There was remarkably little analysis of President Bush's plans to aid homeowners facing foreclosure in the papers this morning. Two proposals should have gotten more attention.

First, according to the Post article, the plan would allow the Federal Housing Administration (FHA) to waive the current 3 percent equity requirement and allow it to insure mortgages that exceed the market value of the home. In other words, the FHA will be helping moderate income homeowners to borrow $200,000 on a home that is worth $180,000. That doesn't sound like a very good plan for the homeowner and is probably not an especially good use of government money. It essentially means paying off the current mortgage holder -- who otherwise would be holding bad debt -- with taxpayer money.

The other item that deserved some additional attention is the plan to temporarily waive the taxation on forgiven debts. The deal here is that if someone owes $400,000 on a home, which is subsequently sold in foreclosure for $350,000, then they have had $50,000 of debt forgiven. Under currently tax rules, this $50,000 is treated as taxable income. According to both the Post and Times, Bush's plan would at least temporarily exempt this money from taxation.

It is important to recognize that most moderate income homeowners will face relatively low tax rates, so this tax break will probably not be of much benefit. On the other hand, many of the people now defaulting on their loans were relatively affluent people who were speculating in real estate. In the example given here, if an investor was in the 33 percent tax bracket, President Bush's tax break would be worth $16,500, more than twice the average annual TANF payment for a family of four.

It would be a simple matter to restrict the benefits of this tax break by capping the savings and only allowing the tax break on owner occupied homes. It is possible that Bush's plan will include such restrictions, but the news reporting did not address this issue.

[addendum-- The Bush plan did not include some of the worst features mentioned in these articles. The plan does not relax the requirement that buyers put up 3 percent equity on their home. The special tax break on forgiven debt will only apply to owner occupied homes and it will be capped, although the limit has not yet been made public. ]

--Dean Baker

Marketplace ran a piece this morning complaining that regulators in California won't allow the electricty companies to charge higher prices during periods of peak demand, and therefore there is no incentive to introduce innovations that can reduce energy use. This claim misrepresents the key issue.

The point is to give consumers an incentive not to use energy when demand is high. One mechanism to provide this incentive is to charge higher prices during peak hours. Another way to provide the same incentive is to give rebates for lower than normal electricity use during these hours. This can be done if electricity companies establish a baseline, which would be based on year-round average usage, and then give large rebates for peak hour electricity use that comes in below this baseline.

The technology for providing a rebate against baseline usage is essentially the same as the technology needed for charging higher fees at peak hours. The main difference is who gets the money, the consumer or the electricity company. So, we can provide the right incentives for conservation, if Marketplace radio doesn't mind letting consumers pay somewhat lower rates. (Actually, we can raise average rates so that the deal is a wash in aggregate.)

--Dean Baker

The Post reports that President Bush is requesting another $50 billion for the wars in Iraq and Aghanistan. This brings the total for the year to approximately $200 billion.

It would be helpful if these numbers were put in a context that would make them meaningful to readers. This spending accounts for approximately 6.7 percent of the federal budget. Alternatively, the wars cost every person in the country approximately $670 a year in taxes.

Or, to use another measure, the cost of the war is twenty times the additional funding proposed in a Senate bill to extend the State Children's Health Insurance Program. The additional $50 billion requested by President Bush is five times the size of the additional funding in the Senate bill.

--Dean Baker

The NYT did a mostly good job in its coverage of the Census Department's release of data on income, poverty, and health insurance coverage for 2006. Two small points are worth noting. Part of the income gain in 2006 was due to strong job growth in the second half of 2005. These numbers are year-round averages, so growth in the second half of 2005 have a large effect on the numbers foir 2006. Due to strong job growth in the second half of 2005, there were 1.4 million jobs in January of 2006 than the year-round average for 2005.

The article also noted the rise in incomes for people over age 65. At least part of the story is higher employment rates among older people. The employment to population ratio (EPOP) for people over age 65 rose from 23.1 percent in 2000 to 28.1 percent in 2006. This huge rise (more than 20 percent) in EPOPs is a good thing insofar as it is attributable to improved health and employment opportunities for people who want to keep working. It is not so good if it is due to the fact that more older people are finding that they cannot make ends meet without a job.

[The link for the Census report was added at Lindsey's request. At BTP we aim to please.]

--Dean Baker

The release of the Case-Shiller house price index for June got some attention today, but not nearly as much as it deserved. The basic story is that house prices are down an average of about 3 percent on a year over year basis.

But this is really just the beginning. Prices in many areas have taken a sharp drop in recent months, so that the annual rate of decline has been far steeper recently. For starters, the annual rate of decline from the first quarter to the second quarter has been 8.1 percent in Phoenix, 10.3 percent in Tampa, 12.7 percent in Miami, and an incredible 18.7 percent in Detroit. If you annualize the rate of decline over the last three months (a more erratic measure), you get a drop of 7.8 percent for Phoenix, 12.1 percent for Tampa, 16.2 percent for Miami, and 19.0 percent for Detroit.

Remember, these data only go through June and refer to closings. That means that these homes were put under contract in May or even April, several months before the credit meltdowns of the last few weeks. Also, remember that these numbers refer to contracted prices. This means that they don't include any kickbacks that sellers might have to throw in to close a deal. (The Case-Shiller index is a repeat sale index, which means that it tracks sale prices of the same homes. Therefore it is not distorted by changes in the mix of homes sold.)

Prices are not down every everywhere. Seattle and Portland are still showing double-digit gains for the second quarter. But supposedly bullet proof markets like NYC and DC are showing substantial declines, 4.1 percent and 5.0 percent, respectively, annualizing from the first quarter to the second quarter.

Given what we know has happened to the market since these sales were contracted, it is hard to believe that the rate of price decline has slowed. This is big news.

--Dean Baker

The Wall Street Journal noted the weakness in the temporary employment sector in recent months. It is down by 2 percent since the start of the year according to the Bureau of Labor Statistics establishment survey.

The situation may actually be somewhat worse than the data show. Many of the jobs that are imputed into the establishment survey for new firms are in the temp sector. When the economy hits a turning point, this imputation will lead to an overstatement or understatement of employment growth. In this case, with the economy slowing, it is likely that the imputation has overstated job growth in the temp sector, which means that the market is somewhat weaker than the data imply.

Employment in the temp sector has come to be seen as a harbinger of the future direction of the labor market, since employers will often add temps before they hire full-time employees and also will be more quick to layoff temporary workers than regular employees.

