According to press accounts, Mr. Paulson is an ardent believer in a strong dollar. Regardless of what you think of the budget deficit, the strong dollar IS the reason for the trade deficit.

This is not really a contestable point. No one opts to buy imported goods rather than domestically produced goods because of the budget deficit. They buy imported goods because the strong dollar makes them cheaper. It really is that simple.

Of course, the United States cannot continue to run large trade deficits indefinitely. And the trade deficit is more than twice as large as unified budget deficit (it's more than 50 percent larger than the on-budget deficit). It might be cause for concern that our new Treasury secretary is a big advocate for enlarging the country's most unsustainable deficit, but you wouldn't get this from any of the reporting.

The high dollar policy is also redistributive since it puts downward pressure on prices and wages in the sectors of the economy exposed to international competition (e.g. manufacturing). This hits less skilled workers to the benefit of the highly educated workers in protected sectors of the economy (e.g. doctors, lawyers, accountants and economists).

It would have been worth including comments from representatives of the industrial sector about Mr. Paulson's selection. Incredibly, none of the reporting I saw even raised this set of issues.

--Dean Baker

I have always considered the consumer confidence index to be one of the least valuable releases of economic data. Consumer spending is hugely important for the state of the economy, but the index provides very little information about the direction of spending. The index includes two components, a current situation component, which does track current spending reasonably well (and therefore has little predictive value about the future), and an expectations component which is highly volatile and has very little predictive value.

The Times had a piece on the recent dip in consumer confidence this morning that backs up my view. The article includes a chart that shows the latest reading for the index is near its 2002 levels, when real consumer spending rose at a respectable 2.5 percent annual rate and the savings rate fell by more than a percentage point. In other words, a low consumer confidence index did not seem to have much impact on consumption growth.

The index probably does give useful information about public attitudes, which can make a big difference politically (at present, high gas prices are making many people feel stretched and angry), but it is not telling us much about the direction of consumer spending or the economy.

--Dean Baker

It took 43 days, but the Washington Post did finally correct an April 17th news story that had Mexico's economy growing at a 17.5 percent annual rate in the period since the passage of NAFTA. This is longer than one would hope, and it required much more prodding from my colleagues at CEPR than should have been necessary, but it is still good to see that the paper felt a responsibility to correct such a blatant mistake.

--Dean Baker

The Times had an article this morning that explained the immigration problem in very simple terms, "this many jobs; only this many visas." As the article reports, there are a huge number of less-skilled jobs waiting to be filled by immigrants, but almost no visas are available for immigrants to come across the border and work at these jobs legally.

To prove this case, the article quotes Stephen P. Gennett, president of the Carolinas chapter of the Associated General Contractors of America (a builders' trade group), "we have a problem here, a people shortage."

While Mr. Gennett is undoubtedly knowledgeable about the state of the labor market for construction workers, he also represents an organization that has a clear interest in this issue, they want cheap labor. Ordinarily, the claim that there is a people shortage would imply that wages are rising at an extraordinary rate. (This is the way economists ordinarily think about markets, shortages mean higher prices.) This means that there is a quick way to verify Mr. Gennett's claims about a people shortage: see if wages in construction have been rising at an extraordinary rate.

A quick trip to the Get Detailed Statistics section of the Bureau of Labor Statistics website tells us that inflation adjusted wages for construction workers have actually fallen about 5 percent since 1980, a period in which productivity has increased by more than 70 percent. So, we have wages falling in spite of a labor shortage, not where I learned my economics.

Labor is a cost to employers, and they would all like to get their labor as cheaply as possible. The Times would like to hire reporters for $25,000 a year. While there are plenty of smart people in places like India and China who would be happy to work for the Times at this wage (and could do a very good job), reporters and other higher paid professionals are powerful enough lobbies to largely foreclose this option. But, let's be clear. There is no more a shortage of workers for low-paid jobs than there is a shortage of workers for higher paid jobs. The difference is simply that the workers who perform less-skilled work have less political power to protect themselves against the efforts of employers to get low cost immigrant labor.

--Dean Baker

I am continually amazed by the apparent need that reporters feel to describe the trade agreements negotiated by the U.S. government as "free trade" agreements. (See the Times article on the Colombian elections for the current target of my wrath.) What possible additional information do reporters and editors believe that they are conveying by including the word "free?"

As I have written elsewhere, these agreements do not free all trade -- there are still substantial obstacles facing Colombian doctors, lawyers, and other professionals who would like to sell their services in the United States. This agreement also increases protectionist barriers by stengthening patent and copyright protection. (Even if you think these protections are good, they are still forms of protection.) So, why don't these reporters just save themselves a word and more accurately describe these pacts as simply "trade agreements."

--Dean Baker

National Public Radio had a piece this morning about how some think tanks committed to "law and economics" (applying economic principles to the law) were hosting seminars for judges. The segment asserted that these think tanks, which purportedly receive large contributions from the tobacco industry, the oil industry, and other industry lobbies, are committed to free market economics.

This should have been one of those paid public relations spots that helps NPR pay the bills. The tobacco industry does not want to be held responsible for things like marketing to children or concealing evidence of the danger of cigarettes. The oil industry doesn't want to be held accountable for the damage that oil does to the environment.

Since when is the effort to avoid being accountable for the damages you cause free market economics? If I burn down by neighbor's house (accidentally), and then argue in court that I shouldn't have to pay for rebuilding, is that free market economics? According to NPR it is.

--Dean Baker

First, Beat the Press extends its congratulations to Taylor Hicks, the new American Idol. Now, for the serious question, was the vote fair?

The issue here has to do with the voting mechanism. As we know the vote took place through phone-in voting. (People could also text message in their favorites). The problem is that the enthusiastic response by Idol fans often left the phone lines busy. For example, the Washington Post Idol wrap-up reported that a special on-line speed dialing service was able to get through with less than one-quarter of its calls. If most calls don't get through, then the votes recorded for each contestant will end up being roughly the same, regardless of how many people intended to vote for them.

