Last quarter the markets were surprised by a stronger than expected number for personal consumption expenditures in March. I commented that the surprise was surprising because March personal consumption expenditures were embedded in the first quarter GDP data that had been released the prior week.

Here's a chance to look for more surprising surprises. The consensus number for June personal consumption expenditures is an increase of 0.4 percent. My arithmetic puts the figure at over 1.0 percent. There is always the possibility of a substantial upward revision to the April and May data, but absent a large revision, June expenditures should come in much higher than "expected." Will the markets be surprised?

--Dean Baker

Apparently the reporters at MarketWatch can't. An article noting the uptick in labor compensation reported in the second quarter Employment Cost Index reported that Fed Chairman Ben Bernanke said that higher labor costs need not lead to inflation, if they are offset by rising productivity. Well, in the very next sentence Mr. Bernanke also said that higher labor costs could be offset by lower profit margins:

"Whether faster increases in nominal compensation create additional cost pressures for firms depends in part on the extent to which they are offset by continuing productivity gains. Profit margins are currently relatively wide, and the effect of a possible acceleration in compensation on price inflation would thus also depend on the extent to which competitive pressures force firms to reduce margins rather than pass on higher costs."

But that part didn't make it into MarketWatch. Thanks go to my friend Jared Bernstein for this tip.

--Dean Baker

The House came up with the brilliant idea of linking the partial repeal of the estate tax with raising the minimum wage. In the words of West Virginia Representative Shelley Moore Capito, this linkage made sense because, "the sustaining of small businesses by keeping their vital assets will allow those making the minimum wage to continue working. This is a jobs bill."

I'm sorry, this is nuts. Only a tiny percentage of small businesses will ever be liable for the estate tax and it is paid out after they are dead. It has no obvious effect on how they would operate their business. It is hard to see how cutting the estate tax will save even a single minimum wage job.

How could a reporter just put these words in print and not talk to an economist to get a comment on this statement? Surely any economist, regardless of their political leanings, would explain that a district in West Virginia is represented in Congress by a crazy person.

--Dean Baker

The weak second quarter GDP numbers were driven in part by the housing sector as noted in the NYT. See also the separate piece on the housing market. In addition to the GDP data, the Commerce Department also released data on vacancy rates for the second quarter. The vacancy rate for ownership units hit a new record.

Cheap tip for the months ahead -- watch for credit card debt to soar. People who can't borrow against their homes, now that prices have stopped rising, will turn to credit cards. It isn't pretty, but that's what desperate people will do to hold onto their homes in a collapsing bubble.

--Dean Baker

Remember the inverted yield curve and the hoola hoop? A few months back, the prospect of an inverted yield curve was seen as an ominous warning sign of bad times ahead. An inverted yield curve was supposed to signal an upcoming recession. This seems worth mentioning now because the yield curve is becoming seriously inverted as long-term rates have edged downward, even as short-term rates remain relatively high.

For those who have better things to do with their time, an inverted yield curve refers to a situation in which short-term interest rates are higher than long-term interest rates. This reverses the normal course of events, typically investors expect to get a higher rate of return if they agree to lock up their money in a long-term bond or time-lock account rather than keeping it in a checking account where they can get immediate access. A few months back, as the Fed was raising short-term interest rates, without much increase in longer term rates, many market analysts raised the prospect that the yield curve would become inverted and that the economy would therefore sink into recession.

This discussion made for painful reading. There is no mysterious incantation that leads an inverted yield curve to do any special damage to the economy. The actual story here is rather simple. Inverted yield curves almost always (I say "almost" in case I missed one) come about because the Federal Reserve Board raises short-term interest rates in an effort to slow the economy and raise the unemployment rate. Sometimes the Fed goes too far and throws the economy into a recession. It is not the inverted yield curve that causes the recession; it is the fact that the Fed raised interest rates by too much. Whether the short-term rate stays 0.1 percentage point above or below the long-term interest rate cannot possibly make any difference when it comes to the probability of a recession.

With the 10-year Treasury bond rate hovering at 5.0 percent and the Federal funds rate at 5.25 percent, we might expect the inverted yield curve folks to be warning of impending disaster. However, this line is apparently no longer in fashion, or at least not in the business pages of the country's major newspapers.

My other favorite recent fashion in economics dates back two years. In the summer of 2004, bond yields (interest rates) regularly fell on reports of higher oil prices. This was confusing to me since I'm an old-school type that tends to think that higher inflation is associated with higher interest rates, and higher oil prices mean higher inflation.

The economic fad of 2004 held out the opposite chain of causation. According to this story, rising oil prices pulled money out of consumers' pockets, thereby slowing the economy. Since the economy was already slowing, the Fed would feel less need to raise interest rates.

This one never made much sense (don't investors still care about the real return they get on their money?), but the story frequently appeared in the NYT and other papers. It also seemed to explain bond price movements at the time. Fortunately, this fad seems to have disappeared without a trace. Oil prices have shot through the roof in the last two years, and interest rates are ….. much higher. I am not surprised.

--Dean Baker

Reporters should always use inflation adjusted numbers when making comparisons of dollar values at substantially different points in time. A dollar is worth much less today than it was 20 or 30 years ago. While most readers may know this, they do not typically have ready access to the consumer price index tables, so they will not generally be able to adjust the numbers themselves.

