An AP article reports that workers are retiring later. It cites as one of the factors the decline in the stock market. Since the vast majority of workers have very little money invested in the stock market, its effect on retirement decisions is likely to be limited. On the other hand, the vast majority of older workers do have a home. The plunge in house prices over the last two years is likely to have a large impact on retirement decisions. For most of these workers, the drop in house prices will have destroyed a large segment of their wealth.

--Dean Baker

This small item in the NYT deserves more attention. The Department of Agriculture banned a small meat packer from testing its cattle for Mad Cow disease. It seems that the problem is that the big meat packers don't want the expense of testing their cattle, but they also don't want this small meat packer of getting a competitive advantage from being able to certify that its beef as been tested and shown to be free of Mad Cow disease.

This is just a wonderful example showing that the Bush administration conservatives have no interest in the free market or "you are on your own" economics. They are prepared to use the heavy hand of the government to ensure that small meat packers do not win out over bigger more politically powerful meat packers. It is clear that the Bush administration is not prepared to tell the big meat packers that "you are on your own."

[Thanks to Ben Zipperer for the head up.]

--Dean Baker

The NYT is making up stories about the economy again. It told readers that "for years, he got no credit for a long-running economic recovery, in part because of popular anger over Iraq."

What are they talking about. The economy was losing jobs from shortly after President Bush took office in January of 2001 until August of 2003. It then created jobs for just over four years and then began shedding jobs in January of 2008. How does this compares to an expansion that lasted for more than 8 years under Clinton? This period of job expansion was far weaker than the stretch of almost 8 years in the 80s also. In fact, it was a relatively short period of employment growth compared to other post-war expansions and it was also quite weak with the pace of job growth relatively modest over most of the period.

So Bush had a short and relatively weak period of job growth. What exactly was he supposed to get credit for?

--Dean Baker

I apologize to readers who know what a windfall is, but since NYT columnist Ben Stein does not and asked to be taught, I thought I would oblige him. Mr. Stein notes that Senator Obama wants to tax the profits of the oil industry to help to pay for a stimulus package. He then asks:

"why punish the owners of the oil companies, who are largely pension plans, group or individual, and individual investors? Why should we punish some American firefighters who own oil company stocks more than American firefighters who own drug company stocks or tobacco stocks? Why tax away the savings of some Americans because they happen to own a share in a company that supplies a totally legal, absolutely indispensable product like oil? I don’t get that at all."

Okay, I'll write this slowly so that even Ben Stein can follow it.

First, close to half of stock, included oil company stock, is owned by very rich people, so the fact that a small portion is owned by firefighters has nothing to do with the time of day. Some of the oil companies' stock is owned by child molesters. Should we be discussing that?

More practically, the oil companies are making enormous profits at present because oil prices went up far beyond what almost anyone had anticipated. In other words, Exxon-Mobil, Shell, and the others had not anticipated $120 a barrel oil when they undertook their investments 10-20 years ago. They would have made a fine profit if oil had stayed in the range of the $30-$40 a barrel they anticipated when they made their investments. The gap between the return they expected and the return they are getting because of unanticipated events is what economists call a "windfall."

The government often acts to prevent windfall gains. For example, if workers in a key industry opted to go on strike to press for higher wages, they would get put in jail. Mr. Stein may be too young to remember, but this is what happened to air traffic controllers when they went on strike in 1981. Their leaders were thrown in jail. The government has held the threat of jail over the heads of other unions that have considered or carried through strikes in situations where they were arguably exploiting their bargaining position.

The neat thing about a windfall is that the elimination of the windfall does not affect supply. It would have been profitable to produce the amount of oil that the industry is currently producing even at far lower prices. This means that we can tax away much of the industry's profits without affecting the supply of oil. In the longer-term, there could be some modest impact, since oil companies will realize that their likelihood of collecting an extraordinary windfall in the future is lower if governments are prepared to tax it away. However, this may not be much of a concern, since just about everyone recognizes that we have to move away from oil consumption in any case.

Mr. Stein also mentions the claim from Martin Feldstein, an economist who has made a career out of being wrong (e.g. he claimed that Social Security had a large negative impact on private savings and that the Clinton tax increases would raise very little revenue), that most of the recent tax cut was saved. This one prompts a really big "huh?" from those familiar with arithmetic.

Real consumption was 5.6 percent higher in May than April, 2.6 percent higher in June than April, and 0.9 percent higher in July than April, all months in which real disposable income would have fallen from April's level, absent the tax rebates. Maybe Feldstein thinks that families increased their spending because of optimism about the economy, but I doubt that many would agree with that view.

--Dean Baker

News reports on the revised second quarter GDP data released on Thursday and the June data on consumer expenditures released on Friday, included many comments from economists expressing surprise at the strength of the GDP data and the weakness of the consumption data. Neither report presented surprising information to people who seriously follow the economy.

The almost exclusive source for the upward revision in the GDP data was a sharper decline in the trade deficit than had been previously reported. Since the trade data for June had already been released, along with a downward revision for the trade deficit reported in May, there was no basis for having been surprised by this upward revision. The data was already known.

Similarly, the weak consumption report for July could have been inferred based on the weak retail sales data which had been reported earlier in the months. Real spending on retails sales (which accounts for approximately two-thirds of non-housing consumption) were sharply lower for June. As a result, it was virtually certain that consumption as a whole would be lower for the month.

Any economist who was surprised by either the GDP release or the data on consumer spending simply was not following the data closely enough.

To preempt surprise among economists, the July consumption data means that it is very likely that the 3rd quarter GDP data, which will be released the Thursday before the election, will show negative growth for the quarter. With the stimulus ending in July and the economy continuing to shed jobs in August and September, it is virtually certain that consumption, which is 70 percent of GDP, will fall for the quarter. Residential housing is almost certain to be down for the quarter also. Both federal and state and local government spending are likely to be close to flat, as budget deficits force cutbacks at the state and local level, and erratic increases in the timing of federal spending get reversed.

The investment component (10 percent of GDP) is likely to show a small positive with equipment investment possibly offsetting a decline in structure investment. Trade is likely to show little improvement after the strong second quarter showing, especially with the economies of our trading partners weakening. Inventories will be a plus for the economy after being a big negative in the second quarter, but probably not enough to pull GDP for the quarter into positive territory.

--Dean Baker

Anti-labor groups have been trying to whip up opposition to the Employee Free Choice Act by arguing that it will take away workers' right to have their union representation decided by a secret ballot. The most basic problem with this claim is that workers do not currently have this right.

Under current law, it is employers who have the right to demand that recognition be decided by a secret ballot. Unions can, and often are, certified by card check, a mechanism whereby it is determined that a majority of the workers in a bargaining unit have indicated their support for a union. Unions can also be decertified by card check.

The major change of the Employee Free Choice Act is that workers would have the option to determine the manner of certification not employers. The Post gets an "A" for pointing out that it would "end a company right to demand a secret-ballot election." Under the Act, workers would still have the option to petition for a secret ballot election, but the choice would remain with the workers.

--Dean Baker

The WSJ noted the 7 percent falloff in profits in the second quarter compared with the year ago level and said that it "raised concerns about the employment outlook." It's not obvious that this should be the primary concern from falling profits.

