 40 percent, or close to 30 percent in nominal terms. With prices having dropped close to 10 percent thus far, we can look to a further nominal decline in house prices of more than 20 percent.

When making comparisons to Japan, the article never noted that Japan had a huge current account surplus in 1990, while the United States has a huge deficit. This deficit will likely be corrected as the bubble deflates, as the dollar continues to decline. However, this will lead to rising import prices, which means rising inflation. The Fed will then be forced to make a choice between trying to keep inflation down by keeping the dollar up with high interest rates, or stimulating the economy with lower interest rates and accepting higher rates of inflation. Inflation was one problem that Japan did not face in its effort to recover from collapsed financial bubbles.

--Dean Baker

Some folks may have noticed that the stimulus package raises the limit on the size of the mortgages that can be insured by Fannie Mae and Freddie Mac, the two huge government created mortgage agencies, from $417,000 to $730,000. This is supposed to help the housing market in high priced markets, where the current limit may not even be sufficient to purchase the median priced house.

There has been very little analysis of the impact of this measure in the media and all of the commentary has come from economists who somehow managed to miss the housing bubble. If the media had relied on a broader array of sources, they would have told the public that the move is likely to hasten the collapse of Fannie and Freddie.

With house prices dropping at a 16 percent annual rate nationwide, millions of homeowners with prime conformable mortgages (the type that are in Fannie and Freddie's mortgage pools), owe more than the value of their homes. For example, in San Diego, many homeowners may owe $400,000 on a house now worth $300,000.

A high percentage of these homeowners will opt to walk away from such homes, in effect making themselves $100,000 and leading to huge losses for the mortgage holders. This process is already occurring, as the foreclosure rate on prime mortgages is rising rapidly and reaching levels seen in the subprime market just a few years ago.

The capital base of both Fannie and Freddie is very limited compared to the amount of debt that they insure. As the foreclosure rate continues to rise, they will both be forced to take large write-offs and will soon be pressing up against the limit of their capital base. Raising the cap on conformable mortgages will hasten the date when this will occur.

Look for analysis in the media from surprised economists when Congress debates the bailouts of Fannie and Freddie.

[note: Frank Nothaft, Freddie Mac's chief economist, was one of the strong advocates of the view that nationwide house prices never fall.]

addendum: At least one reporter did bother to examine the solvency of Fannie and Freddie.

--Dean Baker

Paul Krugman posted a blognote responding to my earlier comment criticizing his column on Obama and mandates. I posted this response on his blog, which I have pasted below.

I would summarize our difference on this issue as being whether an actual mandate is the only and best mechanism to prevent free-riding on community rated health insurance (everyone pays the same fee, regardless of their health). We don't disagree that healthy people would have the temptation to engage in such free-riding (wait until you get sick to sign up) without some enforcement mechanism:

I appreciate Paul’s response. Let’s quickly try to sort out some issues. First, I completely agree that Obama’s criticisms of the Clinton proposal for including mandates were both bad policy and really bad politics. We absolutely need a mandate-like mechanism to prevent freeloading.

I am also entirely willing to believe that Obama and his staff are doing patchwork planning to get around the fact that he did not include a mandate in his plan.

Having said this, the question to my mind is whether there is an alternative route of automatic enrollment plus late enrollment penalties that can do the work of a mandate, and possibly be more salable politically.
Paul’s argues that it won’t fly, I’m not convinced.

First, if we have a well-designed auto-enrollment mechanism, it should take care of the inertia problem. Making it well-designed could prove problematic, but if we get the mechanics right, the only people who remain uninsured are those who deliberately opt out of a plan.

Who would make the decision to opt out? Presumably not low and moderate income people. These people are looking at substantial subsidies under the Obama plan. If they do the arithmetic, they are likely to find that they come out much better taking the insurance, even if they are in relatively good health, especially if they have kids. Furthermore, since their enrollment would be heavily subsidized, the plan doesn’t lose much money if they opt to take their chances. This is bad from the standpoint of getting everyone covered, but it will not matter much for the finances of the program.

Anyhow, presumably most low and moderate income people either can’t be bothered and accept the default enrollment, or realize that it makes more sense to be enrolled, so they are in the system. The more likely gamers are relatively well-to-do folks in reasonably good health, especially those without children. Suppose these people try to game the system and then develop a chronic health problem a few years down the road.
Paul thinks that we would not be able practically or politically to hit them with late enrollment penalties. I think that we could. These are higher income people who could afford to pay more for insurance. Even if their health condition affected their income, this group is likely to have some assets: a house, a car, a 401(k). The late penalty could be paid from these assets.