--Dean Baker

The New York Times had yet another editorial warning that the dollar might fall because the United States has so little savings. Of course, according to standard economic theory the causation goes in exactly the opposite direction -- low savings in the United States leads to higher interest rates, which attracts foreign capital, which pushes up the dollar. The high dollar causes a large trade deficit.

The link between the value of the dollar and the trade deficit should be evident to anyone with the faintest grasp of economics. Consumers don't opt to buy imported goods at Wal-Mart because the government is running a budget deficit, they buy imported goods because the high dollar has made them cheap. An over-valued dollar is the cause of the trade deficit, not Bush's tax cuts. And of course the high dollar was a legacy from the Clinton administration, it has actually declined somewhat during the Bush years.

A falling dollar will be painful. It will mean higher import prices, higher inflation, and quite likely higher interest rates. But there is no way to avoid a decline in the dollar. A high dollar can be thought of as being like a big tax cut that results in a large budget deficit. In the case of a tax cut, people can spend more money for a period of time, but eventually a growing interest burden forces tax increases down the road.

The same is true of the high dollar policy of Rubin and Clinton. In the short-term this meant cheap imports and lower inflation (and millions of lost manufacturing jobs). However, it also led to a huge trade deficit that is not sustainable over the long-term. In this sense, the Rubin-Clinton dollar policy was every bit as short-sighted as the Bush tax cuts. The trade deficit and the over-valued dollar is not something that can be blamed on Bush, except insofar as he failed to bring down the dollar sufficiently.

--Dean Baker

Jeremy Peters did a very nice job in interpreting the Commerce Department's report on new home sales for July. The data showed a surprisingly large jump for July. Rather than seeing this as grounds for celebration that the housing slump was over, Peters noted that the jump was entirely attributable to a large reported jump in sales in the West. He also correctly noted that the rise in median and average price was due to the fact that prices in the west are higher than the nationwide average, therefore a rise in sales in the west would be expected to increase the median and average for the nation as a whole.

--Dean Baker

The Post has a column today by William H. Gross, that calls for the government to spend hundreds of billions of dollars buying up bad housing loans in an effort to prop up the housing market. Of course those familiar with economics know that this can only work long enough to allow smart investors the opportunity to dump their bad loans on taxpayers. The oversupply of housing will only get worse the longer bubble prices are sustained.

For those wondering about Mr. Gross's qualifications, he is the founder of PIMCO, the world's largest bond mutual fund.

--Dean Baker

The NYT article on the new CBO budget projections tells us that CBO projects that if the Bush tax cuts are left in place, and the alternative minimum tax is adjusted to protect middle income taxpayers, deficits would return to more than $200 billion a year. When I look at the numbers (table 1-8), I see a deficit projection for 2017 of $360 billion. This can better be expressed as a not very scary 1.8 percent of GDP.

By the way, CBO's track record on picking up recessions and their budgetray impact is not very good. In January of 2001, after the stock market crash was already in progress, CBO had not adjusted downward its projections of capital gains tax revenue from the bubble peak levels. This led them to underestimate the size of the budget deficit over the 10-year budget horizon by more than $400 billion.

--Dean Baker

The New York Times article on a W.T.O. dispute with Antigua over on-line gambling completely missed the irony raised by Antigua’s response. The basic story is that the W.T.O. ruled that U.S. prohibitions on offshore on-line gambling violated the agreement, and allowed Antigua to apply offsetting sanctions to balance out the harm it incurred.

This is usually the joke part of the W.T.O.. While the United States is a large enough consumer that selective tariffs or other import restrictions can impose a serious cost on most countries. However, the markets of most countries are so small that any restrictions on imports from the United States would barely even be noticed.

Antigua got around this problem by proposing to go the route of free trade. They want the right to distribute recorded movies, music, and software without any regard to U.S. copyrights. In other words, Antigua is proposing to eliminate copyright monopolies on these products. The existence of the Internet means that Antigua’s decision to allow free trade in these products would immediately make them freely available all over the world.

According to the article, the threat of free trade has Hollywood and the software industry terrified. Unfortunately, because the reporter apparently has no background in economic nor spoke to any economists, the enormous irony of this situation was not noted in this article.

--Dean Baker

The media have the country cheering the efforts by Bernanke and the Fed to stabilize the financial markets. They have convinced the public that Wall Street is the home team and that we all will benefit if the banks can be kept solvent and the financial turmoil of recent weeks comes to a halt. That is not true.

The main reason that the financial markets are in turmoil is that banks, hedge funds, and other financial institutions hold trillions of dollars in bad debt. Much of this debt is backed by mortgages that exceed the value of the homes against which they were issued, the result of an unprecedented run-up of house prices. What is happening now is that the banks and funds, after being oblivious to risk for the last five years, suddenly noticed that much of the debt they hold is not very creditworthy. They desperately want to dump this debt and exchange it for safer assets. The Wall Street crew wants the Fed to lower interest rates, which will reduce the cost of carrying this debt, and thereby give them more time to find some suckers on whom to dump it.

There is no general public interest in having the government assist the Wall Street crew in their efforts to dump their debt on less informed investors. They profited on the upside, they absolutely deserve the losses that stem from their failure to exercise good judgment in their investment decisions.

On the other side, the core problem is that house prices have become hugely over-valued. While the rate of home sales is down more than 20 percent from its 2005 peaks, there are still more than 100,000 people buying a home every week. In many cases, these people are buying homes in bubble-inflated markets that may be over-valued by 50 percent or more.

Imagine a hypothetical middle income family. Say, a factory worker who is married to a retail clerk. They have a combined income of $50,000 a year. They saved enough for a reasonable downpayment and now want to purchase a $300,000 home in one of the bubble areas. Since the market is currently hugely over-valued, the house price eventually falls back by one-third (in real terms) to $200,000, costing this family $100,000.

There are millions of families who look like this. Every week that the housing bubble persists, more of them will make an enormous financial mistake that may impose a serious hardship on them for the rest of their lives. Bernanke and the Fed will not be bailing them out. Middle class families have to live with the consequences of their mistakes.

It is not the Fed’s job to protect the financial industry from its own mistakes. As Greenspan and Bernanke said repeatedly in response to questions raised about first the stock bubble and now the housing bubble, the Fed can deal with the consequences of the collapse of financial bubbles. I’m skeptical about how well it will be able to deal with the consequences of the collapse of the housing bubble, but the Fed certainly has no business deliberately propping up financial bubbles so that more informed investors can recover from their mistakes. (In this respect, the Fed’s decision to encourage the use of mortgage backed securities as collateral on loans was completely improper. It should not have been giving its seal of approval to bad debt – I take back my earlier more benign view of this action.)