Profits tend to be highly cyclical, with profits rising in the upturn, when employment is growing rapidly and falling during the downturn, however the link between profit growth and employment growth is not very tight. In the 90s, the profit share of output peaked in 1997, yet the economy continued to generate jobs at a very rapid pace until the last months of 2000. The same has been true in prior cycles, in which the cyclical peak occurred a year or more after the profit peak.

--Dean Baker

There was a more rapid rise in durable goods orders in July than most economists had predicted. While this rise received considerable attention, and seems to have sparked a rally in financial markets, the media largely overlooked the 4.6 percent increase in orders for machinery, which was one of the largest sources of the increase.

Machinery has seen the strongest growth in orders this year, with an 11.0 percent increase year-to-date compared with 2007. (Primary metals has had a somewhat larger rise, but this is likely due in large part to higher prices.) The machinery orders are presumably associated with an increase in manufacturing capacity. Increased demand for manufacturing is in turn likely the result of the improved competitiveness of the United States due to the fall of the dollar.

For this reason, it would be appropriate to highlight the jump in machinery orders. It appears that the declining dollar is having the predicted effect on manufacturing, which is the best hope for a sustained recovery from the current downturn.

--Dean Baker

The coverage of the release of the June Case-Shiller housing prices indices overlooked two important items in the data. First, an examination of the tiered indices (these show separately the movement of house prices in each city for cheapest third of houses, the middle third, and upper third) indicates a sharp divergence within many markets. In several of the former bubble markets higher end home prices appear to be stabilizing, while prices for homes in the bottom tier continue to fall rapidly.

For example, in Los Angeles prices in the bottom third of the market fell by 3.2 percent in June, while prices in the top third fell by just 0.2 percent. Over the last quarter, prices for homes in the bottom tier fell at a 12.2 percent annual rate, while prices in the top tier dropped at just a 0.8 percent rate.

There’s a similar story in Miami, where prices in the bottom tier fell at a 14.5 percent annual rate over the last quarter, while prices in the top tier fell at just a 4.2 percent rate. Over the last year, prices in the bottom tier have fallen 31.6 percent, which is not much larger than the 25.3 percent decline in prices for houses in the top tier. There’s a similar story in Las Vegas, Phoenix, San Diego, and San Francisco.

Ultimately, there must be some spillover in the sense that if the cheapest homes fall far enough, people looking to buy more high-end homes might instead opt for a cheaper one and then invest in major renovations. But the divergence that is showing up in the data at present is striking.

The other important point to note in connection with house prices is that inflation has picked up so that house prices would be falling rapidly in real terms, even if nominal house prices were flat. Over the last quarter, the CPI, excluding the rental components, increased at 14.1 percent annual rate. The bubble can be deflated either by a fall in nominal house prices or through inflation. There are important distributional implications for which route the collapse follows (borrowers will be helped by inflation, while lenders will be hurt), but either route can restore house prices to their long-term trend level.

--Dean Baker

It would be nice if some of the people who get paid big dollars because they supposedly have high skills could acknowledge that they messed up. It would also be nice if the national media did not consider it part of their job to cover up for powerful people who messed up on their job.

Yes, that headline is a a direct quote. It also is the sort of statement that has no place in a serious news article. The swelling tide of toxic loans is not proving to be more worrisome than feared. The problem is that the people who were supposed to be regulating the financial system did not know what they were doling.

The people who did understand the economy knew that an unprecedented run-up in house prices, with no remotely plausible explanation based on fundamentals, with no corresponding increase in rents, was a bubble. We also knew that bubbles burst. And, we knew that when bubbles in a highly leveraged asset like housing burst, that lots of debts go bad and that banks then take really big hits.

The NYT should be exposing the incompetence of people who were paid big dollars to know the housing and financial markets (this includes both bankers at place like Citigroup, Merill Lynch, Bear Stearns, Fannie Mae and Freddie Mac, as well as the top regulators) and completely failed in their responsibilities.

It should not try to tell readers that the housing crash was somehow an unforeseeable event that came out of the blue. It was an entirely predictable event and it was only incompetence that prevented these people from seeing it. Unfortunately, unlike dishwashers and custodians, bank executives and regulators are not held accountable for their performance. Instead, the media covers it up for them.

--Dean Baker

The NYT discusses efforts by local governments to use public money to purchase and renovate foreclosed properties to help revitalize hard-hit areas. At one point the article presents a comment from an economist at the CATO Institute complaining the program that supports this effort will distort the housing market and that it would be best to leave this process to the private sector.

It would have been helpful to put the size of the program in context. The program involves $4 billion in federal money. This is equal to approximately 0.02 percent of the value of the $20 trillion housing stock. It is equal to approximately 0.3 percent of annual housing sales. Spending of this magnitude is not likely to lead to large distortions in the housing market.

--Dean Baker

The Post is complaining yet again thatpoliticians are unwilling to deal with a Social Security shortfall that is first projected to hit in 2049, when John McCain will be 113 years old. To try to makes it case sound more compelling it refers to the date 2018 when the Social Security trustees project that tax revenues will first be inadequate to meet benefit payments.

Of course 2018 is completely irrelevant to the finances of the program. At that point the program is projected to have accumulated more than $5 trillion in government bonds. But the Post wants to scare readers to advance their Social Security agenda so they trot out 2018 as though it is a date that anyone needs to worry about.

The positive side of this story is that Social Security's finances look much better than the Post's. If it keeps making up scare stories about Social Security, perhaps the date of its demise will be hastened.

--Dean Baker

I'm not kidding. The Post actually printed a column bemoaning the fact that people have alternatives to news outlets like the Post, CBS, NPR, etc. And it's solution to this terrifying problem is protectionism, which it is hoping will come in the form of higher energy prices.

Fortunately, the author's understanding of computers and networks is not much better than their understanding of the media. While many computers and networks are energy hogs, it is not difficult to design much more energy efficient systems. These already exist and their price is falling rapidly, so at least this type of protectionism will not prolong the life of failing mainstream media outlets. The fact that sort of column can be given such prominence in a top newspaper demonstrates clearly the need for alternatives.

--Dean Baker

Actually, as far as I know that is not true. I just wanted to say it because the Washington Post has no qualms about printing this same lie about Social Security. The reality, according to the Congressional Budget Office is that Social Security is fully solvent until 2049 with no changes whatsoever, and even if no changes are ever made, it could always pay a far higher benefit to future retirees than what beneficiaries receive today. Unlike the Post, we correct errors at Beat the Press.

--Dean Baker

This could have been the headline of the Washington Post article on a forum about the long-term debt problems facing the United States. The article reported on a forum surrounding the release of IOUSA, a documentary on the debt problems facing the country.

While the film and several participants in the forum try to argue that the United States budget is facing an enormous gulf in coming decades, the overwhelming majority of the projected shortfall comes from projections of continually increasing health care costs in the United States. Since roughly half of health care expenses are paid by the government through programs like Medicare and Medicaid, these projections imply enormous budget deficits in future years.