Reporters, who write news stories for a living, do have the time to adjust numbers for inflation and should routinely do so in their news stories. This means that when an article tells readers that a bill in Congress will raise the minimum wage to $7.15 an hour in 2007, from 5.15 an hour at present, it would be helpful to tell readers that this is equal to approximately $5.32 in 1997 dollars, the year the last minimum wage hike took full effect. This means that minimum wage workers would get about a 3.0 percent increase in real wages from 1997 to 2007, if this bill was approved.

--Dean Baker

If we use protectionist barriers to artificially prop up health care prices in the United States, then people go overseas for health care. It's extremely wasteful (it's much cheaper and better for people's health to have the medical procedures done here), but that is what happens when you have protectionism.

--Dean Baker

Several comments and e-mails on my last post on trade expressed confusion about restrictions on highly educated foreign workers in the United States. (There was one complaint about repetition, as long as the press repeats the error, I will repeat the complaint.)

These restrictions take two forms. The first is formal licensing restrictions. The highest paid professionals, like medicine, law, dentistry, and accounting all have licensing requirements. These requirements present a confusing patchwork (in most areas, each state has its own requirements) that makes it extremely difficult for foreign professionals to get licensed to practice their profession in the United States.

If we applied the same rules to these professions as "free traders" did to manufacturing, we would set a single national standard in each profession that would be based exclusively on legitimate health and safety considerations, just as the W.T.O. and other trade pacts require in the case of safety standards for manufactured goods. These standards would be fully transparent and the tests would be administered throughout the world (by U.S. certified officials) so that smart kids in India, China, or Mexico could as easily become certified to practice medicine or law in the U.S. as kids raised in New York. People who do not support this standardization of licensing requirements are protectionists, not free traders.

The second point relates to rules for hiring foreign workers (including those on H1B visas) more generally. If a university or newspaper wants to hire a foreign professor or journalist, it must claim that there were no qualified U.S. citizens (or green card holders) for the job. It cannot just say that it wanted to hire a foreign worker for a lower wage than U.S. workers demand, in the same way that Wal-Mart buys foreign-made clothes because they are cheaper than U.S. made clothes.

As a practical matter, this restriction is not tightly enforced. However, no one has tried to establish Wal-Mart universities or newspapers where they completely staff the institutions with foreign workers, who might be every bit as qualified as their U.S. born counterparts, but willing to work for half the wage.

I will pre-empt one silly response. The number of foreign reporters, university professors etc. who are trained to U.S. standards (including fluency in English) might be relatively limited today, but that is because they do not have an open door to work here. No one built textile factories in China to export to the U.S. until they knew that they had an open door for their exports. Similarly, you will not see millions of Chinese/Indians/Mexicans etc. train to work as reporters and university professors in the United States until they know the door is open to them. Again, real free traders support opening this door. Those who oppose opening the door (a group that includes the top trade negotiators in both the Clinton and Bush administrations) are protectionist. Let's see how long it takes the reporters (who benefit from protectionism) to get the story straight.

I have a fuller discussion of this issue in the "Doctors and Dishwashers" chapter of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, which is available as a free e-book.

--Dean Baker

The latest numbers certainly show a slowing. Existing home sales are down by 10 percent from their peaks last year. Prices have stabilized on a year over year basis (down slightly after adjusting for inflation), and inventories are building. It is worth noting in the latest report that the inventory of unsold condos stood at 8 months of sales in the June report.

Also, it is important remember that the existing homes data refers to sales closed in June. Since it typically takes 6-8 weeks to close a contract, the June sales are most showing information about contracts signed in April and May.

--Dean Baker

It would be nice if reporters were forced to read what they write before it appears in the paper. What do they mean when they say "free trade?"

What makes increasing patent and copyright protection (an essential part of recent U.S. trade agreements) free trade? These are government granted monopolies. Isn't that obvious? Yes, they serve a purpose in providing incentives for innovation and creative work, but ALL forms of protection serve a purpose, that doesn't mean that they are not protectionism.

Also, it really is infuriating that reporters cannot recognize the protectionism that sustains relatively high salaries for professionals and reporters. If we had free trade for doctors, lawyers, accountants, etc. we would have standardized licensing requirements so that smart students anywhere in the world would have the same opportunity to train and get a job in these professions in the United States as a kid born in New York. Any economics reporter who thinks we have this situation now should be fired on the spot. Obviously, they have no idea what they are talking about.

Also, if we had free trade in reporters, I could start a newspaper and start filling its staff with smart, energetic reporters from developing countries who would be very happy to work for much lower salaries than the current staff. If we had free trade, I would not have to claim that I could not find a qualified citizen for these jobs. I could just say that I hired reporters from the developing world because they would work for less. This is illegal now and as a result, reporters earn higher salaries than would otherwise be the case. Again, if an economics reporter cannot understand how they benefit from this protectionism, they are not qualified for their job.

--Dean Baker

I was going to give this one a pass, since it's a column in the Post Outlook section, not a news story, but even opinion pieces should be able to pass the laugh test.

The basic point of the piece is that the public and media are wrong to be concerned about the fact that researchers who do research and report findings, as well as the regulators who assess them, often get money from the drug companies that stand to make billions. The article assures us that these people are dedicated professionals, committed to bettering human life, who would not let money affect their behavior.

It's great to know that the Washington Post would be willing to print a diatribe arguing that individuals act out of concern for society rather than for monetary gain, first socialist tract I've seen the Post since I've been in town.

