Newsweek has an article this week about Thailand's decision to issue compulsory licenses for a number of important drugs. By eliminating patent monopolies on several AIDS drugs, as well as a few other medications, Thailand was able to reduce prices by close to two-thirds.

Naturally, the drug industry is furious over the possibility that their patent monopolies may not be protected. Newsweek apparently shares the drug industry's anger, telling readers that "advocates of free trade see Thailand's move as a big threat."

Actually, any real advocate of free trade, almost by definition, would have to applaud Thailand's action. After all, the Thai government is eliminating a government imposed monopoly and allowing drugs to sell at prices that are much closer to their free market level.

There are arguments for patent protection, patent protection is obviously one possible mechanism for supporting pharmaceutical research, although probably not a very efficient one. But patent protection is a form of protectionism. It is not free trade.

--Dean Baker

Greg Ip has a nice piece reporting on the latest academic research. If first quarter GDP growth comes in around 2.2 percent, which is now the consensus forecast, chalk up another weak quarter for productivity growth.

--Dean Baker

Being a budget reporter at the Washington Post is a full-time job. In principle, its reporters should have the time to verify the truth or falsehood of specific claims about the budget. Washington Post readers mostly have other jobs, they do not have the time to independently verify the budget claims that they read in the paper.

This is why the Post did not do its readers a service when it printed the statement from Rep. Paul D. Ryan, the ranking Republican on the House Budget Committee, that "the numbers are crystal clear, and they tell the truth, ...This budget, the Democratic budget, gives us the largest tax increase in American history."

As best I can tell (I haven't done the homework myself) this assertion is not even close to being true, but in any case it is an assertion that is in principle verifiable -- either the tax increase implied by letting a portion of the Bush tax cuts expire is the biggest tax increase in history or it is not. The reporter at the Washington Post who writes on the budget should be in a position to tell the Post's readers that either Mr. Ryan is correct and we are about to see a really big tax increase or alternatively, that the ranking Republican member of the House Budget Committee is spewing nonsense.

--Dean Baker

Media coverage of trade issues is so badly distorted that many readers will no doubt think that the assertion that "protectionists promote foreign investment" is an oxymoron. After all protectionists are supposed to be xenophobic rubes who want to build walls around the United States.

Of course, the United States and many other countries have often used protectionist measures quite explicitly as way to promote foreign investment. Trade and direct investment are alternative ways to service a market. If it is more difficult to import goods into a country, then foreign firms will be more likely to invest in that country so that they can circumvent the trade barrier.

This is one of the main reasons that Japanese auto manufacturers have been so anxious to build factories in the United States. This point was effectively acknowledged in an NYT article on Korea:

"South Korea’s handicaps are not only cost-based or technological, analysts say.

'Japan has worked assiduously to reduce antagonism in the U.S.A. from industrial sectors.' said Usha Haley, professor of international business and director of the Global Business Center at the University of New Haven.

'For example, Toyota makes most of the cars it sells in the U.S.A. in this country — Korean car companies do not.'"

Earlier this week, the Wall Street Journal quoted former Clinton administration economist Alan Blinder as saying that the Clinton administration basically lied to sell NAFTA, by claiming that it would lead to substantial job gains. This fact should have been hugely embarassing to the media. After all, not one of the reporters at a major media outlet was sufficiently knowledgeable to catch this lie before the fact, and there has not even been a good analysis published after the fact.

It would be nice if the media could get beyond the "free traders" good guys, "protectionists" bad guys story and try to seriously examine what is at issue. The editorializing on this topic should be be confined to the editorial pages.

--Dean Baker

NPR joined the never ending scare campaign this morning, telling listeners that our standard of living will be threatened if we don't get the deficit under control. Of course the whole story, as always, is the projection of exploding health care costs which, if they prove accurate, will sink the economy regardless of what we do with the budget. If health care costs are contained, as they are in every other rich country, then there would be no plausible story, based on current projections, in which budget deficits would seriously impact our standard of living.

But, NPR would apparently rather beat up on retirees and Social Security than go after the pharmaceutical industry, the insurance industry, and the doctors' lobby.

--Dean Baker

David Cay Johnston reports on the latest data on income (2005), which shows the upward redistribution of income is continuing. While I don't doubt that this story is basically true, I think that the IRS data is somewhat problematic for two reasons.

First, incomes at the very top are extremely volatile because they depend hugely on stock prices. This is partly a story of capital gains, but also due to the timing for the decision to cash in stock options, which will often not appear as capital gain income. In this case, our top 0.01 percent in any given year will be the people who happened to get a really big haul in that year. This is interesting, but ideally we would want to know what things looked like for the top 0.01 percent over a longer (e.g. 5 year) period. My guess is that most of the top 0.01 percent are only in that bracket for a single year. For the other four years they probably fall back to the top 0.1 percent (downward mobility).

The other problem is that reported income for the very rich will depend not only on their timing in realizing capital gains, but also on the decision of corporations to pay out dividends. If corporations opt to pay out a larger share of their profits in dividends (which they have, probably in response to the dividend tax cut), then we would expect stock prices to rise less rapidly (lower retained earnings and fewer share buybacks), but more dividend income to show up on people's tax returns.

Anyhow, I think the basic story reported in the NYT article, that a larger share of income is going to those at the top and most workers are seeing very little of the benefit of economic growth, is certainly true (we have the wage data). I just would advise caution in analyzing the shares of income going to the extreme rich. It ain't easy.

--Dean Baker

According to the NYT, Federal Reserve Board Chairman Ben Bernanke told the Joint Economic Committee yesterday that he “expects business investment and consumer spending to continue to grow.”

This statement is a bit disconcerting, because investment is not growing. The Commerce Department reported that non-residential investment fell at a 2.4 percent annual rate in the 4th quarter. The data for the first two months of the current quarter imply that equipment investment is still falling. The data for January indicate that Investment in the much smaller non-residential construction sector may be rising very modestly, but certainly not enough to offset the decline reported in equipment investment. (This data is all nominal, but the conclusion that real investment is falling holds unless prices are moving very differently than they did in the 4th quarter.)

Anyhow, the data seem to show that investment has been declining since the end of the third quarter. So, it's not clear what Mr. Bernanke means when he says that investment will continue to rise.

--Dean Baker

The WSJ has an article today noting the concerns that Princeton economist Alan Blinder has raised about trade. Both Mr. Blinder's concerns and the discussion seem a bit bizarre.

Blinder's new concerns about trade stem from the fact that some highly skilled workers, in areas like software development and financial research, are being placed at risk by the ability to quickly and costlessly transfer information over the Internet. He notes that there will be an increased ability to outsource many of the highest skilled jobs in the years ahead. Therefore he believes that policy should focus on training people for jobs that require face to face contact, which cannot be outsourced.

