Washington DC’s Fox affiliate appears to have been taken over by Wall Street lobbyists. It has been reporting all sorts of unsubstantiated assertions that a credit squeeze is destroying the economy. You'd never know that typical 30-year mortgage is going for around 6.0 percent these days. Back when I last bought a home I had to pay 7.15 percent. But in Fox's sell the bailout campaign, there is no place for arithmetic.

Of course few people expect much journalistic integrity from Fox. On the other hand, the NYT enjoys a somewhat better reputation. However, with some of its reporting on the bailout, it's not clear this better reputation is deserved Today it told readers that “early on Tuesday, banks were charging one another the highest overnight borrowing costs ever recorded, as measured by an important rate known as Libor.”

That sounds really bad -- the highest overnight borrowing cost in history. Maybe it would have been helpful to tell readers that this data has only been compiled since 2001, a period of unusually low interest rates.

If we want a longer time frame, we can look at the history for the three month interbank rate. Bloomberg reports that the three month London Interbank rate (LIBOR) closed at 4.05 percent on Tuesday. In the same chart, we can find that it was 5.23 percent a year ago.

Those interested in a little more history can find that the LIBOR rate was over 8.0 percent for most of 1990 and actually topped 9.0 percent on some days in September of 1989.

So how scared should we be that yesterday's interest rate was almost half as large as the three month LIBOR back in 1989? It would be hard for a serious person to explain how a 4.05 percent LIBOR can shut down the economy, when the interest rate has been more than twice as high in the not too distant past. But, that won't fit the NYT credit crisis story, so you won't see the historical data mentioned.

--Dean Baker

On January 3, 2001 the NASDAQ jumped more than 14 percent. What was the basis of this euphoria? Alan Greenspan had lowered the federal funds rate by a full percentage point in a rare special meeting. Investors were convinced that this meant that the fed would prevent a recession. Two months later the economy began losing jobs and entered a recession. It didn't begin adding jobs again until the fall of 2003.

The moral of this story is that financial markets should not be viewed as the embodiments of wisdom about the economy. The big actors in the financial markets are subjects to bouts of fear and panic just like the rest of us. In fact, they might even be more subject to irrational mood swings because they sit around talking to each other all day.

The conventional wisdom in the media was that the economy would collapse in the absence of the bailout. I know of few, if any, economists who shared this view, even among those who supported the bailout. However, the disaster view undoubtedly permeated Wall Street just as the euphoria view permeated Wall Street in January of 2001.

We cannot look at the markets as an independent gauge of the impact of Congress not passing the bailout. The stock markets are reflecting the conventional wisdom in the media, they do not provide an independent assessment of the economy.

Furthermore, while the sharp one-day drop is in fact scary, it actually has relatively little direct impact on the economy. As former Treasury Secretary Robert Rubin often said, "markets go up, markets go down." Lower stock prices do not cause firms to cut back investment or layoff workers. Such decisions will be made based on their assessment of the state of the economy and their specific market.

None of this trivializes the dimension of the economic problems facing the country. However, these problems stem first and foremost from the loss of $4 trillion to $5 trillion of housing wealth due to the collapse of the housing bubble. The problems faced by the financial system are an important side-effect from this collapse, but we would still face enormous economic problems right now even if our financial system had somehow escaped unscathed.

Reporters should not allow the panicked reactions of financial markets to lead them to misrepresent the nature of the economy's problems.

--Dean Baker

Should we assume that the NYT is really concerned about the banks? That would be a reasonable conclusion after it headlines a news article, "Trying to Avoid Economic Calamity, Lawmakers Grope for Resolution."

Just to be clear, the headline writer has no clue what 535 members of Congress are trying to do in seeking to pass a bailout resolution. The writer does not know whether Congress believes that the bailout will "avoid an economic calamity," nor does the headline writer know that the package actually will prevent an economic calamity. So why make this sort of assertion?

--Dean Baker

There is nothing intrinsically bad about raising taxes if the money is used for important public services. However for an important segment within the population, tax increases of any sort are sacrilegious. Senator McCain has sought the support of this group, pledging that he would never raise taxes.

This is why it is striking that the media has not paid more attention to Senator McCain’s health care plan. For a substantial segment of the population, this plan is likely to lead to an increase in taxes.

The basic logic is that Senator McCain wants to eliminate the tax deductibility of employer provided health insurance and replace it with a $2,500 tax credit ($5,000 for a family). For most people with employer provided health insurance, this will end up being close to a wash at present. However this will change through time.

The tax credit is projected to increase at the rate of inflation. Health insurance premiums have been rising much more rapidly. Suppose that an employer currently pays $7,500 a year for insurance. (That’s approximately what CEPR pays). If health care premiums rise at the rate of 7 percent annually (the rate that they have been increasing) then in 10 years, this premium will be $15,000. For someone in the 25 percent bracket, this would imply a tax deduction of $3,750.

On the other hand, the size of Senator McCain’s tax increase will only rise with the projected rate of inflation, which is currently about 2.5 percent. In ten years this should raise the size of the tax credit to about $3,200. In this case, Senator McCain’s health care proposal would have raised our taxes by $550 (the $3,750 deduction minus the $3,200 tax credit).

A $550 tax increase for a middle income family isn’t the biggest deal in the world, if the policy is otherwise sound (it isn’t), but it is inconsistent with a no new tax pledge. Senator McCain could of course change his formulas so that fewer people would face tax increases under his health care plan, but as it stands now, he does propose increasing taxes on a substantial portion of the population. This deserves some attention.