However, the health care cost projections also imply that the enormous gap between the cost of health care in the United States and the cost in countries like Germany, Canada, and France will explode to tens of thousands of dollars per person per year. Unless the United States hugely increases the protectionist barriers for our health care system, it will be impossible for it to sustain these sorts of price differences. People will take advantage of more efficient health care systems elsewhere in the world, unless we fix the system in the United States.

--Dean Baker

The Bureau of Labor Statistics (BLS) doesn't think so, or at least they don't adjust for this quality deterioration in their price indices for air transportation. This is worth noting in the context of a NYT article about the increasing percentage of air travelers who are involuntarily bumped from their flights.

The failure to adjust for the deterioration in the quality of air transportation almost certainly leads this component of the consumer price index (CPI) to understate inflation. While there has been a concerted effort within the economics profession to find ways in which the CPI might overstate inflation, and to force the BLS to adjust its measures accordingly, there has been much less interest in examining ways that it might understate inflation.

The understatement at issue is not likely to be large in terms of the whole index, since the weight of air travel is less than 1.0 percent (this means that if the bias is 2 percentage points annually in air travel, the understatement for the CPI as a whole would be 0.02 percentage points), but many economists have made a big issue over very small biases in the opposite direction.

--Dean Baker

The Washington Post noted that the Mortgage Bankers Association (MBA) mortgage application index for last week was 34 percent below its year ago level. This figure understates the decline in new mortgages for two reasons.

First, subprime lenders are under-represented in the MBA index. Since the decline in mortgages occurred disproportionately in the subprime segment of the market, the MBA index will not fully reflect this decline. Also, since many subprime lenders have cut back their lending or gone out of business, some of these borrowers may now be showing up at banks who are included in the MBA index.

The other reason that the MBA index understates the decline in mortgages is that it measures applications, not mortgages. Mortgage applications are far more likely to be turned down now than a year ago, which means that the same number of applications corresponds to fewer mortgages this year than last year.

--Dean Baker

You know, consumption expenditures, the category that accounts for 70 percent of GDP in the United States. The reason that WSJ readers may wonder if the paper has heard of consumption is that an article comparing wage growth in the euro zone and the United States never mentions it.

The article argues that the euro zone countries have greater fear of a wage-price spiral than the United States, because its workers have been better able to keep up with inflation due to its more powerful unions. While this is undoubtedly true, the fact that wages in the United States are not keeping pace with inflation is likely to depress consumption.

The savings rate was already close to zero, meaning that workers on average were spending their whole income. If their real income falls, then they will be forced to consume less, especially in a context where many no longer have equity in their homes against which they can borrow. This will reduce demand in the economy and worsen the downturn.

--Dean Baker

It will take close to a decade to get any oil whatsoever from the offshore areas that are currently protected from drilling for environmental reasons. Even when the area reaches peak production in around 20 years, there is only oil to bring the price of gas down by 3-4 cents a gallon.

These facts come from the Energy Information Agency and are well known to anyone who has bothered to look into the issue at all. That is why the NYT must be calling the McCain campaign stupid when it asserts that:

"Mr. McCain has focused on offshore oil drilling and broad tax relief as steps to directly assist the greatest number of working Americans, by lowering taxes and, his campaign hopes, both gas prices and home foreclosures."

Since Mr. McCain's plan offers little in the way of tax relief to middle income families against current law, it is unlikely that they believe that their plan will actually lower home foreclosure rates. Unless they are completely clueless they don't "hope" their offshore drilling plan will lower gas prices. This is just something they say to get votes and hope that the media will not call attention to the fact that they are lying.

--Dean Baker

Everyone knows that it can be difficult to get by on your own in the modern global economy. Sometimes people need a helping hand from the government. According to the Wall Street Journal, that seems to have been the case lately with Lehman Brothers, the sickest of the major remaining investment banks.

The article reports that the Fed investigated a rumor that Credit Suisse had pulled a line of credit from Lehman. When it determined that the rumor was false, the Fed quietly spread the word so that Lehman stock price and standing with other creditors would not be hurt.

That was very nice of the Fed, but they don't provide this negative rumor correction service to most businesses. How many family restaurants would love to have the government put out the notice that the rumors of customers having gotten sick is not true?

The fact is that most businesses are forced to surf the tide, benefiting from positive news and suffering from negative accounts, whether accurate or not. That is why it is so generous of Ben Bernanke's Fed to provide this negative rumor correction service for Lehman.

The article should have made clear that Lehman is benefiting from this extraordinary form of government welfare. There may be a public interest in keeping Lehman afloat, but it is also reasonable for the public to demand some sort of quid pro quo for such generous assistance for private firms. For example, it could insist that no executives at Lehman receive more than $2 million a year in compensation. If the people running Lehman object to such conditions they would always have the option of dealing with negative rumors themselves, and lose access to the Fed's discount window and also any implicit commitment from the Fed to protect its creditors in the event of bankruptcy.

Anyhow, the news reports should clearly identify major government interventions on behalf of private firms so that the public understands what it is at stake.

--Dean Baker

A reader of the NYT Magazine piece on Senator Obama's economic views would inevitably ask this question. The article is anxious to tell readers that the enormous growth in inequality over the last two decades has been due to the increased value that technology has placed on skills.

How can anyone who reads the newspaper believe anything like this? The CEOs of companies like Fannie Mae, Freddie Mac, Citigroup, Wachovia and other major financial institutions have shown themselves to be almost completely without skills, having cost their companies hundreds of billions of dollars of market capitalization, yet they were paid hundreds of millions of dollars for their work. If this reflects pay for skill, it is not obvious how.

Most workers have seen downward pressure on their wages over the last three decades because U.S. trade policy has been explicitly designed to put them in direct competition with low-paid workers in the developing workers. By contrast, more highly educated workers, like New York Times reporters, still enjoy considerable protection from competition with workers in the developing world.

It would be illegal for the New York Times, or any other newspaper, to hire two hundred highly qualified Indian reporters who would be willing to work for a fraction of the pay of their current reporters. If any newspaper did pursue this policy, it would almost certainly face serious fines and would almost certainly be forced to either pay the prevailing wage or fire the foreign workers.

By contrast, tens of thousands of restaurants, construction companies, cleaning companies and other employers of less-educated workers routinely hire undocumented workers at wages far below what native-born workers or green card holders would demand to do the same work. These employers generally have little fear of legal sanctions.

It is convenient for those who have benefited from the upward redistribution over the last three decades to believe that it was the natural result of the development of technology. However, this view requires ignoring all the obvious ways in which the government has structured the law to redistribute income upward. The NYT misrepresents the world and misleads its readers by presenting this view in an uncritical manner.

--Dean Baker

The Washington Post should keep that in mind when it reports on inflation. An article on the 1.2 percent jump in producer prices reported for July included a quote from a strategist at J.P. Morgan Private Bank claiming that a slowdown is needed to keep inflation in check.

It is not clear that slower growth is the best remedy for inflation at the moment. The main causes of higher inflation are rising world commodity prices, due to increased demand from China and other developing countries, and higher import prices due to the fall in the dollar.