This can be seen with a simple example. Suppose the system accepts 10 calls a minute for each contestant (they had separate phone numbers). Now suppose that Katharine McPhee had 1000 calls and Taylor Hicks had 2000 calls. Since the system will only accept 10 calls a minute, both contestants will be recorded as having 600 votes (60 minutes times 10 calls a minute), even though Taylor had twice as many people call in to vote for him.

Now, as a practical matter, the vote count will never end up exactly the same. Some people may be a bit quicker with their calls, perhaps the percentage of text messagers in the vote will affect the recorded outcome, but the point is that the vote count will be largely determined by the mechanics of the system, rather than the numbers who vote for each contestant.

This would explain the incredibly close three way race between Taylor, Katherine, and Elliot, a week ago. The system let in almost exactly the same number of calls from all three. It would also explain the cliffhanger two years ago when Rueben Studdard edged out Clay Aiken. Any time when the system gets flooded, the vote counts will tend to converge.

Folks, this isn't about hanging chads determining which of America's political dynasties will place their scion in the White House. This is the American Idol. The people must have confidence in the system.

--Dean Baker

The Commerce Department's data for new home sales in April showed a 4.9 percent increase from March. Many news reports took this as evidence of the continued strength of the housing market. A bit of caution is appropriate here.

First, monthly data are always erratic. This should be a mantra for anyone trying to track the economy. If a particular data source shows data that are out of line with other data we have on the economy, then it was probably driven by some quirk in the data.

Second, the new home sales data show contracts signed, not actual sales. The difference is the number of contracts that are cancelled. A year ago, when buyers thought that prices were going through the roof, cancellations were relatively rare. Now there are reports of cancellation rates in the neighborhood of 20-30% in some markets. This means that completed sales may actually be dropping, even if contracts are rising.

There is evidence for this proposition in the April report. The inventory of unsold homes rose 2.9 percent in April and now stands at a record high of 565,000 houses, 27 percent above the year ago level.

--Dean Baker

It appears that Mexico is not the only Latin American country for which the media have difficulty with official statistics. Apparently, the media have been anxious to tout high poverty numbers for Venezuela. The problem appears to be that they want to cite poverty data for 2004, which showed a large upturn in the poverty rate in the immediate wake of a strike in the oil sector.

The Venezuelan economy rebounded sharply, beginning in 2004, and the poverty rate predictably fell back below its previous levels. However, even though the 2005 data is now available, the media continues to use the much higher numbers from 2004. My colleagues at CEPR posted a short piece on Venezuelan poverty today.

--Dean Baker

The New York Times had an article today that could have badly used a bit of economic analysis. The article reports on a provision in the Senate immigration bill that removes the cap on the number of nurses who can enter the country each year.

The problem, as described in the article, is that the country faces a large and growing shortage of nurses. The decision to turn to immigrants is striking, since this is not what Congress did to meet the large shortages of doctors, lawyers, accountants, economists, CEOs and other occupations that draw very high wages. In other words, the Senate is making a decision to consciously try to depress the wages of nurses, in a way that it has not done for other professions that command high wages.

It would have been reasonable to ask why nurses are being singled out in this way. There certainly is no economic argument for holding down the wages of nurses but not the wages of workers in more highly paid occupations.

--Dean Baker

It is now 36 days since the Washington Post published an article that reported that Mexico's economy has grown at a world record 17.5 percent annual rate since NAFTA was implemented in 1994. (According to IMF data, annual growth averaged 2.9 percent.) They have refused to print a correction despite repeated calls and e-mails from my colleagues at CEPR.

The Post has a very strong policy on correcting errors, which was printed in a recent column by the ombudsman ("Policy vs. Reality in Correcting Errors" 5-7-06; B 6):

"The Washington Post is committed to correcting all errors that appear in the newspaper, just as we are committed to the kind of careful journalism that will minimize the number of errors we print. Preventing and correcting mistakes are two sides of the coin of our realm: accuracy. Accuracy is our goal, and candor is our defense."

-- The Post Stylebook

As I noted before, the Post had taken a strong editorial stand in support on NAFTA. I will allow them to explain this situation themselves.

--Dean Baker

The Times had an article this morning about the effort by stock exchanges to merge across international borders. At one point, it comments about fears that this trend could make it easier for companies to shop among stock markets in order to list their shares in the country with the least restrictive accounting and reporting rules.

This is a reasonable concern. It is a safe bet that if companies can evade regulations that cost them money, they will.

But, there is a very important implicit assumption in this story which is worth noting, that investors don't value the regulations that impose high standards for corporate accounting. This is probably an accurate assumption, but one that deserves to be examined more closely.

The Sarbanes-Oxley Act, and other examples of regulatory tightening, was prompted by massive fraud at companies like Enron, WorldCom, and Global Crossing. These companies were able to get away with their fraud because money managers that control billions of dollars of assets did not know anything about the companies in which they invested. No doubt these money managers received large bonuses when the soaring stock prices of these companies produced huge returns for their portfolios.

When it turned out that the stock price was driven more by fraud than profits, the money managers played the "who could have known game." Maybe there was a money fund manager who lost their job for investing a large amount of money in one or more of the poster children for corporate fraud, but I certainly have not heard of such a person.

In short, investing in companies that play with their books does not seem to carry a cost for money fund managers. They get the benefit of the high returns for as long as the fraud can be perpetuated, but then suffer no consequences when the fraud is exposed and the stock loses most of its value.

In such a world, strong governmental regulation of accounting standards is especially important. But it is interesting to ask why highly paid money managers are not held accountable for their failings. This seems to be yet another example of an economy where those at the top enjoy employment security, even when their incompetence has huge costs. It is only factory workers and dishwashers who are responsible for the quality of their work.