Would it be politically viable to seize assets from sick people? I think that it could be. After all, these would be folks who consciously made a decision to opt out of insurance – they were trying to game the system (for the record, we already have late enrollment penalties for the Medicare drug plan). Ideally, the prospect of ending up in this situation would put the fear of god in enough people so that gaming would be rare, but we really can’t know this in advance.

The reality is that both a late enrollment penalty and a mandate pose raise some unpleasant scenarios. (What do we do to people who don’t comply with the mandate?) I don’t know which one is better, but I’m not prepared to condemn Obama for trying the former route.

--Dean Baker

That wasn't the headline of the WSJ article, but perhaps it should have been. I've had plenty of complaints about Bernanke's conduct myself, but the reality is that Bernanke took over the command of the Titanic just before it reached the iceberg. There was no way to steer clear at the point he took the helm, although he could have tried to lesson the damage (e.g. crack down on the abuses in the mortgage market and start yelling about the bubble from day 1).

Anyhow, there is something offensive about seeing these economists, every one of whom somehow managed to overlook the growth of an $8 trillion housing bubble, criticize Bernanke. What would they have done differently? In the interest of full disclosure, reporters should point out that their "experts" missed the housing bubble. Also, those who have been around long enough missed the stock bubble as well.

--Dean Baker

That is not quite what the news reports said, but it's close. Several news accounts (e.g. the WSJ and AP) noted the 1.8 percent rate of productivity growth in the fourth quarter, and pronounced it as good news.

The growth rate was in fact stronger than the 0.0 - 0.5 percent range that most economists had expected. However, the problem is that the faster than expected rate of productivity growth is attributable to fact that hours worked fell at a 1.5 percent annual rate for the quarter. This is the second consecutive reported drop in quarterly hours. Since 1970, we have only seen two consecutive quarters of declining hours when the economy was entering or leaving a recession.

--Dean Baker

There aren't many people who would take that idea very seriously just now, at least not many people other than those who control the NYT oped page. The page published a column by Howard Millstein the "chairman and chief executive of New York Private Bank and Trust, which owns a significant share of stock in The New York Times Company," suggesting that the federal government should guarantee the principle and interest on subprime loans, for 15 years in exchange for banks leaving the teaser rates in effect.

This bails out banks on many loans that are now virtually worthless. In many cases, the loans issued by banks were fraudulent. In these cases, the extended teaser rate is a meaningless concession. The taxpayers are just handing money to Merrill Lynch and Citigroup.

The extended teaser rate also will not help many homeowners who still can't make ends meet paying the mortgage on a home bought at a bubble inflated price. It also does nothing to help strapped homeowners who were smart enough to take out fixed rate mortgages.

There are much better ways to target relief to moderate income homeowners without giving a massive bailout to the banks.

--Dean Baker

Latest word is the protectionists, led by Monsanto, want to make it illegal for people to buy ice cream from milk that was produced by cows not given growth hormones. According to an AP article, Monsanto has been lobbying state legislators to prohibit Ben and Jerry's and other ice cream makers from labeling their product as free of milk from cows that were given growth hormones.

Monsanto claims that such labeling implies that growth hormones are harmful and that there is no scientific evidence to support that view. This claim should have been sufficient to draw ridicule from expert economists mocking Monsanto's efforts to use the power of the government to restrict consumer choice in order to increase their profits. However, the derision from economists was absent from the article. What happened?

The basic point here is very simple. It matters not one iota what the science shows about the health impact of growth hormones. (Are Nike shoes better because Michael Jordon endorses them? Has anyone proposed outlawing celebrity product endorsements?) If people don't want to buy ice cream that comes from cows fed with growth hormones, then they should have that option. Any restriction that prevents people from being able to buy hormone free ice cream imposes costs on consumers and the economy -- that is economics 101.

--Dean Baker

NPR's anchors told listeners to Morning Edition that the deficit is "400 billion dollars, that's 400 billion dollars(their emphasis)." Since very few of NPR's listeners have a clear sense of the size of the economy and prior deficits, they cannot attach any real meaning to this statement other than the fact that the anchors (or their news writers) apparently think the deficit is too big.

There is nothing wrong with presenting opinions on NPR, but these should be clearly separated from the news segments.

--Dean Baker

There seems to be a new trend in economic reporting: publish accompanying charts that contradict the main point of your article. The WSJ did this last week when it whined about the growth of Social Security, Medicare and Medicaid in an article, but was polite enough to include a chart showing that SS growth is actually projected to be relatively modest, while the growth of Medicare and Medicaid is projected to go through the roof.