After having largely neglected to report on the growth of the housing bubble over the last five years, the media should start reporting on the losers in this bailout story. If the Fed can give the big Wall Street boys the opportunity to save themselves by unloading bad debt, then it just means that others will be the ones to eventually pay the price. The media should make it clear that bailing out Wall Street is not win-win; it is a win for Wall Street where some sucker down the road takes the hit.

--Dean Baker

Apparently that is the conventional wisdom at my local NPR station (WAMU). A teaser for a talk show said something to the effect that "we all know that you put your money in the stock market and it goes up 8 percent a year."

Well, those of us who were fortunate enough to get a 3rd grade education know better than this. Corporate profits on average increase at roughly the rate that the economy grows. Going forward, we are looking at annual GDP growth in a 2.5-3.0 percent range. Add in 2.5 percent inflation, and we get 5.0-5.5 percent nominal profit growth. If the market goes up more rapidly than this (as in 8 percent), then the price to earnings ratio must continually rise. If we go out thirty years, we'll be looking at the price to earnings ratios close to 50 to 1. We'll get PEs of more than 80 in fifty years.

Do people at my local NPR station really expect that the PE in the stock market will exceed 50 before 2040 and reach 80 before 2060? It looks like that there are some great sales opportunities down there for stock pushers.

--Dean Baker

That should have been the headline of the NYT piece reporting that the Wall Street crew are complaining that the Fed has not done enough to help them out. These supposedly informed investors sunk trillions of dollars in mortgage debt that is going bad at a very rapid rate and they desperately want the government to bail them out.

The reporting should make clear what is going on here. People who earn tens and hundreds of millions of dollars a year because of theiir alleged skills are now facing a financial disaster. Rather than be willing to live with market outcomes, they are trying to use their political power to force the Fed and Congress to rescue them.

--Dean Baker

The NYT seriously misrepresented the restrictions on immigration facing more and less educated workers in the United States and elsewhere in an article today. At one point the article quotes a demographer asserting that "governments give a green light to high-skilled migrants, but put speed bumps in front of others, ...there’s a stark contrast.” It presents no contrasting views.

In fact, the United States much more severely restricts the flows of highly educated immigrants than less-educated immigrants, it just uses different mechanisms. In the case of highly educated immigrants, the government at least partially enforces laws that prohibit employers from hiring immigrants at wages that are lower than what citizens would be willing to work for. There are no newspapers, hospitals, universities, or law firms that bring in large numbers of undocuments professionals and pay them half of the prevailing wage in their occupation. Such an institution would almost certainly be shut down, with the employers facing prosecution.

By contrast, restaurants, hotels, construction firms and other employers of less-educated workers generally have little to fear from the government, even if their entire workforce consists of undocumented workers employed at salaries far below what native born workers would demand to do the same jobs. While enforcement of employer restrictions against hiring immigrant workers limits the number of high-skilled workers who enter the country, the number of less-skilled workers is limited by harassment and insecurity. These workers know that they risk deportation at any time.

The insecurity and harassment make the prospect of working in the United States far less attractive to less-skilled immigrants than it would otherwise be. However, it is wrong to say that more skilled workers are welcomed with open arms. The numbers that are allowed to work in the United States are treated far better than less-skilled immigrants (they would not come here otherwise), but the absolute number of less-skilled immigrants is far larger than the number of highly-skilled immigrants. This is the result of a conscious policy to protect highly educated workers even as less-educated workers are subjected to the full force of international competition.

--Dean Baker

The NYT ran a column this morning by M.I.T. economics professor Lester Thurow in which he argued that China will take a full century to catch up with the U.S. in per capita GDP. There are so many things wrong in the column that it is difficult to know where to begin, but the crux of the argument is that he disputes China's official statistics. China's official data put its annual growth rate at more 10 percent over the last five years. Thurow argues instead that its growth rate is in a range of 4-6 percent. Furthermore, he puts its current per capita GDP at $1,000 a year, the level of extremely poor countries in Sub-Saharan Africa.

Okay, it's fun with math time. Thurow's per capita GDP measure puts China's current GDP at approximately $1,300 billion. If China's growth averaged 4 percent over the last decade, then its GDP has grown by a total of 48 percent over this period. If its growth rate averaged 6 percent, then its cumulative growth was 79 percent. The 4 percent growth rate implies that China's GDP was $880 billion 10 years ago, menaing that its GDP expanded by $420 billion over the last 10 years. The 6 percent growth figure implies that China's GDP was $725 billion in 1997 and that its economy has grown by $575 billion over the decade. So, Lester Thurow believes that China's economy has expanded by between $425 billion and $725 billion over the last ten years.

Okay, now lets' move to U.S. data. According to the Commerce Department, the annual U.S. trade deficit with China increased by $185 billion over the last decade (annualizing first half data for 2007). This means that Lester Thurow must believe that between 25.5 and 43.5 percent of China's growth over the last decade went to increasing the its trade surplus with the United States. This leaves very little room for increasing investment and improving living standards in China.

Mr. Thurow certainly has a very different view of China's economic progress than almost all other observers. For example, the CIA Factbook puts China's GDP last year at $10.2 trillion and its per capita GDP at $7,700. Given its reported growth, these figures imply a total GDP of about $11.2 trillion at present, and a per capita GDP of $8,400. These figures fit much better than Thurow's with a country that has more cell phones users than the United States, and almost as many computer users, and produces more steel and more college graduates with science and engineering degree each year than the United States.

--Dean Baker

Most of the news reporting on the subprime meltdown has focused on the problems that borrowers face when their loans reset from low teaser rates to much higher fixed rates. While this is a big issue for millions of borrowers, resetting subprimes are just a single wave in an ocean of bad mortgage debt.

This can be seen from the fact that many of the subprimes were seriously delinquent or in foreclosure long before the mortgages reset to higher rates. In an analysis done early this year, the FDIC found that 10 percent of the subprime adjustable rate mortgages issued in 2006 were seriously delinquent (missed three or more payments) or in foreclosure within 10 months of issuance.

Since no mortgages had reset at the 10-month point, clearly there were other problems. Either borrowers could not afford even the low teaser rates or they were defaulting because they realized that their homes were worth less than their mortgages. The latter problem will only get worse as house prices continue to decline in response to the glut of housing on the market (the inventory of unsold new homes is 50 percent above the previous record and the number of vacant ownership units is almost twice the previous peak) and tightening credit conditions curtailing demand.