--Dean Baker

The lead editorial in Saturday's New York Times noted the recent drop in the dollar. It then blamed President Bush's deficits and warned of an impending recession unless the budget deficit is reduced. As best I can tell, the editorial was incoherent, like much of the discussion on the trade deficit and the budget deficit.

In the last quarter century, the conventional wisdom on the relationship between the dollar and the budget deficit has changed almost as frequently as the seasons. It may not be surprising that politicians would change their views on how the economy works whenever it is convenient. It is a bit more disappointing that the media would show similar flexibility.

In the old days, economists used to say that large budget deficits lead to higher interest rates in the United States. When interest rates in the United States rise, more people want to hold dollar denominated assets (e.g. government bonds or money market accounts in U.S. banks). This increases the demand for dollars, causing the dollar to rise. A higher dollar makes imports cheaper for people in the United States, leading us to buy more imports. It also makes U.S. exports more expensive for people living in other countries, thereby reducing demand for exports. With imports up and exports down, the trade deficit rises.

In this way, a budget deficit could be argued to cause a trade deficit. Note the importance of the dollar in this story -- the high dollar is the key mechanism. People shopping at Wal-Mart don't buy the imported shirt rather than U.S. made shirt because the U.S. has a large budget deficit; they make the decision to buy the imported shirt because the high dollar has made the imported shirt cheaper.

This part of the story is important to emphasize, because in the Clinton-Rubin era the conventional wisdom was that a high dollar was somehow good, even though it led to an enormous trade deficit. Right thinking people everywhere (many of whom had decried the budget deficits of the Reagan-Bush 1 era in large part because of the trade deficits they caused) espoused the virtues of Robert Rubin's high dollar policy. In other words, the demon of the over-valued dollar, and the resulting trade deficit, was somehow good when the over-valuation was driven by foreign investors who were anxious to lose their shirts in the U.S. stock bubble of the late nineties.

Now, the high dollar is again bad, although the current cause of the over-valuation is not quite clear in the conventional wisdom (at least as rendered on the Times editorial page). If we assume that the Times has returned to the world of standard economic theory, then the over-valuation of the dollar is attributable to the upward pressure on interest rates that is caused by budget deficits. In this world, a larger budget deficit leads to a higher dollar.

But wait, the Times seems to have a somewhat different story:

"The problem is this: unless a falling dollar is paired with reductions in the federal budget deficit, it could do more harm than good by driving up interest rates, perhaps sharply. That's because the foreign investors who finance the administration's "borrow as you go" budget are likely to demand higher returns to invest in a depreciating dollar.

But if budget deficits declined over the long run, the government's reduced need to borrow would help keep interest rates low as the dollar depreciated."

Okay, foreign investors will demand higher returns to invest in a depreciating dollar (i.e. if the dollar is falling 5 percent a year against the euro, then investors want a return in dollars that is at least 5 percentage points higher than the return available in euros), that seems right. But, the dollar falls more in a world where the budget deficit is reduced than in a world where it stays high. (Remember, a higher budget deficit leads to a high dollar.)

This means that, at least through a period of transition to an era of a lower dollar, we might expect higher interest rates if the budget deficit were to be reduced rapidly and then the dollar fell enough to fill the gap in demand with more net exports.

I apologize if this discussion is unnecessarily complex, but tackling warped logic is not always easy. Putting a different twist on the basic issue could be helpful.

An over-valued dollar, regardless of the cause, creates imbalances (i.e. trade deficits) that inevitably imply a painful correction process. The current over-valuation was not caused by budget deficits (remember, we had a huge budget surplus in 2000, when the dollar was considerably higher than it is now). The correction from the over-valued dollar is going to hurt regardless of what we do with the budget deficit. The price of imports will rise between 10-20 percent, raising the rate of inflation and reducing living standards in the United States.

There are good arguments for reducing the budget deficit, but it's just silly to pretend that the pain from a falling dollar is attributable to the budget deficit, or that a lower deficit will somehow prevent this pain.

--Dean Baker

The financial press eagerly reported Federal Reserve Board Chairman Benjamin Bernanke's comments this week saying that he expected a gradual softening of the housing market, not a serious collapse. Mr. Bernanke's comments may reflect his true view of the housing market. However, it is also possible that these statements were made simply to soothe the financial markets.

One of the most fascinating stories in the stock bubble was Alan Greenspan's view of the Fed's proper role in dealing with the bubble. Following the bubble's collapse, Greenspan has publicly stated that he recognized the stock bubble, but thought it was inappropriate for the Fed to take any steps to reign in the bubble. This included saying anything publicly about the bubble. Greenspan's comments about the stock market as it was soaring to unprecedented price to earnings ratios were carefully crafted comments of noncommittal nonsense. He never said that a 5000 NASDAQ could be justified by fundamentals, but he was also very careful never to say that it could not.

Given that Mr. Greenspan thought that the Fed should not comment on a stock bubble, is it reasonable to think that he would have the same attitude toward a housing bubble. In other words, if Mr. Greenspan believed there is a housing bubble, would he tell us?

I don't have the answer to that one, but it does seem a reasonable question. It also seems to be an important piece of information that should be included in any news story that focuses on Greenspan or his successor's assessment of the housing market. In other words, if Greenspan, and now Bernanke, think the same way about the housing market as Greenspan thought about the stock market, they would not say that there was a housing bubble, even if they believed that there actually was one.

--Dean Baker

The New York Times had an article this morning about efforts in Congress to renegotiate federal oil and gas leases that gave the industry a windfall projected to be $20 billion over the next 25 years. The sums at stake are not huge for the country or the industry (the $800 million annual windfall is less than 1 percent of the industry's current profits), but the story does show the impact that the media can have when they do their job.

