Okay, I'm not gone yet. The NYT reports on concerns about a growing labor shortage in Iowa and tells readers that "remedies are not simple." In the very next sentence we learn that: "wages are lower than elsewhere in the nation or region, except South Dakota."

Arghhhhhhhhhhhh!

There is a labor shortage in Iowa. Wages are the second lowest in the country. Come on folks, the NYT is supposed to be a serious newspaper. I need a vacation.

--Dean Baker

At least until June11th, that is. I will be away on vacation. So stop back in a week and a half, and remember, in the meantime, don't believe anything they tell you.

--Dean Baker

The WSJ ended a 3-part series on the demise of Bear Stearns with a discussion of the buyout engineered by the Fed. It poses the issue confronting the Fed in engineering the buyout and the guarantees to other investment banks and their creditors as one of creating moral hazard versus financial collapse.

These were not the only choices. The Fed could have imposed conditions for its assistance. For example, it could have limited its guarantees and access to the discount window to investment banks that capped executive compensation at $2 million a year. This would have meant that taxpayers would not have to directly subsidize the incomes of the richest people in the country, as they are now doing as a result of the Fed's actions.

--Dean Baker

The NYT reports that the World Bank is increasing it's spending on food programs to $6 billion next year from $4 billion this year. How much of a strain is this on the wealthy countries that provide most of the money for the World Bank? Few readers probably have any idea.

If we just did the calculation based on the populations of the U.S., Europe and Japan, then the cost is less than $8 per person per year. Another helpful comparison is that the new spending figure is equal to less than 2 weeks spending on the Iraq War. Since almost none of the NYT's readers have any idea how much $6 billion is, there is no point in writing in a number like this without any context. It is simply a pointless ritual.

--Dean Baker

The NYT reports on the management of retirement plan of U.S. Sugar Company. The article reports that the company, which is largely worker-owned, cashed out workers shares at a price that was well below the value of a takeover offer that the company had received.

According to the article, the workers were not informed of the takeover offer. Because the company's stock is not publicly traded, the workers did not realize the true value of the stock at the time they cashed out their holdings. There are hundreds of other companies with comparable worker-ownership arrangements where the same sort of abuses could arise. This is nice piece of investigative journalism.

--Dean Baker

The Washington Post told us "new-home sales up 3.3 percent" in a headline to an article on the release of April data on new home sales. The article itself pointed out that the April figure was only up measured against a downwardly revised March sales number and that sales remained near a 17-year low.

The article accurately reflected the weak state of the housing market indicated by recent data. The headline may have given readers a different impression.

--Dean Baker

It's about time. Of course we should ensure that developing countries are compensated for the loss of trained medical professionals. The gains to the U.S. will be so large that we can be sure that the developing countries benefit as well.

Thanks to Carolyn Kay at MakeThemAccountable.com for steering me to this one.

--Dean Baker

I often have occasion to comment on the failure of the media to report on the housing bubble and the risks that it posed to the economy and to families’ personal finances. I have made the same complaint about reporting on the stock bubble. There were few stories in any of the major media outlets that warned of the bubble and its likely demise prior to the collapse in the years 2000-2002.

I have heard many comments (on BTP and elsewhere) that I am being unfair to reporters, because they are just reflecting the consensus within the economic profession, which managed to overlook the growth of both bubbles. This is an entirely valid complaint against the economics profession.

The overwhelming majority of economists completely missed the stock bubble even as it hit its peak in 1999 and 2000 (I’m referring to their public forecasts, not their personal comments to friends). They also completely missed the housing bubble until its deflation was already well underway in 2007.

It is easy to verify these facts. The Philadelphia Fed’s Livingstone Survey [http://www.philadelphiafed.org/econ/liv/] summarizes the predictions of more than 30 leading forecasters. There is no evidence that these forecasts reflect the expectation of an imminent collapse of the housing bubble in 2006 or even 2007, or the collapse of the stock bubble in 2000-2001. (Another good source is the Blue Chip Financial Forecasts, which present the forecasts of 50 prominent economists. In the fall of 2000, not one of the 50 economists saw the recession coming the following winter. Unfortunately, these forecasts are proprietary and therefore not freely available on the web.)

Since the vast majority of economists failed to recognize two huge financial bubbles, the collapse of which had enormous consequences for the economy, it is reasonable to conclude that there is some inherent problem with the nature of the consensus within the economics profession. Either these economists hold views about the world that prevent them from seeing financial bubbles, or the sociology of the profession is such that they are unable to express independent opinions.

Regardless of which scenario is accurate, the consensus within the economic profession has twice in the last decade been demonstrated to be a grossly inadequate source for information on the economy. Good reporters should recognize this fact. This means that going to 2 or 3 standard well-credentialed sources will often not be sufficient to obtain a range of views. It is reasonable to expect that reporters will try to find economists who were not surprised by the collapse of the stock and housing bubbles when getting views on the economy’s prospects.

When reporters continue to rely exclusively on economists who missed the housing bubble, they deserve to be criticized. They are not responsibly presenting the range of views in the profession if they have not included anyone who was able to recognize the nature of the economy’s current problems.

[I have appended a response to a comment by Cervantes below:

All areas of science are to some extent self-contained. They control their own credentialing process -- they decide who gets the top positions and which articles get published in the top journals.

This means that there are opportunities for abuse. It will be difficult for non-experts (including reporters) to determine where such abuses are preventing serious arguments from being presented.

However, when the predictions of the mainstream of the profession are repeatedly shown to be wrong, as they have been in economics, then reporters should be viewing the consensus with skepticism.

I can give a long list of very important topics (not just the bubbles) where the mainstream in the profession has been shown to have been wrong.