This is bizarre for two reasons. First, trade theory shows that the gains are every bit as large (and quite possibly larger) when the trade involves services produced by highly skilled professionals as when it involves the products produced by less educated manuufacturing workers. As economists know, trade implies both overall gains and an element of redistribution. Mr. Blinder's problem appears to be that the element of redistribution is going from highly-educated workers to less educated workers when we outsource services like software engineering and legal services. A true free trader (especially a liberal one) should applaud this development.

The second point is that Blinder's focus on face to face services seems to ignore the potential for these jobs to be filled by immigrant workers. We have millions of people from developing countries who perform face to face services as restaurant workers, hospital workers, and domestic workers. A true free trader would have no objection to replacing some of these immigrant workers with immigrant doctors, lawyers, and other highly educated people performing face to face services in the United States.

Clearly, the problem is that Mr. Blinder really does not want to see people like him subjected to the same sort of global competition as textile workers and autoworkers and dishwashers and custodians. We have yet another example of selective protectionism, which the WSJ has helped to conceal.

--Dean Baker

There were several news reports this evening of investigations into possible fraud commited by Beazer Homes, a major builder. Naturally, all right thinking people will be "shocked, shocked" to find out that there might have been fraud taking place.

When you get a speculative mania, like the current housing bubble, fraud is a virtual certainty. There will always be people out there willing to take advantage of irrational exuberance. The same was of course true with the stock bubble. Those economists who pay attention to multi-trillion dollar distortions (admittedly a tiny minority within the profession) knew that there would be a rash of accounting scandals following the bursting of the bubble, even if we didn't know that companies would be Enron, WorldCom, and Quest.

The obvious place for fraud in the housing market is in the issuance of mortgages. Since these quickly get dumped into the secondary market, the seller, the buyer, and issuer all share an interest in having the mortgage go through even if the true value of the home doesn't justify the size of the mortgage. I have even heard accounts of sellers kicking back part of the contracted price to buyers. If you can get the bank to issue the mortgage, why not?

The main check on this sort of fraud is supposed to be independent appraisers. But, the problem is that the appraisers (just like the corporate auditers in the tech bubble) are not really independent. They get hired by banks that want to issue mortgages. Appraisers that come back with low numbers don't get hired again by the banks. Being smart people, appraisers quickly learn that the way to get steady business is to always give the bank a high number. That way, everyone is happy -- until the bubble bursts.

I look forward to the investigative pieces.

--Dean Baker

Anyone who has ever sat through an intro economics class should know that economists believe that having the price of a product set equal to the marginal cost of production is the basic condition for economic efficiency. In general, economists get really excited about interventions, such as tariffs on trade or rent or price controls, that cause prices to diverge from marginal cost. However, for some reason, they are remarkably unconcerned about the huge divergences caused by patent and copyright protection.

I was struck by this fact once again when I was reading an NYT article on a new study that seems to show that heart stents provide no medical benefit. The article concluded by noting how some experts may question the results of the study:

"Examples of how the results might be questioned emerged even before the data. Dr. Kandzari of Cordis noted that the nearly 2,300 patients in the trial were largely from veterans’ hospitals in the United States and Canada. Those patients receive many medicines free and are more likely to take them as prescribed."

This would appear to be both an incredibly obvious and damning point. Many people, even in the United States, do not take the medically optimal mix of drugs because they are expensive. They often do without drugs that are needed, or don't take them in the proper dosage. This leads to substantial inefficiencies in the form of sickness and unnecessary death.

As I have written here and elsewhere, there are alternative mechanisms for financing prescription drug research. What I can't understand is, given the enormous stakes involved, why isn't half of the economics profession examining this issue?

--Dean Baker

Intel announced plans to build a $2.5 billion chip factory in China. Several of the news reports claimed that Intel and other high tech manufacturers had been reluctant to invest of China because of its weak enforcement of intellectual property rules.

It is difficult to understand the logic of this assertion. Intel has an interest in having its chips made as cheaply as possible. This is independent of whether the country in which it happens to locate its factory enforces intellectual property rules.

The claim that enforcement would be a factor in location decisions seems to implicitly assume that people who gain expertise cannot travel. If a person who gains access to Intel's protected information can go to China and set up a factory with impunity, then it is every bit as bad for Intel as if the person didn't have to travel because they were already in China. I suppose that the need to travel raises the cost of making unauthorized copies of Intel's products, but no one planning a large-scale venture is going to be discouraged by the price of a plane ticket.

There is a plausible story that companies like Intel use their investment decisions as a way to impose political pressure to tighten IP protections, but this is not directly an economic consideration. It would be helpful if reporting on this topic could clarify these issues.

--Dean Baker

Alright, he didn't exactly use this classic Monty Python line, but in his column discussing the imminent collapse of the U.S. housing bubble, he did make a point of urging us not to look backward. I actually find myself largely agreeing with his main point, monetary policy should be forward looking. The Fed should act to support the economy going forward, not trying to rectify past sins. However, some backward glances are important if we are to get the economy on a sound footing and to avoid a repeat of the same mistakes.

Specifically, the goal of Fed policy should absolutely not be to delay the deflation of the housing bubble. Every week, 140,000 families are buying into the housing market, many at bubble inflated prices. These are the families who will suffer the greatest harm when housing prices return to their trend values. I can see no justification in having the Fed act to sustain this bubble so that more families can take a devastating hit on their major financial asset.

We also know that millions of households are not saving enough for retirement, banking on equity in their homes which in many cases will not be there. We best help these people by allowing house prices to adjust as quickly as possible. With these cautions, the Fed should certainly look to try to support the economy, even at the risk of higher inflation, in order to offset the damage from the collapse of the housing bubble.

Of course, as we deal with these hard times, it is important to remember how we got here. The Fed looked the other way as the housing bubble grew to dangerous proportions (arguably, it even promoted the bubble).

The obvious reason that the Fed may have looked favorably on the inflation of the housing bubble is that there was nothing else to boost the economy out of its weakness following the stock crash induced recession of 2001. Of course the stock crash recession was the result of the Fed and Treasury looking the other way as the stock bubble inflated to dangerous levels. And, who do we find on the list of villians for letting the stock bubble get out control? It is easy to see why former Treasury Secretary Larry Summers doesn't think that we should be looking backwards.

--Dean Baker

It is amazing how far the media goes to exclude proposals for a universal Medicare type system from public debate. Yesterday, in an article reporting on a Democratic presidential candidate forum, the Post told readers that "Edwards was the only candidate who came to the forum having put forth a specific plan for universal coverage and said it would cost $90 billion to $120 billion a year."

This is not true. Representative Dennis Kucinich has put forward a detailed plan for a universal Medicare system that has been introduced as a bill in prior sessions of Congress. This can be verified by a quick look at Mr. Kucinich's wesbite.