The windfall was part of the energy bill approved by Congress last year. It included a provision that gave an incentive for the industry to drill in deep water off the U.S. coast, by not requiring royalty payments. The prior energy bill also included this incentive, except royalties would be required if the price of oil crossed $34 a barrel. The new energy bill dropped the $34 threshold provision, making all oil and gas from these wells royalty free.

Times reporter Ed Andrews wrote a series of pieces earlier this year exposing this little-known clause. The resulting outrage is forcing Congress to rewrite the legislation and require the government to renegotiate the leases. The press can do good.

Two small points:

1) To an outsider from another planet, this proposed renegotiation of offshore energy leases might look similar to the recent renegotiation of energy leases in Bolivia, Ecuador, and Venezuela that have prompted such outrage from the media.

2) The principle of having royalty payments kick in when oil prices cross a certain level works pretty much the same way as a properly designed windfall fall profit tax. The idea is that the industry will have incentives based on an expected future price of oil, but if the price soars, presumably due to events beyond the control of the industry, the government takes back part of this unearned and unexpected windfall.

--Dean Baker

The Times ran a piece this morning on a budget resolution passed by the House last night. According to the article, the resolution provides for a substantial increase in defense spending (not counting war expenditures) and some degree of cuts for everything else. However, it is not clear where (if anywhere) adjustments have been made for inflation (now between 3.0-4.0 percent) so I doubt that many readers have any clear sense of what spending changes would be implied by this resolution for a $2.7 trillion budget ($2.8 trillion on NPR).

In fairness, this bill was passed at 1:00 A.M. and the Senate will almost certainly not approve it, but if it was worth writing about, it was worth writing about in a way that provided information to readers.

--Dean Baker

To increase sales, we now have my new book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, available for free download in html format. It is still possible to get a free PDF download, or you can also order a paperback copy.

Also, for those interested in asking questions on the book, or just questioning my competence and integrity, I will be guest blogging at Maxspeak on Wednesday, May 24, from 1:00-2:30 (EDT).

--Dean Baker

Both the Clinton and Bush administrations were eager proponents of European union expansion, calling on the EU to quickly admit the former Soviet bloc countries, as well as Turkey. The media have typically presented resistance to rapid expansion as reflecting perverse European fears of globalization. The Post had another piece in this vein this morning.

In assessing this resistance to expansion, it would be helpful to point out that the EU is more than just a NAFTA type trading bloc. It is a quasi-state, that in principle allows free movement of people and workers across borders and provides for substantial subsidy flows from richer regions to poorer ones.

In this context, the people who oppose rapid ascension of the considerably poorer countries of east Europe and Turkey are showing the same sort of perverse fears as those people who oppose free entry of Mexican workers into the United States and a committment to use federal tax revenue to quickly bring Mexico up to U.S. living standards.

--Dean Baker

Perhaps I'm missing something, but it seems that there is an obvious flaw with President Bush's proposal to have a tamper proof identification card for guest workers. As I understand it, under his program guest workers would be required to present this ID to employers when they get a job.

The flaw in the logic is that all workers are already required to present ID to employers showing that they are either a U.S. citizen or have legal authorization to work in the United States. The problem is that the necessary documents can be readily forged, which is why so many workers are employed illegally.

The question is, if the documents accepted for proof of U.S. citizenship can still be readily forged, what difference does it make that the ID for guest workers is relatively secure? If the flaw in the president's plan has been reported, I have not seen it.

--Dean Baker

The Times had a piece this morning about how Major League Baseball is suing to prevent fantasy baseball games from using players' statistics without paying a licensing fee.

The article tried to be fair in presenting the views of both parties as well as independent legal scholars. What is missing from the discussion is any independent economic analysis. The lack of economic analysis in articles on efforts to extend intellectual property has been an ongoing problem in the media (read the discussions of the legal battles over Napster and related services). This would be comparable to reporting on the debates over agricultural protections without ever referring to their economic costs.

The economics profession has not been very good in its treatment of intellectual property (IP) issues, but that should not give the media an excuse to ignore the often sizable economic impact of IP controversies.

--Dean Baker

Since questions continually arise on my health care postings, I will make a couple of points here that do not directly relate to the news coverage.

First, health care costs have posed a problem everywhere, but nowhere do they pose as much of a problem as in the United States. If we look at the OECD data, in 2003 (the most recent year available) the United States spent 15.0 percent of its GDP on health care. The next three countries ranked by expenditure as a share of GDP are Switzerland, Germany, and Iceland at 11.5 percent, 11.1 percent and 10.5 percent, respectively. Canada clocks in at 9.9 percent of GDP, Sweden at 9.4 percent, and the United Kingdom at just 7.7 percent.

The comparison of GDP shares actually understates the gap in expenditures. Per capita GDP is more than 20 percent higher in the United States than in Europe, primarily because we work more hours.

The difference in current expenditure levels is attributable to much more rapidly growing costs in the U.S. than elsewhere. In 1970, the United States was tied with Sweden and the Netherlands for 3rd place in the rankings, behind Canada and Denmark. The story in other countries is that health care costs have somewhat outpaced the growth in per capita GDP (this is partially due to aging, most of these countries have a considerably older population than the U.S.), it is only the U.S. where health care spending is exploding relative to GDP.

The other point is that the projected cost explosion for our public sector health care programs (primarily Medicare and Medicaid) over the next two decades is grounded in projections of exploding private sector costs. I don't make these projections, they come from the Centers for Medicare and Medicaid Services (CMS). The projections may well turn out to be too pessimistic (we should all hope that they are), but it is ludicrous to make plans to only deal with the public side of the problem and not address the problem of health care costs in the private sector.

The CMS projections imply that the average cost of health care for a person between the ages of 55 and 65 in the year 2025 will be almost $18,000 (in 2005 dollars). These are the 10 years before people reach the age of Medicare eligibility. How do we think that these people are going to pay for their health care in 2025? Anyone who is serious about tackling the projected explosion in Medicare and Medicaid costs better have a plan to deal with the explosion of private sector costs, otherwise, they are not being serious.