For example, just over a decade ago, the mainstream was absolutely contemptuous of anyone who argued that unemployment rate could below 6.0 percent (the old "NAIRU") without accelerating inflation. Now, everyone recognizes this is true.

I also remember arguing with the Boskin Commission people who argued that the CPI overstated inflation by 1.1 pp each year in an effort to cut Social Security. There were some modest changes to the CPI (about 0.3 pp in the Boskin Commission's view), but now no one is complaining about the overstated CPI.

I could add many others, but the point is that the consensus within the profession has repeatedly shown to be wrong. Good reporters know this and therefore seek out views that are outside the consensus.]

--Dean Baker

NPR had a very good piece this morning detailing how investment banks accepted and passed on mortgage loans that they knew to be bad. According to its report, one investment bank had a contract with New Century, a leading issuer of subprime mortgages, that it would reject no more than 2.5 percent of its loans. Of course, such a contract would be an invitation to submit bad loans.

At the end, the report presents the assessment of the investment banks' actions by Adam Davidson, NPR's economic correspondent. Mr Davidson said that the investment banks bear responsibility for the mortgage crisis, but so do many other parties up and down the chain, including the home buyers and the mortgage issuers.

Mr. Davidson did not include the media in his list. Of course there were people who did try to call attention to the housing bubble and the abuses that were fueling it. These people were largely ignored by the media, including NPR (albeit, not completely). Instead they chose to turn to "experts" like David Lereah, the chief economist of the National Association of Realtors, the Joint Center on Housing Studies at Harvard (which explicitly denied the existence of a housing bubble, or any of the hundreds of macroeconomists who somehow failed to recognize anything peculiar in the unprecedented run-up of house prices.

Had reporters been better able to use independent judgment to analyze the situation themselves, rather than just relying on the usual experts, the public would have been alerted to these problems long before the bubble grew to such dangerous levels.

--Dean Baker

The NYT reported that the United States, along with Japan, the United Kingdom, and the World Bank, are putting up $5.5 billion to help developing countries adopt clean technologies. In addition to not giving readers any clear idea as to how significant this sum is (it's presumably a revolving loan fund, but even that is not entirely clear from reading the article), the article also does not give readers any ability to assess it's likely impact.

To do that, readers should look back to a NYT piece published in December that reported on how the Clean Development Mechanism (CDM), which is presumably the context in which this fund is being created, was rife with fraud and having little impact on greenhouse gas emissions. The basic story is that it is very difficult to assess the impact of actions on a project by project basis.

For example, a utility may have already planned to shut down a 60 year-old coal burning power plant, simply because it was no longer cost effective. If the utility gets paid to shut down the plant through the CDM, this is not a new reduction in emissions. Without a well developed baseline path, it is very difficult to determine where specific projects are actually leading to actual reductions in emissions.

It is easy to design mechanisms that could achieve real reductions in emissions in developing countries in far way, but thus far almost no politicians have been interested in pursuing such paths and the media have chosen not to discuss such alternatives.

--Dean Baker

The WSJ tells readers that "despite some changes, euro-zone labor markets remain less flexible than the U.S.'s." While the article implies that labor market inflexibility (e.g. unions and employment protections) is responsible for weak job and productivity growth, that is not what the research shows.

Countries with very strong unions and labor market protections, such as Denmark and Sweden, enjoy unemployment rates that are comparable or even lower than in the United States. For this reason, the OECD now encourages countries to try to emulate the labor policies pursued by these countries, if they want to maintain both strong job growth and provide their populations with economic security.

--Dean Baker

Much of the story in the mortgage market in the last year has been the disappearance of privately issued, privately insured mortgages. The role of Fannie, Freddie, the FHA, and the VA has always been large, but they essentially are the mortgage market now. Floyd Norris has a nice piece on this in today's NYT.

--Dean Baker

The NYT has an interesting article on declining employment rates among teenagers over the last two decades, but it also intertwines discussion of this long-term trend with comments about the difficulties that teens will face finding jobs this summer.

While this may prove to be the case given the weakness of the economy, the most recent data suggest otherwise. The biggest surprise in the April employment report was a 1.2 percentage point jump in the employment rate for people between the ages of 16-19. As was noted in the CEPR Jobs Byte, this jump may prove to be an aberration (these numbers are erratic and the seasonal adjustments are always problematic), but it should have been noted in this discussion.

--Dean Baker

Some leftists argue that people should not use GDP to measure economic progress. It seems that the NYT has embraced this view in an article singing the praises of Brazil's economy.

The NYT tell us that Brazil has "something Latin American long lacked: confidence." It's not clear how the NYT measures confidence, but Brazil does rather poorly by criterion that are more easily measured, like economic growth. While the IMF estimates that Chile's per capita growth between 2002 and 2007 averaged 3.6 percent, and Argentina's growth averaged 7.8 percent, Brazil's growth is estimated at just 2.4 percent.

In spite of this weak growth performance, the NYT tells readers declares that inflation in Brazil has fallen because of the "competent management of President Luiz Inácio Lula da Silva." It also tells readers that "more Brazilians have more money" than they did previously.

These comments have no place in a news article. Economies grow, unless there is a war, natural disaster, or really bad management. The relevant question is the rate of growth. Brazil has done very poorly by this measure. If Brazil's economy had some alternative criteria by which it had done well to offset it weak growth, such as more leisure time for workers or more equal distribution of income, then perhaps the NYT's enthusiasm for Brazil's economy could be justified in spite of its weak growth, but the article presents no such evidence.

In short, the NYT is anxious to celebrate Brazil's economy in spite of the data, not because of it.

--Dean Baker

USA Today reported that the 3.1 percent year over year price decline in the Office of Federal Housing Enterprise Oversight's House Price Index was the largest decline in the index's 17-year history. Actually, there is data from the index going back to 1976, giving it a 32-year history.