I know that Kucinich is not considered a major candidate, but he was at the forum and article did mention him. Since Kucinich has been proposing a universal Medicare system since at least his last presidential run in 2004, and has actually introduced legislation in Congress that would establish such a system, any reporter covering this issue should at least know that he has a specific plan for universal coverage.

On the topic of "single-payer," the NYT coverage of this forum also left me confused. It reported that, "another candidate, former Senator Mike Gravel of Alaska, called for 'a universal single-payer plan.' He said he would give people vouchers, which could be used to pay doctors and hospitals, and a choice of five or six health plans."
I'm not quite sure how you have a "single-payer" system with five or six plans.

--Dean Baker

David Lereah, the chief economist of the National Association of Realtors, and the author of the 2005 best seller Why the Real Estate Boom Will Not Bust and How You Can Profit From It, sees signs of an upturn in the housing market. That was his assessment of the uptick in existing home sales reported for February. (This was largely driven by unusually warm weather in December and January in the Northeast and Midwest.)

To its credit, the Post article did include the views of a more pessimistic analyst, unlike the NYT’s AP story, which let Lereah’s views go unchallenged.

--Dean Baker

He insists that he isn’t, but I don’t believe him, and neither should the Washington Post. The Post had an article on a Senate Banking Committee hearing, in which Chairman Chris Dodd blamed Greenspan for allowing the lax lending standards and exotic mortgages that are at the heart of the meltdown of the subprime mortgage market.

The article cites Greenspan’s denial that he had encouraged people to take-out nontraditional mortgages. The immediate point at issue was that Greenspan had suggested in early 2004 that homebuyers often wasted money by taking out fixed rate mortgages. Greenspan claims that he was referring to limited segment of the market and had qualified his remarks in subsequent weeks.

Sorry, that one doesn’t pass the laugh test. Greenspan saw what was taking place in the subprime market. There was readily available data showing that this sector was exploding, that mortgages were being issues with zero money down and that many of these mortgages included teaser rates that were sure to reset to considerably higher levels in two to three years.

Alan Greenspan knew that his comments, whether misinterpreted or not, contributed to this irrational exuberance. In addition to the regulatory powers of the Fed, he could have used his enormous bully pulpit as the revered chairman of the Fed to warn of the dangers of the situation. Instead, he chose to look the other way, and let millions of low income homebuyers get way over their heads in mortgage debt.

This was a conscious decision and any good reporter should know this and tell their readers.

--Dean Baker

Diane Rehm, who often has very good shows (especially when she has me as a guest), used her talk show yesterday to promote the fiscal scare stories. She allowed David Walker (the star of the CBS 60 Minutes horror show on the budget last month back) to spin his tale of the country going bankrupt without anyone presenting an alternative perspective.

As is easy to show, Walker's story depends entirely on projections of exploding health care costs. If the U.S. could contain its health care costs, as every other country has managed to do, then there is no serious problem. If health care costs grow as projected, then the economy will be wrecked, even if we eliminate the government health care programs. As I have also pointed out, if we are really too dumb or corrupt to ever fix our health care system, if anyone in power supported free trade we could solve our problem by contracting out much of our health care services to countries with working health care systems.

Walker is perhaps the arch promulgator of the "trillions" scare tactic. The prospect of "trillions" of debt sounds very ominous to most people who will never see even a million dollars. Of course our future income is projected to be close to 1000 trillion dollars, so the propsect of something like $10-$15 trillion in debt should not really be that scary. But, the point of this show (like the 60 Minutes segment) was to promote fear, not to convey information.

I should also point out that this is the second time (at least) that Diane Rehm has had one of the main promulgators of the deficit scare story without allowing anyone to present a conflicting opinion. About two years ago, Peter Peterson, the Commerce Secretary in the Nixon administration, was given the mike for an hour, again without any conflicting opinions.

Diane Rehm generally tries to present balanced shows. I know that I have always debated someone with a very different position when I have appeared. I can't see any grounds for allowing the promulgators of the deficit scare stories to present their views unchallenged.

--Dean Baker

The NYT has an article today on the fact that the desertion rate in the army is considerably higher than had previously been reported. However, the article goes on to point out that the desertion rate is still less than 1 percent, which is far lower than 3.41 percent rate reported for 1971 during the Vietnam War.

It might have been worth noting that today's army is composed of people who have voluntarily enlisted, while the army in 1971 was largely comprised of draftees. This fact could explain a substantial portion of the difference in desertion rates.

--Dean Baker

The NYT tells us that China is facing a demographic crisis due to the aging of the population and should try to encourage families to have more kids (seriously, read the article).

It's hard to know where to begin with this one. The articles reports onimously that "The proportion of people 60 and older is growing faster in China than in any other major country, with the number of retirees set to double between 2005 and 2015, when it is expected to reach 200 million." This means that the share of people over age 60 will rise from about 7.7 percent to 15.4 percent over this decade. Considering that the share of the population over age 60 will be close to 30 percent at that point in the U.S., the Chinese can be forgiven if they are not too worried, as the article claims.

Let's play with a little arithmetic here. China's productivity is increasing at a rate close to 8 percent annually. This means that in ten years, workers on average will be producing more than 2.1 times as much per hour as they do today. Let's say that the average retiree gets 60 percent of the income of the average worker. If the ratio of workers to retirees falls from 5:1 to 3:1 over the next decade (a far more rapid decline than is actually described in the article), then workers could still have 90 percent more income in a decade than they do today, after being taxed to support the growing population of retirees.

(The NYT article goes a step further than most in pushing the retirement scare story. It claims that raising the retirement age won't help because it has a big problem with unemployment among the young. Okay, the scare story is too many retirees and too few workers, but the workers are unemployed, that sounds like too many workers. I guess China is suffering from too many workers and too few workers. They really have problems there.)

The rich countries have seen a consistent growth in the ratio of retirees to workers and have continued to sustain improvements in living standards for both workers and retirees. The key to rising living standards, which somehow is never mentioned in this article, is higher productivity. If China can sustain a productivity growth rate that is even half its current pace, then it has no reason to fear an aging population. (This doesn't mean that government pension programs may not need to be adjusted.)

The conclusion of this piece -- that China needs more children and a larger population, should be enough to get millions to cancel their subscription to this paper. The world (and China) does not need more people (someone please tell the NYT about global warming).

--Dean Baker

The NYT has another good piece documenting the abuses of the patent system for financing prescription drug research. Patent monopolies increase our annual drug expenditures by at least $150 billion a year compared to a situation in which drugs were sold at free market prices.

If economics was a serious profession there would be a large body of research comparing the efficiency of patent supported research with alternatives such as prize funds or direct government funding. As it is, economists only worry about protection on shoes and shirts.

Here's my two cents.

--Dean Baker

David Leonhardt comes out strongly in the middle on current trends in mortgage financing. He rightly notes the benefits of increased access to credit, but he does exaggerate the case somewhat.