--Dean Baker

Medicare and Social Security costs are projected to soar over the next decade as the baby boomers retire. Medicare and road maintenance costs are projected to soar over the next decade as the baby boomers retire.

Health care costs in the United States are out of control, with per capita health care costs rising at rate that is more than 2 percentage points more rapid than the rate of growth of per capita income. If this pattern continues, health care costs will have a devastating effect on the private economy and also on the federal budget because of government health care programs like Medicare and Medicaid. The obvious policy response to the projections of exploding health care costs would be to find some way to fix the U.S. health care system (no other country has a problem of the same magnitude). It is dishonest to portray the issue as a problem of aging, we can afford the costs associated with aging, the problem is our health care system.

When the media reports, as the Post did this morning, that the problem is not with discretionary spending, "but with entitlement programs such as Medicare and Social Security, which will grow by 23 percent through 2010," they badly mislead readers. The cost of Social Security is rising only slightly faster than GDP. Over the next decade, Social Security spending is projected to increase by just 0.2 percentage points as a share of GDP. By contrast, spending on Medicare and Medicaid is projected to increase by a total of 1.5 percentage points of GDP.

Furthermore, Social Security is financed by a designated tax that is projected to keep the program fully solvent through the 2052 by the non-partisan Congressional Budget Office. This means that any cuts to Social Security should in principle be matched by cuts in the tax, unless the intention is to mislead people about the purpose of this tax.

There is a large and powerful lobby that would badly like to cut and/or privatize Social Security, and they have no qualms about playing with the truth to advance their agenda. The media should not help them.

--Dean Baker

The New York Times had an article this morning about a new digital copyright law in France. The main features (according to the article) appear to be a requirement that music downloading services be usable on multiple devices (as opposed to Apple's Ipod monopoly) and a relatively small penalty for unauthorized downloading of copyrighted material.

For comments on the law, the Times turned to a representative of Apple, a representative of the recorded music industry, a representative of the software industry, and a business consultant. This would be like writing an article on steel tariffs and only getting comments from the steel companies and their workers. Wouldn't it be appropriate to get some comments from consumer groups or at least economists who could discuss the potential benefits to consumers and the economy from lower prices?

--Dean Baker

The New York Times had an interesting article about the growth of part-time and temporary employment in Europe. It notes that in several European countries, 20-30 percent of the workforce is employed either part-time, or on temporary employment contracts, or both.

It is good to see this piece, because part-time and temporary employment has been an important part of many European economies for close to two decades. As the article notes, these workers tend to enjoy far less employment protection than do full-time workers.

Of course, the article is somewhat misleading in implying that these workers enjoy no protection. The extent to which employment protection extends to part-time and temporary workers varies substantially across countries, but in most countries, part-time and temporary workers enjoy more legal protection than do full-time workers in the United States, who generally can be fired without cause at any time. Part-timers and temps in Europe also generally have health care coverage and other benefits like paid vacations that part-timers and temps in the United States rarely receive.

But the basic point is absolutely correct, part-timers and temps offer employers more flexibility than permanent full-time employees. Given the choice, employers will opt for more flexibility. The extent to which this increased flexibility has led to lower unemployment and more growth is questionable (the OECD research on this issue has not produced strong evidence), but it is an important feature of economic life in Europe, and it is good to see that the Times has discovered it.

--Dean Baker

The moment you have all been waiting for has finally arrived. You can download your copy of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer today. The book is available as a free e-book (read chapter 4 for the reasoning). You will soon be able to order paperback copies at Conservativenannystate.org.

The book takes issue with the prevailing political metaphor in U.S. politics: that liberals want the government to intervene to promote fairness and equity, while conservatives want to leave outcomes to the market. The book argues that conservatives (or at least those in power) support a wide range of government interventions that have the effect of distributing income upward. This list includes a trade and immigration policy that places less-skilled workers in direct competition with workers in developing countries, while protecting highly paid professionals from the same sort of competition. Another item on the list is Federal Reserve Board policies that deliberately weaken the bargaining power of less-skilled workers in order to keep inflation under control.

A third set of policies involves the use of patents and copyrights, government enforced monopolies, that lead to large economic distortions, and incidentally also allow some people to get very rich. Even corporations themselves owe their existence to the government, there are only individuals out there in strict free market land.

The book is intended to force a rethinking of the relationship between the government and the economy. The current framing -- that liberals like government and conservatives like the market -- works well for those who support the economic policies of the last quarter century. Those who think that we can do better need a new framework.

--Dean Baker

The Times had an article this morning that reports on Sweden's success in sustaining healthy rates of economic growth, while also ensuring a high degree of economic security for its workforce. The article is mostly fair, but is misleading on a few points.

For example, the article reports that Sweden overhauled its Social Security system in the mid-nineties and added private accounts. This is true, but it would have been helpful to add that the defined benefit portion of Sweden's system is still approximately one-third larger (relative to wages) than the current U.S. system.

The article also reports a common complaint that the official unemployment rate of 4.8 percent substantially understates true unemployment because it excludes the people in government retraining programs. (The article reports that labor unions put the true rate at 8 percent. Labor unions rarely appear as a source for economic data in Times articles.) It is not clear why workers in government funded training programs should be counted among the unemployed. Would it be appropriate to count workers in companies receiving tax breaks as unemployed?

In its discussion of unemployment the article also adds that, "according to some estimates, Swedes take an average of 17 weeks a year off from work on sick, disability or parental leave, further twisting the statistics. Absenteeism is the highest in the developed world." Presumably, these comments are intended to imply that the unemployment rate is actually worse than the official numbers indicate, but it is hard to follow the logic here. Other things equal, aren't people better off if they get long vacations and can take sick days without worrying about losing their jobs. (I said "other things equal", so we're assuming this doesn't affect productivity, economic growth, etc.)