Falling house prices will cause many homeowners to find that they owe more than the value of their mortgage. This provides a temptation to just walk away, which will get larger as the gap between the size of the mortgage debt and the price increases.

Subprime borrowers, with poor credit histories, might not be very concerned about the prospect of another black mark on their credit history due to a foreclosure. For this reason, plus the fact that many really can’t afford their mortgages, it is not surprising that most of the defaults have been in the subprime segment so far. However, as more homeowners come to realize that they have a large amount of negative equity in their home, the default rate in the prime market is certain to rise. (Defaults to date have been concentrated in the ARM segment partly because of an adverse selection issue. Less well-situated borrowers are more likely to have taken out ARMs since the payments are typically lower than fixed rate mortgages. Therefore it's not surprising that ARMs holders would default at higher rates than holders of fixed rate mortgages.)

When defaults begin to soar among prime mortgages, the big money boys better not say how surprised they are.

--Dean Baker

Remember all those assurances from Ben Bernanke and his predecessor Alan Greenspan that, first there was no housing bubble, and then more recently that the problems were restricted to the subprime market and posed no larger threat to the financial system?

Bernanke’s actions today indicated that he apparently had not known what he was talking about earlier. He abruptly decided to lower the discount rate on the money that the Fed lends to member banks. This sort of rate cut, between meetings of the Fed’s open market committee, is truly extraordinary. The Fed would not make such a move if Bernanke had been right and the problems in the housing market were relatively small and restricted to the subprime mortgage market. The Fed takes a step like this when its chair is panicking.

The media should be holding Bernanke accountable. The current financial meltdown facing the country would have been far less serious if Bernanke and Alan Greenspan had taken steps earlier to stem the growth of the housing bubble and head off the worst excesses in the mortgage market. Custodians and dishwashers get fired when the toilet is dirty or the dishes are broken. Why is the standard of accountability for the Fed chair so much lower?

--Dean Baker

NPR's financial correspondent Adam Davidson still hasn’t caught on to the fact that the problem in the U.S. housing market is not limited to the subprime segment. With house prices falling in many cities at this point, defaults are rising rapidly across the board. The unprecedented glut of unsold and vacant homes virtually guarantees that house prices will continue to fall and probably at an accelerated pace. The financial markets seem to be catching on these facts, even if NPR’s correspondent is still a bit lost.

Btw, Mr. Davidson also gave the hold tight advice to investors.

--Dean Baker

I just heard BBC radio tell listeners that we should be expecting people to start buying on financial markets, given that everything is at rock bottom prices. How did BBC determine that stocks were at rock bottom prices? Did they do an analysis of price to earnings ratios and determine that stocks had never been so low, or at least not in recent years?

They clearly did not perform such an analysis because many, if not all, markets are far above their lows of the last decade. In the case of the U.S., the S&P 500 index bottomed out at under 850 in 2002. Adjusting for growth in trend profits and inflation, this would be around 1100 at present, far below the S&P’s current level around 1400. So where does BBC get off telling its listeners things that are not true.

Of course BBC is not the only news outlet that seems to be working for the financial industry. I listened to several local DC news shows last night and they all gave their viewers the advice from their experts that the best thing is to just sit back and hang on to their stock and to be on the lookout for bargain buying options. There was no one saying “sell.”

I would not necessarily give anyone sell advice, but it is hardly clear that the best thing for investors would be to sit tight. The Nasdaq peaked at over 5000 in March of 2000 and then plummeted by close to a third to 3500 in the summer. The advice to stockholders to sit tight at that point would have been disastrous. The Nasdaq eventually dropped by two-thirds from its summer of 2000 level, eventually bottoming out at less than 1200. Even today the Nasdaq is till down more than one-third from its level in the summer of 2000, after adjusting for inflation. So the sit tight or buy bargain strategies would have led to large losses.

The point is that a buy and hold strategy is not always best. The media are misleading its audience when they present this as the best possible course without presenting any alternative perspectives. As I’ve said before, maybe we should let viewers sue the media for any subsequent losses that they can attribute to such reporting. Such a law would certainly lead to better financial reporting.

--Dean Baker

Okay, here's a little secret. Don't anyone tell the Washington Post. Realtors make money by selling real estate.

Apparently the Post still hasn't discovered this fact. In an article on yesterday's stock market plunge, the Post reported on new data on existing home sales from the National Association of Realtors. Their new chief economist, Lawrence Yun, told the reporter that temporary problems in the subprime market will hold down sales this year, but "the fundamental momentum clearly suggests stabilizing price trends in many local markets." The Post, whose primary source on the real estate market in 2005 and 2006 was David Lereah, Mr. Yun's predecessor, didn't see any reason to present any alternative perspectives on the real estate market.

Other economists might have pointed out that house prices are still close to 70 percent above their long-term trend values. They may have also pointed out that credit is drying up rapidly for large segments of the real estate market, not just the subprime market, which was 25 percent of the market in 2006. The fact that most investors aren't anxious to lose money may make many of them unwilling to sink more money into a secondary mortgage market that they quite obviously do not understand.

Anyhow, it would be a big step forward if the Post could present assessments of the real estate market from someone whose livelihood did not depend on selling real estate.

--Dean Baker

As I noted last week, the Mortgage Bankers Association's (MBA) weekly applications index is probably not a good measure of mortgage issuance at present. First, the MBA's membership almost certainly underrepresents the subprime market, in which the largest downturn has taken place. Second, and perhap more importantly, many more applications are rejected today than a year ago. The Post has an article making this second point this morning. T

Ordinarily, the weekly applications index is a timely measure on the state of the housing market since it reports weekly data with just a one week lag. Unfortunately, it is not a useful measure in the current market.

--Dean Baker

The Washington Post's main source on the housing market through the peak bubble years was David Lereah, the chief economist with the National Association of Realtors and the author of the 2005 bestseller, Why the Housing Boom Will Not Bust and How You Can Profit From It. They don’t appear to have learned any lessons.

The paper has a front page article highlighting the problem of a woman who had a contract to buy a condo in a building that is still under construction. Because the market has fallen out the developer is instead turning the units into rentals. She got her deposit back, but now doesn’t ave a condo in which to live.

While the Post wants us to cry for this woman, the reality is that she got an enormous gift. She likely paid 10-20 percent more than the current market price for her condo. If the price was $450,000 (likely for a one-bedroom condo in DC), then she got a gift worth $45,000 to $90,000. She should be thanking the gods of real estate for her good fortune.

--Dean Baker

The NYT tells us this morning that its possible to make more money in Louisiana suing the oil companies for damages to the oyster harvest than actually harvesting oysters. It tells us that some of the claims made by oystermen are not even true.