--Dean Baker

on TPMCafe.

Contrary to what NPR told listeners this morning, the bailout has no serious restrictions on CEO pay. It has weak provisions that limit the tax deductions for very narrow categories of executive compensation. It is not clear whether these restrictions will limit any CEO's pay, however there is no doubt that executives at companies like Goldman Sachs will still rake in tens of millions of dollars even as their banks get billions of taxpayer subsidies.

--Dean Baker

Regular readers of BTP know that the Washington Post editorial board occasionally just makes up numbers to advance its arguments. For example, last year it told readers that Mexico's GDP had quadrupled since 1988 when it was trying to argue that NAFTA was great success. (It had actually grown 83 percent.)

Well the Post editorial board is at it again. Today it told readers that "the [budget] crunch actually begins much sooner than that -- in 2011, when Social Security's cash flow turns negative, because of the first wave of baby-boom retirements."

This not true, the Social Security Trustees report projects that income from designated Social Security taxes (not counting interest on its government bonds) is projected to exceed benefits until 2017. The Post just pulled 2011 out of the air to try to scare readers.

Of course, the year when benefits first exceeds tax revenue makes no difference for either SS or the overall budget anyhow. Under the law, SS is financed by a designated tax. The surplus over the last quarter century has been used to acquire more than $2.4 trillion in government bonds. According to the SS trustees, the bonds held by the trust fund will be sufficient to keep the program fully solvent until 2042. According to the non-partisan Congressional Budget Office, the program will be fully solvent until 2049. Both dates are far enough out that reasonable people need not panic, we have dealt with far more imminent SS shortfalls.

As far as the federal budget, the stress is first felt when the annual surplus of revenue over spending begins to decline. We're already pretty much there, as the recession and jump in inflation virtually guarantees that the 2009 surplus will be smaller than the 2008 surplus. Of course this is not that big an item in the federal budget, which is why the Post and no one else bothered to notice it.

The next sentence in the Post article is the highlight: "According to the GAO, the federal budget deficit -- projected at more than 3 percent of GDP next year -- is on a path to exceed 20 percent of GDP by 2050, unless we enact substantial reforms to our tax structure and entitlement programs."

Actually, if we just had a health care system that was as efficient as the health care system in Canada, Germany, England, France or any other wealthy country, we would not have to make any other fundamental changes to the "tax structure or entitlement programs." We have a health care problem, not a budget problem.

The Post obviously has an agenda to cut SS and Medicare and they are willing to mislead their readers to advance this agenda, just as they were willing to mislead readers to make the case for NAFTA.

--Dean Baker

There are numerous accounts of the bailout that discuss the possibility that taxpayers will make money on the deal when the housing market stabilizes (e.g. the print version of the Post article). This is a fairy tale.

We had a housing bubble. A housing bubble is like a stock bubble. Prices get over-valued because of irrational exuberance and do not reflect fundamentals. After the bubble collapses, prices fall back to levels consistent with their fundamentals.

In the current case, the bubble is about half deflated and house prices are falling rapidly. They are not falling because of the credit crisis. They are falling because of an enormous over-supply of housing. The vacancy rate for ownership units was already 50 percent higher than its previous record in the fall of 2006. This was before there was any credit crunch.

The fact that Alan Greenspan, Henry Paulson, Ben Bernanke and many other others in positions of authority did not recognize the housing the housing bubble in years from 2004-2006 demonstrated extraordinary incompetence. Anyone who still does not understand that the root problem is a bursting housing bubble should not be allowed near the negotiations and certainly should not be writing news articles trying to inform the public.

--Dean Baker

The NYT told readers that the Bush administration requested the $700 billion bailout "to prevent an economic collapse."

Is that so? Do we know for sure that this is not a trumped up crisis designed to help the Wall Street fat cats? I don't know the answer to that one. If the NYT does they really should share this information with their readers.

--Dean Baker

Unfortunately, I'm only partly kidding. The NYT apparently still does not recognize that there was a housing bubble. In its editorial today it argued for including reform of the bankruptcy laws to protect homeowners (good) and to support house prices (loony).

It is incredible that the NYT missed the $8 trillion housing bubble on the upside. (Actually some of its reporters did write about it, unfortunately the editorial writers apparently don't read the paper.) It is astounding that they still can't see the bubble even as its collapse is leading the country into a financial crisis and recession.

It makes no more sense to prop up house prices than it does prop up the price of Internet stocks. The big mistake was letting house prices get so out of line in the first place. The best that we can hope to do now is limit the pain to homeowners and the financial system.

--Dean Baker

The NYT is spreading fear at a very bad time. It told readers that "Credit Enters a Lockdown." The information in the article doesn't back up the case.

Much of the story seems to rest on the experience of a mortgage broker in Cape Coral, Florida. According to the broker, "The underwriters are terrified and they’re dragging their feet, and making more excuses not to close loans ... Basically, they just don’t want the deals.”

Cape Coral is on the West Coast of Florida, which is ground zero for the housing bubble. House prices in the area are plummeting. No one in their right mind would make a real estate loan in this area even if they had more money that Bill Gates.

While the banking system is clearly impaired by its mountain of bad debt, it is still expanding credit at a modest pace. For example, credit card debt grew at a 3.5 percent annual rate and a 4.8 percent rate in July. This growth is not consistent with a credit freeze up.

--Dean Baker

My thoughts following President Bush's speech.