It is not obvious that an economic slowdown in the United States will do much to counter either factor. Even if demand falls off in the United States, increased demand elsewhere in the world will continue to put upward pressure on the price of oil and other commodities. The falling dollar is a correction from its prior over-valuation which led to the country's massive trade deficit. An economic slowdown will not reverse the dollar's decline.

It would have been helpful if this article included the views of an expert who did not work for a bank, who could have presented these arguments to readers.

--Dean Baker

The NYT has a nice piece on the marketing campaign for two vaccines against cervical cancer that has led to the rapid spread in use of the new vaccine. Cervical cancer is relatively rare in the United States, and usually not fatal. Furthermore, the longterm effectiveness of the vaccine is not yet known, nor are its potential side-effects fully understood. Nonetheless, through a successful marketing campaign that has involved heavily lobbying of state officials and even using the location of research facilities as a marketing tool, Merck and GlaxoSmithKline have gotten the vaccine widely accepted. Some states even mandated it for school girls.

This is the sort of corruption that economists predict result from relying on patent rents to finance research instead of more efficient mechanisms.

--Dean Baker

There has been an enormous rise in wage inequality over the last three decades. Most economists attribute this increase in inequality to the increased premium that highly valued skills can command in a globalized economy.

Fannie Mae (along with the rest of the financial sector) is working hard to prove these economists wrong. Daniel Mudd, the CEO of Fannie Mae, has earned tens of millions of dollars in this position over the last three years. In exchange for this extraordinary compensation, more than 1000 times what a minimum wage earner pulls down, Mr. Mudd pushed Fannie in bankruptcy. How many minimum wage earners could do that?

The Post gives an inside look at some of Mr. Mudd's incompetence, although it covers up his ineptitude by wrongly describing the decline in house prices. The article reports that Fannie Mae performed stress tests on its portfolio of subprime mortgages and concluded that it faced little risk.

According to the article, the stress tests assumed that house prices would fall by 5 percent for two years. It then asserts that: "the deterioration in home prices has not been as extreme as the hypothetical "stress test" scenario." This is not true, according to the Case-Shiller index, house prices fell by 16.2 percent in the one and three quarters years since prices peaked in the second quarter of 2006 (data for the 2nd quarter of 2008 is not yet available). Price declines have been even sharper for lower priced homes that were likely purchased with the subprime mortgages.

It required extraordinary incompetence not to recognize the housing bubble even in 2007 after prices were already declining. However, according to this article, Fannie Mae was still buying more subprime mortgage backed securities at this point.

Any normal worker would be fired in a second for such incredible incompetence, however Mr. Mudd is still in his job drawing a seven figure salary. Furthermore, no one seems to view this as strange, which suggests that it is common to have people with no skill whatsoever in the very highest paid positions in our economy.

--Dean Baker

The NYT got the story wrong today when it noted that exports of manufactured goods are lagging growth of agricultural goods. The article implies that the decline in the value of the dollar is not having the beneficial effect on exports that would ordinarily be expected because so much manufacturing has already relocated elsewhere.

In fact, the growth in of exports U.S. manufactured goods has been very impressive, given the slowdown in both the world economy and the U.S. economy. It is important to realize that the U.S. economy has itself become an engine for U.S. exports because so many products for the U.S. market are assembled outside of the United States. This means that when the economy grows more rapidly, more parts are exported to factories overseas to assembled and then imported back to the United States. This pattern also applies to exports of long-lived capital goods, as increased demand in the U.S. will increase investment in developing countries to serve the U.S. market.

For this reason, a downturn in the U.S. economy would be expected to lead to a downturn in exports of U.S. manufactured goods. This is exactly what happened as the U.S. economy sank into recession in 2001. Exports of capitals goods fell by 21.2 percent from the first quarter of 2001 to the first quarter of 2002. By contrast, exports of food, feed, and beverages fell by just 0.3 percent.

Without the sharp fall in the dollar in recent years, it is likely that the slowdown would have to let to a falloff in exports of manufactured goods. Instead they have risen at a rapid pace, albeit not as quickly as exports of commodities.

--Dean Baker

Yesterday it printed an editorial that implied (incorrectly) that U.S. corporations face a higher tax burden than their competitors in other wealthy countries. Today it has a column by Amity Shlaes that is a diatribe against all the economic damage the Democrats will do.

While much of the column is just random ranting against Democratic policies, the column does include the assertion that the Democrats want to eliminate the cap on the Social Security payroll tax, "an effective increase in the top marginal tax rate of 6.2 percent, or for some 12.4 percent, all by itself." The problem with this charge is that no one of any prominence in the Democratic party is proposing removing the cap on the payroll tax.

Senator Obama has called for imposing a tax of 2-4 percent on income over $250,000. This would affect only about one-fifth as many people as would be affected by removing the cap on the tax and the maximum impact would be less than one-third as large as Ms. Shlaes suggests.

Columnists are supposed to have considerable leeway in expressing their views, but they should not be allowed to attribute positions to their opponents which they do not hold.

--Dean Baker

The Washington Post editorial page has no qualms about making up data to further its agenda. Last December, when it wanted to attack the Democratic presidential candidates for their criticisms of NAFTA, the Post told readers that Mexico's GDP had quadrupled since 1987. In fact, the actual growth during this period was about 83 percent, according to the IMF. Most newspapers might feel embarrassment about using such a blatant misrepresentation to push its preferred policies, but not the Post.

Today, the preferred policy is further reductions in corporate income taxes. To advance this agenda the Post tells readers that, "U.S. companies operating abroad already labor under a bigger tax burden than most foreign competitors."

That's not what the OECD says. Data from the OECD show that in the average member country corporate taxes are equal to about 3.5 percent of GDP. In the United States, corporate taxes have generally been between and 1.5 percent and 2.5 percent of GDP over the last two decades, according to the Congressional Budget Office (Table F-4).

That would have been the appropriate headline for an article on the Democrats' plan to open up some offshore areas to oil drilling. Polls show that the public strongly favors opening areas to offshore drilling because they believe that it will lead to a decline in gas prices.

Of course this is not true according to the estimates of the Energy Information Agency (EIA). The EIA projects that no oil will come from these areas for a decade, and even when the area attains full production levels in about 20 years, there will only be enough oil to lower gas prices by around 3-4 cents a gallon.

The media have rarely bothered to point out these facts, which would undermine the Republicans' efforts to make this a major election issue.

--Dean Baker

The vast majority of small businesses are traditional brick and mortar stores. These stores pay sales taxes to support local services. By contrast, huge Internet retailers like Amazon don't collect sales taxes, giving them a huge competitive advantage against small bookstores and other businesses that collect sales tax.

According to the New York Times, Senator McCain is a strong opponent of removing this tax subsidy for Amazon. The article includes several comments asserting that Senator McCain is a strong ally of small businesses. It would have been appropriate to note that his support of this tax subsidy that hugely disadvantages small businesses.

This article also incorrectly describes Senator McCain as a strong supporter of free trade. This is not true. Senator McCain has supported increased protection in the form of stronger patent and copyright protection. He also has never expressed concern about the protectionist barriers that make it difficult for doctors and other highly educated professionals from working in the United States.