The column points to the fact that mortgage fees have fallen by 80 percent as a share of mortgage values over the last two decades. This is misleading for two reasons. First, the fees have fallen in part because of the runup in house prices. A $2,000 fee is 1 percent of the purchase price of a $200,000 house, but only 0.5 percent of the purchase price of a $400,000 house. With the real price of houses rising by more than 50 percent since 1995, we should expect to see a substantial decline in the ratio of fees to mortgage values.

The second reason for the decline is a change in the mix of mortgage products. Twenty years ago, the overwhelming majority of mortgages were 30-year fixed rate mortgages. The vast majority of current mortgages are much shorter term and/or adjustable rate. These are very different products. Often borrowers take out an adjustable rate with the intention of switching to a fixed rate in 2-3 years. This would cause the borrower to incurr additional fees.

Of course, the widespread availability of adjustable rate mortgages does give borrowers more flexibility than they had previously, and for people who only stay in their house 2-3 years (unfortunately this is common) they can provide real savings. But it is misleading to compare the cost of short-term mortgage loans and ARMs with the cost of a 30-year fixed rate mortgage. These are different products.

Easier access is mortgage credit is definitely a positive development, but the people who sought to mislead lenders to push their loans (and there were many) deserve to be hung. I am not in the school that thinks low income people are dumb and can get easily suckered, but I do think that someone who devotes their marketing expertise to pushing a complex financial product to typical consumers will often be able to succeed. After all, most people don't analyze mortgage products for a living.

Higher income and more educated people can be every bit as gullible in this regard as low income people (how many bought tech stocks in 1998-2000), but it is of less consequence for them when they take a hit.

--Dean Baker

I generally give the NYT magazine more license than the rest of the newspaper. After all, it prints longer, more literary pieces, not straight news. But, I am still old-fashioned enough to think that being literary should not prevent one from being able to use logic.

The "Pop Psychology" piece in Sunday's NYT fails the logic test badly. Roger Lowenstein dismisses the promulgators of the housing bubble view (Shiller is his target, but I'll claim preeminence having raised the issue before Shiller [BS?]).

He tells us that the National Association of Realtors (NAR) reports that house prices on average rise by 2 percentage points more than the rate of inflation each year. That's a good source -- the NAR would never have reason to mislead anyone. I assume that Mr. Lowenstein gets his views on the link between cancer and cigarette smoking from the Tobacco Institute and no doubt he has learned about global warming from the oil lobby.

The government's data show that, until 1995, house prices almost exactly tracked inflation (i.e. they did not increase by 2 percentage points more than inflation every year). Robert Shiller has constructed his own index that shows house prices had tracked inflation since the 1890s until 1995. That is the reason that Shiller and I believe that the 50 percent run-up in real house prices over the last decade constitute a bubble.

Lowenstein also points out that the biggest jump in defaults has been in depressed areas that have not seen rapid run-ups in house prices, not the coastal areas where prices did increase a great deal. Let's get out the big "DUH." In areas where there have been big price hikes people will still have some equity in their home. No one ever defaults on a home in which they have equity -- they either sell it or they borrow against the equity to keep the home.

I can appreciate the NYT's desire to have more literary pieces in its magazine, but they should be able to find someone who can understand the topics on which they write, in addition to being a good writer.

--Dean Baker

The Post is guilty of some seriously lazy reporting in its lead story on the Democrat's bill for Iraq War funding. The article reports that the bill includes $21 billion in funding that President Bush did not request. It gives several examples of items that seem to fit the definition of pork, but then notes that the bill includes $2.9 billion for the recovery from Hurricane Katrina. Is this pork?

It would be reasonable to ask that an article give some systematic breakdown of this $21 billion. How much likely would be appropriated in any case, but just placed in different bills? What percentage is going to pork and what percent is going for real programs? Will this money be spent in one year or over many years? I know that it would take some time to get this information, but I believe that the Post has full-time reporters. Making sure that the numbers presented in their articles provide information to readers would be a good use of their time.

--Dean Baker

The WSJ decided to highlight a 3-month old study to tell readers that everything is fine with the mortage market. While the study (by Christopher Cagan at First American CoreLogic) presents a reasonable breakdown of the risks of mortgage defaults, the problem with the WSJ assessment is that it is based on the assumption that house prices do not fall. If prices fall by 10 percent, then Cagan projects that the default rate would be more than 70 percent higher and the losses to the financial system would more than double.

How plausible is it that house prices don't fall from their December 2006 level? Well, the National Association of Realtors data show that the median house prices has fallen 3.1 percent over the last year. The current inventory of unsold homes is 23.1 percent higher than at the same point last year. The vacancy rate for ownership units is more than 40 percent higher, which presumably means that there are many anxious sellers. Soaring foreclosure rates also mean more distressed sales. Add in the tightening of mortgage credit and slower economic growth than in 2006.

Does anyone think that house prices won't fall in 2007?

--Dean Baker

For some bizarre reason the idea of "wage insurance" continually pops up in the discussion of trade. Wage insurance is a mechanism for replacing some of the wages that workers might lose if they leave a good-paying job and are forced to take a new one at a lower wage. Most proposls call for making up 20-25 percent of the lost wages, usually with a cap in the neighborhood of $5,000 a year.

It is bizarre that wage insurance comes up in reference to trade because the overwhelming majority of people who are hurt by current U.S. trade policies do not actually lose their jobs. The current pattern of trade hurts most workers by putting less educated workers (those without college degrees) in direct competition with low-paid workers in the developing world, forcing down their wages. Trade insurance provides no benefit whatsoever to the workers who get lower pay at their current jobs or who enter the labor force receiving lower wages because of the impact of trade.

It is understandable that the proponents of the current trade agenda would try to imply that wage insurance is an effective remedy for those who are harmed by their policies, but this is not true and reporters should not play along with this nonsense.

This article also commits the cardinal sin of telling us what politicans believe about the world: "Democrats like Mr. Rubin and Mr. Schumer view global trade and open markets as sources of growth and dynamism." As they should tell reporters in journalism 101, we don't know what politicians believe about the world, we only know what they say.

In this particular case we know with absolute certainty that Mr. Schumer doesn't always view open markets as a source of growth and dynamism. Just two weeks ago he was all over the media calling for weakening the Sarbanes-Oxley rules on corporate accounting because he claimed that they were causing business to go overseas. This is not a reasonable argument for someone who believes in "free trade." We should have accounting rules that make sense based on their merits. A true free trader would not care if such rules caused corporations to take some of their financial business overseas. This is not a reason to have bad accounting rules in the United States.

--Dean Baker

The Post article on the February jump in the CPI includes a chart (not on the web) showing the monthly increase in the CPI and the monthly change in real weekly wages.

This juxtaposition doesn't make sense for several reasons. First, if you're comparing wage growth to inflation, then the appropriate figure is nominal wage growth, not real wage growth, which is adjusted for inflation. Second, data on average hours is extremely erratic. Changes in reported hours are far more likely to be due to errors in measurement than actual changes in hours. It would be far better to take monthly changes in the average hourly wage.