Stephen Henn told listeners that free market conservatives "believe" that the financial crisis is attributable to the close government relationship with Fannie Mae and Freddie Mac. Actually, it is extremely unlikely that free market conservatives actually "believe" this assertion because it is so obviously not true.

Fannie and Freddie got into subprime junk and helped fuel the housing bubble, but they were trailing the irrational exuberance of the private sector. They lost market share in the years 2002-2007, as the volume of private issue mortgage backed securities exploded.

In short, while Fannie and Freddie were completely irresponsible in their lending practices, the claim that they were responsible for the financial disaster is absurd on its face -- kind of like the claim that the earth is flat. Free market conservatives know that the claim that Fannie and Freddie were responsible is ridiculous. They just say it because they know that news outlets like Market Place will treat it as a serious proposition and thereby muddy the waters in the mind of the public.

It is bad enough that Market Place repeats such an outlandish claim without giving its listeners any background information. It should not pass along the additional misinformation that conservatives actually believe such nonsense.

--Dean Baker

In his weekly NYT column, David Leonhardt argues that limits on executive compensation are a sideshow to the bank bailout. Actually, they are an essential part of the story.

A key issue in the bailout is addressing moral hazard. The message to Wall Street should not be to get rich on fees from stupid loans and then run to the big government to save your rear when the loans go bad. We give this message to the shareholders by saying that we are going to own much or all of your bank if you come to us for help.

It is necessary to give a similar lesson to the CEOs. A major problem in corporate America is that top executives have been able to pillage their corporations at the expense of shareholders. This problem is nowhere worse than on Wall Street, where high level executives (not just CEOs) routinely earn tens of millions annually in compensation, and sometimes hundreds of millions.

It is therefore crucial that the CEOs also be forced to take big hits in this sort of bailout. Otherwise, their incentive is to rip off their shareholders in the good times with irresponsible lending policies (thereby getting huge fees) and then have the government kick the shareholders in the teeth in the bad times, but they themselves can escape unscathed.

In short, kicking the top management in the teeth as part of the bailout is both a necessary part of the bailout and good policy for stemming the growth in inequality over the last three decades.

--Dean Baker

On Morning Edition, NPR discussed the proposal to allow bankruptcy judges to change the terms of mortgages during a bankruptcy proceeding in the same way that they can change the terms of car loans, credit card loans and other debt. The report noted the assertions of the mortgage industry that this could raise the cost of mortgages and then told listeners that this would be bad for the housing industry.

While the possibility of bankruptcy renegotiation would undoubtedly raise costs, which presumably would be passed on to borrowers, the impact would almost certainly be very small (especially if the change was temporary, as many have proposed). Only a small fraction of mortgages go into bankruptcy and lenders already take large losses on most of these mortgages, since they typically end up in foreclosure.

In normal times, it is unlikely that even 1 percent of mortgages would end up in bankruptcy. If the average difference in the loss on these mortgages is 5 percent (a very large average difference, since in many cases there would be no change), then the change in the cost would be 0.05 percent. An increase of this magnitude would have little impact on the housing market. Mortgage rates often fluctuate by far larger amounts in the course of a single day.

It would have been appropriate for NPR to give listeners an idea of the size of the potential increase in mortgage interest rates. Otherwise they have no way to assess the potential impact of the policy.

--Dean Baker

The Washington Post complained in a front page article that the Presidential candidates have not adjusted their tax and spending plans to accommodate the new fiscal realities implied by the bailouts. The article calls for them to advocate spending cuts and/or tax increases.

While this reflects the Post's editorial position, it is not clear that it reflects the fiscal and economic reality. At this point, neither the Post or anyone else knows how much a bailout will cost. It is possible that it will be structured so that most of the burden will be placed on the banks.

The Post also doesn't know how severe the current recession will be. There are few economists who would advocate cutting spending or raising taxes in the middle of a serious recession.

In short, this article is reflecting the editorial perspective of the Post, not economic or fiscal necessities.

--Dean Baker

The WSJ discusses the puzzling issue of how far the bailout should go. Should it cover auto loan debt, student loan debt, construction loans?

If the bailout were structured correctly, this wouldn't be a problem. The bailout has to be painful, it is not supposed to be a reward for ridiculously overpaid executives who pushed their companies to the edge of bankruptcy. If the government's purchases of bad debt were tied to serious restrictions on executive compensation and the forced sale of equity to the government, then only banks that really needed the money would line up for the bailout. Under these terms, we could include whatever assets the Wall Street boys and girls want to sell.

--Dean Baker

Is Henry Paulson the right person to run a $700 billion bank bailout? In assessing this question USA Today headlined "The Hammer's" history as a football player, as it presented the assessment of his personal friends. It doesn't mention the fact that The Hammer somehow managed to completely overlook an $8 trillion housing bubble and that he minimized the extent of the country's financial problems at every point over the last year and a half. This information might be more relevant to his qualifications for managing the bailout.

--Dean Baker

The NYT implied that the drop in stock prices was a vote of no confidence in Congress' efforts to pass a bailout. Actually, the decline (which was largest in financial stocks) can be an indication that Congress is likely to pass a bill, with serious restrictions on the benefits for the banking industry.

If stocks rose at the end of last week on the expectation that the Bush administration would give the financial industry a big windfall, it would be expected that stocks would decline if most investors now believe that Congress will impose stringent conditions on the bailout. In other words, the decline in stock prices could be an indication that investors actually expect a bailout bill to pass Congress.