Of course, if anyone really believed what the column argues, then we should just take the money out of drug research altogether. If the scientists are high-minded individuals who only act out of their desire to better humankind, then we can just give them standard government salaries and set them to work developing new drugs. There is no need for patents and the multi-billion dollar rewards that can go to lucky patent holders. I haven't seen the piece arguing this position in the Post Outlook section, and I doubt that I will.

--Dean Baker

A Washington Post editorial this morning criticized efforts in Maryland and other states to force large employers (especially Wal-Mart) to pay for their workers' health care. The article contrasted these efforts with the approach being followed in Massachusetts, which it asserts is "a state that is trying to responsibly address rising health-care costs."

This is an interesting assertion. Massachusetts recently passed a law that required all its residents to have health insurance. There were some limited subsidies in the bill plus some restructuring of the insurance market, but there was nothing that would work in any obvious way to control health care costs, or at least nothing that was reported in the Washington Post.

So, if we believe (with the Post editorial) that there were important provisions for controlling health care costs in this bill, then we should be furious with the Washington Post for failing to report on them. Alternatively, we could believe that the Post editorial board is just making things up to support its case.

--Dean Baker

David Cay Johnston has a great piece in today's NYT reporting on the Bush administration's plan to halve the number of lawyers who audit estate tax filing. According to the article, these lawyers generate an average of more than $2,000 per hour of work in revenue for the government. This implies, that unless they are paid more than $4 million a year, the government will lose money by laying them off.

--Dean Baker

Fortunately, I have a busy life, so I really don't have a great deal of time for such trivia. Unfortunately, other economists are less busy and do calculate such trivia. Even more unfortunate is the fact that the St. Louis Federal Reserve Board publishes these calculations as though they are serious economics. However, the real problem is that columnists in the Times use this stuff to make the case for cutting Social Security.

The story here is real simple. The U.S. has a broken health care system. If it is never fixed, it will have a devastating impact on the economy. It will also lead to severe budget problems. Any competent economist/ reporter would see these projections as another way of demonstrating the need for national health care reform. They tell us nothing about the budget situation.

--Dean Baker

The Sunday Times has an article reporting that many homebuyers who took out adjustable rate mortgages 3 years ago, are now refinancing to avoid higher mortgage rates. The article (actually the accompanying chart) also adds that many are refinancing with negative amortization loans, under which the outstanding principle increases through time. The chart tells readers that this could make sense, as long as house prices continue to rise.

Okay, let's check the numbers here. Three years ago, homeowners were taking out adjustable rate mortgages at rates in the neighborhood of 4.5 percent. Many are now resetting at rates that are 2.0 percentage points higher, or close to 6.5 percent. The article reports that the national average for adjustable rate mortgages is now 6.28 percent. Throw in fees of 0.5 to 1.0 percent and it's hard to find the savings. In other words, simply exchanging adjustable rate mortgages will not in general save homeowners any money.

Now, the point may be that homeowners are pulling more equity out of their home, taking advantage of the strong appreciation in many areas over the last three years. While, contrary to claims in the article, this doesn't save anything in terms of monthly payments (the payment on a larger mortgage will be higher, not lower), the additional cash can postpone a day of reckoning.

However, the risk in this case is really the exact opposite of what the article claims. The article reports that this strategy may make sense if home prices continue to climb. Actually, pulling out more equity can make much more sense if home prices fall. In that case, the mortgage holder is left with a mortgage that exceeds the value of the house. The homeowner can walk away turning over a house that may be worth much less than the amount of money he has borrowed. That might not be pretty, but it is what will happen in hundreds of thousands of cases across the country.

--Dean Baker

Financial bubbles breed accounting fraud. Those of us who warned of the stock bubble in the late nineties were not surprised by the Enrons and WorldComs that surfaced when the bubble deflated. Bubbles make it possible to paper over all sorts of questionable accounting or outright fraud. When the bubble deflates, these practices can no longer be hidden.

The analogous problem in the housing bubble is with appraisals. The basic story is simple. Mortgage issuers make their money by issuing mortgages. Once the mortgage is issued they sell it to someone else (in many cases, the key figure is actually a broker who never holds the mortgage), so they have little interest in accurately assessing the quality of the mortgage. To get a mortgage issued, it is necessary to have a house appraised at a value that justifies the mortgage.

The issuer generally chooses the appraiser. Okay, suppose an appraiser comes in with a low number and the mortgage can't then be issued? The issuer is very unhappy, no money here. The issuer then finds another appraiser, who will come in with a higher number for the value of the house. Appraisers, being intelligent people, come to realize that they don't get jobs if they give low appraisals, so appraisers come in with high appraisals so that the mortgages can get approved. Everyone is then happy, until the bubble bursts.

The Wall Street Journal has a good piece on this topic today. It would have been nice if they had run this piece three years ago, before the damage had been done. But, maybe this can help stop the next financial bubble driven train wreck:)

--Dean Baker

In econ 101, we teach that when the government intervenes in a market to keep prices above marginal costs, it will encourage all sorts of undesirable and harmful rent-seeking behavior. This is one reason that all right-thinking economists are strong opponents of tariffs and quotas that can raise the price of things like shoes, shorts, and steel by 20-30 percent above the competitive market price.