--Dean Baker

This is what the headlines of the news articles noting the recent rise in the dollar should have said. Instead, we were told things like "Dollar's Rise Could Dampen Inflation," and "Dollar Rallies Against Euro, Pound on Concerns of Global Slowdown."

The over-valuation of the dollar has been of the economy's most serious problems for the last decade. The high dollar led to an unsustainable trade deficit that peaked at almost 6 percent of GDP in 2006. By definition, a trade deficit means that domestic savings is less than domestic investment. This means that (barring an investment boom, which we have not seen) there must be either a large government deficit, low private savings, or a combination of the two. None of these situations are desirable or sustainable, at least over the long-term. While the trade deficit has consistently been far larger than the budget deficit over the last decade, it has received far less attention from the media.

The only plausible way to bring the size of the deficit down to a manageable level is by reducing the value of the dollar. A lower dollar is especially important in the wake of the collapse of the housing bubble. Without the improvement in the trade balance, the economy would have been shrinking over the last three quarters. Without a continued improvement in the trade balance, spurred by a falling dollar, there is little hope that the U.S. economy will escape a prolonged downturn.

The media should be giving more attention to the recent rise in the dollar and pointing out the danger it poses to the economy. It should also be discussing the dollar in the context of the presidential campaign, since the next president's policy on the value of the dollar is likely to have more impact on the near-term health of the economy than anything else he does in office.

--Dean Baker

The NYT reports that the FDIC is hiring back retirees to help it cope with the sudden increase in bank failures resulting from the housing crash. At one point the article tells readers: "Few expect the scale of the current crisis to approach that of the 1980s debacle [the S&L crisis], in which 2,000 banks and savings and loans were eventually closed."

It is worth noting that almost no economists anticipated any crisis at all even a year ago. Given their complete failure to see the housing and mortgage crisis coming, their projections of its severity are likely to be of relatively little value.

The actual number of bank failures is likely to be far lower than in the 80s, but this is largely because the crisis of the 80s led to a huge consolidation within the industry, with many small banks closing or merging with other banks. This time around, the banks that fail will be much larger (one of the failures to date IndyMac, was the second largest bank failure in U.S. history), and the value of deposits in failed institutions is likely to be comparable (measured as a share of GDP) to what we saw with the S&L crisis.

--Dean Baker

One item largely overlooked in the reporting on the surprisingly large jump in the July CPI is its implications for growth. The 0.8 percent jump in the CPI will almost certainly exceed the increase in nominal consumption spending for the month (nominal retail sales fell in July), which means that consumption spending will show a decline for the second consecutive month. With the last round of rebate checks arriving in July, and the economy continuing to shed jobs, it is unlikely that August and September will show any big burst in consumption.

Therefore consumption spending, which comprises 70 percent of GDP, is likely to fall in the 3rd quarter. There is little chance that housing will show a positive number for the quarter and non-residential investment will be at best a weak positive. Spending by state and local governments will also be weak or negative, as deficits force cutbacks in the new fiscal year.

Last quarter, trade gave a big boost to GDP, and this number will be revised upward based on the June trade data. However, it is unlikely that we will see much improvement from the 2nd quarter trade numbers, with most our trading partners now slipping into recession.

In short, it is very likely that the third quarter GDP number will be negative. That may not mean very much in itself. GDP numbers are always somewhat erratic, and there is not much difference in the real world between a small positive and a small negative number. But, the 3rd quarter GDP figure will be released the Thursday before the election. It is the last major pre-election data release. Coming at that time, a negative number is likely to draw considerable attention.

--Dean Baker

In general, property taxes are less sensitive to the ups and downs of the business cycle than income taxes, so they provide a more stable source of revenue. However, property taxes that are tied closely to property values, as is the case in many states, would be a very erratic source of revenue in the face of an expanding housing bubble that is now collapsing.

That is why it is peculiar that the NYT asserts that California's budget has been harmed in this downturn because it is more dependent on income taxes than property taxes. The state's restrictions on property tax, stemming from Proposition 13, limited the extent to which taxes increased during the housing bubble. As a result, property tax revenue is falling less rapidly in the crash than would otherwise have been the case.

--Dean Baker

The New York Times finally put some meat on the bones of the repeated claims that Japan will face a labor shortage due to its declining population. The NYT reported how Chinese workers are being brought in to fill jobs for which Japanese workers cannot be found.

The focus of the article is a village where Chinese workers are brought in to pick lettuce. Presumably, farmers would have to pay much higher wages to get Japanese workers to pick their lettuce. This could make lettuce growing unprofitable in Japan. The result would be that the land would be used to grow other crops, or it could even be left available for other uses. Since most farming is heavily subsidized in Japan, if land was pulled out of agricultural production, it could mean substantial savings to the government.

One of the other potential problem mentioned in this article is that a chain restaurant may be forced to cut back on its plan to triple its number of stores because it can't get enough workers.

These are useful examples for showing why a declining population does not pose an economic problem. Japan has no special interest in maintaining its lettuce production, if it proves not to be an economically viable sector. If farmers cannot make a profit paying the prevailing wage to grow lettuce, then there is no obvious loss to the country if the lettuce industry is allowed to disappear. Similarly, Japan has no special interest in seeing this restaurant chain triple in size if the market conditions will not support this growth.

Lettuce farmers and restaurant owners may be unhappy about losing access to cheap labor, but this is not a problem for the economy or the country as a whole.

--Dean Baker

It was hard to get people to take the housing bubble seriously in 2002, 2003, 2004, and 2005, but in 2008, even Alan Greenspan is able to see it. So, how can the NYT print a lengthy piece on the explosion of home equity loans without mentioning the role of the bubble.

The bubble is central in this story, because if home prices rise 10 percent a year, and are expected to continue to rise for the indefinite future, then it is entirely reasonable for people to borrow against the new wealth created by this appreciation to support their consumption.

Unless homeowners listened to that small minority of economists who warned of the bubble (and ignored the pronouncements of Alan Greenspan and other prominent economists), they would been entirely reasonably in consuming based on their housing bubble wealth. This fact should have been mentioned in this article.

--Dean Baker

If the U.S. never fixes its health care system and the cost horror stories prove true, then people will just stop using our health care system. It will be cheaper to go anywhere on earth for care than to see a doctor in the United States (and the care will almost certainly be better elsewhere).

--Dean Baker

That could have been the headline of an article reporting on a new set of projections for immigration from the Census Bureau. According to the article, immigration will rise from its current rate of 1.3 million a year to more than 2 million a year by the middle of the century.

By contrast, the Social Security trustees intermediate scenario assumes that immigration will fall from its current rate to just over 1 million a year by the middle of the century. Even the low cost scenario assumes immigration of only 1.3 million a year by the middle of the century.

A more rapid pace of immigration improves the financial situation of Social Security. If the Census projections prove correct, then close to 30 percent of the projected Social Security shortfall would be eliminated. This point should have been mentioned in the article.

The Post hasn't heard of Social Security either.

--Dean Baker

USA Today tells us that workers have not cut back their contributions to 401(k)s with the downturn. But the data it presents show they have. According to the article, average contributions have increased by 1.5 percent between 2007 and 2008. Inflation over this period has been close to 4.0 percent, which means that real contributions have fallen by close to 2.5 percent.