--Dean Baker

That would have been an appropriate headline for a Washington Post article on the bank bailout. The article reported Senator Shelby's objections to including any provisions in the bailout that would restrict executive compensation. According to the article, Shelby said that he thinks that compensation should be set by corporate boards.

Of course nothing proposed in the bailout would prevent corporate boards from setting whatever compensation levels they want. However, if the corporation wants to take advantage of the government's largess than it would be required to meet rules on executive compensation.

This sort of restriction on those getting special privileges from the government is common. For example, churches that enjoy tax exempt status are restricted in their ability to lobby Congress and take part in other political activities. No one questions the right of any individual or group of individuals to lobby Congress. However, those that directly benefit from special tax treatment, do face restrictions. Similarly, corporations can pay their CEOs whatever they want. However, if they want a share of the government's bailout, they may face restrictions if the Democrats get their way.

--Dean Baker

Treasury Secretary Henry Paulson is telling Congress that if it doesn't give him a $700 billion blank check the financial system is going to collapse. It would be reasonable for reporters discussing this request to present some background on the track record of the person asking for this enormous blank check.

In March of 2007, after the first shock waves of the housing meltdown had already hit, the Associated Press reported Mr. Paulson's view that the credit difficulties linked to the housing slump would be limited.

In August of last year, after the second round of financial shock waves disrupted markets worldwide, Paulson commented, "We have the strongest global economy I’ve seen in my business lifetime."

Just last March he warmly endorsed a reduction in the capital requirements for Fannie Mae and Freddie Mac, saying "additional capital [invested in mortgages by Fannie and Freddie] will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market."

At every point along the way, Secretary Paulson has failed to see the extent of the crisis resulting from the collapse of the housing bubble. This raises serious questions about his judgment. Reporters should be discussing Paulson't track record in the context of this bailout proposal.

--Dean Baker

[The NYT is on the job -- I missed the excellent chronology in the sidebar.]

Since some of you asked, you can find my two cents here.

--Dean Baker

The bailout will clearly carry a big bill, likely in the $500 billion to $1 trillion range. As the Post reports today, opponents of Social Security and other government social programs are already using this expense as a rationale for curtailing such spending.

When assessing their argument it is important that the financing of the bailout be correctly understood. From an economic standpoint, the cost of the bailout was incurred when the bad loans were made. That was when people built a home, borrowed for a vacation, and spent in some other way that demanded real economic resources in the form of newly produced goods and services.

When the government supports a bailout, it is not directly creating demand for new goods and services. It is simply ensuring that money that we thought was already there (e.g. funds in a money market account) does not disappear through a financial collapse. No one is going to spend more because their savings account did not disappear. (They obviously would have spent less if their savings account actually did disappear.)

For this reason, the cost of this bailout (like the S&L bailout in the 90s) should be considered an addition to the debt, but not part of the annual deficit. That doesn't make it cheap, but the people who try to scare us with lines about $900 billion or $1 trillion deficits in 2009 are being dishonest. Adding $500 billion to $1,000 trillion to the national debt is a big deal (and it shows the cost of ignoring a housing bubble), but it should not be an excuse to ignore important social needs, like fixing the health care system.

--Dean Baker

Those waiting for any mea culpas from the Washington Post editorial page (remember all those news stories and columns warning about the housing bubble?) will have to wait a bit longer. Instead of acknowledging its failure to report accurately on the circumstances that led up to this crisis, the Post is using it as an opportunity to push its agenda for cutting Social Security and Medicare.

The reasoning powers of the Post's editors are still lacking. The loss of trillions of dollars of equity in housing has just wiped out most of the wealth of baby boomers nearing retirement. Their dependence on Social Security and Medicare will be greater than ever as a result (and these people vote). That's what happens when you rely on David Lereah (the former chief economist of the National Association of Realtors) as your main source on the real estate market.

--Dean Baker

Talk about putting lipstick on a pig, the Washington Post gives a lead front page story talking about "Bush's Shifting Ideology." To ask the obvious, what makes the Washington Post think that President Bush has an ideology?

This is not gratuitous Bush bashing. The same comment could be directed at any politician. Politicians get elected to high office by appealing to powerful individuals and interest groups. They act in a way to maximize their political support, that is how they get elected. Any strongly held ideology is likely to be a detriment in these efforts.

More importantly, their personal ideology is likely to be a mystery to anyone but their closest friends. Politicians must convince people that they agree with their views, whether or not this is fact true. Any reporter who claims to know what a politician really believes is either lying or too close to that politician to be reporting objectively.

Readers would be much better served if the Washington Post saved the lipstick. Tell us what the President Bush and the other politicians do. Spare us the speculation on their ideology.

--Dean Baker

Reuters had a nice piece on the investment banks and short-selling. Apparently they have not always had such a negative view of shorts. The basic point here is simple. There is nothing wrong with shorts. There is everything wrong with market manipulation, but there is no more reason to believe that this occurs on the down side than the upside.

--Dean Baker

The NYT missed the obvious questions with the Bush bailout proposal. The most obvious question: is how will paying market price for near worthless assets prevent the collapse of zombie institutions like Bear Stearns, Lehman Brothers and AIG? These institutions needed money. They won't get it from selling mortgage backed securities, that are chock full of bad mortgages, at the market price. We already know this, because they already had the option to do so.

The Bush proposal to throw out hundreds of billions of taxpayer dollars to buy up this debt will do little if anything to prevent another round of collapsing banks. We will again see desperate weekends with Treasury and Fed honchos running around trying to save the next major basket case.

