We regularly see efforts to push favored public policies by trotting out really big numbers that are supposed to scare people. For example, there is a whole contingent running around Washington who talk about the country's $75 trillion long-term deficit as a way to push cuts to Social Security. The real story is that the bulk of the projected shortfall (about 6 percent of future income) is attributable to projections of exploding health care costs and has nothing to do with Social Security.

Washington Post gives us another example of would be scary numbers when he tries to warn off regulation of oil prices by referring back to the price controls of the Nixon presidency. Mallaby tells readers that "administering the controls on energy alone took an estimated 5 million man-hours per year."

Are you scared. Let's see, most workers put in 2000 hours a year, so this means that it took 2,500 people to administer energy prices under Nixon. I had never given this one too much thought, but I probably would have guessed something considerably higher. After all, energy accounted for well over 5 percent of GDP and was the most problematic sector of the economy in terms of pushing prices higher. So, containing prices in energy required 2,500 people -- the same number who might occupy a small town in Iraq --that one doesn't scare me. I would not argue for oil price controls (I agree with many of Mallaby's points), but I would caution against being scared away by seemingly big numbers.

Undoubtedly, most of the increase in oil prices is real. Is some of it due to speculation? It seems almost impossible for me to believe it isn't. There are sharp movements in oil and other commodities. These sharp movements are not just responses to changes in underlying supply demand. Inevitably speculation exaggerates these moves.

In response to the question of where is the oil being stored. First, with a product with highly inelastic demand, we don't need very much oil to be pulled off the market to affect the price. But the obvious place that the oil would be stored is in the ground. Do we know exactly how much oil would be pumped at $140 a barrel, if producers anticipated it would rise no higher? Obviously the rate of current production will depend on future price expectations of price. That doesn't make for a grand conspiracy of speculators, but it does mean that the expectation of higher prices in the future can lead to higher prices in the present.

This doesn't mean we should have price controls or ban speculation. My policy recommendations would be to tax the speculation. We tax casino gambling, why not tax gambling in financial assets? We could easily raise over $150 billion a year on a comprehensive set of financial transactions taxes. We could even use the money to pay for a cut middle class income taxes.

For oil, how about a windfall profit tax? We can use the money to pay for tax cuts for energy conserving home improvement. Will that reduce the amount of investment in new drilling for oil? Probably, but we can almost certainly do more to influence the energy market in the future through conservation.

--Dean Baker

I have nothing against Europeans (some of my best friends .....), but I have never worried that the world will run out of them. This sets me apart from the NYT magazine which devoted a lengthy piece to this "problem."

Some of the discussion is reasonable. Several countries in Europe, like France and the Scandinavian countries, have adopted work and child care arrangements that make it easier to raise kids in two worker families. Other countries, like Italy and Spain, lag badly in this regard. Certainly it makes sense to have policies that allow workers the option to raise children without extreme hardship.

But, let's say we adopt these policies and populations still decline. Why should we fear being able to go to beach and not fighting for a place to put a blanket? Will the world collapse if we go to work and there are no traffic jams? And, should we be upset that it will be easier to reduce greenhouse gas emissions if there are fewer of us emitting?

The article seems to rely on some loon tune economics to make the prospect of declining populations seem like a serious problem. For example, it warns about rising rates of retirees to workers. Guess what, we have had rising rates of retirees to workers for the last century. Why on earth would anyone think that this is some sort of crisis? (The article actually tells us how much Germany and Britain's populations would have to increase to keep the ratio of retirees to workers constant. I suppose that is interesting trivia, but why on earth would anyone care?)

The implication that we will have no workers to care for our elderly, or alternatively that future generations of workers would face some crushing tax burden can be seen to be ridiculous with the most basic economic analysis. As one commentator quoted in the piece notes, there is a large amount of unemployed and underemployed labor in Europe. This could be put to work in the event that there was a labor shortage.

Once underutilized labor was fully employed, we would expect to see workers go from less needed jobs to more highly valued jobs. That means fewer people working in restaurants, as house cleaners in hotels and homes, and working the midnight shift at convenience stores. I still don't see the crisis.

Note that as the labor shortage develops, wages get bid up. So our impoverished young people will be earning really high wages. They also will pay much less for housing. In the U.S., rent averages 30 percent of expenditures. It can often be 40-50 percent in highly populated areas. In our declining population scenario, rents will fall since there will be an excess supply of housing.

So, our impoverished young people will be getting high wages because of the labor shortage and paying low rent because of the glut of housing. Yes, but their taxes will rise. Excuse me, but this sort of argument is tripe and it has no place in a serious newspaper. Standard projections for the growth rate of wages show that the rise in before tax wages should easily outpace the impact of any tax increases necessitated by a higher ratio of retirees to workers. There is no plausible story in which demographic pressures will cause future generations of workers to have lower standards of living than we do today.

(The article even puzzles over the question as to whether we can have economic growth with a declining population. The correct answer is, "why would anyone care?" Suppose the population is falling by 2.0 percent annually and the GDP is falling 1.0 percent a year. This translates in per capita GDP growth of 1.0 percent a year. What is the problem with that?)

It would be useful if the NYT would have an editor with some knowledge of economics review a piece like this before turning over 10 pages in the Sunday Magazine.

--Dean Baker

The news articles noting that the stock market is flirting with bear market levels reminded me of previous comments that I made on the investment advice that I saw on my local Fox affiliate back in January and also in November. The investment advisers told people to hold their stock and just let the market ride out the downturn.

Of course, anyone who had sold back then could buy into the market today and be almost 20 percent richer. Did we know that the market would fall at the time? Well, we can never know the timing of the market for certain. Even if we had a perfect chart of what the economy will do over some future period of time, we can't know that some moron with access to hundreds of billions of dollar will not buy hugely overpriced stock and keep its price from falling, but we can have some basis for our assessments of the market.

Last fall there was good reason to believe that the market would drop from what have since turned out to be peak levels, because the vast majority of economists were still insisting that housing meltdown was not a big deal. Those of us who recognized the seriousness of the loss of close to $5 trillion in housing bubble wealth (and rising) thought it likely that these losses would be a serious hit to the economy and corporate profits, and presumably also to the stock market.

It would have been appropriate for Fox , as well as other media outlets wishing to present investment advice, to seek out divergent views. Those who listened to the Fox experts have just lost much of their retirement savings.