Of course, monthly wage data is pretty bad also, as is monthly price data. If you really want to make a serious comparison, take quarterly changes in wages and quarterly changes in prices. This filters out most of the noise, increasing the probability that what you are seeing on the chart is real.

(And, if you've read to this point, you now get the answer -- average hourly wages have increased at a 4.1 percent annual rate over the last quarter, slightly better than the 4.0 percent rate of inflation.)

--Dean Baker

The NYT has a nice piece today. It's a bit late and doesn't go far enough in fingering all the villians (some of whom were well-meaning, but hopelessly naive), but it's a start.

--Dean Baker

I was just watching David Brancaccio on NOW discussing with a guest how it would be desirable to encourage shareholders to take a longterm perspective. What was Mr. Brancaccio's proposal? Eliminate capital gains tax on shares held for more than ten years.

What a fantastic idea!!! Why should anyone expect Bill Gates to pay the same tax rate as someone who cleans toilets for a living or puts out fires. After all, Bill Gates sits on share of Microsoft -- much more important work.

Of course, if David Brancaccio is smart enough to breath (something that he seemed to be doing), he knows that we could also provide incentives for longterm holdings of stock by taxing short-term holding. In fact, this is exactly what they do in communist England. England imposes a tax of 1.0 percent on every stock sale (0.5 percent paid by the seller and 0.5 percent paid by the seller). This discourages frequent trading without allowing the richest people in the country to get away without paying any taxes.

I don't mind David Brancaccio saying stupid things, but it does piss me off that he does it on PBS. I really don't like paying my tax dollars for such nonsense. Where is Newt Gingrich when we need him?

--Dean Baker

The media largely ignored the 1.3 percent rise in the finished goods index reported for February. The monthly data are always erratic, and this increase was driven largely by jumps in food and energy prices, but even the core index rose by 0.4 percent. Furthermore, I'm beginning to think that some of the food price increases are not just random, but actually suggest an upward trend in food prices. Food prices in the finished goods index are up by 6.8 percent over their February 2006 level. They are up by 18.9 percent in the core goods index. Of course higher prices for agricultural goods is an explicit goal of U.S. trade policy, perhaps it is working. (A falling dollar will also raise food prices.)

In addition to higher food prices putting upward pressure on prices, the slower pace of productivity growth over the last 10 quarters also puts upward pressure on prices, as will the declining dollar. This is all big news because of the Fed's strong commitment to low inflation (mistaken in my view). If inflationary pressures really are mounting, then the Fed will be more reluctant to lower interest rates even in the face of growing evidence of economic weakness.

--Dean Baker

The Washington Post gives us another budget article chock full of big numbers that will be almost meaningless to anyone who reads it. (Next time i will list the names of the 47 budget wonks who can make sense of this sort of article). This is not reporting. Reporting is supposed to convey information. Writing big numbers without any context is more like a fraternity ritual --you do it because everyone else does it. If the Post finds it impossible to print articles that provide readers with any context for these numbers, perhaps they can be persuaded to refrain from writing articles on the budget in the interest the environment. (Why kill trees for this stuff?)

Also, as PGL at Angry Bear pointed out yesterday, when talking about a balanced budget, reporters should distinguish between the unified budget and the on-budget budget. If the government is borrowing money from Social Security, it is still borrowing. The on-budget budget counts the money borrowed from Social Security as part of the deficit.

--Dean Baker

Many politicians and political figures tout homeownership for the low-income families as a path to the middle class and financial security. While homeownership can sometimes be a good way to build savings and provide a measure of economic security to low-income families, this is not always true.

It is certainly not true when low-income families buy overpriced homes in the middle of a housing bubble. It is also not true when they use mortgages that they really can't afford to make the purchase.

The NYT endorsed a proposal today for the federal government to put up money to help bail out some of the low-income families that are now in trouble because they paid too much for a home and/or got a mortgage that they could not afford. Certainly these families are in difficult situations and could use some help. But, instead of taking the money from the taxpayers, maybe it could be taken from the politicians and organizations that pushed policies that got these low-income families in trouble in the first place. Also, is there some reason that we don't want to help the low-income families who were smart enough to ignore the experts on wealth building and continued to rent?

It is really tragic that millions of low and moderate income families are suffering because of the social engineering of policy elites. Anything that can be reasonably done to ease their hardship should be done, but the media should be shining a spotlight on the mistaken policies that got us here.

[USA Today has a good piece that explains why some of us don't believe that everyone everywhere should always own a home. Sometimes you have to move to follow a job.]

--Dean Baker

The media seem to be applying a strict rule: the only experts cited on the meltdown of the subprime mortgage market are those who didn't see it coming. Marketplace radio followed the pattern this morning (sorry, I didn't catch the name and it's not up yet on their site).

Of course the real story here is how something so entirely predictable was not foreseen by the experts. The experts who blew it (mistakes were made) are probably not the best people to answer this question.

--Dean Baker

The Washington Post presents some budget reporting that about 50 budget wonks will follow. How significant is a projected budget surplus of $132 billion in 2012 (0.7 percent of GDP) or $800 billion in tax revenue over the next five years (approximately 5 percent of projected revenue or $530 per person per year )?

--Dean Baker

The Washington Post reports on the release of new data showing a rapid rise in delinquency rates on subprime mortages. It would have been useful if the article had included the views of some analysts who were not surprised by this situation.

--Dean Baker

The NYT gives its usual non-informative budget reporting this morning when discussing the extension of the State Children's Health Insurance Program. It reports that Senator Hillary Clinton and Representative John Dingell are proposing to triple the size of the program at a cost of $50 billion (above current levels) over the next five years.

Is this a lot of money? Well, $10 billion a year is equal to approximately 0.3 percent of projected spending over this period. Alternatively, it comes to about $33 per person per year over this period. In compartive terms, it is less than what the United States spends in 3 weeks on the war in Iraq.

--Dean Baker

By my count, the NYT used "free trade" 5 times, not counting references to a trade deal known as the "North American Free Trade Agreement." I am beginning to suspect that this could be a paid product placement.

As I have pointed out endlessly, NAFTA did not free all trade -- Mexican professionals still face substantial obstacles to working in the United States, so the deal did not free trade in professional services. It also increased protectionism in the form of copyright and patent protection. So, let's save space and trees -- just refer to a "trade" agenda.

I guess we should just be glad that they aren't still describing Mexico's post NAFTA growth (1.3 percent average annual per capita GDP growth) as "rapid."

--Dean Baker

Robert Pear does what reporters are supposed to do in the NYT today. He does a little digging, and finds that new Medicaid rules requiring a birth certificate, or similar documentation, to receive benefits, are denying coverage to many citizens.