Given what we teach in econ 101, it is very difficult to explain why economists are not more concerned about things like patent protection for prescription drugs. This form of protectionism raises the price of drugs by several hundred percent, or even several thousand percent, above the marginal cost of production. Drugs that would sell for $20-$30 a prescription in a competitive market often sell for $300-$500 per prescription when they have patent protection.

When the government creates this sort of opportunity for large rents, economic theory tells us to expect corruption. The NYT gives an interesting account of one way such corruption occurs. A New York doctor was arrested in March for promoting "off label" uses of a prescription drug.

The basic point here is that drug companies have to get the FDA to approve their drugs for specific uses. The FDA assesses the effectiveness and safety of the drug for the purposes that the company wants it to be prescribed. Drug companies can then promote their drug, subject to required warnings, only for the uses that the FDA approves. However, doctors are free to use their judgment to prescribe a drug for other "off label" purposes, if they believe it is appropriate for these purposes.

This is the problem. Drug companies make enormous profits when they sell more drugs at huge mark-ups. While they cannot legally promote their drug for any purpose other those explicitly allowed by the FDA, they can of course dispense information about new research on their drug. Hence the story of the doctor being arrested for promoting off label uses. He was getting large fees from a drug company to give talks about the off label use of its drug.

I know nothing about the issues in this case other than what appears in the NYT article. But, as a believer in the market, when it comes to government bureaucrats trying to restrict such health endangering practices, versus the pharmaceutical companies that stand to make billions, my money is on the pharmaceutical companies. Of course, if economics were an honest profession, there would be many more economists yelling about the inefficiency and corruption that result from patent protection in the pharmaceutical industry, than the losses from a 10 percent tariff on textiles.

--Dean Baker

I believe that the Washington Post has a copyright on combining the words "Medicare" and "Social Security" in a single sentence. Anyone who writes on these issues on their editorial pages always seems to do it.

Again folks, the numbers are real clear. Medicare is a big problem because U.S. health care costs are projected to explode, which means that Medicare costs will explode. The moral is fix the health care system. Social Security is not a problem. The story on aging is not very different in the future than in the past. We are living longer, that has always been true.

I assume that some of the editorial and op-ed writers actually do look at the projections occasionally. This makes you wonder why they are so insistent on ignoring the projections when they discuss these issues.

--Dean Baker

There is plenty of room to debate what the Federal Reserve Board's monetary policy should be, but the necessary prerequisite for a serious debate is the knowledge of how monetary policy works. Readers of the Post would be badly misled on this topic by an article in today's paper.

The article correctly reports that the Fed adjusts interest rates to prevent inflation from getting too high, explaining that "when inflation is a concern, it raises borrowing costs to cool economic growth, which weakens businesses' power to raise prices."

Well, not exactly. The immediate target of the Fed's anti-inflation policy is wages, not prices. In fact, many macro-models have prices being a fixed mark-up over wages, which implies that the only way to control prices is to control wages. The Taylor rule, the standard guidepost for Fed policy, is based in part on the gap between a definition of full employment (the non-accelerating inflation rate of unemployment) and the current level of unemployment.

This isn't being picky. The point is that the Fed slows inflation by raising the unemployment rate and throwing people out of work, thereby placing downward pressure on the wages of those who still have jobs. Disproportionately, the people who lose jobs tend to be less-skilled workers, manufacturing workers, sales clerks and custodians, not doctors, lawyers, and economists. The people who the Fed throws out of work are also disproportionately black and Hispanic.

People can agree with Fed policy and think that controlling inflation is worth the cost in terms of higher unemployment and lower wages for these workers. However, we should not airbrush the picture. People will suffer for the Fed's decision to raise interest rates, and it will not be just businesses that have less ability to raise prices.

--Dean Baker

The NYT had a good article this morning highlighting a new Brookings report that details how people living in inner city areas often pay far more for goods and services than people living in more affluent areas. The report is worth reading and the NYT gets credit for calling attention to it.

Unfortunately, the report suffers from a serious lack of imagination in its proposed remedies, highlighting greater public-private cooperation in bringing lower cost services to the poor. I have nothing against cooperation, but I always worry that these efforts end up being more of a subsidy to the industries involved than the poor people that they are supposed to help. My model nightmare is the accounts established to receive electronic payments from the government (e.g. disability or veterans benefits) for low income people. They cost the government a great deal in subsidies to the financial industry, and do very little for their intended beneficiaries.

In some cases, I prefer good old fashioned competition. Suppose the government set up postal banking systems (similar to those existing in many European countries) that could provide basic banking services to the poor at a minimal charge. (The government could even contract with a private company to actually provide the service.) This way, people in the inner cities would all have a low-cost option. If they would rather go with the private sector alternatives, then that's fine. The same could be done with car insurance, home insurance, and especially retirement accounts. If the private sector really is more efficient, then they should have nothing to fear.

--Dean Baker

The NYT had a very good piece about how the shift of 6 million Medicaid beneficiaries into the Medicare drug benefit program may increase drug company profits in 2006 by $2 billion. According to the article, under the new program the drug companies get to sell the same drugs at higher prices. It doesn't get much better than this!

--Dean Baker

The NYT had a good piece this morning reporting on how the medical supply industry pays top hospital executives thousands of dollars for advice on how to market their products. This is what you expect to happen when government patent monopolies allow these firms to sell their products at prices that are several hundred percent above the free market price.

--Dean Baker

NPR had a piece this morning warning of a shortage of agricultural workers in California. It reported that some crops may rot in the field, if farmers there can't get more workers by the end of the summer.