I'm sure this was an innocent mistake but it should be corrected. The sharp price decline in house prices over the last 18 months really are extraordinary, and are without precedent since the Great Depression. News reports should make this point clear to their audiences.

[Okay, put this in the "never mind" category. An alert reader pointed out to me that the 17 year history referred to the OFHEO purchase index. OFHEO produces their House Price Index based on both purchases and refinanced homes. The prices used in the latter case are appraised prices, not actual sale prices. There are good reasons for believing that the sale prices give a better sense of the market than the appraisals. For this reason, OFHEO began to report the a separate index based only sale prices in 1991, 17 years ago. So, USA Today is absolutely right, the index is just 17 years old.

--Dean Baker

That's the headline of a WSJ article about the views of Christian Noyer, a member of the governing council of the European Central Bank. The WSJ also has an article today about how the Fed is now painting a gloomier picture of the future. It looks as though the economists were once again surprised by bad news.

However entertaining it might be to hear the expressions of surprise about the state of the economy from prominent economists, it might be useful if reporters would occasionally seek out the views of economists who are not continually surprised by the economy.

--Dean Baker

Robert Samuelson told readers this morning that, "today's retired and well-pensioned autoworkers have condemned those who followed to lower-paid jobs or no jobs at all." As a matter of economic theory, it is almost impossible to imagine what Samuelson could be thinking. How does a worker get less money because someone of a prior generation received a good pension? Is the worker's marginal product now lower?

Presumably Samuelson is arguing that pensions and health care benefits have been a major drain on the big auto companies. This is of course true, but this was due to the incompetence of highly paid pension fund managers and their Wall Street consultants who were too dumb to recognize a stock bubble in the mid-90s.

Let's keep the evil-doers straight. The company's 7-figure executives control the pension fund. The fact that they didn't know what they were doing weakened the big three. The problem is with the 7-figure crew, not the people who worked for a living on the assembly line.

--Dean Baker

I really don't have a clue on that one, but that's the view that the NYT attributed to the French finance minister.

Let's see, a low dollar makes foreign goods imported into the United States more expensive. It also make U.S. exports cheaper for people living in foreign countries. On both sides we should see an improvement in our trade balance as imports decrease and exports increase. So why would this increase demands for protection?

It would be appropriate for reporters to point out that these sorts of assertions by high level officials don't make sense just as it would be appropriate to point out that if they were wrong if they made a wrong assertion about a historic fact of importance.

As a more general issue, it would be appropriate to point out that the word "protectionism" is used simply to refer to trading practices of which the speaker disapproves. There is no, as in zero, as in none, economic theory that says that protectionist barriers on manufactured goods are in any way more harmful than the protectionist barriers that the United States has on highly paid professional services, like doctors' and lawyers' services. The main reason for the different treatment of the two forms of protection seems to be that reporters (and economists) are more likely to identify with doctors and lawyers than with textile workers and autoworkers.

--Dean Baker

At least some of us have been surprised by the limited extent to which inflation in the earlier stages of production has been passed on in either the consumer price index or the finished goods index of the producer price index. With the release of data for April, we may no longer need to be surprised.

The core finished goods index rose by 0.4 percent in April. It has now risen at a 5.0 percent annual rate over the last quarter. The core intermediate goods index rose by 1.2 percent in April and has risen at a 12.4 percent annual rate over the last quarter. With productivity growth having slowed sharply, it is difficult to believe that these higher costs won't be passed on at the consumer level. This is big news.

--Dean Baker

The NYT wants its readers to believe that the 35 hour work week has made France less competitive, reporting that "even some leading Socialists have acknowledged that the policy has hurt French competitiveness."

It's not clear what factual or theoretical basis for this assertion is. In the competitiveness category France seems to be doing substantially better than the United States, with nearly balanced trade, compared to a U.S. trade deficit that exceeds $700 billion a year, more than 5 percent of GDP.

On a theoretical level, the article implies that the law increased labor costs, telling readers that law reduced the workweek "to 35 hours from 39, with no loss of pay." In fact the reduction in the workweek was phased in over time. Furthermore, it has been a decade since the law took effect. This means that even if the law may have originally led to some increase in hourly wages, employers would have had ample opportunity to adjust wage rates over the last decade so that wages should again reflect productivity (insofar as they ever do).

While restrictions on the workweek can impose some cost on employers, it is not obvious that these costs are large. Furthermore, given the public response to efforts to lengthen the workweek, it appears that the benefits to workers of shorter workweeks are substantial.

--Dean Baker

Bob Davis is worried that if elected, Barack Obama may find it difficult to push the same sort of trade pacts as his predecessors. He couches his concern as a fear that Obama may "find it hard to govern as a free trader," but of course none of his predecessors governed as free traders, they governed as selective protectionists.

Trade deals like NAFTA and CAFTA were designed to remove barriers to trade in manufactured goods, thereby putting manufacturing workers in direct competition with low-paid workers in the developing world. This not only put downward pressure on the wages of manufacturing workers, but on the wages of non-college educated workers more generally.

These trade deals did little or nothing to remove the barriers that protect highly paid professionals like doctors and lawyers. There is no economic theory that shows protection for manufactured goods is more harmful than protection for highly paid professional services, so the concern expressed here seems to be that Obama may not pursue trade policies that redistribute income upward with the same vigor as his predecessors.

It is also important to note that a major thrust of recent trade agreements has been to increase protectionists barriers in the form of increased patent and copyright protection. These forms of protection lead to enormous economic distortions, since they can raise prices several by several thousand percent above the competitive market price. In the case of patent protection for prescription drugs, the cost can also be in the form of lives, since many people in developing countries may be unable to afford the patent protected price for life-saving drugs.