--Dean Baker

That seems to be the conclusion of a NYT column bemoaning new rules that restrict contact between the bankers who underwrite new stock issues and stock analysts. The column presents the argument of Frank Quattrone, an investment banker who was accused of obstruction of justice charges in connection with passing along biased research. (The charges were dropped.)

Mr. Quattrone argues that the restrictions on contact with bankers make it too expensive to research small firms. As a result, there is little information available to investors about these firms. That makes investors more reluctant to buy their stock, which makes it more difficult for them to raise capital through the stock market.

It would have been appropriate to note, that the misinformation that was spread prior to the imposition of restrictions to limit conflicts of interest, caused many new stock issues to be hugely over-valued. While this led to enormous bonanzas to many entrepreneurs who started worthless companies, for the larger economy it implied a huge mis-allocation of capital. Money that could have been used productively in established firms was instead funneled to businesses that were destined to bankruptcy.

There are alternatives to raising capital through public issues of stock, which small companies have long pursued (e.g. bank loans and venture capital). The most obvious implication of Mr. Quattrone's comments is that many small companies should not be looking to the stock markets as a source of capital. The column should have made this point.

--Dean Baker

The NYT reports on a growing trend for Wall Street banks to ship jobs, including many high-paying jobs, to India. This is a situation in which increased trade will lead to gains to the economy as a whole, as the cost of financial services drops. It should also help to reduce inequality as one, two, or even three digits get removed from some of the compensation packages of the Wall Street crew. It would be useful to include some economic analysis of this new trend.

--Dean Baker

The Washington Post reported today on the economic slowdown hitting Europe. The article makes the interesting point that, while the Federal Reserve Board lowered interest rates when the economy started to run into trouble, the European Central Bank has responded by raising interest rates.

The article includes comparisons of growth rate projections for the United States, Italy, Germany, Spain and France. It is worth noting in such comparisons that the populations of Italy and Germany are both shrinking and the population of Spain is virtually flat. France's population is growing at a rate of about 0.4 percent annually. By contrast, the population of the United States is growing at the rate of 0.9 percent annually. This means that to maintain the same rate of improvement in living standards, annual GDP growth in the United States has to be about a percentage higher than in Italy, Germany, and Spain, and a half percentage point higher than in France.

--Dean Baker

The Post ran a lengthy piece in the Sunday Outlook section about the plight of the Wall Street investment banks and the millionaires and billionaires who run them. According to the article, without the sleaze practices of the last decade, they just can't make any money.

It's touching to see that some of the richest people in the country might be worried about their future and the future of their industry, but why would a serious newspaper devote space to such nonsense. Is there a public interest in ensuring that incompetent investment bankers can still make millions, tens of millions or even hundreds of millions a year pushing deals that harm the economy?

While the author tries to argue the case, anyone who has taken an intro econ course or has enough intelligence to tie their own shoes can recognize the argument as nonsense.

Let's take the author's worst case scenario. Suppose Goldman Sachs, Merrill Lynch, Lehman Brothers and the rest go out business. Does that mean that no one is doing underwriting of stock and bond issues?

Absolutely not. The whole premise of the piece is that the profits have been driven down so much by competition that there is no money in this line of business any more. The demise of these Wall Street giants would simply mean that a large number of overpaid bankers would have to look for jobs elsewhere in the economy. The elimination of this huge layer of waste in the industry would mean an enormous increase in the productivity of the investment banking sector and for the economy as a whole. Perhaps we should have government retraining programs for unemployed investment bankers, but there certainly is no reason to stand in the way of economic progress.

The real outrage is that the Post allows this sort of shallow special interest pleading for investment bankers, while it would never publish a comparable piece on behalf of autoworkers or textile workers. Even worse, the Outlook section would never consider a piece that would correct some of the inaccurate impressions given by this article.

As every economist knows, the public should be applauding the elimination of waste in the investment banking sector (i.e. the loss of tens of thousands of investment banking jobs and big pay cuts for those remaining). It is unfortunate that the Post will not allow an economist to make this point in its newspaper.

--Dean Baker

I haven't seen the data, but let's suppose that were true. Would the Washington Post simply report the results of the poll without raising questions about the tooth fairy's existence?

That is how the Washington Post reported the results of a new ABC News poll on public attitudes towards drilling restrictions. The article notes that the overwhelming majority of voters now supports the removal of drilling restrictions. It never points out that the removal of restrictions will have no impact whatsoever on the price of gas for close to a decade, and even when the full effect of new production is felt in 15 or 20 years the impact will only be a 3-4 cents a gallon.

The article does attribute a statement to this effect to House Speaker Nancy Pelosi, but this would be comparable to having a quote from Speaker Pelosi denying the existence of the tooth fairy. The non-existence of the tooth fairy is not a matter of partisan dispute, it is a fact.

Similarly, it is a fact that removing environmental restrictions on drilling will have no impact on oil prices any time soon and only a trivial impact in a decade or two. The polling results presented in this Post article are a testament to the incredibly bad reporting on this topic, which has led so many voters to believe something that is clearly wrong. This article provides an example of poor reporting.

--Dean Baker

The NYT has an interesting article today reporting the views of several economists on how much further they expect house prices to fall. One of the economists, Christopher Mayer, argued that the extraordinary spread between mortgage rates and the interest rates on Treasury bonds has been a substantial factor depressing prices. The comments seem to imply that when the mortgage market settles down there will be a reduction in this spread giving a boost to house prices.

Actually, what is unusual at present is not the spread between mortgage interest rates and Treasury yields, but rather the unusually low real yield on Treasury bonds. The real return on the 10-year Treasury bond is currently negative, with the interest rate around 3.9 percent and the inflation rate around 4.5 percent. This is extraordinary. Typically, the real return on the 10-year Treasury has been in the range of 2-4 percent.

The low current return on Treasury bonds is due largely to the fact that foreign central banks, most importantly China's, are consciously trying to prop up the dollar and the U.S. economy by buying vast amounts of U.S. Treasury bonds. They are doing this to sustain their export markets to the United States. In exchange, they have been willing to take enormous losses on their holdings of Treasury bonds.

This is not a typical situation and will presumably not persist indefinitely. When foreign central banks no longer feel the need to prop up the dollar and hold down U.S. Treasury rates it is likely that the yield on Treasuries will rise, thereby closing the gap with mortgage interest rates. The real interest rate on mortgages of approximately 2.0 percent, is actually quite low by historical standards. It typically is in the range of 3.0-4.0 percent.

--Dean Baker

A large portion of the people who have been displaced by foreclosures following the collapse of housing prices have been renters. This fact has largely been ignored by the media, presumably because it has also been largely ignored by politicians. Of course an independent press is supposed to report on what is important regardless of whether it fits the agenda of politicians at the time.

Today, the Washington Post had a front page article noting the large number of tenants who have been displaced by foreclosures. The article includes a great quote from an expert at Harvard University's Joint Center for Housing Studies, a research institute that was widely known for denying the existence of a housing bubble: "It's only now that the renter's dilemma is bubbling up to the top."