--Dean Baker

The NYT had a very good article this morning on the overuse of CT scanners, a new devise for examining the condition of the heart. The article points out that the scans are of little or no use for the vast majority of patients who receive them. They also are somewhat risky, because they expose patients to large doses of radiation.

Nonetheless many doctors administer them to patients. This may be because they think that they are actually helpful or because they receive large fees for the scans.

It would have been useful if the article had examined more carefully how the way in which the United States finances research into drugs and medical devices creates this incentive structure.

The waste of resources on medical technology (either devices or drugs) occurs at the point where they are developed. At that point, all the scientific expertise and capital involved in either a medical device like a CT scan or a new drug has already been expended. The cost of actually using the scan (or a new drug) is very modest -- a bit of electricity and perhaps 20 minutes of a skilled technician's time.

However, because of patent monopolies, these devices (and drugs) can command huge fees. These fees provide enormous incentives to use these devices in cases where they may be of little use or even harmful.

On the other hand, if the cost of the research was paid up front (e.g. through public provided funds), then medical devices and drugs would be available at their marginal cost. In this event, a CT scan might cost less than $100. Most drugs were sell for less than $10 a prescription. There would be no incentive for manufacturers to misrepresent the benefits of these treatments.

A piece of this length should have spent some time explaining how the incentive structure of the drug/device development process leads to the sort of problems it highlights.

--Dean Baker

It takes a newspaper with a great deal of self-confidence to turn over a regular Sunday column on business issues to someone who has no idea whatsoever what they are talking about. I have no idea how or why Ben Stein has a column in the NYT business section, but you have to admire the NYT's editors for their willingness to put up with the regular embarrassment.

This time he really went all out. First he minimizes the problem of higher oil prices by telling us that "as of this spring, gasoline and oil and heating oil together amounted to about 2.5 percent of total personal consumption expenditures in this great country."

I am not positive where this one came from (he says the Economic Report of the President -- I suspect I know how he got confused), but if we look to the most recent consumer price index report (Table 1), we can find that motor fuel is 5.5 percent of consumption expenditures. Household energy would add another 4.2 percent to total consumption expenditures, if we want to take a broader measure of the impact.

Next Mr. Stein tells readers that after peaking in 1973 "real wages both hourly and weekly for all nongovernment workers, on average, have fallen by about 5 percent, very roughly." Okay, this one is not quite right for two reasons. First, Stein has used the wrong deflator. There have been changes in the Consumer Price Index over the last 35 years, and a proper measure takes these into account. When this is done, real wages in this series have been roughly flat over this period.

The other problem with Stein's statement is that this index does not include "all nongovernmental workers." It includes production and non-supervisory workers, about 80 percent of the labor force. For the most part, this series excludes the "lawyers, doctors, investment bankers, accountants, dentists" that he refers to later. (Imagine the situation of a typical worker if a series that did include these workers had actually fallen by 5 percent in real terms over the last 35 years.)

But these mistakes are just the prelude for the big one:

"The federal government can do little to make the price of oil fall in the short run, except, perhaps, for one basic thing: balance the budget. The world price of oil is denominated in dollars. The dollar is weak for many reasons, but a big one is the immense budget deficits run by our government. If President Bush and Senators John McCain and Barack Obama were to stand together in front of a camera and solemnly swear that they would balance the budget in four years, even if it required tax increases on people earning millions, the dollar would rise against the euro, and oil would fall in dollars."

Okay, this one is wrong on almost every angle. First the fact that oil is priced in dollars matters not one iota. We have to pay dollars to buy it. If oil was priced in potato chips, then it would take us more dollars to buy the potato chips that we needed to purchase oil. When the dollar falls in price, it takes us more dollars to buy oil, just as when the Mexican peso falls in price it takes people in Mexico more pesos to buy their oil.

Next, what happens when we balance the budget. Well, in econ 101 land, we learn that there is less borrowing, which causes interest rates to fall. When interest rates fall in the United States, then fewer foreigners want to hold dollar denominated assets. (Why?, because they would be getting a lower rate of interest.) With foreigners buying fewer dollar denominated assets, the dollar falls in value.

If Mr. Stein were a bit older he might remember the stories of the "twin deficit." The idea was that large budget deficits led to high interest rates, which raised the value of the dollar, thereby causing our trade deficit to rise.

The basic story of the 80s fits this picture very well. The Reagan deficits led to higher interest rates, which caused the dollar to rise and the trade deficit to soar. Toward the middle of the decade, the deficits came down somewhat and interest rates fell. The dollar fell also, and the trade deficit eventually came down to sustainable levels. The whole story is more complicated, but few economists would dispute the essence of this picture.

In short, if the next president wants to raise the value of the dollar, the last thing that he would want to do is to balance the budget. Balancing the budget will not raise the value of the dollar and reduce the price of oil. As Ben Stein said in a slightly different context "that will not happen."

--Dean Baker

The article in today's paper on the continuing collapse of the housing market never mentions the bubble. It is impossible to make any sense of the flood of foreclosures and the price declines without noting the bubble. In some metropolitan areas, like Atlanta, Cleveland, and Detroit, there is no bubble and no reason that prices need to continue to fall. On the other hand, in markets like Los Angeles, Miami, and San Diego, and Washington, the bubble is still in the process of deflating.

Housing policy can help to shore up prices in the depressed markets like Cleveland and Detroit. It is not plausible to imagine that housing policy can sustain prices in the bubble-inflated markets. Not is it obvious that it would be desirable to sustain these bubble-inflated prices since it would mean that new people moving into the area or forming their own households would find homeownership unaffordable.

It would have been useful if the article had made the distinction between these markets.

--Dean Baker

Why does the Post insist on attributing motives to members of Congress in their actions? The Post today asserted that the housing bill before Congress is "intended to halt the steepest slide in home prices in a generation."

Wow! So the bill is intended to prop up a housing bubble? That's really interesting. I don't know of a single economist who believes that it will have this effect. Given the record level of oversupply in a $20 trillion market, it hard to believe that anyone actually thinks that a bill that CBO prices at $1.7 billion will do the job. We spend far more to prop up prices in farm commodities with markets that may not even reach $100 billion a year. Have the boys and girls in Congress been drinking too much happy water?