The NYT followed the same practice today in talking about the "record" deficit of $413 billion in 2004, which may be surpassed by the $410 billion deficit now projected for the current year. I would be fuming that the deficit in 2004 was considerably smaller than the records hit in the 80s, measured as a share of GDP, even if we included the money borrowed from the SS trust fund. I would also point out that the deficit projected for 2009 is considerably smaller as a share of GDP than the 2004 deficit, because nominal GDP has grown by almost 30 percent over this period. (Although the money borrowed from SS has also increased, so that difference in the "on-budget" deficits, measured as a share of GDP, is not as large.)

But, you don't need BTP to make these points, the NYT was good enough to show the deficit measured as a share of GDP (not including the money borrowed from SS) in a chart accompanying the article. Those who understand the charts may wonder what the article is talking about, but at least the information is there.

--Dean Baker

David Wessel, a reporter for the WSJ, was interviewed this morning. He explained the logic of the bailout of the bond insurers. At one point he told us that the default rate on mortgages is far higher than "was expected" just a few months ago.

"Was expected?" This is a classic Washington evasion of responsibility, as in "mistakes were made." There were people who had these expectations. And, these people obviously were not competent to do the jobs that they were doing at the time and probably are still doing.

It was easy to recognize the housing bubble. The data clearly showed that house prices had diverged sharply from long-run trends. There was no one who had any explanation for this divergence that passed the laugh test. In fact, to justify this divergence some prominent economists even made up utter nonsense that clearly didn't pass the laugh test.

The people who made decisions at major financial institutions about the credit worthiness of mortgages issued in the middle of a housing bubble are clearly not competent to do their jobs. If dishwashers or custodians displayed the same level of incompetence they would be immediately fired. Instead, in large part due to inept reporting, most of the people responsible for the key decisions that kept the bubble growing, and created the basis for the current crisis, are likely to keep their six and seven figure salaries.

--Dean Baker

The NYT notes the current deficit problems and asks "How, for example, will the next president rein in the cost of retirement and health programs?" The better question is why should the next president rein in the cost of retirement programs?

The Congressional Budget Office's projections show that the main government retirement program will be fully funded for almost thirty years after the latest date that the next president can leave office, so why should the next president be reining in the cost, because the NYT wants it to?

It would be equally sensible to ask how will the next president rein in the cost of interest payments on the national debt. The next president could have a partial default on the national debt to accomplish this task. Since workers have already paid the Social Security taxes to fund their retirement far into the future, the NYT implicitly wants the federal government to default on the bonds held by the Social Security trust fund (the implication of "reining in the cost" of Social Security). If the NYT wants default on these bonds to be on the national agenda, then there is no obvious reason that default on government bonds more generally should not be on the national agenda.

--Dean Baker

It’s not often that I take issue with Paul Krugman’s economics (at least not recently), but he does misrepresent the issues in going after Obama on health insurance mandates.

The simple story is that any effort to establish national health insurance will require some anti-free loader mechanism to prevent gaming. The logic is straightforward. Everyone agrees that we want to get rid of the current practice under which insurers are allowed to charge fees based on people’s health. Under this system, people with serious illnesses either must pay exorbitant fees or are unable to get insurance altogether. (Insurance companies lose money if they insure people with high bills.)

Under a reformed system, we will require a standard fee under which everyone pays the same rate regardless of their health history. However, this creates a situation in which it doesn’t make sense for healthy people to pay for insurance. Why not just deal with minor health related costs out of pocket? You can wait until you get sick and then buy into the system and pay the standard rate.

That works for healthy people, but it would destroy the system because the only people buying insurance would be those with relatively high bills. This means that insurance would be very expensive, which of course encourages more people to play the “wait till I’m sick strategy.” The end result is that the system collapses, because only the very sick would ever find it worthwhile to buy insurance.

One way around this problem is to mandate that everyone buy insurance. Senator Clinton has proposed a mandate as an explicit part of her plan. Senator Obama has attacked Clinton for this mandate (sometimes unfairly). By contrast, he has suggested that we can get near universal enrollment through other mechanisms. Specifically, he has suggested that we can have a system of default enrollment, whereby people are signed up for a plan at their workplace.

People would then have the option to say that they do not want insurance, so they are not being forced to buy it. However, they will then face a late enrollment penalty if they try to play the “healthy person” game. When they do opt to join the system, at some future point, they will have to pay 50 percent more for their insurance, or some comparable penalty for trying to game the system.

A system of default enrollment will ensure that people do not remain uninsured due to inertia. A system of late enrollment penalties will ensure that people don’t try to game the system.