Those of us who believe in markets would suggest that the farmers try raising wages. It is possible that some of the crops being farmed now in California would not be profitable, if farmers had to pay the wage necessary to attract workers in the current market (or if they had to pay the market price for water). In a market economy, that means that the farmers made bad choices on crop choices.

That's unfortunate for the farmers, but that's how markets work. I would like to be able to get a lawyer for $20 an hour, but because we have a lawyer shortage, that is not an option. Maybe NPR will be able to find some folks who understand markets to help with their reporting on economic issues.

--Dean Baker

Back in the days of the Soviet Union, key facts were often excluded from historical accounts in order not to put the regime in a bad light. The NYT seems to be experimenting with this journalistic style.

Today's article on the G-8 summit in St. Petersburg included a passing reference that described Russia's 7-year long economic recovery as "oil-fueled." Well, the rise in oil prices certainly has helped Russia over this period, but it is probably at least as important that Russia abandoned the economic straightjacket that had been imposed on it by the I.M.F. and then U.S. Treasury Secretary Robert Rubin (with help from his deputy Larry Summers).

Until the summer of 1998, Russia had tied its currency to the dollar. In order to sustain this link, it was forced to raise interest rates to ever higher levels. The over-valued ruble, coupled with high interest rates, was strangling Russia's economy, bringing growth to a halt. The I.M.F. and the U.S. Treasury both insisted that Russia maintain the link to the dollar at all costs.

This eventually proved impossible, and the Russian government allowed its currency to float and deferred payment on its foreign debt. The pundits and the media pronounced this to be a disaster and insisted that Russia's economy would crumble. (Read Rubin's book to get the consensus opinion.)

There was a financial collapse, and Russia's economy did tumble downward for the rest of the year. But by the beginning of 1999, Russia's economy began to grow again and has been growing rapidly ever since. In this case, the real danger was the medicine coming the I.M.F. and U.S. Treasury. Once Russia began to ignore their recommendations, its economy performed quite well.

--Dean Baker

The Times had an interesting piece discussing the impact of more than $1.2 trillion in adjustable rate mortgages resetting in the next two years. The article points out that many homeowners may find their rates increasing by as much as 2 full percentage points when their lock-in period ends on an adjustable rate mortgage.

The article notes that this increase in mortgage payments may cause serious distress for many homeowners and may even lead some to give up their house, especially if it has lost value since the mortgage was issued. However, the article assures us that the situation will not pose any problem for the mortgage banking industry.

How do we know it won't pose a problem? Well the industry said so. That pretty much settles the case. After all, if they were seriously worried, the representatives of the industry would no doubt be anxious to have their concerns prominently displayed in the New York Times.

I have written on the housing bubble at length (see our site), but I'll just give two quick items to unsettle the comfortable. First, to make the case that there is no problem, the article comments that "mortgage industry losses of $110 billion spread over several years would amount to a mere 1 percent of the total national homeowners' equity of $11 trillion." I am not sure where the $110 billion figure originated, but loses of this magnitude would certainly take a very serious toll on the mortgage banking industry. The relevant denominator is not the amount of homeowners' equity, but the net worth of the banks in the sector. Without checking the books, I would be confident that their net worth is considerably less than $500 billion. If losses in the sector go over $100 billion, even spread over several years, then it is virtually guaranteed that you will see some major banks facing serious problems.

The other cause for concern is that economists seem to have a very difficult time seeing bubbles or assessing the impact of their collapse. In September of 2000, not one of the 50 "Blue Chip" forecasters predicted a recession in 2001. The lowest growth projection from this group was 2.2 percent. Given the stock market crash was already in progress, it shouldn't have required too much insight to see problems down the road. I doubt that the quality of economic forecasts has substantially improved in the last six years.

--Dean Baker

I will be giving a talk on my book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, at Demos next Thursday at noon. The talk is free, as is the book, if you want to download it. You can the details on their website.

--Dean Baker

Economists are supposed to be good at math. It is a great honor for an economist to be appointed as head of the President's Council of Economic Advisors. For these reasons, it should be big news that the person currently holding this position apparently has problems with simple arithmetic.

According to an article carried by Dow Jones Newswire, Ed Lazear, the current chief of the Council of Economic Advisors, claimed that wage growth "seems to be taking off right now." The article reports Mr. Lazear's view that workers now seem poised to get substantial real wage gains.

If the article presented Mr. Lazear's comments accurately, then it missed the real news. Nominal wages are at best just keeping pace with inflation, leaving no room for real wage growth. From June 2005 to June 2006, the average hourly wage increased by 3.9 percent in nominal terms. From May 2005 to May 2006 (the June data is not yet available) the consumer price index increased by 4.1 percent. This means that the real wage fell by roughly 0.2 percent over the last year.

If we focus on just the last three months, nominal wages rose at a 4.5 percent annual rate over the three months April, May, and June compared with the prior three months. This is equal to the annual rate of growth of the CPI in the three months of March, April, and May compared with December, January, and February. In other words, the most recent data indicate that wages may now be just keeping even with inflation.

If wages have slightly trailed inflation over the last year and are just now roughly breaking even, how can President Bush's chief economist say that wage growth "seems to be taking off?" Mr. Lazear either does not know arithmetic or is not being honest. The fact that he is making a claim so completely at odds with reality should have been big news. (Thanks to PGL for the tip.)