Some people have argued that this measure will help homeowners facing foreclosure keep their homes. Clearly it will do this in some cases, although the benefit of this can be disputed when much of the money is likely to go to markets where the bubble is still in the process of deflating.

There is an alternative explanation of motives that is at least as plausible as the one the Post presents here. Members of Congress may want to help the politically powerful financial industry. The Post recently had an article suggesting this alternative motive for this housing bill, "Vital Part of Housing Bill is Brainchild of Banks".

--Dean Baker

The NYT noted the fact that Dow briefly hit a level that was 20 percent below its previous peak on Friday, meeting the definition of a bear market. There is no reason for most people to really care about this milestone, both because the Dow is not a representative index and the vast majority of people own little or no stock. (And we would want to look at inflation adjusted numbers in any case.)

Movements in the stock market bear only a loose relationship to the overall health of the economy and in fact can go in the opposite direction for substantial periods of time. This is easily demonstrated by the bear market that ran from 1965 to 1982. While the NYT tells us that periods of bear markets "coincided with geopolitical or economic turbulence — wars, the Depression, stagflation," the first 8 years of this bear market were actually the most prosperous period in the country's history.

From 1965 to 1973 the unemployment rate averaged 4.5 percent, GDP growth averaged 3.9 percent annually, and the real average hourly wage grew at a 1.7 percent annual rate. In fact, real wages for a typical worker grew more during the first 8 years of this bear market than in the subsequent 35 years.

The economy clearly faces very serious problems in the years ahead due to the collapse of the housing bubble, the correction from an over-valued dollar, and the adjustment to higher oil prices. It is likely that these developments will also have a negative impact on the stock market, but the market itself is a very poor measure of the state of the economy. The NYT and the rest of the media would better serve the public if they focused on actual measures of the health of the economy.

--Dean Baker

That's the word from the Washington Post. The Post reported that the Fed is seeking to structure its rules in a way that facilitates investment from hedge and equity funds. The only comment on the merits of this proposal comes from Randal Quarles, a managing director of the Carlyle Group, a private equity fund.

Mr. Quarles is quoted as saying that, "Banks have a tremendous need for capital right now and it's in everyone's interest for the Fed to help facilitate the flow of capital into the industry, including from private equity."

Observers who were not surprised by the collapse of the housing bubble and the crisis in the banking system (and who don't have a direct material stake in the Fed's policy) might have told Post readers that many of the current problems in the credit market stem from a failure to maintain transparent arms length relationships. For example, the bond-rating agencies were paid by the companies whose bonds they rated. Similarly, Citigroup created numerous Structured Investment Vehicles (SIVs), corporate entities whose legal status was unclear. These SIVs contained tens of billions of dollars in assets and liabilities.

Since we are seeing the fallout of a large set of dubious, if not illegal, practices in the financial sector, it might be a very bad time to adopt regulations that will make it easier for secretive private equity and hedge funds to play a larger role in the sector. It may well be better to let failed institutions collapse and then to start over with clean books, after their incompetent and/or corrupt management has been removed.

--Dean Baker

The NYT had a brief assessment of Bill Gates career in building up Microsoft as he prepared to leave his position with the company. The article mentions the anti-competitive practices that caused it to lose an antitrust suit in connection with its Internet browser. However, it did not discuss the earlier practices that helped give Microsoft near monopoly status in the operating system market.

In the late 80s, Microsoft signed contracts with several major computer manufacturers under which they got a discount price, but agreed to pay Microsoft for every computer they shipped, whether or not it included the Microsoft operating system. This meant that the marginal cost of including the Microsoft system was essentially zero, since the manufacturer had already paid for the system, even if she decided not to use it. The result was discourage the use of any other operating system. This could have prevented an erosion of market share that could have resulted if other software companies sought out niche markets.

Microsoft was investigated for these contracts by the Justice Department and in 1993 signed a consent decree in which it agreed to not write any more of these contracts (after Microsoft had already captured 90 percent of the operating system market).

It would have been worth mentioning this background in this piece. Gates benefited enormously from the willingness of the government to ignore violations of anti-trust law during his rein at Microsoft. If he had tried the same business practices at other times, he might be going to prison rather retirement.

--Dean Baker

That's good to know, some folks might have thought the loss of $5 trillion in housing wealth, more than $60,000 per homeowner, was a big deal. Standard models indicate that this will lead to a large falloff in consumption spending (@$200 billion to $300 billion in annual spending). This falloff coupled with continued weakness in the housing market, declining non-residential construction, weak investment, and cutbacks in the state and local spending, might be expected to lead to a serious downturn. Of course record loan write-offs might also be expected to weaken the economy.

But the Post told readers that "the economy is in only a modest downturn, with economic growth still slightly positive and fewer jobs being shed than in recent recessions." So, why worry?

--Dean Baker

Of course this is true. The fund managers currently only have to pay a 15 percent tax rate on much of their pay. By contrast, without the tax break, most of them will pay a 35 percent tax rate.

Nonetheless, the Post's way of characterizing the removal of a tax break for some of the richest people in the country is rather unusual. I suppose this is case of the glass being half empty or half full.

People who are upset about a special tax break for extremely rich fund managers focus on the fact that the tax break allows them to pay a tax rate that is 60 percent lower than what the law would require in the absence of special treatment. On the other hand, people who are sympathetic to the extremely rich fund managers focus on the fact that removing the tax break will more than double the tax rate that these managers will pay on their compensation.

--Dean Baker

Actually the headline was "approval is near for bill to help U.S. homeowners" in the NYT. The Post waited until the first sentence to tell readers that "a plan to help thousands of troubled homeowners avoid foreclosure" won bipartisan support in the Senate.

Well, here at BTP we don't attribute motives to politicians, since we are not mind readers and do not know what is going through their heads as they vote on legislation. Apparently, the NYT and Washington Post have more confidence in their ability to determine the motives of politicians and feel the need to very pointedly share their assessments with readers.

The housing bill in question allows banks, not homeowners, to decide which loans get brought in under the program. While the lenders would have to accept much less than the original value of the home, it stands to reason that no lender will ever bring in a loan if they think they will get less money under the program than they would by either carrying through a foreclosure or doing its own workout.

Since the decision on whether to bring a loan into the program is left with the lender, it would not be absurd to think that the purpose is to help lenders (many of whom are very generous in their campaign contributions).