Those experts who recognized the housing bubble had been raising this issue for some time.

[Addendum: Based on the discussion below, I want to make two points about the plight of tenants. While I am in general sympathetic to the plight of homeowners losing their homes, they did sign a mortgage that got them into trouble. I understand how mortgages can be complex documents and that mortgage issuers were often deliberately deceiving homeowners, but they still had some control over the situation. By contrast, the tenants are being evicted because their landlord didn't pay their mortgage. The tenants had no recourse in this story, unless they had somehow been able to analyze the financial position of their landlord.

The second point, is that contrary to some assertions in the comments, renters often can have pets. My wife and I are renting with two fine pound hounds. If we had to look for another unit that allowed pets, it would be a serious problem for us or for any renter who had pets, as many do.]

--Dean Baker

Okay, it's a propaganda flick directed more broadly against government social programs, but the review appears on the front page of the business section, not the opinion section where it belongs. The film is intended to scare people about the size of the government debt, as is indicated in the subhead.

To further this goal the review reports the size of the debt and the projected future growth in the debt in trillions of dollars, not relative to the size of future GDP. Every competent reporter and policy analyst knows that virtually no one can understand what it means to have a debt over all future time of $53 trillion, a number presented in the review.

On the other hand, if the review had told readers that the projected debt is equal to 6 percent of future income, then nearly all readers would be able to understand its meaning. Using the $53 trillion figure is an effective way to scare people, but not to inform them.

Perhaps more importantly, virtually the whole debt story is due to projections of exploding health care costs. If per person health care costs in the United States followed the cost path in Germany, Canada, or any other country with better health outcomes than the United States, then the debt problem would be relatively minor.

The makers of this film have an agenda (apparently shared by the Washington Post) to seriously cut Social Security and Medicare. To advance this agenda, they deliberately deceive the public about the nature of projected budget shortfalls and conceal the fact that the projected crisis is entirely a health care story. An honest film on the projected debt problem would be devoted to discussing the U.S. health care system.

(The review implies that this debt view is correct because the makers of the film anticipated the housing meltdown in 2007. Any competent economist should have been able to foresee the collapse of the housing bubble. It was not necessary to believe scary stories about the debt to recognize the bubble.)

--Dean Baker

That's how the NYT would describe it if it employed the same euphemism in describing Obama's plan to raise taxes on the wealthy as it did to describe proposed cuts to pensions in Europe.

It includes several comments that are inaccurate or peculiar. For example, the article tells readers that France's spending on public pensions is projected to rise from 13.3 percent of GDP today to 14.8 percent in 2050. It then describes this as three times the share in the United States.

The current share of GDP going to pensions in France is more than three times the share for the United States, but the share in 2050 will be less than two and a half times the 6.1 percent share of GDP projected to go to Social Security in 2050. The increase in pension benefits in France projected for the next 40 years is actually relatively minor.

At one point it compares Sweden's partial privatization to the one proposed by President Bush in 2004. It is worth noting that Sweden's public system, after the privatization, is one-third larger than the system in the United States.

The article also asserts that the public system in the United States faces less stress than in Europe because of the U.S. system of employer based pension. Actually, this system is collapsing rapidly so that most workers will not be able to anticipate substantial income from either defined benefit or defined contribution pensions.

--Dean Baker

NPR did a piece this morning on the loss of airline service by many communities as a result of higher oil prices. The basic point is that the higher prices can make service impractical because it raises costs. If the airline charges enough to cover its costs, then it will get fewer passengers, which would force further price increases. The result could be that there is no fare at which regular service can profitably maintained.

The piece then noted the economic harm that many communities fear if they lose regular air service. This was exactly the rationale for the regulatory structure that was in place prior to 1978. This structure deliberately kept prices on main routes higher than necessary in order to allow airlines to cover the cost of serving less heavily trafficked areas. In effect, the system of regulation had passengers on the main routes subsidizing the service to smaller cities.

If loss of service to smaller cities proves to be a major problem, it may be desirable to return to a comparable system of cross subsidies. The history would have at least merited some discussion in this piece.

--Dean Baker

Forgiveness might be divine, but forgetting is just bad reporting. When former Fed Chairman Alan Greenspan warns the public that the financial markets will not be set right until the housing bubble has fully deflated, it is worth reminding readers that Mr. Greenspan was a vigorous bubble denier during his tenure as Fed chair. He refused to take any steps to head off the growth of the bubble and repeatedly insisted that there was nothing out of line in the housing market.

--Dean Baker

The NYT tells us that the slowing of the growth rate of China's economy to just over 9 percent, "will make it much harder to supply jobs to the millions of Chinese moving to cities from rural areas in search of work."

The very next sentence tells readers that, "any slower growth could prove a shock to workers who have been receiving double-digit pay increases each year, as companies struggle to find enough labor to keep factories open."

Okay, the first sentence warns us that growth may be insufficient to absorb the number of workers leaving rural areas in search of jobs. The next sentence tells us that the slowdown in growth will reduce the labor shortage that has been putting upward pressure on wages.

We need an editor here. Double-digit wage growth implies that factories were having trouble attracting workers away from rural areas. If the economy weakens, then the rate of wage growth will presumably slow, but the country is not likely to face problems absorbing the flow of workers from the countryside unless the growth rate slows far more than is predicted in this article.

--Dean Baker

This article reports the results of the search for intelligent life at Freddie Mac, evidence that people did warn the highly paid CEO Bill Syron that the company was getting into trouble. It notes several warnings that were ignored by Mr. Syron. This is what newspapers are supposed to do.

The article does have important error. It notes that both Freddie Mac and Fannie Mae were unprepared for a nationwide decline in housing prices, which was of course an entirely predictable event to people who understood the housing market, which should include the management at these companies.

It then comments that: "the only real protection against such a downfall was purchasing only the safest loans." Actually, this would not have provided protection either because even safe loans default at much higher rates in a downturn, substantially reducing their value.

The only real protection would have been to stop lending in areas where housing appeared to be substantially over-valued, which would have been most of the country. Fannie and Freddie would have faced enormous political pressure if they had gone this route, but people who are paid 8-figure salaries are supposed to be able to make tough decisions. If Fannie and Freddie had cut the supply of credit, it would have burst the bubble at a much earlier date, limiting the harm to the economy.

--Dean Baker

The Washington Post, which excluded any articles warning of the housing bubble from its oped page all through the period the crisis was building, again has a piece assuring readers that there is no problem in the housing market. The piece concludes that there has been no large-scale decline in housing prices based on the Office of Federal Housing Enterprise Oversight's (OFHEO) House Price Index. It dismisses the 14.1 percent year over year nominal decline in the Case-Shiller index because it is driven largely by price declines in homes purchased with subprime mortgages and jumbo mortgages, both of which are excluded from the OFHEO index.

The article also reports research findings based on data in several cities that finds no feedback between rising foreclosures and falling prices. It concludes, based on these findings, that there is little basis for concern about a downward spiral in house prices.