Let's get the facts straight. No one disputes that the oil industry does harm the oyster harvest with its occasional spills. So the problem is that some of the money may go to people who don't actually deserve it, making the oystermen rich and the oil companies poor. How much money is at stake? The NYT reports that it runs from $10.1 million to $14.8 million a year. Or put slightly differently, about 6 hours worth of Exxon's profits or maybe two months of their CEO's pay. Since most of this money presumably goes to the people who were actually harmed by the industry, was it really worth an article in the NYT to tell us that some oystermen are gtting money that they don't deserve? Why don't we send these reporters over to Wall Street?

NYT columnist David Leonhardt does a good job of spreading some basic commonsense on stock prices. The stock price should reflect earnings. Leonhardt notes that current PEs are about 27 against trend earnings, far higher than the historic average.

The reason for including the "almost" is that Leonhardt felt the need to say that maybe stocks aren't over-valued if profits keep growing rapidly (sounds like Alan Greenspan in the 90s). Well don't hold your breath on that one. Profits peaked in the 3rd quarter of 2006 and were down sharply in the 4th quarter of 2006 and the first quarter of 2007. It's always possible that they will bounce back, just like it's possible that President Bush will sign the Kyoto agreement, but I don't know anyone who will bet on either event.

--Dean Baker

The business lobbies complain that it's expensive to comply with Sarbanes-Oxley, the post-Enron law that is intended to prevent Enron-style accounting. Independent analysts, such as those at the Government Accountability Office, didn't see much of an issue, except for small firms. However, the Washington Post sides with the lobbyists telling readers today that "going private is also becoming increasingly attractive to public companies that must spend large sums to comply with complex accounting regulations that are part of Sarbanes-Oxley."

Not complying with Sarbanes-Oxley may not save businesses much money, but it certainly does make it easier to do Enron-style accounting.

--Dean Baker

Marketplace radio raised the question of whether Alan Greenspan might bear some of the responsibility for the turmoil hitting the mortgage market. The beatification process is apparenly still underway. The one economist cited criticized the critics for using 20-20 hiindsight in talking about the mortgage mayhem and the housing bubble. Of course, some of us critics had 20-20 foresight, we just didn't get our views presented in outlets like Marketplace. (Is being wrong a pre-condition?)

The segment also tried to claim that Greenspan warned about the housing bubble, playing a comment from two years ago in which, in classic Greenspanspeak, he warned that when markets begin to discount risk it can lead to a subsequent depreciation of asset values. I'm sure that gave potential homebuyers pause.

--Dean Baker

NYT columnist Ben Stein tells everyone that they being Chicken Littles because they are worried about the fallout from the subprime meltdown. Mr. Stein calculates that of the $10.4 trillion in outstanding mortgages, only about 13 percent or $1.35 trillion is subprime. Of this, only about 5 percent, or $67 billion is actually in foreclosure. If the losses on foreclosed loans is 50 percent then we're talking about $33 to $34 billion. That's not a lot of money in a $14 trillion economy.

The problem is that the Chicken Littles are a bit better at logic than Mr. Stein. The subprimes are melting down because house prices are worth less than mortgages. This is leading to rapidly increasing default rates in the Alt-A and prime markets as well. It does not make a lot of sense to payoff a $600,000 mortgage on a home that's worth $400,000.

The problems are showing up today in the subprime market because these are the people with the least resources and therefore the ones who are first forced into default. However, as time goes by, and more homeowners realize the situation they are in, the subprime meltdown will turn into the prime meltdown. The chicken littles know this, which is why the markets are panicking.

[Thanks to Ed Hopper.]

--Dean Baker

The NYT tells us that the price-to-earnings ratios in the stock market are just 16.8, only a bit higher than the long-term average of 15.7. This might make the stock market sound reasonably safe right now, but this misses an important piece of information.

Profits are currently at a cyclical high. Profits fluctuate hugely over the course of the business cycle. For example, the Congressional Budget Office (CBO) projects that profits will revert to their trend share of output over the next several years, so that in 2017, real corporate profits will be just 13 percent higher than in 2006. If this proves right, and stock prices rise in step with corporate profits over the next decade, it implies that real returns in the stock market will be just over 4 percent annually.

By comparison, a completely riskless inflation indexed treasury bond pays a return of 2.6 percent. This means that, if the CBO profit projections are in the ballpark, stockholders will receive a very low risk premium over the next decade.

--Dean Baker

When it comes to cracking down on opponents of the selective protectionism that passes for free trade in Washington policy circles, David Broder is one of the foremost enforcers. He is working overtime this Sunday, denouncing the irresponsibility of the Democratic presidential candidates for not supporting his trade agenda.

Just to remind everyone, these trade deals are slectively protectionist because they only break down some trade barriers, while leaving others in place, and actually strengthening some forms of protectionism. The main barriers that the "free-traders" want to eliminate are the barriers to importing manufactured goods into the United States. Eliminating these barriers has the effect of placing U.S. manufacturing workers into direct competition with low paid workers in the developing world. While this lowers the price of manufactured goods for consumers in the United States, it also reduces the wages of manufacturing workers and less-educated (non-college educated) workers more generally. As a practical matter, the "free-traders" have largely succeeded in removing the barriers to trade in manufactured goods (we can buy anything we want from China), so the remaining deals will have little impact in this regard.

The free-traders are absolutely fine with the protectionist barriers which keep up the wages of highly paid professionals. There are professional and licensing barriers that prevent foreign doctors, lawyers, and other professionals from working in the United States. These barriers cost U.S. consumers hundreds of billions of dollars every year. The "free-traders" don't object to barriers that sustain their own high wages or those of their friends. (They all claim to oppose such barriers, but no one has ever been denounced in the pages of the Washington Post for not supporting liberalized trade in physicians services.)

The protectionist part of these trade deals is increasing the stringency of patent and copyright protection. Almost all of the trade deals pushed by the U.S. increase patent protection for prescription drugs and copyright protection for music, movies, and software. These are incredibly costly forms of protectionism since items that would otherwise be cheap (drugs) or free (downloaded music and software) are made very expensive as the result of government granted monopolies. But, the free traders like pharmaceutical companies and software tycoons more than they like textile workers and autoworkers, so they denounce the opponents of protectionism for their products as "protectionist."

So, it's ad hominum Sunday as Mr. Broder calls out those who aren't with the program. Enjoy the entertainment.