The program also does not impose any price caps to insure that it is not insuring mortgages at bubble-inflated prices. When the sale price is very high relative to rent it means that homeowners are paying more in ownership costs than they would to rent a comparable unit. For example, if the sale price is 25 times the annual rent, as is still the case in many bubble markets, then the homeowner can easily be paying twice as much in ownership costs as they would to rent the same home.

For a $200,000 home this difference can be more than $8,000 a year. For a moderate-income family earning $40,000 a year, that money will come at the expense of spending on child care, health care and other necessities. If a housing bill was intended to help homeowners rather than banks, it might have put a cap on the ratio of sale price to rent for a mortgage covered under the program, or it would simply have set the guarantee price as a multiple of appraised rental value.

--Dean Baker

The Post tells us that the White House says cutting payments to private insurers within Medicare will reduce services, while the Democrats say that the insurers "receive too much money." What is a reader to think?

Well the Post might have told readers that it is not just the Democrats who say that insurers receive too much money, but also the non-partisan Medicare Payments Advisory Commission. The commission found that Medicare pays on average 10 percent more for patients that sign up for private insurers than it would pay for these same people in the traditional government-run program.

The White House claim also has some truth for the obvious reason that they are getting extra money from the government. Suppose that the government pays $1,000 to private insurers for every person that they sign up (roughly the amount involved). The insurers would then have an incentive to offer some additional incentives to draw more customers, to some extent sharing the government's largess with their customers.

In short, there is no he said/she said here. The government is paying more to have beneficiaries sign up with private insurers, although the people who go this route are likely to see something in the form of additional benefits.

--Dean Baker

The NYT reports that the European Central Bank (ECB) is planning to start raising interest rates because of concerns about rising inflation, and more importantly (according to the article), inflationary expectations.

The article warns that workers are getting uppity and demanding pay increases to compensate for inflation. As one example, it tells readers that "Lufthansa’s employees are demanding a 9.8 percent increase in wages." That's a pretty big pay increase -- very scary for inflation hawks. Of course the article does not tell us the time period of which this increase will take place. Is this a one-year hike where they will be back for more next year? Is it two years or three years? I don't know, and neither does anyone else who relied on the NYT for their information on this one. Needless to say, the time period makes a huge difference.

More generally, it would be nice if the NYT drew out the issue here a bit more clearly. The ECB doesn't like inflation. (Who does?). Its plan for reducing inflationary pressures is raising unemployment to put downward pressure on the wages of less-educated workers. The people who lose their jobs and are expected to take pay cuts to allow the ECB to reach its inflation targets are factory workers and flight attendants, not doctors and lawyers.

People may still view the ECB's call as the right one -- maybe there is no better way to keep inflation from spiraling out of control -- but let's put the facts on the table. The ECB is about to draft millions of low and middle income workers to be the front-line soldiers in its war on inflation. We should at least make sure that their sacrifice is recognized.

--Dean Baker

In a discussion of Senator McCain's support for NAFTA, the Post told its readers that readers that:

"The disagreement on trade is emblematic of disputes the two candidates have on other economic issues, with McCain offering a pro-growth, anti-regulation vision and Obama proposing a variety of measures to help Americans deal with immediate pocketbook issues."

This quote implies that, in contrast to Senator McCain, Senator Obama does not support policies that foster growth. This is not true. The track record of Democratic presidents in promoting growth over the post-World War II period has on average been better than that of Republicans. (Here's the story for the Bush business cycle.) While this is undoubtedly in part luck, it is unfair for the Post to imply that McCain's tax cutting will produce growth while Obama's plans for rebuilding the infrastructure and fixing the health care system will not.

[Thanks to a BTP reader for this tip.]

--Dean Baker

There has been considerable discussion of speculation as a factor driving up the price of oil, corn, and other commodities. Undoubtedly, speculation had played a role. (I don't know how much, my guess is that it is not the main force in most cases.)

There are many plans to crack down on speculation, but as a practical matter it will not be easy to distinguish between speculative dealings and normal business purchases of commodity futures (that is if there is a hide your motive).

A simple way around this problem to treat speculation like casino gambling, just tax it. A set of modest taxes on financial transactions (e.g. 0.2 percent on a future trade, 0.25 percent on a stock trade) could raise an enormous amount of money -- on the order of $150 billion a year. It would have almost no impact on real investors, but it would take a big bite out of the hides of speculators. In the past, economists such as Lasrry Summers and Nobel prize winners Joe Stiglitz and Jim Tobin have supported financial transactions taxes. It would be nice to see the media allow some discussion of the issue.

--Dean Baker

Both the editorial and news pages of the Post display an obsession with a notion of fiscal responsibility which often appears almost bizarre. For example, a front page article complaining that the presidential candidates may have problems paying for their campaign promises warns that the $340 billion deficit projected for 2009 is likely to grow "as the economy weakens."

Yeah, as the economy weakens, we will collect less money in tax revenue and we will pay out more money in unemployment benefits, food stamps, and other transfer programs. Would the Post rather the deficit did not increase in the downturn? This would not only increase the suffering, but it would also worsen the downturn, since the deficit helps to create a source of demand that would otherwise be absent.

Of course the more serious problem is the downturn. This leads to both hardships for millions of families and bigger budget deficits. If the Post had been willing to report on the housing bubble in the years before it burst, perhaps we wouldn't be facing such a severe economic crisis today. But that's another story.

Anyhow, readers would be especially hard-pressed to make any sense of this piece because it never puts any numbers in context and it doesn't even use numbers consistently. For example, it tells readers that "economists expect the deficit to top $400 billion when the fiscal year ends Sept. 30, rivaling the all-time high set in 2004."

This is wrong and wrong. The economy will be almost 25 percent larger in 2008 than it was in 2004. To have the same impact on the economy as the $413 billion deficit in 2004 the deficit in 2008 would have to be approximately $515 billion. Furthermore, measured as a share of GDP, the 2004 deficit was not close to a record. The deficit was 3.6 percent of GDP in 2004, compared to 6.0 percent in 1983. (Adding in money borrowed from Social Security can get you to 4.6 percent of GDP in 2004.)