The grounds for dismissing the Case-Shiller data are questionable. While most of the stock of housing falls within the category covered by the OFHEO index, close to half of the sales in recent years would fall outside of the category covered by the index. Subprime and Alt-A mortgages accounted for 40 percent of all mortgages in 2006. In addition, the median house price in large parts of the country (e.g. California, New England) would have required jumbo mortgages and therefore also not been included in the OFHEO index. Any index that excludes such a large share of recent purchases is missing much of the movement in house prices.

In addition, extrapolations from periods in which local periods experienced no extraordinary run-up in prices are not likely to be informative about periods following extraordinary price increases. The decline in the NASDAQ following the late 90s bubble could not have been predicted from any analysis of its price fluctuations in the 70s and 80s.

The Post badly misled its readers during the bubble years by relying on David Lereah, the chief economist of the National Association of Realtors, as its leading expert on the housing market. (Mr. Lereah is also known as the author of the 2006 bestseller, Why the Real Estate Boom Will Not Bust and How You Can Profit From It.)
It appears as though it is still misleading its readers about the state of the housing market.

--Dean Baker

The NYT reports that the delinquency rate on prime mortgages is rising. This is almost as predictable as the fact that the days get shorter after the summer solstice.

There are more ten million homeowners, most of them with prime mortgages, who now owe more than the value of their home. Many of these people are struggling to meet mortgage payments on a home purchased at a bubble-inflated price. During normal times, prime mortgage holders are almost never upside down in their mortgage since they purchased their home with a reasonable down payment and the home appreciated ,at least at the rate of inflation, following their purchase.

This means that if they have to struggle too much to meet their mortgage payment then they can either borrow against their equity or alternatively sell their home and pay off the mortgage, and pocket the remaining equity.

These options are not available to homeowners who are underwater. While many will see their situation worsen due to resetting mortgage interest rates, or alternatively due to job loss as the economy weakens, the fundamental problem is the crash in housing prices. The only real news in this article is that some people employed by the banking industry to analyze the mortgage market were apparently caught by surprise by the rising delinquency rate among prime borrowers.

--Dean Baker

The WSJ assures us that productivity is holding up well as the economy weakens. Perhaps, the last few quarters haven't been bad, but the record since the second quarter of 2004 is pretty dismal. Productivity growth has averaged less than 1.7 percent annually. This is only a bit higher than the 1.5 percent annual rate during the long slowdown from 1973-1995.

The article includes some bizarre assertions. It reports that the shift away from construction due to the housing crash would raise productivity. Actually, construction is a relatively high productivity sector so the shift away from construction would lower productivity, other things equal.

The article also reports that the improvement in the trade balance should raise productivity because exporting sectors have higher productivity on average than industries that don't export. Actually the main improvement on the trade balance has been on the import side, as imports have fallen sharply. The replacement of imports with domestically produced goods might be expected to lower productivity, since the domestically produced goods had been more expensive than imported goods before the drop in the dollar.

As a more general rule the higher prices for imported goods in general is likely to be a major drag on growth since firms will be likely to substitute labor for imports that are now more expensive. Just as the rise in the dollar might have provided a temporary boost to productivity growth, the decline in the dollar might be expected to be a drag on productivity growth.

There are two other important measurement issues that should be noted in an article like this one. There has almost certainly been a much sharper decline in employment in the construction industry than the data show because many undocumented workers in this industry never showed up in the data. This means that productivity growth was likely overstated in the boom and is being understated now.

The other factor to keep in mind is that these data are subject to large revisions, especially in periods near recessions. It is likely that the final data will show a very different pattern in productivity than our current data now indicate.

--Dean Baker

The Washington Post decided to adopt the Republican talking point that drilling for oil offshore will lower gas prices. It ran a sub-headline on an article about Obama adopting a compromise position "oil search would be part of a 'comprehensive energy policy' aimed at lower gas prices."

In reality, plans to drill for oil offshore will have no impact on the price of gas. There is not enough oil there, at least according to the estimates of the Energy Information Agency, to have any noticeable impact on the price of oil. Neither the Post, nor any other major media outlet, has published any estimates of the potential oil available in protected offshore areas that suggest that it could have an impact on gas prices.

Polls have shown that the public supports offshore drilling, presumably because they believe that it will lower the price of gas. This most likely explains the Republicans' commitment to drilling (along with some benefits to oil companies who may profit even from limited deposits of oil), since they presumably do not value endangering the environment as an end in itself.

Since the public is obviously misinformed about the potential impact of offshore drilling on gas prices, the responsibility of media outlets like the Post is to provide correct information, by informing the public that drilling is not expected to have any measurable impact on oil prices even decades in the future when production is maximized.

Responsible media outlets should not be repeating obviously false statements about the potential impact of drilling on gas prices simply because it is consistent with the platform of one of the political parties. By this logic, if the Republicans proposed drilling for oil in an important religious shrine, where there was no reason to believe there was oil, the Post would be telling readers that the Republicans wanted to drill to lower gas prices. It would describe those who wanted to protect the shrine as favoring higher gas prices.

That is not responsible reporting.

--Dean Baker

The Washington Post had a lengthy article reporting on the findings of a study by the Center for Immigration Studies, which purports to show that stepped up enforcement of immigration laws has reduced the flow of illegal immigrants into the country. The basis for this contention, according to the article, is that the number of immigrants in the country illegally fell sharply by some estimates in the summer of 2007. The study attributes this decline to enforcement rather than the economy, because the unemployment rate did not begin to rise for less educated Hispanics until 6 months after the decline in immigration.

There are several problems with this assessment. First, the residential construction sector, which was an important source of jobs for undocumented workers began to contract in the winter of 2006. By the summer of 2007, housing starts were already down by more than one-third.

If this source of jobs had dried up it may not have been reflected in unemployment rates for two reasons. First, the main impact could have been that flow of immigrants slowed, since the jobs were no longer here, and some unemployed workers returned to their home countries. This means the loss of jobs may not have been associated with an increase in the unemployment rate among Hispanics in the United States.

The second reason that the job loss may not have resulted in an increase in the measured unemployment rate is that many undocumented workers are not covered by the Census Bureau's main survey for measuring unemployment, the Current Population Survey. The coverage rate for young Hispanic men in this survey is just over 70 percent. This means that there can be a substantial increase in unemployment among this group that may not be picked up by the survey, especially if unemployed workers are less likely to be covered than employed workers.

For these reasons, it is entirely plausible that the labor market turned down for undocumented workers before there was any measured increase in the unemployment rate among less educated Hispanics. The recent upturn in the unemployment rate for this group can be explained by the fact that the continued deterioration of the labor market may be reaching segments of the Hispanic population with deeper roots in the United States, who are more likely to both stay in the country when unemployed, and be covered by the survey.

--Dean Baker

The reason for asking is that the Washington Post is reporting that Greenspan believes the housing market is nowhere near the bottom. While I strongly agree with this assessment, it is worth pointing out to readers that Greenspan spent his tenure as Fed Chairman avidly denying the existence of a bubble in the housing market.

Greenspan is certainly entitled to change his mind, but readers should realize that Greenspan has an abysmal record in assessing trends in the housing market, so they may want to weigh his views accordingly.

--Dean Baker