It may have been appropriate to mention in this context that the employment rate (the share of the working age population that is employed) is approximately 2 percentage points higher in Sweden than in the United States.

The article concludes with the obligatory warning that Sweden and the other Nordic success stories are unique, "And in this debate, size, geography and history do matter. Sweden has been free of war for 200 years. Norway, with 4.6 million people, is rich in oil but fiscally cautious. The economy in Finland, with some 5.2 million people, revolves around the fortunes of the cellphone giant Nokia.

Also, the Nordic countries tend toward the individualism of seafaring lands whose past spanned trade and conquest. Only Finland, the lone republic among the Scandinavian monarchies, joined the euro common currency, and Norway has rejected membership in the European Union altogether."

In other words, don't try these policies at home.

--Dean Baker

Washington Post columnist Allan Sloan called for defaulting on the U.S. national debt, or at least a portion of it, in his weekly column today. Mr. Sloan pointed out that the Social Security trustees project that the program will begin drawing on the government bonds in its trust fund in just over a decade. He said that repaying the bonds in the trust fund will be a burden to the government, and that his children, as future taxpayers, shouldn't have to bear this burden.

Mr. Sloan probably would object to describing his column as a call for default on the national debt, but this in fact exactly what it is. In the column, he implicitly derides the legitimacy of the bonds held by Social Security by calling them IOUs. Of course all bonds are IOUs, but they are never described this way in normal discussions.

Under the law, the bonds held by the Social Security trust fund are legal obligations of the federal government. Social Security bought these bonds with the excess Social Security taxes paid by more than 150 million workers over the last two decades. (Taxes were deliberately raised to exceed benefits in order to build up the trust fund.) The trust fund current holds more than $1.9 trillion in bonds, approximately $12,000 for every active worker. Workers have every right to expect that the money they paid into the trust fund in Social Security taxes will be repaid in benefits that are financed out of general revenue. (This is not in one pocket out the other, general revenue comes primarily from the progressive individual and corporate income taxes, while Social Security taxes are highly regressive.)

Mr. Sloan's kids may not want to pay their taxes (most people would prefer not to pay taxes, if they can avoid it), but as a moral matter, there is no greater justification for defaulting on the debt to Social Security than any other portion of the government debt. If a future Congress debates default on the bonds held by the Social Security trust fund then it would also be reasonable for it debate default on all other government bonds, including those held by banks, corporations, and wealthy individuals.

Realistically, if we fix our national health care system, then future budgets should not impose any extraordinary burdens on future generations of taxpayers. But, if default ever rises as an issue on the national agenda, then we should be talking about making all debt holders share the burden of the default, not just the debt holders that Mr. Sloan doesn't like.

--Dean Baker

A New York Times article this morning, reporting that up to 4 million infants die every year for the lack of very simple medical care items, provides a classic example of reporting numbers out of context. The article informs readers that the Bush administration proposes to spend $323 million in 2007 on aid for maternal and child health care in developing countries, down from $356 million in 2006.

Apart from the failure to adjust the spending figures for inflation, very few Times readers are probably aware of the fact that the 2007 appropriation comes to $1.08 per person in the United States, or 0.013 percent of federal spending. This program may or may not be a good use of public money, but it is a trivial item in the federal budget, and readers should be made aware of this fact.

--Dean Baker

The New York Times had an interesting piece on the poor state of the dental care provided by the British public health care system in its Sunday paper. The article reports that people face long waits for even emergency dental care, and that many now turn to private dentists or go to foreign countries for treatment.

Readers naturally feel sorry for the plight of Britons with bad teeth and are thankful that here in the United States we have an efficient private health care system. The key fact missing in the story is that Britain spends less than 40 percent as much person for its health care as the United States. Whatever the relative merits of the British mechanism for providing health care and the U.S. system, it would be truly astonishing if the British system could best the U.S. in every category, spending just 40 cents to our dollar. (Britain does much better on life expectancy for its 40 cents.)

This article is part of a long series of articles in the New York Times which could go under the title of "the problem of publicly financed health care systems." Previous articles in this series have noted problems in French, British, and most often the Canadian health care systems. Articles in this series almost never mention the fact that the health care system in question costs far less than the U.S. system or that it produces longer life expectancies. My guess is that most of the highly educated readers of the New York Times are ignorant of these basic facts about health care, even though Paul Krugman has done a heroic job of trying to fill the information gap in his columns.

--Dean Baker

Like everyone else, the media have been confused on this basic question, with the main data sources providing very different answers. Last Friday, the Bureau of Labor Statistics (BLS) released the employment cost index (ECI) which showed a sharp slowing in the rate of nominal hourly compensation growth in the first quarter to an annual rate of just 2.4 percent. This is well below the rate of inflation, which, depending on the course of gas prices, will be in the range of 3.0-4.0 percent for this year.

On Thursday, BLS released productivity data, which showed that hourly compensation was rising at an annual rate of 5.7 percent for the same quarter. Further complicating the picture is the employment report that BLS released this morning showing wages rising at a 4.7 percent annual rate over the most recent three months (compared to the prior 3-month average).

The picture is not quite as confusing as this may appear. First, the quarterly compensation data from the productivity report should be ignored. There are enough random factors on both the compensation side and the hours side that this number is essentially worthless. For example, this data shows hourly compensation rising at a 10.0 percent annual rate in the 4th of 2004 and at just a 1.3 percent annual rate in the 2nd quarter of 2005. Compensation growth in the world is not so erratic.

It is worth taking the annual data that shows hourly compensation increasing by 3.8 percent over the last year. This is probably a good start.

The slowing of compensation growth in the ECI turns out to be entirely attributable to a sharp slowing in benefits growth. The pattern of benefit growth in the ECI is also extremely erratic. This is due to the timing of firm's payments to pension funds and insurers, it has little to do with the benefits actually received by workers. If we just look at the wage component of the ECI, we find a modest uptick in wage growth to a 2.8 percent annual rate in the first quarter, although the pace of wage growth over the last year at 2.4 percent is down from the 2.7 percent rate in the year to March 2005.