Strengthened patent and copyright protection are also inconsistent with free trade, although these measures do also have the effect of redistributing income upward.

--Dean Baker

The NYT is worried about the next rash of resets of mortgages, this one in the Alt-A mortgage market, the segment that is rated between prime and subprime. They are worried that if nothing is done that house prices will decline too far.

Someone has to get these folks a program so they can follow the housing crash. The problem in the housing market is falling prices. Mortgage resets were always secondary. NYT editors might repay a $400k mortgage on a home that is worth $300k, but most homeowners have more commonsense (or less money to waste).

The main reason that mortgages are going bad in very large numbers is that prices have fallen. If prices had not fallen, then homeowners having trouble paying their mortgages would either borrow against their equity to meet their payments (as many had done before prices began to decline) or they would sell their home and put money in their pocket. The reset to higher interest rates is very much a secondary part of the story.

The NYT's concern that house prices will fall too far is difficult to understand given its lack of concern about the rise of house prices during the bubble. There is no obvious reason that below trend house prices should be viewed as a more serious problem than above trend house prices.

Below trend prices house prices benefit those who do not own a home. There is both a direct effect (it's cheaper to buy a home) and an indirect effect (non-homeowners will own a greater share of national wealth). Non-homeowners tend to be relatively lower income people. Above trend prices obviously benefit homeowners who tend to be relatively higher income people.

It is perhaps worth noting in this context that the NYT's very strong held trade policy of selective protectionism (dubbed "free trade") also has the effect of benefiting higher income people. The NYT trade policy calls for subjecting manufacturing workers, who tend to be less educated, to competition with low-paid workers in the developing world. By contrast, it is content to leave in place the barriers that keep highly paid professionals (e.g. doctors, lawyers, and economists) largely protected from such competition.

--Dean Baker

Reuters reports that Josef Ackermann, the CEO of Deutsche Bank, says that the credit crunch is almost over. It would have been worth reminding readers that Mr. Ackermann was completely caught by surprise by the onset of the mortgage crisis and the credit crunch. This would have provided them with more context with which to assess his perspective.

Some of those who did see the mortgage crisis coming have pointed out that house prices are still falling rapidly and this is leading to a situation in which more mortgages are underwater and those that are already underwater are becoming even deeper underwater. This is an environment that invites defaults which will led to substantial losses for lenders. For this reason, the losses going forward are likely to be considerably larger than the losses seen to date.

--Dean Baker

The NYT is sounding the alarm because the number of engineering students in Japan has fallen by approximately 10 percent over the last decade. Apparently students are turning to other higher paying or more exciting occupations. The big question that readers of this article should ask is: "what is the problem?"

Japan's overall population is declining very modestly and its workforce will soon be declining somewhat more rapidly, so it would not be surprising if the number of engineers in Japan also fell. Furthermore, the article never providing the most basic information that would indicate the extent of any shortage: what is happening to engineers' wages? If there is a shortage of engineers in Japan, then we would expect rapid increases in their wages.

The article does not tell us anything about engineers' wages except that they are lower than for doctors and for people in finance. Without information on wage growth there is no way to assess the extent to which a shortage of engineers might actually be creating a problem for Japan's economy.

--Dean Baker

Federal Reserve Board Governor Frederic Mishkin again repeated the Greenspan "who could have known" mantra in reference to the housing bubble. In a speech presented yesterday, Mishkin attributed the financial crisis associated with the housing bubble to a breakdown in underwriting standards and distorted incentives, but asserted that:

"These problems became apparent only in retrospect. Neither the market nor regulators had sufficient information for evaluating the nature of the risks involved."

This is a remarkable assertion. It was easy for those following developments in the housing market to know of the collapse of lending standards even without the special access to the banks' financial status that regulators enjoy. The surge in zero down payment purchases was widely publicized and even celebrated in 2004 and 2005, as was the explosion of the subprime mortgage market. It was also easy to recognize that house prices had diverged sharply from their historic trend with the 70 percent real appreciation over the decade from 1996 to 2006.

This sort of disclaimer of responsibility from a Fed governor should be viewed like President Nixon's assertion that he was not a crook. It should be a major topic of investigation for financial and business reporters.

The Fed absolutely should have known about the housing bubble and the irresponsible finance that was supporting it. Its incompetence in failing to confront the bubble is big news.

--Dean Baker

Does anyone recall seeing the news reports that GDP grew 0.15 percent in the first quarter of 2008? Probably not, as a convention GDP growth in the United States is always expressed as annual growth rate, not the actual growth in a quarter.

This raises the question as to why the NYT would tell us that "German economy grew 1.5 percent in the first quarter of this year." This figure refers to growth in the first quarter. The annual rate of growth would have been approximately 6.0 percent.

Those who read the article carefully would find out that the number was a quarterly growth rate, but it is easy to believe that many, if not most, readers would not catch this detail. Therefore there would walk away thinking that Germany's economy is only growing at one-fourth its actual rate.

It is difficult to understand why the NYT did not simply annualize the growth number to eliminate this obvious source of confusion.

--Dean Baker

That would be a question that few readers of this NYT article could answer. The article describes the rapid growth of solar power in Germany, a country that gets relatively little sunlight.

It notes that government mandated subsidy are a major factor, telling readers that these subsidies. The article reports that the subsidies currently cost consumers about 1 euro a month, but then cites a legislator opposed to the subsidy complaining that the subsidy could rise to 8 euros a month by 2015, which would supposedly "soak up" 120 billion euros at that point.

The arithmetic of this one doesn't quite work. There are around 50 million German households. If they pay 8 euros a month in subsidies for solar energy, this would come to a bit less than 100 euros a year. That would translate into a cost of 5 billion euros for the country as a whole.