The new rules are intended to prevent immigrants from receiving Medicaid benefits. But, many low-income citizens do not have the proper documentation needed to qualify for Medicaid under these rules, as a result they must either find a way to pay for their health care themselves, or do without.

Pear has been on top of this story since the rules were first being considered by Congress last spring. He has done an important public service, as has the NYT by running the stories.

--Dean Baker

Those who have been following the news know that China's central bank is planning to set up an investment fund to diversify its assets and increase its returns. The reports invariably describe the U.S. treasury bonds, which comprise much of the fund's current holdings, as "safe," but low yielding.

Let's play with some arithmetic here. The dollar has fallen by more than a third against the euro since 2002, which means that each dollar purchases one-third less in euro land than it did five years ago. Back in the summer of 2003, the interest rate on the 10-year treasury bond bottomed out at 3.05 percent. Today, it stands at around 4.6 percent. This means that the bonds China held back then have lost approximately one-third of their value. (The price of the bond is inversely proportional to the yield. The actual calculation of the bond price is a bit more complicated, since it does matter when they reach maturity.) If the yield on 10-year treasury bonds rises back to its avearge rate for the decade of the 90s (6.8 percent), then the value of the bonds would drop by another 30 percent.

The point here is that if "safe" means that you cannot lose money, then U.S. treasury bonds are not a safe asset for the Chinese central bank. This is important because the central bank's motivation in holding treasury bonds was not to find a safe asset in which to store its wealth. It was to prop up the dollar against the yuan and to keep long-term U.S. interest rates low (that's why they bought long-term bonds) to keep the U.S. economy growing. This in turn sustained the huge growth in China's exports. While this helped to spur China's extraordinary growth over the last decade, it was inevitable that at some point the country would no longer need the U.S. export market to sustain its growth. It seems that this day is now approaching.

[Note: Felix Salmon has corrected my arithmetic here. For a very long maturity bond, the price can be treated as inversely proportional to the interest rate. For a 30-year bond, this is close to true. For a ten-year bond, the closeness of the maturity makes a big difference. The 50 percent increase in U.S. interest rates that I note here corresponds to an 11 percent fall in the bond price. I should have bothered to check this one before writing. (I still don't think the Chinese central bank bought 10-year bonds in 2003 yielding 3.05 percent expecting to get a good return.)]

--Dean Baker

The reason for asking the question is that the NYT has an article today reporting on how bad social attitudes and an outdated educational system is forcing European businesses to look abroad for qualified workers.

While people in Europe may have bad attitudes towards highly skilled professions and their educational system no doubt can be improved, Bill Gates complained in the Washington Post two weeks ago that the United States also does not train enough highly skilled professionals to keep his business running smoothly.

I assume that we can look forward to a piece in the NYT examining the problems in U.S. society and the educational system that force entrepeneurs to look halfway across the world for qualified workers.

[Added note: My original comment was based on the web version of the article. However, I now have the print copy in its full beauty. It has a graph that shows the percentage of European companies who reported in a survey that labor shortages are limiting their production. The percent saying yes is up from about 2 percent in 2004 to 5 percent at the end of 2006. Before anyone gets too concerned, please note that the just under 10 percent made this complaint in 2000.]

--Dean Baker

The implosion of the subprime and the Alt-A portions of the mortgage market will have negative impact on the housing market this year. While the media has reported on the bankruptcies of some of the big lenders in this area, and the losses incurred by some of the major actors in the secondary market, they have not focused much on the impact that this will have on the housing market.

It can be substantial. Reuters quotes an analyst from Bears Stearns who estimates that the cutback in credit in these market segments will reduce the number of homebuyers by 1.1 million this year.

I won't vouch for the accuracy of this estimate (it doesn't seem ridiculous on its face), but even if the impact is just half this size, it would still imply a substantial drop in house prices. Of course further declines in house prices will lead to more delinquencies, more losses in the mortgage industry, and a further tightening of credit. BTP readers know where this one goes.

Any macroeconomist who didn't see this one coming should be forced to turn in his/her license immediately.

--Dean Baker

The NYT has a column this morning that makes the true point that the cheapest way to reduce greenhouse gas emissions is to pay developing countries not to pollute. The problem is that basic argument is not right and the proposed solution is inadequate.

The problem with the basic argument is that China's economy is not hugely inefficient in energy terms as the article claims. China's GDP is almost 80 prercent of the size of the U.S. economy, not one third the size, as the column claims. This means that it should not be surprising that China may soon pass the U.S. in greenhouse gas emissions.

The other problem is that the mechanism for paying for reductions he proposes is not likely to accomplish much. As has already been shown with other projects, it is easy to game single project reductions and very expensive to monitor the process in any case. It would make far more sense to provide China a generous emissions target (comparable to its baseline growth) along the lines of the Kyoto agreement, and the allow it to see permits to other countries (who would get more stringent targets than they have at present). This would make a more efficient and enforceable system.

--Dean Baker

Much of the discussion of the Alternative Minimum Tax (AMT) is unnecessarily confusing. It is often reported that is expensive to "fix" the AMT. The real problem is that baseline budget projections assume tax revenues that no one expects will ever be collected.

The basic story on the AMT is that it is a catchall tax. It tells taxpayers above an income cutoff that they must pay the tax they owe under the ordinary tax code or (crudely) X percent of their income, whichever is higher. The big problem with the AMT is that the law does not permanently index the cutoff point to inflation, like the other tax brackets in the tax code. This means that more people will fall below the cutoff every year, unless Congress votes to raise the cutoff. Congress has voted to raise the cutoff temporarily for around a decade.

Of course, if Congress does not raise the cutoff, then millions of middle income families would be hit by the AMT. No one ever expects that these people will be paying the higher tax rate that the AMT would imply. The gap is even larger due to President Bush's tax cut, since that lowers the baseline tax rate -- it effectively means that millions of people will have been promised a tax cut that they would never receive because they would be nailed by the AMT.

Anyhow, the obvious problem in this story is counting the revenue from not indexing the AMT in the baseline, even though no one expects that the government would ever receive it. The Congressional Budget Office (CBO) is obligated to construct their baseline in this way, since they must assume current law holds, which means that there is no annual fix to the AMT. But, reporters could take advantage of the information provided by CBO (Table 1-5) and report the deficit under the assumption that Congress does what it has always done and fixes the AMT, at least temporarily. This would be a more honest way of reporting on the budget.

--Dean Baker

Representative Barney Frank has proposed a law that would require corporations to have non-binding polls of their shareholders on CEO compensation packages. According to Marketplace Radio, the opponents of this measure claim that shareholders have diverse interests and aren't in a position to properly assess CEO compensation.

It would be helpful if the media teased this one out a bit further -- the shareholders aren't qualified to determine the pay of their top employee, but the insiders (a corporate board that usually owes their position primarily to the CEO) somehow can be trusted to act in their interest.