--Dean Baker

The Post editors are people who are constantly surprised by expected events. I could imagine a Post article headlined "Sun Rises This Morning." Naturally they were caught by surprise by the current problems in the mortgage market. They were probably too busy worrying about the Social Security shortfall projected for 2046.

Today the Post editorialiized (reasonably in my view) against allowing Fannie Mae and Freddie Mac to play a larger role in the mortgage markets. However, the editorial is written from the standpoint that the problem is only in the subprime mortgage market.

Of course the problem is in the housing market more generally. We had an unprecdented run-up of 70 percent in real house prices over the last twelve years. Typcially house prices have been flat in real terms. This has led to an enormous oversupply of housing. The inventory of unsold new homes is more than 50 percent above its 1990 peak and the number of vacant ownership units is almost twice its previous peak. This is guaranteed to put more downward pressure on a housing market in which prices are already falling. The situation will only get worse with tightening credit weakening the demand side of the market.

As prices decline, more homeowners will find that they owe more than the value of their home, which will make default a very inviting option. The reason that most defaults have been in subprime thus far is primarily because these people have little or no reserves on which to draw when they run into problems paying their mortgages. But the underlying problem is falling house prices and this will affect homeowners across the board.

Maybe if the Post didn't rely so much on David Lereah (the author of Why the Real Estate Boom Will Not Bust and How You Can Profit From It) it wouldn't be so surprised by the problems in the housing market.

--Dean Baker

Both the NYT and Washington Post are getting into the misinformation business this morning. Both papers claimed that the Fed buys mortgage-backed securities (MBS) as one of the ways in which it injects reserves into the financial system (along with Treasury bonds and bonds issued by government agencies).

This is NOT true. I was shocked to read a Bloomberg column (subsequently corrected) yesterday that reported that the Fed had purchased $19 billion of MBS. This would have been shocking because it would have been an extraordinary departure from the Fed’s normal practice, which the Fed would not do unless it viewed the situation as truly desperate.

The reality behind the story was that the Fed has accepted $19 billion in MBS as collateral on loans that it had made to banks through its discount window. The Fed, like any bank, demands collateral when it makes loans, and mortgage-backed securities have long been an acceptable form of collateral on loans from the Fed. The only departure from standard practice was that the Fed encouraged banks to use MBS as collateral. This was clearly an effort, albeit modest, to shore up the market for these assets.

The dealings of financial markets can get quite complicated especially with so many exotic instruments now in circulation. But, the mechanics of the Fed’s open market operations are not that difficult to understand. The NYT and Post should get them right.

--Dean Baker

The coverage of the market meltdown includes many assurances from the experts that everything is just fine. I suppose it would be considered rude for reporters to ask why anyone should trust the assessments of people who apparently failed to see the current credit crunch coming.

It would certainly be less rude, and more informative to readers, if they pointed out that their assurances don’t make much sense. For example, the NYT reported this morning that American International Group, one of the world’s biggest financial firms, assured investors that “that despite its own exposure to subprime loans, the U.S. housing market would have to decline by 30 percent or 40 percent, to Depression-era levels, before it would suffer significant losses.”

Well, since real house prices in the United States have risen by 70 percent since 1995, a decline of 30 percent would not even bring them back to their 1995 level in real terms, and still leave them more than 50 percent higher in nominal terms. The 40 percent drop gets us closer, but most people don’t think that the 1995 was the depression.

So, the American International Group is giving us a reassurance that is in fact total nonsense. Reporters should be pointing out this out. Tens of millions of people are making important personal financial decisions for themselves right now. The NYT should not be helping the big boys mislead the rest of us.

--Dean Baker

The headline writer at USA Today got it wrong today. We don't know that "home loan demand surges as interest rates drop." The article reports on a large increase in the Mortgage Bankers Association weekly mortgage application index.

I am usually a big fan of this index as an up-to-date source of data on the current state of the housing market. However, recent numbers are likely skewed upward for two reasons. First, while the association gets data from close to half of all mortgage lenders, subprime lenders are under-represented in the index. This means that an important segment of the mortgage market that is contracting rapidly is not getting weighted properly. In addition, some applicants who might have otherwise gone to subprime lenders not included in the survey, are now going to members of the MBA, because the subprime lenders have shut down.

The other reason why the applications number is likely skewed upward is that mortgages are being denied with far greater frequency than was the case a year or even six months ago. While the overwhelming majority of applications were approved last year, the percentage of denials is far higher now. This means that the same number of applications corresponds to fewer mortgage actually being issued. In principle we can adjust for this change if we have current data on the success rate of applications, but lacking this information, we really can't make good comparisons between periods in which the success rate of mortgage applications is likely to differ substantially.

--Dean Baker

As the economy slows the Fed usually acts to lower interest rates to boost the economy. The NYT says that this is what the Fed should be doing now, except that it can't because if the Fed lowered interest rates, the dollar might fall. The editorial then blames the Bush tax cuts for this problem.

Okay, Econ 101 time. One of the main ways in which lowering interest rates is supposed to affect demand and stimulate the economy is by lowering the dollar and improving our trade balance. A lower dollar makes imports more expensive to people in the U.S., thereby encouraging people to buy domestically produced goods. It also makes our exports cheaper for people living in other countries, thereby encouraging exports. The link between interest rates and the dollar can't be blamed on Bush's tax cuts, it is basic economics.

In fact, we all should want a lower dollar, unless we think that the country should have a trade deficit equal to 5 percent of GDP forever (which of course we can't). As an alternative to the falling dollar, the NYT proposes that we can correct the trade deficit by increasing savings, especially by taking back the tax cuts. (Actually, the main reason that savings are despressed in the U.S. is the housing bubble, which has boosted consumption. The impact of the tax cuts is much smaller.)

But, the NYT is right that higher savings can reduce the trade deficit. There are two routes through which higher savings can reduce the deficit. Other things equal, higher savings slow the economy. (If we have less consumption, and no offsetting increase in other demand, then we have a weaker economy.) When the economy weakens, we buy less of everything, including fewer imports. In other words, if we throw the economy into a severe recession, we can move towards balanced trade.

Is the NYT advocating a severe recession to cure the trade deficit? It seems that they are, because the other mechanism through which increased saving can be expected to reduce the trade deficit is by (drum roll please ........) yes, A LOWER DOLLAR!

Of course the surging trade deficit predated Bush and the tax cuts. The trade deficit went from just 1.2 percent of GDP in 1996 to 3.9 percent of GDP in 2000. You remember 2000, that was the year when we had a budget surplus of more than $200 billion, about 2.4 percent of GDP. It's a bit hard to blame the huge 2000 trade deficit on a budget deficit in the real world. The bottom line here is that the U.S. (under Clinton and Rubin) had a high dollar policy. They said it was a good thing to have a high dollar -- it keeps inflation low.