This is quite far from the 120 billion euro figure. Either this number is fabricated or there is some other form of subsidy that the article has neglected to mention.

--Dean Baker

Readers of the Wall Street Journal might be asking this question after seeing it describe several state-level initiatives being pushed by unions in Colorado as "costly." One of the initiatives would require that before carrying through with layoffs, employers demonstrate that there is "just cause" for the action.

Another initiative would require that firms employing more than 20 people provide workers with health care. The standard view in economics is that benefits like health care come out of wages, not profits.

The article also misrepresents the potential impact of a "right-to-work" initiative, saying that it "would let workers in union shops opt out of the union." Actually. no workers are ever compelled to join a union. Under the National Labor Relations Act, when a union is designated as the representing a specific group of workers, it is legally obligated to represent all the workers in the unit, whether or not they support the union. This means that if a worker is wrongfully fired or is the victim of some other breach of the contract or labor law, the union is obligated to represent the worker's interest, regardless of whether or not the worker supports the union.

In Colorado, as in many other states, unions may sign contracts with employers that require all the workers who it represents to pay a fee to the union for this representation. The initiative discussed in this article would make such contracts illegal, thereby giving workers the option of being represented by the union without paying for this representation. Since the initiative would allow people to benefit from union representation without paying for and does nothing about people's right to work, it can more accurately be described as a "right-to-freeload" initiative.

--Dean Baker

It's not clear what point the NYT was trying to make in its coverage of the April consumer price report released yesterday.

At one point the article asserts that:

"But most American households do not have the luxury of excluding gasoline and food from their budgets. The details of the report offered clear signs that much of the country is grappling with rising prices, just as the job market is shrinking and many companies are cutting working hours, eroding the purchasing power of American paychecks."

This is a strange comment to make about this particular price report because there actually was not much difference between the 0.2 percent inflation rate shown in the overall CPI and the 0.1 percent rate shown in the core index. Food prices did jump 0.9 percent in April, but energy prices were unchanged. Clearly, this comment does not apply to this price report.

The report also included a number of comments suggesting that core inflation is abating as the economy weakens. This is a dubious proposition as a careful examination of the report shows. There are several core components that have been showing price declines or weak price growth, which almost certainly will not continue.

Specifically, hotel prices have been falling at a 13.5 percent annual rate over the last quarter. This fall is likely to be at least partially reversed in future months. Car prices have declined at a 2.4 percent annual rate over the last quarter even though they have risen at a 3.6 percent annual rate from December to March in the finished goods index.

Finally, medical care costs have risen at just a 1.2 percent annual rate over the last three months. Medical care costs had been rising between 4-5 percent annually. Maybe I missed the reform of health care that suddenly brought medical care costs under control, but I don't think so. Look for higher medical care costs in the month ahead.

In short, this report gives good news on the inflation front for now, but look for higher inflation ahead. As always you can get the story in the CEPR price byte.

--Dean Baker

Steven Pearlstein gets it badly wrong in discussing the Frank bill that would have the FHA bailout banks by guaranteeing hundreds of billions of dollars in new mortgages. Pearlstein complains that the Bush administration complains that the program will both cost billions of dollars and not help many homeowners.

According to Pearlstein, this is impossible. Either the bill will not help many homeowners or it will not cost much, both cannot be true.

WRONG!!!!!! If the bill guarantees new mortgages at what are still bubble-inflated prices, then many of the "beneficiaries" of this program will find themselves still paying too much on mortgages which will again go underwater as prices fall further. This will lead to high default rates, which will push up costs, and relatively few people left as secure homeowners.

Frank could limit the problem of excessive guarantee prices by tying the price to rents, but he has chosen not to do so. Therefore, it is entirely reasonable to complain that the bill will be both costly and help relatively few homeowners.

--Dean Baker

The FT reports that the Fed is abandoning the Greenspan doctrine and will start to take asset bubbles seriously. If this is true, it is huge.

--Dean Baker

Very few economists saw the problems in the housing market and financial markets coming. Given that their profession is following the economy, this was a serious failing. Fortunately for them, economists are not like dishwashers or truck drivers, workers who are held accountable for their job performance.

While no one expects economists to be accountable for their work, the WSJ does a disservice to its readers by relying exclusively on the economists who missed the crash in the housing market and the resulting financial turmoil in assessing the risks of a recession.

If the WSJ had spoken to unsurprised economists they might have emphasized the impact that the loss of $6-$8 trillion of housing wealth might have on consumption. The savings rate out of disposable income remains close to zero. Before the wealth created by the stock and housing bubbles began to depress savings in the 90s, the savings rate was typically close to 8 percent. If the savings rate rose to 4 percent, just halfway back to its historic rate, it would imply a loss of more than $400 billion in annual consumption (@ 3 percent of GDP). If this increase happens over a relatively short period of time, then it would virtually guarantee a serious recession.

The continued decline in house prices is also virtually certain to lead to even higher mortgage default rates and sharply higher losses for banks on each default. The larger the drop in house prices, the more homeowners stand to benefit by defaulting on their mortgages, thereby giving them more incentive to give up their home to the bank. When mortgages are further underwater, banks stand to lose more money on each loan.

Banks have not written down the losses on defaults that have not yet taken place. When they start to see these defaults and must adjust their books, it will almost certainly lead to a second wave of financial turmoil. Look for more surprised economists in the WSJ and elsewhere in the media.

--Dean Baker

That's apparently the problem, according to a NYT article repeating the complaints of Kamal Nath, Indian's commerce minister. According to Mr. Nath, U.S. and European farming subsidies "undercut agricultural production in fertile areas of Africa."

So now we are back in the world in which food prices are too low. That's really something. We had all these articles about how food prices were too high leading to hunger and starvation and now we find that the real problem is that they are too low.