While these budget numbers refer to the unified budget deficit, which does not include the money borrowed from Social Security, the earlier paragraph refers to a debt that is approaching $10 trillion, a figure that does include money borrowed from Social Security. Later the article warns of projections that show the debt rising by $3.3 trillion by 2018 under Obama's proposals and $4.3 trillion by 2018 under McCain's proposals. These debt numbers do not include the $2.3 trillion in projected borrowing from Social Security over this decade. Of course, since the numbers are neither adjusted for inflation nor expressed as a share of the economy, almost none of the Post's readers has any idea what they mean. It would have been equally useful to substitute "really big number that should scare you" for either of these projected debt figures.

The article also includes a comment about Social Security which does not make any obvious sense when it warns readers that::

"But the more immediate problem is the depletion of excess cash in the Social Security trust fund, which has been used for years to cover a portion of the annual budget deficit. Government economists predict that the Social Security surplus will start shrinking in 2011 and dry up completely by the end of the next decade, exposing government-wide budget deficits of a magnitude not seen since Bush's first term."

This should prompt a huge "huh?" In fact, the Congressional Budget Office projects the annual Social Security surplus to continue grow in dollar terms until 2016 and even as a share of GDP until 2013 (see Table 1-1). The annual surplus is not projected to disappear altogether until after the end of the next decade. It is possible that the article is referring to the surplus of Social Security taxes over benefits, but this peaked in 2006 and has been declining ever since. Measured as a share of GDP, the surplus on payroll taxes peaked in 2000.

There are other errors in this piece. For example, it reports that Senator Obama's plan to eliminate the donut hole in the Medicare drug benefit would add $400 billion to debt over the next decade, ignoring the fact that this money can easily be saved by negotiating lower drug prices with the pharmaceutical industry, as he has proposed. It also reports that his health care plan would add $65 billion to the annual deficit. This figure does not include the revenue from the fee that he has proposed for firms who do not provide health care insurance for their workers.

In short, readers can learn from this article that the Washington Post is very concerned about deficits. They cannot learn much else.

--Dean Baker

The NYT has a worthwhile article reporting on the sharp falloff in the homeownership rate in the last two years. It would have been useful if it has spoken to an economist who was not surprised by the crash of the housing bubble which led to this falloff.

One of the experts cited in the article is from the Joint Center for Housing Studies at Harvard University which actually made a point of contesting the existence of a bubble in the housing market as it actively promoted homeownership among moderate-income families. It would have been useful to include this background in this article.

At one point the article reports that rents have been rising rapidly because of the large number of people who have lost their homes and are now seeking rental housing. Actually, while there are places in which rents have been driven up, especially for moderate income families, there is still a new record rental vacancy rate.

The article reports that rent has risen about 11 percent since 2005. While this is true of rent component of the consumer price index (CPI), this has been driven largely by utilities. The better measure of pure rent is the owner's equivalent rent component of the CPI. This component has risen by 9.7 percent over the last three years, somewhat less than the overall rate of inflation.

--Dean Baker

Presumably, the answer to this question is "no," but the methodology that he used in claiming the success of NAFTA, would imply that the answer is "yes."

According to the Wall Street Journal, McCain pronounced NAFTA a success at a speech in Canada, noting that Canada had created 4 million jobs since the deal was signed and that the United States had created 25 million jobs.

The fact that these economies have created jobs over the last 15 years tells us nothing about the success of NAFTA. Barring wars or environmental disasters, or incredibly bad economic policies, economies always create jobs. The serious question is the rate of job creation. In the case of NAFTA, a deal which was designed in a way that would put downward pressure on the wages of non-college educated workers, a key question is the rate of growth of wages of these workers over the last 15 years.

Reporters are supposed to do more than just write down what politicians say. (Presumably smart high-school students would be willing to do this work at a bit more than the minimum wage.) When candidates say things that make no sense, as did Senator McCain, it is appropriate to point this fact out to readers and to press the candidate or their staff about what the candidate intended to say.

--Dean Baker

USA Today reports that many state governments are facing severe budget shortfalls due to the collapse of the housing market and the weakening recession. This is a very important issue, both because states (in the absence of federal help) are likely to be forced to cut many important services at a time when their populations most need them, and cutbacks in spending and tax increases necessitated by the shortfall will contribute to the downturn.

This article would have been far more informative if it expressed the shortfalls as a share of the total budget. For example, the piece tells us that California faces a shortfall of $1 billion a month, but it doesn't let us know how large a share of its total budget this is (approximately 12 percent). Similarly, the article tells us that Rhode Island faces a shortfall of $400 million. It would have been helpful to tell readers that this is also approximately 12 percent of the projected budget for 2009.

--Dean Baker

Let's see, John McCain wants to drill offshore to increase oil supply and lower gas prices. Barack Obama says he wants to protect the environment and maintain the ban on such drilling. What is a voter to do?

Well, one piece of information that might be relevant is how much we expect the potential oil production to lower prices. After all, we probably wouldn't destroy a nice city park for a 0.1 cent reduction in the price of a gallon of gas, while some folks would destroy Yellowstone, the Everglades and everything in between to cut gas prices by $1.00 a gallon, so what are we talking about here?

I haven't seen any analysis of the tradeoffs in the reporting thus far. After all, why use numbers when we can say that this is just a question of values -- the environment or cheap energy?

Well, here's my quick back of the envelop calculation. According to the NYT, the Energy Information Agency estimates that the total amount of oil in the offshore zone in question is about 16 billion barrels. If we assume that it would take about ten years from the day of authorization to get to peak production and that most of the oil is pumped out over 30 years, this would translate into a bit over 1 million barrels of oil a day.

That would be equal to about 1 percent of world production in a decade. If we assume a long-run demand elasticity of 0.3, this would imply a drop in world prices of approximately 3 percent. In today's prices, we would be looking at a drop in the price of a barrel of oil from around $135 to $131. If this were passed on one to one in gas prices (this is long-run story), we might expect to see a drop in the price of a gallon of gas from around $4.00 to around $3.92 a gallon.

These are of course very crude numbers (someone has probably done a serious analysis), but they should get us somewhere in the ballpark. Without numbers like these, the public has no way to assess the relative merits of McCain and Obama's positions. The media should provide them.