--Dean Baker

The coverage of the debate over the recent budget numbers has been painful. The arguments on both sides have been far removed from reality. The media should have put in the effort to bring the issue back to earth.

First, the White House's claim that the recent growth in revenue show that the tax cuts have somehow paid for themselves, by increasing growth, is laughable. If we go back to 2001, before the economy had the benefit of President Bush's tax cuts, CBO projected the economy to grow by 20 percent between 2000 and 2006. On its current path, growth over this period is projected to be 16.7 percent. (CBO's growth projections are constructed to average in the effect of recessions, so the 2001 recession should not affect this story. Furthermore, even the White House's growth projections do not show the economy ever catching up to the path projected by CBO in 2001. In other words, the White House's economists don't believe that the tax cuts have had any substantial impact on growth.)

Getting to tax revenue, CBO's projection of revenue for 2006 was more than 20 percent higher (adjusted for inflation) than the White House's latest figure. In other words, the economy is behind its pre-tax cut growth path and its way behind its pre-tax cut revenue path. Users of arithmetic know that the tax cuts did not come anywhere close to paying for themselves.

The fact that tax revenues are coming in somewhat higher than expected this year is explained largely by the strong stock market performance last year and the resulting increase in capital gains tax revenue. There is always a large random component to tax collections. Arguing about the budget situation based on these random fluctuations is like drawing conclusions on global warming based on yesterday's weather.

On the other side, the claim by Democrats that Bush is bankrupting the country are also a bit hysterical. The deficit is larger than it should be, and giving tax breaks to the rich was not the country's most pressing need, but the current deficit is not that large by historic standards. (By the way, it would be more honest and help the hysteria case if the Democrats started using the on-budget deficit, which adds in the $195 billion borrowed from Social Security.)

The reason why the hysteria on the deficit seems so misplaced is that the current account deficit is so much larger. It was running at an $834 billion annual rate in the first quarter of 2007, nearly three times the size of the unified budget deficit and more than 50 percent larger than the on-budget deficit. Of course, the villain in the case of the current account deficit is the high dollar policy that had its origins in the Clinton-Rubin era. This fact makes the current account deficit less interesting to Democrats, but doesn't change the extent to which it should concern economists or people interested in doing serious reporting on the economy.

--Dean Baker

The prospect of a new trade agreement with the United States has prompted mass opposition within South Korea, as demonstrated by large and angry protests. The International Herald Tribune (IHT) appears to be rising to the occasion, going all out to push the new pact.

The article includes a variety of facts that are supposed to demonstrate the need for the trade agreement. It begins by noting that South Korea's growth "averaged a torrid 8 percent a year in the 1970's and 1980's, has slowed in recent years." Wow, they can't sustain an 8 percent growth rate, disaster looms. In fact, South Korea's per capita GDP growth has been averaging about 3 percent a year over the last few years. This is very good for a country with European standards of living. (Post NAFTA Mexico would be euphoric if it ever achieved this growth rate.)

The article then reports that Korea's share of the U.S. export market has fallen to 2.6 percent from 3.3 percent a decade ago. And this is supposed to matter, why?

Then the article tells readers that Korea faces challenges like "a rapidly declining birth rate and an aging population," Hmmmm, less crowding and longer life expectancies, this is really frightening.

And the kicker, "economists say the country must restructure its economy to keep growing for the long term." Sure, I would like to find one economist who claims that Korea is about to stop growing if it doesn't "restructure" in the manner advocated in this article. There are no economists cited in the article who offer this opinion.

The fact is that South Korea is an incredible success story. It went from Sub-Saharan living standards in the 50s to European living standards at present. It succeeded by pursuing policies that defied the conventional wisdom among economists. That's too bad for the economists who apparently do not understand development. Their ignorance is not Korea's problem, or at least it is not Korea's problem as long as they are not able to impose their policies on the country.

Oh yes, the IHT felt the need to call the trade pact a "free trade" agreement.

--Dean Baker

Many of the stories on the reduction in the 2006 budget deficit have correctly focused on the fact that the long-term deficit picture still looks pretty awful. However, they have badly misled readers about the reason for the deficit problem. The standard line is that "Social Security and Medicare" costs will explode as the baby boomers retire (e.g. this NYT piece).

This is incredibly misleading. Social Security costs will rise modestly -- the projected increase in SS measured as a share of GDP from 2005 to 2030 is less than the increase from 1960 to 1985. The real culprit in the story, as every serious reporter knows, is Medicare. And the reason that Medicare costs are projected to explode is that the U.S. health care system is broken.

In other words, the deficit stories should be talking about how the exploding cost of the U.S. health care health system will devastate the budget and the economy. People should demand that the reporters get this simple point right and stop telling scare stories on Social Security.

--Dean Baker

The initial reports on the Fed's release of consumer credit data for May focused on the slow 2.4 percent annual rate of growth reported for the month. This reporting misses the boat.

There are two major components to consumer credit. The non-revolving component is primarily car loans. This component fell at a 2.0 percent annual rate, reflecting weak car sales.

The other component is revolving credit. This is primarily credit card debt. This component rose at 9.9 percent annual rate in May. This is a sharp acceleration from earlier this year, when revolving debt was actually declining.