The media also portray this as a government intervention into the corporate sector. Of course, this is nonsense. The corporate sector is a creation of the government (individuals can have partnerships, legal corporations are a creation of the state), the question here is about setting the right rules. The government already imposes a long set of rules for corporate governance, including rules on disclosure of financial data and also rules ensuring that the rights of minority shareholders are protected. The issue here is whether it is necessary to change the rules to ensure that CEOs do not abuse their insider power to get exorbitant compensation packages. (I discuss this issue in a chapter of the Conservative Nanny State.)

--Dean Baker

BLS released the revised data for the 4th quarter and incorporated the benchmark revisions to employment from the establishment survey. The net result is that productivity growth has averaged just 1.5 percent annually over the last two and a half years. At the least, this is a very serious cyclical slowdown, if it does not actually mark the end of the 1995 productivity upturn.

Let's see if the reporters notice.

--Dean Baker

The Washington Post has an article discussing plans for "wage Insurance." This is a set of proposals which would provide workers who lose their job and take a new job at lower pay a wage subsidy for a number of years (usually 2-4 years) Many proponents of the Clinton-Bush trade agenda have argued that wage insurance is a way to compensate the losers from trade agreements.

Of course, the vast majority of workers who are hurt by the Clinton-Bush trade agreements are not those who lose their job. Since the agreements have been designed to place U.S. manufacturing workers in direct competition with low-paid workers in the developing world, the vast majority of losers are the manufacturing workers, and other non-college educated workers, who have their wages lowered as a result of trade. This is the result of a trade policy that deliberately places less educated workers in competition with workers in the developing world, while still protecting doctors, lawyers and other highly paid professionals. For this reason, wage insurance would provide little comfort to the opponents of recent trade agreements.

This point would have been clear to readers if the article had cited any of the critics of wage insurance.

--Dean Baker

A segment on Marketplace radio this morning reported that the European Union (EU) has the same standard of living that the United States had 25 years ago. The piece was generous enough to note that much of the gap is due to the fact that the EU just admitted 10 countries from Eastern Europe that were mostly much poorer, thereby bringing down the average. However, it also reports that poductivity in the former EU 15 is far lower than the United States.

Well, data from the OECD does not support that assessment. Average productivity in the EU15 is somewhat lower, but the gaps are mostly not very large. For example, the OECD estimates productivity for Germany at 91 percent of the U.S. level (productivity in former West Germany would be almost the same as the U.S. level, since the East has much lower productivity). The UK, Italy, and Spain are put at 83 percent, 79 percent, and 76 percent of the U.S. level, respectively. On the other hand France and several smaller countries are estimated to have higher levels of productivity. The productivity levels for France, Belgium, and the Netherlands, are estimated at 101 percent, 109 percent, and 104 percent, respectively.

How far behind does this put the EU 15? Well, eyeballing the data, let's put the average current productivity level at 88 percent of the U.S. level. That puts the EU productivity level at approximately the same place as the U.S. was in 2001. Those poor people.

The EU 15 does have considerably lower GDP per person, which is largely a result of the fact they have chosen to take some of the benefits of productivity growth in the form of leisure (4-6 weeks a year of vacation are the norm, and 35 hour workweeks are common) instead of higher wages. There is no obvious reason that this is bad, and anyone who has heard about global warming may think that this is good. Europe emits much less greenhouse gas per capita than the U.S. and its decision to take much of the gains from productivity growth in leisure is undoubtedly an important reason.

--Dean Baker

Microsoft apparently is frightened by the free market. (With their software, who would blame them.) According to the Financial Times the company plans a major crusade against Google over its "cavalier" approach to copyrights.

This is an interesting story. Regular BTP know that I consider copyright a very expensive form of protectionism which is an extremely inefficient way to support creative work. But the immediate issue is how far should the government should go in suppressing communication in order to maximize the value of copyrights.

Google has adopted a policy where it makes part or all of copyrighted material available (e.g. books on Google Print), but removes the material if the copyright holder complains. This practice would seem to give copyright holders plenty of control. After all, if it is not worth their while to do a google search on their material and send an e-mail, how much money could be at stake?

In an article of this length, it would have been appropriate for the FT to talk to an economist, or someone familiar with the economics of copyrights, so that they could have pointed out the economic costs of following Microsoft's strong copyright policy.

--Dean Baker

The NYT had an interesting piece this morning about possible plans by China's central bank to diversify its massive holdings out of U.S. treasury bonds in order to get a better rate of return. At one point it tells readers that developing countries have built up huge reserves in order to keep down the value of their currencies, which makes their exports cheaper.

This is part of the story. The other big reason is that developing countries, like those in East Asia and Latin America, have found dealing with the IMF to be an extremely unpleasant experience. Following the East Asian financial crisis, and subsequent financial crises in Brazil and Argentina, many developing countries sought to build up sufficient reserves so that they need never deal with the IMF again. Some countries, like Argentina, even prepaid loans, so that they would not have to answer to the IMF.

The way things stand now, the IMF is irrelevant for most middle income developing countries. The build-up of large reserves is a big reason.

There is another serious oversight in this article. It raises the issue of the returns that China's central bank gets on its reserves. It reports that the return on the holdings in the U.S. are 4 percent (nominal). Actually, the returns would be considerably less. The interest on U.S. bonds and bills would be in the neighborhood of 4.0 percent (actually, they might be closer to 5 percent at present), but the dollar was been falling against the yuan. Even the very modest decline of the dollar over the last year and a half (@4 percent) would largely offset the return in dollars.

This point is important, because the decline in the dollar was anticipated, it is actually deliberate policy by China's central bank. Clearly China's central bank is not buying dollars for the return, it is buying them to keep down the value of the yuan and sustain the growth of China's export market. It has been prepared to accept an extremely small or even negative return to accomplish this goal.

--Dean Baker

The NYT uses the term "free trade" three times in an article about President Bush's tour of Latin America. Do they pay reporters by the word? Once again, "trade" is more accurate and saves space, trees, and energy. Doesn't the NYT know about global warming?

--Dean Baker

The NYT reports on the problems facing New Century Financial and some of the other financial firms that specialized in issuing subprime morgages. Those who were concerned about the prospects for the dealers of mortgages that seem likely to go bad, and leave homeowners out on the street, will be happy to know that they have socked away enough money in the good years so that they will still be incredibly wealthy.

The folks that bought the homes or who now hold these mortgages may be somewhat less fortunate.

--Dean Baker

60 Minutes declared war tonight on Social Security and Medicare. It told its audience (wrongly) that if these programs follow their current course, that we won’t be able to sustain our standard of living.

If they wanted to be accurate, the 60 Minutes crew could have said that projected spending would slow the rate of growth of the standard of living (unless absurd assumptions are made about the government never doing anything for decades to reduce enormous deficits).