--Dean Baker

The WSJ's dislike for Senator Obama is overflowing from its editorial page. A front page piece complained that: "Sen. Obama cited new economic forces to explain what appears like a return to an older-style big-government Democratic platform skeptical of market forces." Obama then went on to talk about the need for a stronger role for government to prevent the extremes of inequality that we have witnessed over the last three decades.

Perhaps Senator Obama was thinking of a stronger role for government to prevent Wall Street executives from booking enormous profits on what subsequently turned out to be bad loans. As the NYT reported, half of the profits of the Wall Street banks over the years 2004 through 2007 have already disappeared in write-downs of bad debt. Of course, the executives who got bonuses based on these bogus profits (some of the richest people in the country) get to keep the bonuses.

If Senator Obama thinks that the government should try to regulate the financial industry so that executives are not able to enrich themselves by mass marketing bad loans that leave homeowners homeless and stockholders out of luck, is this "a return to an older-style big-government Democratic platform skeptical of market forces?"

--Dean Baker

[Thanks to a BTP reader for this tip.]

A front page Washington Post article notes that consumers have the most negative attitudes about the economy in almost three decades, even though measures like the inflation rate and unemployment rate are not very high. After reviewing possible explanations, it concludes that people are now expecting better: "coming off two decades of prosperity and low inflation, Americans have come to treat low unemployment and inflation as givens."

Actually, most of the last two decades have not been especially prosperous. Wages did not keep pace with inflation over most of this period, with the notable exception being the years from 1996 to 2001. While inflation was relatively low, economic theory argues that workers care about their real wage, not the rate of inflation per se. The view that workers are happier with 3 percent inflation and 2 percent wage growth, than 5 percent inflation and 5 percent wage, contradicts widely held economic theory. If the Post wants to argue this position, they should find some research that supports their view or directly lay out the argument for readers.

The most obvious reason that consumers would feel gloomy is that tens of millions of homeowners have just seen most of their life's savings disappear in the housing crash. Real house prices have fallen by almost 25 percent over the last two years, costing the typical homeowner $55,000 over this period. While the Post notes the decline in house prices, it does not view it as a key factor in explaining the public's attitudes.

It is also worth noting that demographics may play a role in public perceptions. When workers are young, they tend to see their pay rise as they get more experience. In other words, a typical 30 year-old earns more than a typical 25-year old. This means that even if wages are going down throughout the economy, most workers may still be seeing rising wages.

However, with the huge baby boom cohort now in the ages between 44 and 62, this age effect has largely disappeared or is even going in the opposite direction. If wages economy-wide are falling, then most workers are probably experiencing this decline directly.

--Dean Baker

The NYT did the arithmetic and found that the Wall Street Banks had already written off an amount almost equal to half of their profits over the three and a half boom years from 2004 to the middle of 2007. Now that's really financial innovation.

--Dean Baker

The NYT tells us that Senator McCain's health care plan is market-oriented, but it is hard to see how this is the case. The plan breaks up existing employer insurance pools and would have each individual buy their own insurance.

There are large disparities in health care costs with the sickest 10 percent of patients accounting for almost 90 percent of costs. Insurers make money by not providing insurance to these sick people. When workers are put together in large pools, then insurers have no choice to provide insurance to sick people, however when they contract with each person individually then they have the opportunity to exclude people with health problems.

It is difficult to see how shifting from a system of employer-provided insurance to individual insurance is a market-oriented reform (there is a market now for employer-provided insurance). It is very difficult to see how this change will lead to more efficiency, as claimed by the expert cited in the article, since it will almost certainly lead to more resources being wasted in screening individuals for prior health care conditions and efforts to conceal these conditions by individuals.

--Dean Baker

The NYT tells us that "many economists say [the falling dollar] has helped drive up oil and food prices." It doesn't tell us how or give us any names of economists who hold this view.

Again, this one is not very complex -- suppose that shoe prices were falling. Then the price of oil and food measured in shoes would be increasing. However, anyone who did not use shoes to buy their oil and food would not be affected by the fall in the price of shoes.

it is the same story with the dollar. If the NYT or any economists have a different view, it would be interesting to see it presented.

--Dean Baker

That is the question that the NYT should have been asking in an article that reports that China's WTO representative complained that the United States "had failed to safeguard the value of its currency, worsening the pain for people around the world who pay high oil and food prices in dollars."

Did the Chinese really not understand that when they were buying several hundred billions of dollars a year worth of U.S. financial assets that they were propping up the dollar? This would imply unimaginable ignorance about financial markets. It would be comparable to the Saudis not realizing that their oil output affects world oil prices or Microsoft not realizing that it can affect the price of computer operating systems.

The fall in the dollar is not raising the cost of any products for any country that does not choose to link its currency to the dollar. Items cost more money measured in dollars, but other currencies would rise against the dollars (other things equal) unless they have opted to link their currency to the dollar.

The article should have pointed out to readers that the pain noted by China's WTO representative only would result to countries that chose to link their currency to the dollar, it is not a result of the falling dollar per se.

--Dean Baker

The Washington Post contributed to the housing bubble in the late 90s and first half of this decade by consistently presenting the views of housing market cheerleaders and rarely presenting the opinions of analysts who recognized the problems in the housing market. In fact, the most widely cited expert on the housing market in the Post in the years from 2003 to 2006 was David Lereah, then chief economist of the National Association of Realtors, and the author of Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them.

The Post seems to be continuing its pattern of misreporting on the housing market with a three part series on the bubble. The first article today relies exclusively on the views of analysts who failed to recognize the bubble. As a result it fundamentally distorts the phenomenon.

First and foremost, the article attributes the bubble to the proliferation of subprime and exotic loan instruments. in fact, the bubble preceded the surge in subprime and the development of exotic financial instruments in the housing sector. House prices had begun to diverge from their long-term trend in the mid-90s, spurred by the run-up of wealth created by the stock bubble.

By 2002, real house prices had already increased by more than 30 percent. By comparison, real house prices had remained virtually flat for the century from 1895 to 1995. No economist had any plausible explanation of this run-up, which is why it was possible to recognize it as a bubble. If the Post (and the rest of the media) had allowed the views of economists who recognized the bubble into its pages, it might have mitigated the damage, as more homeowners, potential homeowners, and investors would have been warned about the dangers of a collapse of the housing market.