The other big question is: how will we get the banks to honestly describe the assets they throw into the auction? Will we rely on the rating agencies?

Maybe the Bush crew missed this one, but a big problem in the housing bubble financial flow was the fact the rating agencies accepted many false claims by the banks and therefore rated a lot of junk as investment grade debt. Has the Bush administration figured out how it will get around this problem with its reverse auction system?

Question II is directly related to question I, because a poorly designed auction system will be a fiasco, wasting taxpayers dollars and rewarding the most effective liars. If we have more time to design the auction system, then we can minimize this risk. There would be urgency if the auction system was the mechanism that would prevent the sort of freeze up of the financial system that we saw this week, however if the auction system will not accomplish this goal, then we can take the time necessary to get it right.

--Dean Baker

Since I'm giving suggestions for news stories this morning, this one seems obvious. For those with short memories, this refers to the bailouts that followed in the wake of the East Asian Financial crisis. As the U.S. Treasury and Fed went about laying down the law for the countries in the region, Time Magazine ran a cover story with the picture of Alan Greenspan, Treasury Secretary Robert Rubin, and Undersecretary Lawrence Summers, dubbing them the "Committee to Save the World."

--Dean Baker

That is the question that serious reporters would be asking after the SEC banned all short-selling on financial firms. Have the folks at the SEC determined that stocks of financial firms are under-valued? They must be really smart if they can determine that. Of course if the SEC crew can recognize undervalued stocks, presumably they can also recognize over-valued stocks. Have they ever stopped trading because a stock's price had gotten too high?

Let's hypothesize that the SEC folks really don't know that financial stock prices are too low. Then they are preventing the shares of financial companies from adjusting to their proper level. Is there a public interest in artificially inflating the prices of financial stocks? I suspect that many insiders and large investors might take advantage of this SEC stock price support and dump their shares on people who are not quite as smart. I'm not quite sure what the public interest is here.

There has been a lot of silliness about the evil "naked shorts" in recent weeks. There is nothing sinister about a naked short, it is just a convenience, it is easier and cheaper to do a naked short than a covered short. It is analogous to buying stock on the margin.

We now see that the issue is not really naked shorts, it is shorts pure and simple. I can think of no reason whatsoever why the SEC should be preventing investors from acting on the belief that stocks, financial or otherwise, are over-valued than they would in acting on the belief that stocks are under-valued.

If the issue is stock price manipulation, then the SEC absolutely should be cracking down, but if there are actors who can easily manipulate the market on the downside, then they can presumably also manipulate the market on the upside and have been doing so. The media should be asking questions on this. What justifies the ban on short-selling? It's a real simple question.

--Dean Baker

David Brooks is either very confused or very dishonest. He tries to argue that the financial crisis would have been almost impossible for the Fed to have anticipated and that it was actually worse in the more highly regulated sectors of the financial industry than in the less highly regulated sectors: "The current financial crisis is centered around highly regulated investment banks, while lightly regulated hedge funds are not doing so badly. Two of the biggest miscreants were Fannie Mae and Freddie Mac, which, in theory, “were probably the world’s most heavily supervised financial institutions,” according to Jonathan Kay of The Financial Times."

Investment banks are "highly regulated?" Who does Brooks think highly regulates the investment banks, the SEC? Hedge funds are not doing badly? I suppose that's true of the ones that have survived. As far as Fannie and Freddie, they are still issuing mortgage backed securities. The private issuers are out of business because the market won't buy their garbage. Does Brooks really not know any of this?

In terms of the Fed, there was no excuse for its incompetence. It was easy to recognize the housing bubble -- there were no serious arguments on the other side, just the authority of prominent economists. We just need superhumans as Brooks tries to imply, we just need people running the Fed with a little commonsense and who can think for themselves.

--Dean Baker

The newspaper that had no room for those warning of the housing bubble criticizes the bailouts. Wow!!!!

Yes, bailouts are expensive and they could have been easily avoided if the people designing economic policy over the last fifteen years had a clue. The Post, which has been a regular outlet for James "36,000 Dow" Glassman, and David "Why the Real Estate Boom Will Not Bust" Lereah, has been of no help in advancing sound policy over this period.

(oh yeah, Rick Kane reminds of this "the economy is great" piece by Donald Luskin in last Sunday's Outlook section.)

--Dean Baker

That is no doubt how the Washington Post would report the debate over a bill that authorized dog abuse as a way of lowering energy prices. The Post would carefully present the statements of support or opposition to such a bill. It would not bother to point out that kicking dogs actually will not lower oil prices, just as the Post will not report that drilling offshore will not lower oil prices. What possible relevance could that have for readers?

--Dean Baker

NPR had a segment on Morning Edition which featured several economists urging people not to pull their money out of money market funds. All three economists told people that money market funds are still very safe, even though some did report losses due to the recent turmoil in financial markets.

It is worth noting that the expert crew on NPR were all caught by surprised by this financial turmoil. Listeners should keep this in mind in assessing their current perspectives. This is one reason why NPR and other media outlets should seek our non-surprised experts for their assessments of the situation. (For the record, I would largely concur with their assessment of money market funds, although I would say the risk is not zero.)

--Dean Baker

The Washington Post editors are such huge proponents of U.S. trade policy that they are willing to make up numbers to support their case, famously telling readers last year that Mexico's GDP had quadrupled since 1988 in order to back up their case for NAFTA. (The actual growth figure is 83 percent, according to the IMF.)