Is the Obama mix as good at reaching universal or near universal insurance as the Clinton mandate? The reality is we don’t know. It will depend on many factors, most importantly the sanctions that are imposed under both systems (i.e. the penalty for not getting insurance with the mandate, and the late enrollment penalty in the Obama system). Krugman is wrong to say that a mandate is necessary. We can get to the same place with Obama’s approach; it really depends on the details.

--Dean Baker

The Washington Post warns readers that the budget deficit for 2009 may rival the "record deficit of $412 billion in 2004." It then says that "administration allies argue that shortfalls of that size now represent a smaller share of the overall economy and are thus more manageable."

Okay, lets' start at the beginning. You don't have to be an "administration ally" to say that a budget deficit of $400 billion matters less in 2009 than a deficit of this size in 2004, you just have to be a believer in arithmetic. The economy will be almost 30 percent larger in 2009 than it was in 2004, which means that the same deficit in nominal terms is 30 percent less important, given the size of the economy.

This adjustment is also necessary in accessing the "record" $412 billion deficit in 2004. This deficit was equal to 3.6 percent of GDP. It is dwarfed by the deficit in 1983, which was equal to 6.0 percent of GDP. In fact, the deficits were larger relative to GDP in all but three years between 1982 and 1993. Even adding in the money borrowed from Social Security, the deficit in 2004 would only come to 4.9 percent of GDP.

The Post has been absolutely obsessed in both its news and editorial pages with the budget deficit. It has almost completely ignored the much larger current account deficit, which has been close to 6 percent of GDP for the last two years. Of course, it also managed to almost completely ignore the housing bubble the collapse of which is now throwing the economy into a recession. The amount of space that a news outlet devotes to an economic topic should bear some relationship to its impact on the economy.

--Dean Baker

Under U.S. law, governments cannot sue for libel. There should be prominent warnings to this effect. Then newspaper readers would realize that articles do not need to apply the same standards of accuracy to reporting on governments or countries as they would to an article on an individual like Bill Gates or a company like Microsoft. If Japan were a U.S. corporation, the Washington Post would be squirming right now to evade a lawsuit.

Continuing its long series of hit pieces on Japan's economy, the Post tells readers about Japan's "long, slow slide." The basis of this slide are two serious confusions/distortions. First, the article confuses currency conversion GDP with purchasing power parity GDP, telling readers that Japan ranked 4th in the world in per capita GDP fifteen years and today ranks 20th.

Economists (unlike the Washington Post) do not use currency conversion measures of per capita GDP when they want to make cross country comparisons of living standards. The reason is that the exchange rates fluctuate wildly and have little direct bearing on living standards. Compared to the euro zone countries, living standards in the United States have fallen by close to 40 percent in the last five years using a currency conversion measure of GDP. This is of course nonsense and the Post has thankfully not run any pieces arguing this case. Purchasing power parity measures of GDP try to control for changes in exchange rates and apply (in principle) a common set of prices for the goods and services produced in each country.

While Japan has been through some tough times in the wake of the collapse of its stock and housing bubbles in 1990, its per capita GDP is now growing more rapidly than the per capita GDP of the United States. According to data from the IMF, over the 15 years from 1992 to 2007, Japan's per capita GDP grew by an average of 1.1 percent annually compared to 1.9 percent in the States. But, if we go back to 1987, taking in some of Japan's pre-crash boom years, both countries showed per capita GDP growth averaging 1.8 percent annually. More importantly, over the last five years, Japan's 2.0 percent annual growth rate somewhat exceeds the 1.8 percent rate in the United States.

It is also worth noting that Japan is running a current account surplus equal to 4.5 percent of GDP, which means that it is building up wealth that it will be able to draw upon in the future. By contrast, the United States is running a current account deficit equal to 5.7 percent of GDP. This is money that it is borrowing from foreigners on which it will have to pay interest in the future.

The other major confusion in the Post article is that it equates slower overall GDP growth with a weak economy. There is no reason for a country to be concerned about weak, or even negative, GDP growth if it is associated with a declining population. A smaller population reduces pressures on land and resources. This can be especially desirable in a crowded country like Japan. A shrinking population will also make it much easier for countries to reduce greenhouse gas emissions. Per capita GDP is what matters in determining the wealth of a country's people, although its political leaders may value overall GDP to enhance their stature in international affairs.

The article also makes a big point about the recent decline in Japan's stock market. While the market's value matters a great deal to those who have a lot of money invested in it, stock markets have about as close a relationship to economic well-being as the quality of the country's national soccer team.