The growth of subprime and the spread of exotic financing is characteristic of the later stages of financial bubbles. As a bubble inflates, investors no longer use sound judgment in reviewing financial assets. As long as the bubble continues to grow, sound judgment isn't necessary. Any mortgage is a good mortgage, as long as house prices keep rising 10 percent a year.

While this flood of bad financing helped perpetuate the bubble and increase the damage associated with its collapse, the Post has confused cause and effect in making this the centerpiece of its analysis. In presenting the bad financing as central, the Post also effectively conceals its own culpability, along with that of the rest of the media.

Prior to the collapse of the bubble, it would have been very difficult to know exactly which banks were involved in which bad practices unless inside sources were willing to come forward. However, the fact that bad lending practices were taking place on a very large scale was easily knowable and known to serious analysts of the housing market. The explosion of subprime lending alone should have been enough to warn anyone that some really bad trouble was coming. In the same vein, serious analysts knew that there were Enrons out there in the late phases of the stock bubble, even if they didn't know the identity of the Enrons (or Worldcoms or Global Crossing, etc.) Bubbles lead to bogus financing, but we only find out the specifics after the crash.

The Post bizarrely describes a scenario in which Greenspan "puzzled over one piece of data a Fed employee showed him in his final weeks. A trade publication reported that the subprime mortgages had ballooned to 20 percent of all loans, triple the level of a few years earlier."

If this is true, then it implies an incredible level of incompetence on Greenspan's part. The rise in subprime lending was not some obscure fact known only to a privileged few. It was a widely noted development in the housing market over the years 2003-2005. If Greenspan was just made aware of this growth as in the last month of his tenure in January of 2006, then he was incredibly negligent in performing his job.

The growth in housing prices had been the central fuel of the U.S. economy in the recovery following the 2001 recession. Greenspan had been an eager proponent of housing dismissing the concerns of those who warned of a housing bubble. If he did not even know of the surge in subprime lending, then it is difficult to imagine any possible basis on which he could have ruled out the existence of a bubble in the housing market. (The article says that Greenspan "did not recall" whether he mentioned the growth in subprime lending to Bernanke. If Bernanke, did not already know about the growth in subprime, then he is not competent to be chairman of the Fed.)

In short, this article does more to conceal than reveal the developments that led to the current housing crash. There were no deep mysteries that had to be uncovered. House prices had gotten badly out of line with fundamentals by 2002. This was possible for any competent analyst to recognize just as it was possible to recognize the stock bubble by 1998. Unfortunately, the Post and the rest of the media relied almost exclusively on analysts who somehow failed to recognize the housing (and stock) bubbles or worse, had a direct interest in perpetuating these bubbles. Even after the fact, the Post is still choosing to rely almost exclusively on those who failed to see the bubble, rather than the experts who foresaw and warned of the problems ahead.

--Dean Baker

Given the column inches that the NYT has devoted to harshly denouncing the country's farm price support programs is is striking that it can be so strongly supportive of house price support programs. I would go back and quote their condescending comments among the economic illiterates who support farm prices support programs, but it's not worth the trouble.

The basic story of course is that Congress cannot hope to sustain house prices at their bubble-inflated levels and it would be foolish to try. If it passed a bill that opened the spigots to buy more homes at bubble-inflate prices, then this might temporarily slow the price decline, but eventually it would lead to more homes being constructed, further increasing the over-supply of housing. This is called "supply and demand" and we teach it in intro economics.

Perhaps the NYT would prohibit further home construction or find some other mechanism to maintain artificially high prices in the housing market, but it is unlikely to prove successful in the long-run, even though such measures can easily cost the government hundreds of billions or even trillions of dollars.

The best thing that can happen now is a rapid adjustment of house prices to trend levels. This will be very painful, but there is no way to avoid the deflation of a housing bubble. The time for government was the years when the bubble was inflating, from 2002-2006. Unfortunately, the NYT editorial board, like the rest of the policy establishment, was asleep at the wheel back then.

The best that can be done now is to ameliorate the pain, for example by giving homeowners facing foreclosure the right to stay in their home as renters. Perhaps something can also be done to increase the retirement income of tens of millions of baby boomers witnessed their life-savings disappear with the housing crash. But the NYT's house price support program would just delay the pain and at the end of the day make it worse.

--Dean Baker

That is a point worth mentioning in a discussion of measures intended to lengthen its period of solvency. There are many people who are convinced that the program is on the edge of bankruptcy. This is the result of a well-financed scare campaign by people like Peter Peterson.

The Post neglected to mention this important fact in its discussion of a proposal by Senator Obama to raise Social Security taxes on people earning more than $250,000 a year.

--Dean Baker

The NYT reports that a new study shows that China has substantially overtaken the United States in greenhouse gas emissions. While the article notes that the United States still emits almost four times as much per person as China, it doesn't discuss the implication of this fact.

If China is going to agree to any cap on its emissions, it will almost certainly demand that it be compensated by the rich countries. Otherwise, it is difficult to understand why they should agree to constrain its population to a much lower standard of living because of an environmental problem created by the rich countries.

--Dean Baker

The NYT reports that "some investors pointed to declines in the price of clothing and computers as evidence that high gasoline prices were not forcing up costs of other products."

If true, this would be a basis for not having confidence in investors. Computer prices have fallen in almost every month for the last twenty years. This decline provides virtually no evidence on the extent to which energy prices are being passed on in other areas.

Investors should also know that apparel prices are highly erratic so that any particular month's measure is almost meaningless. Looking to the producer price index, women's apparel has fallen in price by 0.2 percent over the last year, although it has risen at an 0.8 percent annual rate over the last quarter. Men's apparel has risen at an 0.8 percent rate over the last quarter and the last year. Footwear has risen at a 6.5 percent annual rate over the last quarter and a 2.5 percent rate over the last year.

The real mystery in this report is the fact that higher inflation in the producer price index have not shown up in the consumer price index. This suggests either sharply lower profit margins or some serious measurment problems.

As always you can get the story in the CEPR price byte.

--Dean Baker

Is it possible to have a serious discussion of long-term projections of health care costs and not mention how patent monopolies raise the price of drugs and medical equipment. The answer is no, but the Washington Post doesn't care.

An article reporting on how the health care sector has continued to grow and add jobs even as the economy sinks into recession never mentioned the role that patent protection plays in raising costs. This is the sort of article in which such discussion should occur.