Of course, in the short-term, a high dollar is good. Just like a tax cut, it can allow people to enjoy higher living standards by consuming goods that they are not paying for. But, in the long-run, the trade deficits from an over-valued dollar are no more sustainable than tax cuts that lead to bloated budget deficits. The dollar is at risk of falling -- in fact must fall -- because Rubin and Clinton allowed it to rise to an unsustainable level. It's that simple.

There are plenty of good reasons for criticizing Bush's economic policies and especially his tax cuts for the wealthy. But Bush can't be blamed for basic economic relationships. The trade deficit can only realistically be addressed by a falling dollar. We cannot blame President Bush for this fact.

--Dean Baker

This is the obvious unasked question in a Financial Times piece on plans for helping homebuyers who stand to lose their homes. It does seem incredible that these people could really have been oblivious to the unprecedented run-up in house prices over the last decade. It would have been reasonable for the FT to question the senators or their staffers about how they could have overlooked the most important force driving the economy.

Incidentally, the bailouts being discussed would quite likely benefit holders of mortgages that might otherwise be nearly worthless. Some of the holders of these mortgages include banks and also hedge funds. Yes, you've heard of hedge funds -- the funds that are managed by people who earn hundreds of millions of dollars but don't have to pay the same tax rates as the rest of us. It is said that hedge fund managers are highly skilled investors. Since they can get the Senate to bail them out when they get in trouble, I suppose this is true.

--Dean Baker

The release of revised data puts productivity growth over the last three years at 1.2 percent annually. This is below the 1.5 percent rate of the long 1973-1995 productivity slowdown. It's always possible that growth will bounce back (a downward revision to the jobs numbers will help), but the evidence that the 1995 upturn is over keeps mounting. This is REALLY big news.

USA Today flunks bigtime with an article headlined "Productivity Up." That is not the news in this quarter's report.

--Dean Baker

The media seem to be saying that this is the financial markets' expectation now that Fannie Mae and Freddie Mac might loosen some of their lending restrictions. Fannie and Freddie are implicitly backed up by the government. The business press reported (see the Post for example) that the stock market jumped yesteday on reports that they would loosen restrictions and buy up subprime and jumbo loans that previously would have been excluded from their portfolios.

I would question whether even Fannie and Freddie (with our tax dollars) can support the housing bubble in the long-run, although a few trillion dollars can certainly slow the collapse. It can also give the smart money enough time to unload their positions.

It would be nice to see a bit of analysis of the implications of the sort of intervention that Fannie and Freddie might undertake. Given that we are having a huge debate on whether we can spend another $10 billion a year to provide health insurance to kids, the public would probably be interested in knowing how many trillions Fannie and Freddie might put at risk in an effort to sustain the housing bubble.

--Dean Baker

The New York Times has a nice set of graphics outlining the factors in the housing market that provided the basis for the bubble and how this bubble could deflate in the months ahead. The NYT has been far better than the rest of the media in alerting the public to the dangers of the housing bubble, although its coverage was still not appropriate to the enormity of the problem.

Seriously, which is more important, whether the budget deficit is $20 billion higher or lower or an $8 trillion housing bubble? How big a deal is a trade agreement with Peru or Panama relative to a bubble that threatens to wipe out the accumulated savings of tens of millions of homeowners. The NYT was far better than almost anyone else (don't ask me about the Post), but it still did not give the housing bubble the attention that it deserved.

--Dean Baker

How low can the Washington Post go? When I taught intro econ we would pound the distinction between a debt and deficit into our students. Those who got it wrong were brought to the front of the class for public humiliation.

The Washington Post got it wrong today, so they now face public humiliation. An Outlook piece by visiting scholar Michael Zielenziger tells readers that Japan’s “fiscal deficit tops 170 percent of gross domestic product.” Actually Japan’s fiscal deficit is less than 2 percent of GDP. It’s a bit larger than the U.S. budget deficit if you exclude the money borrowed from Social Security and somewhat lower than the U.S. budget deficit if you include this borrowing.

Obviously Mr. Zielensiger was referring to Japan’s government debt, the accumulation of all prior deficits, which is more than 170 percent of GDP. This is considerably larger than the gross U.S. debt, which stands at close to 67 percent of GDP, but because interest rates are so low in Japan, the interest burden on government debt is actually smaller in Japan than in the United States.

But leaving the comparisons aside, how can a Washington Post “visiting scholar” make such a basic mistake? How can the Washington Post editors fail to catch the mistake before it appeared in print?

It is worth noting that the mistake is consistent with the demographic crisis story that is a regular feature of the Washington Post editorial and news pages. In deriding Japan’s prospects the column comments on its aging population that will soon “make South Florida look like a youth hostel.”

I would ask whether the Post is as careless when printing columns that disagree with its editorial position on the impact of aging populations, but there really isn’t any basis for making such an assessment.

--Dean Baker

The NYT noted the growth of earmarks in recent years, and told readers that the total for all these little pet projects of powerful politicians comes to $11 billion a year. Is this a big deal?

It comes to about 0.4 percent of federal spending next year. Alternatively, it's approximately equal to what we spend every month on the war in Iraq. In short, it's not trivial, but earmarks do not explain the country's budget problems.

--Dean Baker

Investigative journalism is rapidly dwindling at all the major news outlets due to cost pressures, but it shouldn't take too much investigation to uncover the employment report released every month by the Bureau of Labor Statistics. This is arguably the government's single most important release of economic data. It tells how many people have jobs, how many are looking for work, the industries in which they work, and the how much they get paid.

For this reason, the major papers have always devoted a full article, often on the front page, to reporting on the release. Apparently this is no longer the policy at the Post. The employment report got mentioned in three paragraphs of a business section article on Friday's market meltdown. Hopefully this is just due to reporters' vacation schedules and does not indicate the Post's intention to stop giving serious coverage to the employment report.

--Dean Baker

President Bush is planning an international summit meeting to address climate change with voluntary emissions targets. The Post dutifully tells readers that "the proposal marked a clear shift for Bush."

Obviously the Bush administration wants the public to see this summit as a bold new initiative, but it is hard to see how it amounts to a "clear shift." Folks in the real world will recall that the action for the whole world on global warming is the Kyoto agreement, which Bush has ignored. Guess what, he is still ignoring it. Where's the clear shift?