Of course the problem is that food prices are too high, causing people to go hungry. The truth is that the U.S. and European subsidies that cause the Post, the NYT, the World Bank and many NGOs to get apoplectic have the effect of lowering world food prices. That means that fewer people go hungry than would be the case without these subsidies.

This isn't rocket science, it's almost definitional. The U.S. and European effectively pay their farmers to keep farming, thereby producing more food than otherwise would be produced. This may have negative consequences for farmers elsewhere in the world, but it does mean that supply is greater and prices are lower than they would be in the absence of the subsidies.

These countries are not granting the subsidies to feed the world's poor and there are undoubtedly better ways to accomplish this task. Nonetheless, in the battle against world hunger, these subsidies are a net positive. When the foes of subsidies blame them for world hunger, they are not being honest. Their complaints against the subsidies obviously have some other basis.

--Dean Baker

That would not have been an entirely fair characterization of Senator Dodd's housing bill, but neither is it entirely fair to describe the bill as an effort to "rescue homeowners at risk of foreclosure," as the Post does today.

The bill would allow banks to substantially reduce their losses on houses facing foreclosure. The banks would be able to decide which loans it puts up for refinancing. Presumably it would only put in loans on which it anticipated large losses. The appraisal mechanism in the bill is also likely to have many of the new loans guaranteed at bubble-inflated prices, thereby reducing banks' losses on their loans.

Clearly the Democrats understand the ways in which this bill will be beneficial to banks. It is wrong to inaccurate to describe it as simply an effort to rescue homeowners.

--Dean Baker

The NYT took a strong position on its editorial page today demanding that President Bush join its effort to keep house prices unaffordable for tens of millions of families. That's right, the NYT wants housing to be unaffordable.

They didn't use this term, but they complained that house prices were falling and they wanted President Bush to sign legislation to keep house prices high. While efforts aimed at keeping the housing bubble from deflating might be beneficial to those looking to sell their homes in the next year or two, they are incredibly bad public policy.

A house price support program will cost the taxpayers billions of dollars, and it will inevitably fail, since high house prices will lead to more construction, which will lead to more oversupply, which will place more downward pressure on prices. Unless the government is willing to spend infinite amounts of money, its house price support program will eventually fail.

The effort to temporarily prop up house prices is also likely to hurt many of the families who it claims to be helping. In many cases, these families will be paying much more in housing costs to stay in a house that they "own," than they would pay to rent a comparable unit. Since the house price will eventually fall, they will never accumulate any equity. Getting moderate income families to divert money from health care and child care to paying a mortgage is not a favor to them.

--Dean Baker

The Washington Post has an extraordinarily cavalier attitude toward commitments to workers. Today it has an article in which it reports on the status of public pension funds. At one point it quotes a researcher at the Pew Center on the States as saying that defaulting on the pension funds would make public officials feel "like you are breaking a contractual promise."

Defaulting on pension obligations to workers certainly should make public officials feel like they are breaking contractual obligations, because that is exactly what they would be doing. These workers worked for their pay and their pensions.

While the Post implies that meeting these obligations is a matter of choice for public officials, (earlier the article asserts that fund managers will "have to choose whether to continue paying out or renege on benefits promised to retirees") in reality, they have little choice except declaring bankruptcy. If governments do not meet their legal obligations to retired workers, then the workers will be able to go to court and seize public assets such as the city halls, police and fire stations and schoosl. They will be able to sell off this property to collect the benefits owed them by the governments.

--Dean Baker

Over the last six years, the United States has been by far the largest beneficiary of foreign aid in the history of the world. Foreigners have been willing to put more than $3 trillion in dollar denominated assets, the vast majority of which provided negative returns (i.e. they lost money) to their foreign holders.

There are reasons why foreigners do put money in the United States, even at a loss, the most obvious of which is that foreign central banks (e.g. China and Japan) want to keep the dollar high against their currency in order to preserve their export markets. For these foreign central banks, the point is not to get a good return on their investment or even the "safety" of their investment, the point is to preserve an export market as part of an economic growth strategy.

However, there is a frequently heard claim, repeated by the NYT today, that foreign investors somehow need to hold dollars because the United States is the safest or most secure place to hold wealth. It is not clear what people are thinking when they make such assertions.

When discussing investments, the term "safe" usually means that the investment will hold its value. Investments in dollars have not held their value over the last six years as the dollar has fallen consistently and sharply over most of this period. The returns in dollars have often been very poor as well (the current ten-year treasury bond rate is less than 4.0 percent), so that investors have not come close to being compensated for the fall in the dollar by high returns. In other words, the dollar has not been and is not a "safe" currency by normal investment standards.

If the claim is that the United States will not disappear as a country, this is almost certainly true, but it is also almost certainly true of dozens of other countries around the world. Even a country like Mexico or Chile is very unlikely to disappear. Furthermore, even when such countries do disappear, such as with the dismantling of the Soviet Union or Czechoslovakia, debts are most often paid in an orderly manner. So the United States hardly stands out by having the expectation of continued existence.

In short, the decision of so many investors around the world to continue to hold much of their wealth in dollar denominated assets cannot be readily explained by other an interest in returns or the safety of dollar denominated assets. Some other explanation is needed.

My personal guess is that the dollar is safe in that an investment fund manager who loses his/her fund a fortune by investing in dollars does not have to worry about any consequences. For example, many fund managers must have lost 20-30 percent on their funds, measured in euros or Canadian dollars, over the last couple of years. Few, if any, of these managers will be fired for this loss.

On the other hand, if they had incurred similar losses by investing in Argentina or Mexico, they probably would be getting an unemployment check today. Investing in dollar assets provides fund managers with the same right to be stupid that investing in the stock market in the late 90s provided fund managers at the time. Even though it was obvious that such investments would be big losers, the managers that lost their clients billions could just say "who could have known?" and get off the hook.