Today, they printed a column by Fred Bergsten arguing that trade is helping the economy stay out of a recession. While the growth in net exports has been hugely important in sustaining growth in the last three quarters, almost as much as this growth has been attributable to reduced imports as increased exports. In other words, less trade, in the form of fewer imports, has been one of the main factors propelling growth over the last three quarters. Somehow Mr. Bergsten neglected to mention this fact.

--Dean Baker

Most NYT readers are not experts on economic policy. They do not generally have the time or energy to verify the accuracy of assertions of candidates running for public office. However, virtually all New York Times readers are capable of assessing how truthful someone appears in making their claims to the public.

This is why it is extremely unhelpful for the NYT to run an article that purports to tell readers how Senator McCain is "laboring to hit the right note on the economy." The article includes a variety of comments noting various McCain statements, but makes little effort to assess their accuracy apart from telling readers that in his past statements that the fundamentals are sound, "in some ways, given that the recession that many have feared all that time has yet to be officially proclaimed, he has been borne out."

Actually, recessions are always officially declared long after they begin. The 2001 recession, which was dated as beginning in March of 2001, was not officially declared until November of 2001. Assuming the same time lag, the National Bureau of Economic Research would not yet have declared a recession even if it had begun in February.

It is therefore a considerable stretch to claim that McCain has been in anyway vindicated by the lack of an official declaration. In terms of the likelihood of an official declaration, the private sector has lost jobs every month since December. It has never previously lost jobs for even three consecutive months apart from periods associated with recession.

The article concludes by telling readers that:

"By the end of the day, the campaign had gone back on offense. ...And Ms. Palin said that Mr. Obama’s 'tax plans really would kill jobs and hurt small businesses and make even today’s bad economy look like the good old days.'"

It would have been worth pointing out under President Clinton the economy had tax rates in place that were comparable to those proposed by Senator Obama. On average, the private sector created almost as many jobs in each year of the Clinton administration as it has created during the entire Bush administration. In other words, Governor's Palin claims that Obama's proposed tax increase on the wealthy would destroy jobs has no basis in reality. It would have been worth pointing this fact out to readers.

--Dean Baker

When the Fed stepped in to ensure an orderly collapse of insurance giant AIG, it meant bad news for many short-sellers. The problem isn't for short-sellers of AIG stock. They should do fine as the stock is likely to have little value post-intervention. However, there may have been short-sellers who bet that some of AIG's big creditors were about to take a hit. These short-sellers may rack up big losses as a result of the Fed's actions.

We could perhaps say that the short-sellers should take into account the possibility of Fed interventions when they place their bets. However, this does create an asymmetric situation in which those betting that stocks will rise need have no fear that the Fed will intervene to take away their profits, while those placing short bets must have this concern. This will bias traders away from taking short positions even when a proper assessment of fundamentals may justify a short position.

If this sounds like a far-fetched concern, it shouldn't. The economy has just suffered from the rise and demise of two enormous asset bubbles, one in stock and one in housing. Think of how much better off the country would have been if short-sellers had nailed Pets.com and other Internet darlings before they became hugely over-valued. In the case of the housing bubble, imagine that short-sellers had crashed Citigroup and Merrill Lynch when they first started pushing complex mortgage derivatives filled with junk.

We need not feel sorry for the short-traders. They are speculating and should know the risks. However, we obviously have a serious problem with financial bubbles and one force that could act as a corrective (absent action from the Fed) would be short-sellers. If the Fed's policy creates a bias against short-selling then it is yet another factor helping to promote asset bubbles.

--Dean Baker

In the wake of the of yesterday's turmoil in financial markets, there was growing talk of the possibility that the Fed may cut interest rates to provide a boost to the economy. Surprisingly, almost no one seemed to note the most obvious way that a rate cut would boost the economy -- through a lower dollar.

The biggest imbalance in the U.S. economy at present is its enormous trade deficit. This can only be corrected by bringing down the dollar, thereby by making U.S. products more competitive on international markets. While the dollar has fallen substantially in the last six years, which has boosted exports and cut imports, it recently rallied against the euro and other major currencies. This is a big step in the wrong direction.

The Fed would be wise to take strong steps to try to push the dollar back down. A quarter point cut in interest rates would help in this effort. A half point cut would be even better. If foreign central bankers want to hold dollars, we should make sure that they lose lots of money in the process.

(WSJ reporter, David Wessel did not mention the dollar in his discussion of a rate cut on NPR.)

--Dean Baker

The attention the media is giving to yesterday’s stock market plunge is overplayed, although the underlying problems in the economy are real. As I have argued in times past, the stock market is not a good barometer of the economy’s health. It can be driven up as a result of a redistribution from wages to profits, or simply as a result of irrational exuberance. Neither story is good news for the economy as a whole, although anything that pushes up stock prices is obviously good news for the small minority of people who own substantial amounts of stock.

Yesterday’s market plunge did not by itself mean much. The immediate precipitating factor was the collapse of one major investment bank (Lehman Brothers), the rushed takeover of a second (Merrill Lynch), and the prospect of the collapse of the nation’s largest insurer (AIG).

It is news when major financial institutions face collapse, but this situation was totally predictable, even if the list of characters and the precise schedule was not. The collapse of the housing bubble is destroying $8 trillion in housing bubble wealth ($110,000 per homeowner). The bulk of this loss will be born by homeowners who will see much of the equity in their home disappear.