--Dean Baker

The cover story in the latest issue in BusinessWeek there has never been a nationwide decline in house prices of 25 percent, but "some economists are beginning to talk about it."

Actually some economists had been talking about this possibility -- likelihood-- for the last five years. Unfortunately, BusinessWeek, like most major media outlets, chose not to report such views and instead opted to rely on economists who apparently did not understand the dynamics of the housing market.

--Dean Baker

According to the Financial Times, the models that the banks and securitizers use to predict mortgage loan defaults only relied on credit scores. The FT claims that they did not take loan to value ratios into consideration. As a result, they are surprised that homeowners with negative equity are defaulting on their loans.

Could it really be possible that people dealing with tens of billions of dollars in mortgage debt didn't realize that someone would be more likely to default if they owed more than the value of their home? If this is true, it is really incredible. What qualifications do you need to work in the financial industry?

--Dean Baker

The Washington Post has an editorial this morning decrying the fact that millions of people might have been wasting billions of dollars on heart medications that were no more effective than much cheaper alternatives. Its answer is better regulation from the Food and Drug Administration (FDA).

Better regulation by the FDA would be nice, but the underlying problem is the perverse incentives created by government imposed patent monopolies. Since the firms that own the patent, and who stand to earn enormous patent rents, control the testing process, they have enormous incentive to conceal and/or distort research findings to promote their drugs. We can think that the government cops at FDA will be able to effectively police those sharp-minded wizards in the private sector, but my money is on the drug companies -- and thus far the evidence supports my case.

The only way to clean up the drug industry is to take the money out. The testing should be done by independent firms who have no stake in the outcome. All data should be fully public so that researchers can analyze it independently and doctors can make their own assessment of the relative effectiveness of the different drugs available. The testing could be paid for by cutting the payments for drugs purchased through the Medicare drug program to the level paid by the Veterans Administration.

This change provide great benefits to public health as well as the public's pocket books. The Post's editorial board would be looking in this direction if it believed in market incentives instead of government imposed marketing monopolies.

--Dean Baker

In the January jobs report, the Bureau of Labor Statistics (BLS) incorporated its benchmark revision and lowered the number of jobs estimated by 376,000. This revision is based on data from state unemployment insurance (UI) offices, which covers more than 99 percent of payroll employment. The downward revision implies that employment growth had initially been overestimated by approximately 30,000 jobs per month in the year from March 2006 to March 2007.

While the size of this revision was known since September, when BLS released its preliminary estimate, the inclusion of the revision in this month's report should have opened a few eyes. The BLS had been imputing roughly the same number of jobs for new firms not counted in the survey in 2007 as in 2006. This imputation is presumably the source of the overestimate of job growth. If we were imputing too many jobs in 2006, then we must be over-estimating job growth in 2007 by even more, since the economy is growing more slowly. This means that when we get the benchmark revision based on the March 2008 UI data, it is likely to show an even sharper downward revision than the one we just saw.

There is one other noteworthy item that the vigilant reporters writing on the jobs report managed to overlook. The percentage of the workforce employed in manufacturing fell below 10 percent for the first time since we've been keeping the data. The data show that we fell below the 10 percent threshold in October. We didn't know it at the time because BLS had not yet adjusted its employment numbers for its benchmark revision.

Of course, those who get CEPR data bytes already knew all this.

--Dean Baker

The Wall Street Journal did the standard "Social Security, Medicare, and Medicaid" trick to argue for the need to cut Social Security. As BTP readers know, the projected increase in Social Security spending is relatively modest. By contrast, Medicare and Medicaid spending are projected to soar, driven primarily by higher health care costs. This means that anyone seriously concerned about reducing the long-term deficit would focus on fixing the health care system rather than cutting Social Security.

While all the experts cited in the article seem to share the WSJ's desire to see Social Security cut, the WSJ was good enough to include a chart with the article. The chart shows clearly the contrast between the projected explosion in Medicare and Medicaid costs with the modest projected increase in Social Security spending. In effect, the chart contradicts the thrust of the article.

The article gets a few other important items wrong. For example, the article asserts that the Medicare drug benefits "costs almost $80 billion a year." According to the Congressional Budget Office, the benefit will cost $44 billion in the current fiscal year.

Also, when discussing plans to cut Social Security benefits, it would have been appropriate to mention that the Social Security trust fund is projected by the Congressional Budget Office to be fully funded for almost 40 years. Cutting benefits in this context effectively amounts to defaulting on the bonds held by the trust fund. If the government is going to default on bonds designated to fund workers' retirements, then the public may want to consider defaulting on other government bonds as well.

--Dean Baker