It is always possible that a single month's data is simply an aberation and will be reversed next month. But if this proves to be the beginning of a trend, then the story goes like this: home prices have stopped rising and may even be declining in some places. This means that people can no longer sustain their consumption with by withdrawing equity from their homes. Therefore, many people are turning to credit card borrowing as a way to sustain their consumption and in some cases to make their mortgage payments. (Many adjustable rate mortgages taken out in 2003 are being reset at much higher rates now.) If this story is true, then the May report on consumer debt is a sign of growing stress in consumer finances.

--Dean Baker

For those who want to read more of my ramblings, I am guest blogging at the Drum Major Institute this week.

--Dean Baker

Okay, I tricked you. The Washington Post ran an article reporting that the wages of high-skilled workers in the Washington area are rising far more rapidly than the wages of less-skilled workers. It attributes this fact primarily to technology that has reduced the demand for less-skilled workers.

Those who believe in market forces would see rising wages as evidence of a labor shortage. In other contexts (e.g. nurses, construction workers, custodians etc.) the Post has reported that the country needs immigrants to deal with such labor shortages. Surprisingly, this article did not include any discussion of the need for more high skilled immigrants.

In fairness, the article did conclude with a brief discussion of immigration and its impact on wages. It does not attempt to reconcile the claim that wages for less-skilled workers are being driven down by technology with the claim that the country is sufficiently short of such less-skilled workers, that it desperately needs immigrants.

Let me head off one attempt at reconciling these claims. Some of the jobs frequently done by immigrants at present (e.g. construction work and manufacturing jobs in food processing) used to be relatively well-paying jobs. So it is not true that immigrants simply took the lowest paying jobs that no one else would do.

--Dean Baker

The NYT magazine had a pretty good piece summing up the state of the academic debate on the impact of immigration on the labor market. I have two quick observations.

The piece, like the literature, largely ignores the impact of immigration on housing costs. This is important, because housing is a large chunk of people's expenditures, especially those of low wage workers, who are the focus of the discussion. Examining wages across cities and regions provides little insight if we don't adjust for differences in housing costs, since housing accounts for close to 40 percent of the consumption of low income families.

A casual glance at the data suggests that there is a real issue here. Certainly housing costs have risen far more rapidly in cities with heavy concentrations of immigrants (e.g. San Diego, Los Angeles, Miami) than those with few immigrants (e.g. Cleveland, St. Louis, Detroit).

Second, the article is rather cavalier in its treatment of high end immigration. The author notes in passing that if the country was flooded with immigrant writers then he would get lower pay for his gigs. Well, we could design the policy that way. The article is debating the appropriateness of having less educated workers subjected to more competition from people from the developing world and largely concludes that the benefits to more educated workers are sufficiently large, that the less-skilled should be willing to bear the cost.

Needless to say, if a less-skilled worker got the opportunity to write a piece for the NYT magazine, he/she would come to the same conclusion about opening the doors to more high-skilled immigrants. The article implicitly accepts the idea that writers and other high end workers will never be subjected to the same international competition as low end workers because they have so much political power. This is quite likely true, but let's be clear about the role of power in this story.

--Dean Baker

There was a larger than expected jump of 8 cents in the average hourly wage reported for June. This left some folks scrambling for an explanation. The Washington Post found a creative one, courtesy of "some analysts."

According to these analysts, the more rapid wage growth in June is partly explained by a change in the mix of jobs, with the economy losing low wage jobs in the retail sector and adding jobs in the relatively high-paying manufacturing sector.

Okay, sports fans, let's check the numbers. Employment of production workers (the relevant category) in the retail sector reportedly fell by 20,000 in June. Employment of production workers in manufacturing increased by 19,000. This gives a total change in composition of 39,000. This change in composition is equal to 0.042 percent of the total employment of production workers (92,700,000).

The difference in pay between manufacturing workers and retail workers is $4.25 an hour. This means that 0.18 cents of the reported increase in wages in June can be explained by this shift in the composition of employment. Some analysts should be happy that their names did not appear.

The more obvious explanation for the rapid wage growth reported for June was the slow wage growth reported in May. In the economy, the actual pace of wage growth generally does not change very much from month to month. When our surveys show unusually strong or weak growth in a given month, it is more likely due to sampling error than anything real in the economy. The May data showed the average hourly wage growing by just 1 cent. This was almost certainly slower than the true rate of wage growth in May. In effect, the June data was picking up both wage growth in June plus the gap between the true pace of wage in May and the reported rate. Some of us who watch the numbers were not surprised by the big June increase.

--Dean Baker

The Washington Post had an interesting piece about whether it still makes sense for the government to mint pennies, given how much they cost to make relative to their value. The article might have asked the same question about the dollar bill. Coins are in general much cheaper to keep in circulation than bills, and given that a dollar today is worth about as much as a quarter was 35 years ago, it might be time for the switch.

Of course we do have dollar coins, but they rarely circulate. In this respect, it's worth noting that the last two dollar coins both feature women (Susan B. Anthony and Sacagawea [a native American woman who accompanied Lewis and Clark on part of their journey]). These are the only U.S. coins or notes to portray women.

--Dean Baker

The lead headline of the Washington Post this morning was "Mexico Vote Tally Gives Free-Trader a Narrow Victory." Wrong! Felipe Calderon, the candidate who is now ahead in the vote tally to be Mexico's next president is not a free-trader. He has supported increasing copyright and patent protection and shown no special interest in removing protectionist barriers that obstruct free trade in the services of highly paid professionals (e.g. doctors, lawyers, accountants).