However, homes are highly leveraged assets. In the old days, people typically bought homes with down payments of 10 to 20 percent. At the height of the housing bubble, they often bought homes with zero down. When these homes lose 30-40 percent of their value, as they have in many of the most over-valued markets, it is inevitable that many of the mortgages will go bad. This is especially likely when the home was purchased with an adjustable rate mortgage that resets to a higher interest rate, as was often the case in the heyday of the housing bubble.

In other words a tsunami of bad mortgage debt was inevitable. The only question was where it would show up. (Fannie and Freddie were virtually certain to be nailed. All they hold is mortgages and mortgage backed securities. No serious economist should have been surprised by their collapse.)

The collapse of housing equity will also lead to higher default rates in all sorts of other loans. People use the equity in their home as a backdrop for all the other loans that they take out, such as credit card loans, student loans, car loans, small business loans. When they lose the equity in their home, as tens of millions have, they no longer have a fallback when they lose their job, have a serious illness or face some other financial setback. Therefore, it is virtually certain that default rates on all sorts of loans will jump, even before we see the full effects of the recession.

With this backdrop, it is guaranteed that we will see more major financial institutions collapse. Look for those who hold large amounts of mortgage debt, especially on homes in the former bubble markets. The aggregate impact will be large. The Fed will have to struggle to keep the financial system operating smoothly. We will also see more bailouts – perhaps of AIG, down the road expect Congress to bail out the Federal Deposit Insurance Corporation, which is likely to see its reserves exhausted by a few more IndyMacs and many smaller bank failures.

I don’t know how much lower this will drive the stock market, but the economy will see a recession and quite likely a very bad one. This was all totally predictable. The tragedy is that those in a position of power did nothing to prevent this disaster (arguably they promoted it). It is especially unfortunate that the media are still covering up for the incompetence of those in government and business who are responsible. They should be held accountable.

--Dean Baker

One could think this is the case when they highlighted their coverage of the Lehman bankruptcy with comments from Wall Street Journal reporter David Wessel saying how surprised he was by the collapse. Wessel is a good reporter who often has interesting things to say about the economy, but it would be nice to have someone on NPR occasionally who was not surprised by the collapse of the largest housing bubble in the history of the world and the financial crisis that would inevitably follow.

--Dean Baker

Wow, the NYT finally pointed this out, except it was in an oped column, which interestingly enough was co-authored by Robert Hahn, a conservative economist at the American Enterprise Institute. The argument in the piece is interesting: everyone thinks that drilling will matter, so give them what they want, and then do real energy policy.

Maybe that makes sense given the incompetence of the media, but why can't the media report the reality that every energy expert knows -- drilling won't lower prices in any substantial way.

--Dean Baker

Alan Greenspan is certainly in a position to know about the problems the financial system is facing. After all, there is no one who bears greater responsibility for today's events.

But, it would be appropriate to remind readers that Greenspan was the arsonist here. He was the one who choose to ignore the abusive lending practices in the mortgage industry that became widespread under his tenure. He was the one who chose to ignore the growth of an $8 trillion housing bubble.

When he said that, "This is a once-in-a-half-century, probably once-in-a-century type of event," it might have been worth pointing out that he was the arsonist who created the conditions for the extraordinary set of events hitting Wall Street.

--Dean Baker

Like most newspapers, the Washington Post likes to run opinion pieces that present a different take on the news. But most newspapers prefer that this different take is grounded in reality, not the Post.

Today the Post featured a piece by Donald Luskin, an advisor to John McCain, saying that the economy is just fine. The highlight of this argument seems to be that economy grew 3.3 percent in the second quarter “virtually the same as the 3.4 percent average growth rate since --yes, the Great Depression.”

Apparently, Mr. Luskin wasn’t informed of the $160 billion stimulus package that Congress used to keep the economy growing in the second quarter. Since Congress doesn’t have comparable packages available to hand out in the third and fourth quarters, GDP is likely to be flat or negative in these quarters.

While Luskin argues that people were led to believe that the economy is bad because of the media’s negativism, it is also possible that they are responding to the weakest labor market since the early nineties. They may also be responding to the fact that wages fell behind inflation by close to 2 percentage points last year as people’s paychecks did not keep pace with the price of food and the price of gas.

In fact, the typical worker has seen no benefit for the last seven years of economic growth. Workers probably know that they are not getting ahead, even without the media pointing it out.

The rest of the piece is a range of confused and misleading statistics. The piece argues that default and foreclosure rates are no worse than the late 90s (huh?). Take a look at the Fed’s data on charge-off rates for loans for residential real estate. The rate for the last quarter was more than twice as high as the peak in the last recession and more than four times as high as any rate in the 90s. Delinquency rates are almost one-third higher than at any point in the last recession.

Luskin comments that house prices have bottomed out using indexes that don't control for the mix of homes being sold. Since the subprime end of the market has been hardest hit, the typical house sold today is almost certainly far more upscale than the typical house sold last year. Indexes that do control for the mix, show that nominal house prices are down by more than 10 percent from last year. That's a sharper decline than at any point since the Great Depression.

Luskin also doesn't see anything unusual in the pattern of failing financial institutions. Yeah, Fannie and Freddie go down every week, not to mention Bear Stearns, Lehman Brothers, Indymac. These are not neighborhood banks going down the tubes.

Even the "record" homeownership rate touted in the price is nonsense. The rate has fallen sharply in the last two years. In age-adjusted terms (people are more likely to own homes in their 40s than their 20s) we're not far above where we were a quarter of a century ago.