President Bush has also been opposed to mandatory emission targets. Guess what, he is still opposed to mandatory emission targets. Where's the clear shift?

He has also consistently exaggerated the likely economic costs of curtailing greenhouse gas emissions. It looks like he is continuing to do so since the article begins by reporting that President Bush invited world leaders to "take part in a climate change summit aimed at establishing voluntary goals for lowering greenhouse gas emissions while sustaining growth." In fact, there are no serious models that show that reducing greenhouse gas emissions will stop economic growth. Of course measures to reduce emissions may slow growth, but this is also true of the war in Iraq. President Bush has never even expressed concern about the growth lost due to the war. So again, where's the clear shift?

This summit proposal looks like yet one more attempt at delaying any concrete steps to reduce greenhouse gas emissions and obstructing the international efforts already in place to address global warming. In other words it is a continuation of the policy that President Bush has pursued on global warming since he took office, but in order to be effective, it must be presented as a "clear shift."

--Dean Baker

That appears to be the guiding principle of the Washington Post's coverage of the fund manager tax break. Today's article does its best to try and portray the status of the compensation that managers receive for their work as a debatable issue.

For example, it tells us that "the highly skilled, hyper-aggressive people who run private-equity firms and hedge funds put some of their own money into the pot, but nowhere near the sums contributed by the other partners, whose profits are taken as capital gains -- that is, returns on their investment of capital."

Actually, whether or not they put a penny into the pot is completely irrelevant to the issue at hand. We are asking about the money they get for their work, not the return on their investment. Also, how do we know that fund managers are "highly skilled?" Some manage to lose vast sums for their clients. While many fund managers are undoubtedly very highly skilled, their defining attribute is that they are highly paid.

The article also tells us that defenders of the tax break "say managing partners are not employees, but bosses, deserving of the capital gains income that flows through the partnership because they are largely responsible for creating it." It's not clear what difference being a boss makes. CEOs are bosses also, yet their earnings, including bonuses and stock options, are taxed as ordinary income.

In short, there really is not much of a case here. The Post is not doing its readers a service by trying to present this issue as a debatable point. They are simply sewing confusion. This is a tax break that lacks any economic rationale, it is not balanced reporting to try to pretend otherwise.

btw, it is not appropriate to describe the $6 billion potentially at stake (0.2 percent of annual revenue) as "astonishing."

--Dean Baker

The NYT again missed an opportunity to inform readers on the debate over reforming the 2003 Medicare Modernization Act. The bill that the House passed expanding the State Children's Health Insurance Program (SCHIP) would finance the expansion by cutting the payments to private insurers operating within the Medicare program.

A NYT article on the topic comments that "many Democrats say these plans, which serve nearly one-fifth of the 43 million Medicare beneficiaries, are overpaid." This is true, but the non-partisan Medicare Payment Advisory Commission and the non-partisan Congressional Budget Office also report that private plans cost Medicare 12 percent more per person, on average, than the traditional Medicare program.

In other words, this is not a "he said, she said" that the reader must decide for themself, the excess payment is a fact. The Republicans have argued that the excess payments are warranted for a variety of reasons, which can be debated, but there is no dispute that the private plans substantially increase the cost of Medicare. The NYT should have made this point clear to its readers.

--Dean Baker

Yeah, what else is new. Does anyone know how much $53.8 billion in cigarette taxes is over ten years? (0.16 percent of projected revenue, an average of $16 per person.) How about cost saving of $157 billion in Medicare over the next decade? (It's around 3 percent of the projected Medicare budget over this period.) And we wonder why the public has no idea of where their budget dollars are going.

--Dean Baker

There are many things that one can say about the proposed expansion of the State Children's Health Insurance Program, but it is not accurate to say that "the legislation would launch the most significant growth in federal health care in a decade," as the Post did this morning. That honor goes to the 2003 Medicare Modernization Act which created the Medicare drug benefit.

--Dean Baker

The NYT did a decent job reporting on the bill passed by the House to reauthorize the State Children's Health Insurance Program, except when it came to reporting to the tab. The article gives us three sentences that look like a parody on the Daily Show:

"The federal government is spending $5 billion a year on the program. At that rate, it would spend $25 billion in the next five years. The Senate bill would provide an additional $35 billion over five years, for a total of $60 billion. The House bill would provide $50 billion, for a $75 billion total."

Got that? Everyone know exactly what the burden of this bill be for the public?

Expressing costs in billions of dollars or tens of billions of dolllars is sort of like a fraternity ritual. It is very meaningful to a tiny number of budget wonks, but almost completely meaningless to anyone else. Add or subtract a zero from these numbers and they would probably mean the same thing to the vast majority of NYT readers.

Okay, so here's the boring numbers, the $10 billion a year proposed under the Senate bill comes to about 0.3 percent of projected federal spending over the next five years or $33 of spending per person, per year. The $15 billion a year proposed in the House Bill is approximately 0.5 percent of projected spending, or $50 per person, per year.

--Dean Baker

No, Senator Edwards is not lost in a time-warp, this is my invention. But suppose that he did present his plan to address the Soviet threat? Would the reporters dutifully write it down and pass it along to readers to evaluate for themselves? Perhaps, but more likely they would write that Edwards is incredibly ill-informed, since he does not seem to realize that the Soviet Union collapsed more than 15 years ago.

This is relevant because the NYT did not think it was appropriate to make such a correction in reporting on a speech in which Republican presidential candidate Rudy Giuliani laid out his plans for reforming the U.S. health care system. According to the article, Mr.Giuliani warned against the health care reform proposals of the leading Democratic presidential candidates: "you have got to see the trap. Otherwise we are in for a disaster. We are in for Canadian health care, French health care, British health care.”

It would have been helpful to readers to point out that by a wide variety of outcome measures, including life expectancy and infant mortality rates, these countries' health care systems do as well or better than the United States. Mr. Giuliani is either ignorant of the performance of these health care systems or trying to mislead his audience.

--Dean Baker

Trotting out the old "Security, Medicare, and Medicaid" line, Washington Post columnist Robert Samuleson complained that programs that serve an aging population threaten to take up 75 percent of the federal budget by 2030, and no one is talking about it.

Those familiar with federal budget projections (which should include economics columnists at the Washington Post) know that the bulk of the projected increase in costs in these programs is due to rising health care costs, not the aging of the population. Those familiar with the debate among presidential candidates (which should include economics columnists at the Washington Post) know that reforming the country's health care system has been by far the most important domestic policy issue.

In other words, the politicians are talking about the country's real budget problem, the rising cost of health care. What is Robert Samuelson talking about?

--Dean Baker