Finally, the average hourly wage series in the employment report is now showing an extraordinary acceleration in wage growth. Much of this is driven by a 0.5 percent increase reported for April. The monthly wage data is erratic and the April jump will likely be partially reversed by slower than trend wage growth in coming months, but it is hard to avoid the conclusion that there has been an acceleration of wage growth in this series. At the beginning of 2005, the average hourly wage was rising at close to a 2.5 percent annual rate. It is probably rising at rate between 3.5-4.0 percent now. Such a figure would be consistent with the compensation data in the productivity report.

The are some technical differences in the way that the ECI is constructed that could explain its divergence with the hourly wage series (the wage data usually track closely). But, I would bet on the average hourly wage series at this point, the gradual acceleration (partially dismissing the April number) is consistent with a picture of a tightening labor market that is finally allowing workers to share in some of the productivity gains of the last five years.

--Dean Baker

I plead guilty to the same sort of sloppiness I have noted elsewhere. Earlier this week I commented on the coverage of Commerce Department's release of data for March on consumer spending and prices. I then noted that the consensus forecasts for first quarter productivity growth appeared to be too high. I based this on the fact that the hours data reported in the monthly employment reports indicated that hours were growing at close to a 4.0 percent annual rate in the quarter. As it turned out, hours growth was reported as 2.5 percent. What went wrong?

Well, the hours data that go into the published index in the employment reports are for production and non-supervisory workers in private non-farm employment. That means that the index excludes the impact of changes in employment and hours for production and supervisory workers. (There are also some private sector workers who are not in the business sector, for example workers in non-profit universities or hospitals.) Since the vast majority of workers (@80 percent) fall into the production/non-supervisory category, I got lazy and assumed that the change in hours for this group of workers would be pretty much the same as the change in hours for all workers in the non-farm business sector.

As it turned out, this was wrong big time. While non-production supervisory employment rose by 664,000 from the fourth quarter to the first quarter, employment of supervisory workers actually fell by 80,000. (This is an interesting story, which I may return to in future notes.) Anyhow, the moral is to do your homework. I didn't do it as thoroughly as I should have (all this data was publicly available), and therefore I was wrong.

--Dean Baker

The New York Times has run many excellent articles over the years describing various forms of corruption in the pharmaceutical industry. (The latest describes the battle over monitoring the prescribing practices of individual physicians.) The one thing missing from these articles is any economic analysis.

Every person who has suffered through an introductory economics class has heard the story about how government intervention in the market leads to corruption. Economists always rant above how trade protection or various forms of government regulation inevitably lead to gaming of the system and rent-seeking behavior. If we expect to see such corruption when a tariff or quota raises clothes prices by 15-20 percent, why wouldn't we expect to see such corruption when drug patents raise prices by 200 percent or more?

Calling government protection a "patent" or defining it as an "intellectual property right" does not change the economic model one iota. The sort of incentive for corruption from protection is the same, except the magnitudes are many times larger. For this reason, the predictable result of the government granted monopoly known as a drug patent is that drug firms will lie about their test results, conceal evidence of harmful effects, use illicit political influence to get drugs approved by the FDA and purchased by government agencies like Medicaid, make payoffs to doctors for prescribing their drugs, make payoffs to generic manufacturers to prevent competition, etc.

The Times has performed a valuable service in documenting many instances of these abuses over the years. However, the media needs to expose the underlying problem in the incentives created by the patent system so that we can have a serious debate over the best mechanism for financing prescription drug research.

--Dean Baker

I just heard economics commentator Chris Farrell on Marketplace talking about the United States open border immigration policy, under which ambitious hardworking immigrants can freely enter the country. Excuse me, but what planet is this guy on?

Open borders mean that a Mexican doctor, an Indian lawyer, a Brazilian economics commentator can come across the border in any form of transportation they like, and work wherever they like, at whatever pay they are willing to accept.

The United States does not have this policy or anything like it. It has a policy that sharply limits legal opportunities for working in the country. The policy is that if you are willing to risk death in a dangerous border crossing and risk facing deportation at any time, then you can work in some sectors of the economy illegally.

Doctors, lawyers, and economic commentators in the developing world are not willing to take these risks. Furthermore, the businesses that hire such people are not willing to risk the legal and political consequences of wholesale violation of immigration laws. This means that people like Chris Farrell don't have to face the same competition from immigrants as less-skilled workers. If he did, Marketplace would have a far more competent commentator on economic issues.

--Dean Baker

Steven Greenhouse had an excellent piece in today's New York Times about sweatshops in Jordan that manufacture apparel for export to the United States. This industry has been developed largely as a result of a trade agreement that Jordan signed with the United States in the late nineties. The article describes slave-like conditions, as foreign workers routinely have their passports confiscated by factory owners so that they cannot freely leave. According to the article, workers can be forced to work up to 48 hours straight, are routinely ripped off for their pay, and are beaten if they complain.

Two aspects of the article raise especially interesting questions. First, the article indicates that the apparel jobs have gone almost exclusively to foreign (largely Bangladeshi) workers. It is unlikely that the trade agreement was sold in Jordan based on the jobs that it would create for guest workers. The benefits to Jordan's economy from this trade would be very limited.

Second, the Jordan trade pact actually included language on labor standards, unlike other trade deals of the last fifteen years. The conditions reported in this article suggest that this language has not had much impact on actual labor conditions.

--Dean Baker

At the risk of damaging my standing as one of the leading proponents of the housing bubble argument, I would take issue with the assessment of a Washington Post article. The article reported that the percentage of people refinancing homes with mortgages that are larger than the original mortgage (in other words, pulling equity out of their home) hit a 16 year high in the first quarter.