The Washington Post does not own the term "free-trade." If they want to identify Calderon by his trade position, they can call him pro-NAFTA. It is more accurate and saves 2 letters.

--Dean Baker

Remember the good old days when newspapers didn't just unquestioning print what the powerful tell them? (Okay, maybe they never existed.) Anyhow, a Times article this morning reports that Petrobras, the Brazilian energy company, has invested $50 billion in Bolivia.

How does the Times know how much Petrobras has invested in Bolivia? Did their reporter go around and price out the various wells and pipelines that the firm has constructed over years? Maybe the reporter talked to an expert who gave his/her estimate of the amount invested. While both of these are possibilities, the article doesn't tell us the source of the $50 billion figure, leaving open the possibility that the Times just printed what the company told them.

This matters because, as the article reports, Petrobras is currently engaged in a dispute with the Bolivian government over its efforts to renegotiate royalty agreements. Petrobras' moral, if not legal, claim is improved, insofar as it has invested heavily in developing Bolivia's resources.

One reason for viewing the Petrobras claim with skepticism is that Bolivia's GDP is currently $9.7 billion. This means that Petrobras is claiming to have invested a sum that is more than 5 times Bolivia's current GDP (that would be more $65 trillion in the U.S.). Such claims should at least come with a source.

Addendum: The reporter apparently did not get the $50 billion figure from Petrobras, or at least not from its website. The website gives a somewhat more plausible figure of $1.5 billion. (Thanks to my CEPR colleague Ben Zipperer.)

--Dean Baker

Economists always like to talk about the ideal situation of perfectly competitive markets. This is the world in which there are vast numbers of buyers and sellers so that no individual buyer or seller can affect the price. In this world, every producer is a price taker. This means that the price is set by the market, and they can sell as much as they want to produce at the prevailing market price.

In the real world, this is not an accurate description of most markets, which have a relatively limited number of sellers. The one market that does seem to fit the competitive story reasonably well is agriculture. Farmers see a price in the market for corn, wheat, soybeans, etc. and they can sell as much as they choose at this price.

Unfortunately, the Post apparently does not believe that agriculture is a competitive market. It reports today that the United States is trying to open up markets in developing countries in order to give U.S. farmers something to offset the loss of subsidies in a new W.T.O. agreement. Sorry, this doesn't make any sense.

Farmers can already sell all they want in the market today at the prevailing price. It is unlikely that farmers will feel any better if the wheat they sell at $2.50 a bushel is going to Zambia than if it's going to Pennsylvania.

Perhaps the article meant that by opening up markets in Zambia, and other developing countries, the price of wheat would rise. It doesn't seem very likely that the new markets would produce any substantial rise in price (the new entrants would be relatively small compared to the existing world market), but this would be a qualitatively different effect than simply an increase in the quantity of wheat sold. It would mean that all of us would be paying more for wheat. This could lead a more efficient world market, but it would also mean higher prices for consumers in the U.S. If this is the intended outcome from an new W.T.O. agreement, shouldn't the Post be telling its readers?

--Dean Baker

The New York Times editorial page went a bit overboard in its anti-Bush tirade on the budget deficit. The basic point, that the Bush administration deficits are too large, is on the mark. (By the way, they could better make this point using the gross deficit [4.0 percent of GDP], which includes the money borrowed from Social Security, or better yet, just report the change in the ratio of gross debt to GDP.)

If the Times had left the issue there, all of us econ types could happily applaud this push for fiscal responsibility. But our intrepid Times editorial writers felt the need to push further. They tell us that the debt is especially troublesome because 43 percent is in foreign hands and "debt owed to bankers in Beijing, Tokyo and elsewhere could destabilize the dollar and from there, drive up interest rates and prices." Huh?

Okay, let's check the bases here. Most foreigners hold government debt for the same reason that investors in the U.S. hold debt, they value its safety, and also expect a decent return. Is there a set of events that will cause bankers in Beijing, Tokyo, and elsewhere to dump their U.S. government debt, which will not also cause bankers in New York, San Francisco and Chicago to dump their debt? Is the Times promoting the image of the patriot banker who holds onto their U.S. government bonds, even as their price falls through the floor? In the interest of the environment, the NYT should save a few trees and not print such nonsense.

Of course not all foreigners hold bonds for their safety and return. Foreign central banks (most importantly the Chinese and Japanese central banks) have bought up vast amounts of U.S. government debt in order to keep the dollar high. Their reason is that a high dollar makes their exports cheap to people in the United States, and export growth was helping to drive their economies.

These central banks will stop buying, and possibly start selling, U.S. debt when it fits their economic strategy. This can be destabilizing for the U.S. economy, leading to higher interest rates and higher prices, as the NYT editorial suggests, but this has nothing to with Bush's budget deficits. The problem here is simply that the U.S. allowed the dollar to get overvalued.

The main villain here is Robert "strong dollar" Rubin. He was the one who initiated the high dollar policy back in the mid-nineties. Politically, this is great policy. It allows for substantial short-term gains (low inflation and higher living standards for those protected from import competition), at a cost of substantial long-term pain. Bush of course is complicit in this high dollar policy, since he did not move aggressively to bring the dollar down to a sustainable level.

Anyhow, we will pay a large price, possibly in the near future, for this short-sighted high dollar policy. But, the fault here lies primarily with Rubin and Clinton, not the current occupant of the White House.

--Dean Baker