As long as fund managers know that they can lose their clients a fortune with impunity by investing in dollars, then they will continue to do so. If they are forced to be held accountable for dollar denominated investments in the same way that they are accountable for other investments then they will demand the same returns from investments in the United States that they expect from other investments.

--Dean Baker

It is remarkable how often reporters/columnists feel the need to assert that political disputes are about ideological issues. Why do they feel the need to make assertions for which there is generally no evidence?
Politicians get elected by getting the support of individuals and groups with power. They don't get elected by being political philosophers.

Contrary to what Gretchen Morgenson (ordinarily a very good reporter) tells NYT readers, the battle over the Frank-Dodd bailout plans is not about ideology. The bills are crafted in ways that make them very friendly to banks. The banks get to decide which loans get put into the program. Presumably they don't make this decision unless they think they will benefit from the bailout.

In addition, the appraisals on which the government's guarantee price is set are based on sale prices, which may still be seriously inflated in the bubble markets. It would have been easy to avoid the problem of inflated appraisals by setting the guarantee price based on a multiple of rents. However, the supporters of these bills chose not to go this route.

At least some of the opposition to these bills is based on the view that giving more taxpayer dollars to banks should not be a higher priority than paying for health care, child care and other important needs. It is not clear what ideological issue is at stake here, since the ideology that we all should pay higher taxes to keep the banks rich has never been well articulated.

--Dean Baker

Readers can infer the NYT's approval based on the "Homeowner Rescue Plan Passed Despite Veto Threat." article's headline Supporters of the plan undoubtedly like to call it a "homeowner" rescue plan, but that does not make it an accurate description of the plan.

This bill, the central feature of which is having the FHA guarantee new mortgages to replace one's currently facing default, would first and foremost be helping the banks who hold bad mortgages. All the checks get written to banks, not homeowners. Banks get to decide which mortgages qualify for the program, not homeowners. Congress also opted not to put in price guarantee restrictions that would have prevented the guarantees being set at bubble-inflated prices.

The headline could have read with at least as much justification "Bank Rescue Plan Passed Despite Veto Threat." This headline involves some very serious editorializing.

--Dean Baker

That is an implication of the claim in a Washington Post article that a $7,500 first-time home buyer tax credit is intended to keep house prices from falling. In large parts of the country the housing bubble pushed prices out of the reach of most moderate and middle income families. The correction from this bubble was again making prices affordable. While it is unlikely that this tax credit will actually prevent the market adjustment, it could slow the process.

In any case, the Post should have pointed out the perverse implication of this policy. It is not clear that many voters would approve of congressional efforts to use their tax dollars to keep house prices artificially high.

--Dean Baker

Or at least reporters are. What on earth would any reader learn about the budget from this AP story on the farm bill that ran in the NYT? The article just reports every item in billions of dollars -- it never gives shares of the budget or per person expenditures -- information that would tell readers whether the spending on this bill is a big deal in terms of the budget or their tax dollars.

More importantly, the article never tells readers that the appropriations are over 5 years. This does make a difference. The NYT would do its readers and the environment a great service if they just saved the trees rather than print budget stories like this.

--Dean Baker

David Leonhardt took advantage of the fact that I was busy to slip in a column assessing the claims that the CPI is seriously understating inflation. Actually he does a pretty good job, but he does glaze over part of the story.

Leonhardt makes reference to the infamous "Boskin Commission," which appears in his piece as a "committee of academic economists." Actually, this commission was put together by the Senate Finance Committee (under the guidance of Senator Daniel Patrick Moynihan), for the purpose of getting expert support for cutting the annual cost of living adjustment for Social Security. The commission was chaired by Michael Boskin, who had been chair of the Council of Economic Advisers until Bush I. All of the five members of the commission were publicly on record as saying the CPI substantially overstated the true rate of inflation.

The commission's magic number at the end of its deliberations was 1.1, as in the CPI overstated the true rate of inflation by 1.1 percentage points annually. They proposed that Congress set up a committee of wise people (like themselves) who would decide the proper inflation number to index Social Security and other government programs.

Because the members of the commission were all very prominent economists, and they enlisted the support of several other very prominent economists (Martin Feldstein deserves special mention here), the overstatement view was regarded as the consensus in the profession. The Clinton administration signed onto the deal, and the cut likely would have been implemented had it not been for the opposition of the House minority leader Richard Gephardt. (Think Gephardt-Gore and Democratic presidential primaries in 2000 and you have the story.)

Anyhow, it is very encouraging to Stephen Cecchitti, an expert cited in the story, say that the CPI is "about as accurate as anybody is going to get it." The vast majority of the overstatements identified by the Boskin Commission were not corrected. By the assessment of the commission's surviving members the CPI still overstates the true rate of inflation by 0.8 percentage points.

So, it looks like the Boskin commission was wrong after all. So much for expertise in economics.

--Dean Baker

My earlier note misrepresented the new policy announced by Fannie Mae yesterday. They will NOT be allowing homeowners to get further underwater through refinancing as I wrote. Their new policy is to allow people who already owe more than the value of their home to refinance into a lower interest mortgage. This is exactly what we should want banks and other financial institutions to do. It effectively means taking some loss on the current loan in the hope that the homeowner will be able to meet the terms of a new loan.

--Dean Baker

That would seem to be the implication of the views attributed to Brian Montgomery, the FHA commissioner, in a Washington Post article:

"At his FHA office, Montgomery said that the mortgage crisis could have been averted had Congress heeded his pleas to overhaul the FHA in 2006 so his agency could better compete with subprime rivals.

'I'm back here now trying to pick up the pieces, and they're telling me you're just not doing enough,' he said. 'It's a little disingenuous.'"