The article rightly notes that people cannot use their homes as banks indefinitely, and that this process depends on continually rising house prices. This is all fair enough, but there is a key issue that is missing in this analysis. The main reasons to refinance are to save money on interest by taking advantage of lower interest rates and to pull equity out of your home by taking out a larger mortgage.

Well, mortgage interest rates are back up to levels not seen since 2002. This means that few homeowners can save money by refinancing at a lower interest rate. Those looking to do so almost certainly already refinanced at some point in the last 4 years. With this reason for refinancing disappearing (total refinancing is down by more than two-thirds from its 2003 peak), the only people who refinance are the ones who want to pull equity out of their home.

So, the refinancing story may not be evidence of the bursting bubble, but there is plenty of other evidence. Noteworthy on this list are record high vacancy rates for ownership units and the downward trend in existing home sales and mortgage applications for home purchases. The sky is still falling.

--Dean Baker

I was struck by the reporting on the increases that the Commerce Department reported for March consumer spending and the personal consumption expenditure deflator (PCE). Both figures were presented as being higher than expected. It seems that the financial markets were surprised by the news, since the yield on 10-year treasury bills rose by 6 basis points.

I am surprised by the surprise because the spending and price data released on Monday was not new information. It was actually imbedded in the first quarter GDP data that was released on Friday. The Commerce Department needed to include March data for both consumption and inflation in order to compile GDP data for first quarter data. This means that anyone who cared could have pulled out the previously released data for January and February (which is subject to revision) to calculate the numbers that would appear in the March release.

I have occasionally done this myself when I had no better use of my time. Unless the first two months data are revised by a large amount (unusual, but not impossible) it is possible to know almost exactly what the data for the third month will look like before it is officially released.

Given the six and seven figure salaries that stock market analysts earn, it seems absurd that they would ever be surprised by data that could be known in advance with simple arithmetic. I guess this shows that there are still good-paying jobs for unskilled workers.

(Tip for this week: productivity growth will be close to 2.0 percent. The reason is a reported first quarter surge in the number of self-employed workers will lead to hours growth at close to a 4.0 percent annual rate.)

--Dean Baker

The reporting on the release of the annual Social Security and Medicare trustees reports was better this year than in the past, but still not very informative. Most reports did not include the context that would have made the information understandable to most readers/viewers.

In the case of the Social Security report, there was less mention of the scary sounding multi-trillion dollar shortfall projections that are meaningless without being placed in any context. (The 75-year shortfall projected by the Congressional Budget Office [CBO] is equal to 0.4 percent of GDP over this period, approximately 40 percent of the size of the post September 11th boost to the defense budget.) Much of the reporting still portrayed the projected 2040 date of the trust fund's depletion (2052 according to CBO) as a looming crisis demanding prompt action, implying that Congress needs 34 year lead time to deal with a problem that was dealt with in 8 months back in 1983. Given the size and uncertainty surrounding the projected shortfall, it is difficult to make a serious case that action on Social Security is urgent.

In addition to distracting attention from more pressing problems, my concern over hasty action on Social Security stems from the widespread ignorance about the state of the program and its potential impact on future well-being. Even the trustees relatively pessimistic assessment of the future implies that real wages will be almost 50 percent higher by the 2040 projected depletion date (real wages will be almost 80 percent higher in the CBO projections). The idea that our children or grandchildren will impoverished by higher Social Security taxes is absurd on its face, but the public has been so scared by demagoguery on this issue, that tens of millions of people have precisely this fear. My preference is to defer action until the media has done its job of educating the public. If that takes 34 years -- that's okay by me.

Of course the real danger to future living standards is the projected increase in health care costs that is threatening the Medicare program and government budgets more generally. This is a private sector health care problem, not a problem with the Medicare program. The projected increases in health care costs imply that the annual cost of health care for workers between the ages of 55-64 will be almost $18,000 a year (in 2006 dollars) by 2026. This is a crisis that demands our attention. Unfortunately, this projected explosion in health care costs rarely is noted in the media, even as they report the dire implications for a program like Medicare.

--Dean Baker

It would be reasonable to think that a densely populated island with exorbitant land and housing prices would be happy to alleviate its crowding problem. That's not the thinking at the Washington Post.

The Post had an article this morning noting the surprising fact that the number of obstetricians in Japan is declining along with its dropping birth rate. The article notes that Japan's population is currently shrinking, and that if current trends continue, its population will fall from over 127 million to just 100 million by 2050. The Post then describes this drop in population as a "problem."

Well, fewer people, rising capital labor to ratios (and therefore higher wages), less crowding, and less pollution is not a problem in any economics I know. Maybe the Post will explain its reasoning in some future article, but for now, this front page story simply doesn't make sense.

--Dean Baker

NPR had a report this morning on the debate over extending the lower tax rate on dividends. The report correctly pointed out that the vast majority of this tax cut will go to the richest 1 percent of the population. It also noted the ambiguity of the evidence showing any substantial link between lower dividend taxes and increased investment and growth. However, the report neglected to point out that the vast majority of stockholders do not benefit from the cut in the dividend tax rate.

The reason is simple. Most stockholders hold most or all of their stock in retirement accounts. These accounts accumulate money tax free as long as the money is in the account. When a worker retires and pulls money out of the account, the money (all of the money) is taxed as ordinary income. This is regardless of whether the money in the account came from wages, dividends, interest or capital gains. (The tax is paid in advance with Roth IRAs, but holders of these accounts also get no benefits from the tax cut.)

I have discovered that many people are confused on the impact of this tax cut and that many holders of retirement accounts believe that they benefit from it. In fact, I remember arguing at length with an economics reporter from a major city paper who was convinced that he was getting a tax break on the money in his 401(k). It is very simple to point out that holders of retirement accounts do not benefit from the dividend tax cut. At least then the public would know who gains from this tax cut. It's too bad that NPR listeners will remain ignorant on this point.

--Dean Baker