New life-saving drugs that can sell for hundreds of thousands of dollars a year would sell for a few hundred dollars in the absence of patent protection. Similarly, tests with high-tech medical equipment that can cost thousands of dollars would cost just $100-$200 (the cost of a technician's time and electricity) in the absence of patent protection.

While it is necessary to finance the research that allows for the development of new drugs and medical equipment, there are more efficient mechanisms than the patent system. It is important that the country have a serious debate over these alternatives if it is to rein in the explosive growth of health care costs.

--Dean Baker

The NYT told readers that: "Although it is common in tough financial times to blame the speculators, this escalating hostility toward them is starting to worry people with years of knowledge about how commodity markets work. Because without speculators, they say, these markets do not work at all."

The rest of the article explains how speculation stabilizes markets, reducing volatility, rather than increasing it. Actually, many people with years of knowledge about how commodity markets work do not believe that speculation is necessarily stabilizing.

There is a substantial body of research around "noise trading," the notion that traders' views respond to prices in the market, rather than an independent assessment of fundamentals. In this scenario, speculation can often be destabilizing, since traders see higher prices in commodities like oil as evidence that the price should be higher. This can cause them to bid up the price further.

While there is no easy way to identify noise traders, it is possible to tax them. A modest tax on financial transactions (e.g. 0.02 percent on the sale of a standard futures contract and 0.25 percent on the sale of share of stock) would substantially raise the cost of noise trading, while having very little impact on investors seeking to hedge or to engage in longterm investment. It could also raise more than $150 billion a year (1 percent of GDP).

There is a long list of prominent economists who have advocated financial transactions taxes to reduce speculation, including Keynes, James Tobin, Joe Stiglitz, and Larry Summers. It would have been appropriate to mention both noise trader theory and financial transactions taxes in this article.

--Dean Baker

Do the people who write about the need to cut "entitlements" really not know that the problem is the unique inefficiency of the U.S. health care system (per capita health care costs in other wealthy countries average half as much) or are they lying?

Of course this diatribe about the candidates' neglect of longterm budget problems ignores the fact that one of the candidates (Obama) has a health care proposal that could contain health care costs and thereby make the "entitlement' problem manageable. Of course, authors who write things like this probably can't get their pieces in Slate, so it's much easier to repeat nonsense about the entitlement crisis.

--Dean Baker

I expect to see this headline any day now. After all, the Post told us today that "Life Expectancy Hits Record High in the United States." Of course life expectancy increases almost every year, so this will almost always be true. So, look for the big news in the Post that children get taller as they get older.

--Dean Baker

In a discussion of the problems in Washington, NPR allowed John Harwood and Gerald F. Seib, two authors of a new book, to repeatedly use Social Security as an example of a crisis that was not being dealt with. It is rather bizarre to call the situation facing Social Security a crisis, since the most recent projections from the Congressional Budget Office (CBO) show the program can pay all benefits for the next 38 years with no changes whatsoever. Even after that date, the CBO projections show that the program could always pay higher benefits (adjusted for inflation) than what workers receive today.

The host should have interrogated the authors about their definition of crisis and pointed out that their main complaint was that Congress would not approve their political agenda.

--Dean Baker

This is not semantics, this is a question of accurately understanding trade policy. Robert Rubin has never pushed trade deals that focused on eliminating the barriers that make it difficult for highly educated professionals from developing countries from working in the United States. Has has actively promoted trade agreements that increase protectionist barriers in the form of copyright and patent protection.

I know BTP readers have heard me make these points hundreds of times, but obviously they will have to continue to be made until the media stops asserting that Rubin and his ilk support "free trade."

Trade policy in the last quarter century has been about one-sided protectionism, not free trade. It has been a major factor shifting income upward over this period. It is one of the main misconceptions promoted by the beneficiaries of these policies. Trade policy is perhaps the quintessential example of a Conservative Nanny State policy masquerading as a free market policy. The media should not be helping the wealthy conceal the true nature of their trade agenda.

--Dean Baker

The Washington Post contrasted the economic policies of Senators McCain and Obama by telling readers that "one of the starker contrasts between McCain's emphasis on job creation and reducing regulation and Obama's focus on immediately easing financial problems."

While Obama has certainly made a point of crafting policies that are intended to ease the financial problems of low and moderate income families, most notably providing universal health care, it would be difficult to characterize Senator McCain's agenda as focusing on job creation.

Senator McCain's economic proposals center on maintaining the tax cuts put in place under the Bush administration. The economy has sustained the slowest pace of job creation on record during the Bush years, creating jobs at annual rate of just over 700,000 a year (0.5 percent). By contrast, it created jobs at almost a 3 million annual rate during the Clinton years.

It would be wrong to attribute the entire falloff in the pace of job creation between the Clinton and Bush administrations to President Bush's tax cuts, but it would be difficult to argue that an economic policy that centers on maintaining these tax cuts has a "emphasis on job creation" as the Post told readers.

--Dean Baker

[addendum: as correctly noted in the comments, Obama's plan will not provide universal health care coverage. It will extend health care coverage. There is a big difference.]

The Post has a good article today reporting on how HUD encouraged Fannie Mae and Freddie Mac to buy up mortgage backed securities that were comprised largely of subprime loans. However, the article never mentioned that the primary problem was not the nature of the loans, but the fact that people were buying homes at bubble-inflated prices. If house prices had risen with inflation (as they typically do), we would not be facing a mortgage crisis. This should be obvious, but there is no evidence that the Post recognizes the bubble was the problem.

--Dean Baker

The NYT told readers today that the European Central Bank (ECB) might raise interest rates because it is concerned about a strong dollar. It also told readers that "European leaders are increasingly impatient about the weak dollar, which is hurting their economies because Europe depends more on exports than does the United States."

Not to be nitpicky, but these are contradictory arguments. If the ECB is worried about inflation, then it should be delighted about the fall in the dollar. This not only reduces the price of imports from the United States, but also the price of imports of goods from China and all the other countries that link their currency to the dollar. This does slow European economies, but presumably that is what the ECB wants, if it is concerned about inflation.

In short, the article is claiming that Europeans both want more growth and a higher dollar, which would imply more inflationary pressures, and also lower growth. Clearly different actors may hold different views, but the article should have made this point clearly.

--Dean Baker