More importantly, if they wanted to be accurate, the 60 Minutes crew could have pointed out that almost the whole horror story is driven by projections of exploding health care costs, not “entitlements” for the elderly (e.g. Social Security). As is clear to anyone who is moderately competent at arithmetic, the projected budget problems are due to a projected explosion in health care costs, not demographics. If U.S. health care costs were more in line with those in any other wealthy country, there wouldn't be much of a budget crisis to talk about.

Needless to say, we had several opportunities to have warnings of "trillions" of dollars of debt. Sounds very scary, but do any of the viewers have any idea of what it means? Do the reporters doing the peice? Would it have been too hard to express the trillions as a share of future income, or would that have destroyed the fear factor?

It would have been helpful if the 60 Minutes had been more honest with their viewers, but apparently they had another agenda to pursue.

-- Dean Baker

Cambridge University Press has just published my widely awaited new book, A History of the United States Since 1980. You can get your copy at an Internet retailer near you. Sorry folks, this one is not available for free download.

--Dean Baker

When a reporter writes that a political debate is about ideology they are trying to tell readers that they have no idea what they are talking about. Politicians are not political philosophers. They do not get elected by espousing clever political philosophies. They get elected by making deals with people who can give them the money or produce the votes needed to get elected.

When the Washington Post tells us that a debate over extending the State Children Health Insurance Program (SCHIP) is “is exposing Washington's familiar ideological divisions” get out your bull detector. The article tells us that the ideological battle is over “the proper role of government” with “Democrats generally favoring more activist attempts to ensure that everyone has access and Republicans supporting a more limited role that focuses on helping the neediest.”

Anyone who reads through the whole article would discover that the Democrats actually don’t propose spending any more government money on health care than the Republicans. The Democrats want to use the subsidies that the government pays to private insurers in the Medicare program to extend coverage under the SCHIP program. Why are government subsidies to private insurers not “activist,” but payments to provide health care for kids are? We’re just talking about using government money to help different groups of people.

The Post’s editors should pull this nonsense out of articles. Just report the policies and don’t try to tell us what politicians believe – the reporters don’t know, and it wouldn’t matter in any case. Politicians do what is necessary to advance their careers. Their personal beliefs (if they have any) have nothing to do with their work.

By the way, this article also engages in the Washington fraternity practice of reporting budget numbers in a way that means almost nothing to anyone. For example, it reports that it would take $13 to $15 billion above current funding levels to keep the same number of children funded over the next five years.

Wow!!!! Is this a lot of money? Is this a little money? Does anyone reading this article have any idea? Well it’s about 0.1 percent of projected spending over this period, with the annual cost being about 2 weeks of funding for the Iraq War. Alternatively, the cost would be about $10 per year in taxes for every person in the United States. Is it that hard for Post reporters to write budget numbers in a way that might be meaningful beyond the 50 budget wonks who live this stuff?

-- Dean Baker

Now that the housing bubble is starting to deflate, many of the excesses of the mortgage industry are coming to light. Many of the mortgages that they issued at the peak of the bubble are going bad, especially in the sub-prime market. More 10 percent of the sub-prime hybrids issued in 2006 were already seriously delinquent just 11 months after issuance. Note that this is the period in which low teaser rates are in place. One can only imagine the share of these loans that will eventually go bad when the interest rate resets at a higher level.

There is a real structural problem with the mortgage industry that hopefully will be addressed in the wake of the collapse of the bubble (mortgage issuers make money on selling the mortgage, not holding it), but there is a more fundamental policy question that needs to be asked. Politicians routinely hawk homeownership as an end in itself and have pushed policies that are designed to maximize homeownership. (They have also been assisted in these efforts by private foundations that are committed to assisting moderate income families.) This has often meant promoting policies that provide large subsidies to homeowners, and implicitly neglecting renters.

This single-minded promotion of homeownership is now proving to have disastrous consequences for many moderate income families that bought homes at the peak of the bubble. Many of these families will end up losing their homes and whatever savings they had used to buy a home. Their credit record may be permanently damaged and possibly their aspirations as well.

This is what happens when sound policy is subjugated to political ideology. For many people, in many circumstances, homeownership is a good idea. But it is not everywhere and always better for people to own than rent. With the unwinding of the housing bubble, and the millions of tales of families in distress that will be part of this picture, it will be important for the media to examine the policies that got us here. This means that reporters should go after the ownership at all costs crowd. These people have a lot to answer for.

--Dean Baker

Why do reporters always have to use the term "free trade" when they just mean "trade?" Obviously the politicians who are promoting trade deals like to use the word "free," I'm sure that the focus groups show it gets a positive response, but what is the excuse for reporters adopting their language?

The immediate target of my wrath is Market Place radio which commemorated the 1-year anniversary of CAFTA with a discussion of the impact of "free trade" on the region. The discussion would have been so much better if they could just have called it "trade."

Also, the NYT has an article which reports without comment Treasury Secretary Paulson's assertion that free trade has been a cornerstone of U.S. prosperity and warning against protectionist barriers. Of course the United States is very far from a free trading country. We have huge barriers to trade in highly paid professional services, like physicians services, lawyers, services, etc. There is no economic theory that supports the view that barriers to trade in professional services are somehow less harmful to the economy than barriers to trade in items like clothes and shoes. If the latter is harmful, then so is the former.

In addition, we have the huge economic distortions created by patent and copyright protection. But, I'll leave that one for another day.

--Dean Baker

The Post notes that its stable of economic forecasters are now getting worried about the economy's prospects.

--Dean Baker

The pharmaceutical and insurance industries both profit enormously from the current design of the Medicare drug benefit. They also are both powerful lobbies that make large contributions to politicians. Therefore it is not surprising that many politicians are willing to spew utter nonsense to defend the program from its critics. However, there is no obvious reason that the media should just repeat the same nonsense.

For example, a USAToday article reports on a new study that shows that insurance companies have often been raising drug prices over the course of the year, even though beneficiaries are locked into their plans. The article reports
without comment a defense of the program from the insurance industry and Center for Medicare and Medicaid Services that the prescription drug benefit is saving people money.

The federal government is spending almost $40 billion a year on the plan (about 6 times the current SCHIP appropriation), it would be really remarkable if it were not saving people money. This would be comparable to a defense contractor responding to complaints about huge cost over-runs by saying that they built the weapon system. Since this is an unbelievably low benchmark, a reporter might reasonably ask the question "is that the only
success you can claim?"

The article also prints without comment the industry's defense that only about 10 percent of beneficiaries, people who fall in the doughnut hole, would be affected by these price increases. This is also a rather dubious defense. Most seniors don't have very high drug expenses. For them, the benefit is nice, but it was not really a necessity. It is precisely the people with high drug costs, the people who fall into the doughnut hole, who really need the benefit. It is not much of a defense to say that people with low drug costs are not hurt by higher drug prices.

A bit more background and context could go a long way to inform readers.

--Dean Baker