In reality, by 2006 millions of homeowners had already bought homes at prices that were hugely inflated by the housing bubble, many with subprime mortgages that were rescheduled to reset to much higher rates. These homeowners were certain to lose large amounts of money on their homes and in many cases destined to default on mortgages that they could not afford. While the damage could have been reduced if the Fed, Congress, the FHA and other agencies took steps to stem the growth of the bubble at the time, it was already too late to avoid most of the pain from the housing crash.

The fact that Mr. Montgomery and others in positions of authority did not recognize the housing bubble at the time was due to extraordinary negligence. If the FHA commissioner cannot recognize the bubble, even in retrospect after it has begun to deflate, it really calls into question his fitness for this sort of job. The Post should have sought to determine the extent to which he is in fact uninformed about developments in the housing market.

--Dean Baker

Yet again (yeah, it's standard) the WSJ refers to the selective protectionism pursued by the United States in its trade policy as "free trade." Yes, tens of millions of people are upset about policies that are designed to put manufacturing workers in direct competition with low-paid workers in China and Mexico. The trade agreements allow doctors, lawyers, economists and other highly paid professionals to remain largely protected from such competition.

The latter group are obviously knuckle-scraping Neanderthals who fear the global economy. But, this group also has enormous political power, so trade agreements don't get written that make them face competition in the same way as auto or steel workers. It will be a huge step forward when this situation is discussed more honestly in the media.

--Dean Baker

The WSJ should be asking this question in its analysis of the progress of the new farm bill in Congress. It reports that complaints of White House spokesman Tony Fratto that the bill would be raising food prices when we actually want lower food prices.

Actually, much of the effect of the bill would be to lower food prices. By providing subsides to people engaged in a wide range of farming activities, it is encouraging people to enter farming. This leads to more output in general. On the other hand, the subsidy to ethanol, does directly pull land out of food production and shifts it into the production of biofuels.

The restrictions of importing sugar has the effect of raising sugar prices in the United States, but lowering them for the rest of the world. From the vantage point of people outside the United States, these barriers might be viewed as positive (except in the case of sugar producers).

It would be helpful if the analysis sought to assess the the goals of U.S. agricultural policy and whether this bill was helping to meet them.

--Dean Baker

I confess to not having the highest opinion of the Wall Street crew, but look at what the WSJ said about thinking among analysts of the mortgage market:

"The question now is: Even though the delinquency rates are climbing, will the loans follow the same path as in previous years? In 2000 and 2001, for instance, the growth in the 60-day delinquency rate slowed when those subprime loans were about three years old and peaked after a little more than four years, then started to fall."

Get me a baseball bat, I've got to beat some sense into these people's heads. If you go 3 years out from 2000 or 2001, home prices had appreciated by close to 30 percent as a nationwide average. In many of the big subprime markets, home prices had close to doubled. When the price of a home doubles, homeowners accumulate equity -- lots of it. If a homeowner has equity, they don't default on a mortgage. They either borrow against their equity or they sell the home and put money in their pocket.

Contrast that situation with the present. Home prices are now down nationwide by close to 10 percent from their year ago levels. In many of the big subprime markets they are down by more than 20 percent. Furthermore, prices are falling rapidly. In another year or two years, most recent homebuyers in these markets will still have negative equity and possibly a lot of negative equity.

Now do we think that default patterns three years out on mortgages issued in 2000 will look like default patterns three years out on mortgages issued in 2006? Is there anyone really stupid enough to ask this question who is actually employed and paid money by a financial institution? If so, that is an unbelievable scandal. The media should find out if anyone who is so completely out to lunch is in a position of responsibility and run a front page article on the astounding incompetence of high-paid people in finance.

--Dean Baker

I attribute the fact that both Senator Clinton and Senator McCain proposed suspending the gas tax for the summer to focus groups results uncovered by their consultants. New York Times columnist David Leonhardt attributes this coincidence to their common instincts.

Actually, that is a bit unfair. Leonhardt examines the economic positions taken by Senators Clinton and Obama to assess their instincts on economic issues. This looks like another venture in mind-reading. Both Senator Clinton and Senator Obama are politicians, and in fact are very successful politicians. Successful politicians are by definition good at saying things that get them votes.

It is reasonable to believe that their statements on economic issues primarily reflect what they view to be popular political positions. It is not clear that their statements reveal much about their instincts.

In this respect, it is worth noting that President Clinton ran his 1992 campaign on a promise of public investment, emphasizing spending on education, training, and infrastructure. Once in office, he actually cut these areas of these budget (measured as a share of GDP). He placed his primary focus on deficit reduction. It is not clear what one could have said about President Clinton's economic instincts based on his statements during the campaign or more importantly if his instincts had anything to do with the policies he pursued while in office.

--Dean Baker

The Washington Post has a major front page article today telling readers that President Bush is pushing for his principles in his last year in office. Among the examples it cites are his efforts to open the Arctic National Wildlife Reserve to oil exploration and getting the Colombia trade agreement approved by Congress.

Are these fundamental matters of principle for President Bush? As an alternative explanation, the opening of the wildlife refuge has long been a top goal of the oil industry, an interest group with whom President Bush has close ties. The Colombia trade agreement if being pushed by the pharmaceutical industry and other powerful groups with whom President Bush also has close ties. Presumably, these powerful lobbies appreciate President Bush's efforts to promote these policies and will be more likely to reward Republican candidates with their support as a result.

Is President Bush pushing these policies because they are deeply held philosophical positions or because he is trying to promote the interests of his political backers? I don't know the answer to this question, but neither does the Post. So why does it have a major front article making assertions that it does not know to be true?

--Dean BakerPosted at 07:34 AM | Comments (3)