This column has no place in a serious newspaper (unless its intention was to embarrass McCain). Of course on economic issues the Post does not claim to be a serious newspaper. In order to push its pro-NAFTA view, it told readers last year that Mexico's GDP had quadrupled since 1998, implicitly claiming a success for NAFTA. The real growth figure was 83 percent. A serious newspaper would have corrected this enormous mistake. The Post still has not.

--Dean Baker

The Post ran a piece today about Congress failed to follow through on several warnings about potential problems with Fannie Mae and Freddie Mac. Former Bush administration National Economics Council Director Al Hubbard took Senator Chris Dodd and Representative Barney Frank to task for the same thing in a column on Friday. (Sorry to be slow here – I had a short vacation.)

Both items really miss the point. Yes, Congress was out to lunch on Fannie and Freddie. But the problem was not Fannie and Freddie, the problem was the housing bubble. Fannie and Freddie did help promote the bubble. With their implicit guarantee of government backing (now implicit), they helped to funnel trillions of dollars of capital into financing mortgages on over-valued real estate.

But, what is the counter-factual? Suppose we had reined in Fannie and Freddie a decade ago. Would there have been no bubble? That seems unlikely. In fact, the private issuers of mortgage backed securities (MBS) were far less responsible than Fannie and Freddie. That is why they have almost all shut down, no one will but their issues anymore.

So, if we had followed the advice of those who wanted to rein in Fannie and Freddie (all of whom missed the housing bubble), we might have seen somewhat less capital flow into the housing sector, but the money that did flow in would have been even more poorly regulated than what we saw at Fannie and Freddie. Who knows, the volume of bad debt may even have been enough to sink Citigroup and some of the other big actors in private issue MBS.

And remember, the taxpayer is on the hook here also. When IndyMac went down, it pulled billions from the Federal Deposit Insurance Corporation. When the FDIC needs to be recapitalized (yes, it will), it will be taxpayers who foot the bill. Bear Stearns’s collapse put the Fed (and therefore the taxpayers) on the hook for $29 billion.

In other words, the question wasn’t whether taxpayers would pay a price for a bailout when the housing bubble collapsed; the only question was which pocket it would come out of. By all means we should point fingers at the key members of Congress who protected Fannie and Freddie, but everyone who helped to foster the housing bubble (or failed to act to contain it deserves a share of the blame. This group certainly includes everyone in the Bush Ownership Society crew.

--Dean Baker

That should have been the headline of a USA Today article telling readers that the heads of several major corporations went to Congress to push for approval for three pending trade agreements. Instead, USA told readers that the CEOs said that the trade deals "could help revive the ailing U.S. economy."

Of course lobbyists never publicly say that Congress should do "X" because it will make us richer. They always say do "X" because it is good for the country. Reporters should know this.

While exports have been a major factor in supporting growth over the last year. The decline in imports have been almost as important, adding an average of 0.7 percentage points to GDP over the last three quarters, a period in which growth has averaged just 1.3 percent. The article implies that we should have more trade agreements because of the importance of exports in recent growth. By this perverse logic, we should also raise tariffs because the decline in imports has been so important in boosting growth.

Remarkably this article does not mention the decline in the dollar, which virtually all economists would acknowledge has been the main factor behind the improvement in the trade balance, both increasing exports and decreasing imports. A further drop in the dollar would be far more effective in boosting exports than trade agreements with relatively small countries with which the United States already has relatively open trade.

--Dean Baker

That must be the case because real newspaper people wouldn't just report what the Democrats and Republicans say about drilling, they would actually tell readers what the facts are. This article reports Republican complaints about the Democrats reluctance to open areas to offshore drilling, but it doesn't bother to tell readers that opening these areas to drilling will have about as much impact on the price of gas over the next decade as having Sarah Palin go out and shoot a moose.

Even in the longer term, the impact of additional drilling would have only slightly more impact on the price of gas than shooting moose in Alaska. The Energy Information Agency estimates that the amount of oil in these areas could eventually supply about 0.2 percent of world production, which could lower the price of gas by 3-4 cents a gallon in 20 years.

The article does tell readers that House Speaker Nancy Pelosi is "worried about the effect of offshore drilling and conservative Democrats concerned that $4-a-gallon gasoline prices this summer have left them vulnerable to GOP opponents in the November elections." This statement is a testament to the incredibly bad reporting on this issue, since everyone should know that drilling offshore will no have effect on the price of gas for a decade and only a trivial effect even in the more distant future.

--Dean Baker

Robert Samuelson did a classic misrepresentation of data in his column today. He told readers that people spend pretty much the same amount of money on health care regardless of income. He blamed this on government health care programs like Medicare and Medicaid which pick up much of the tab for low-income people. He sees this as a problem because it leads us to spend a great deal on health care procedures that often have little value in terms of improving health.

There are two big problems with Samuelson's analysis. First, the relative equality of spending is hugely driven by age (the elderly largely fall in the bottom quintile), which Samuelson notes in passing. This is important because old people need health care, young people don't. Most young people spend little on health care and they would still spend little on health care even if their incomes increased by a factor of ten. (Do people go to the doctor for fun?) Controlling for age, rich people do spend substantially more on health care than poor people, although not as much more as would be the case without government assistance.

The other problem with Samuelson's analysis is that often the "expensive" procedures are not really expensive in the sense of using substantial resources, they are only expensive because the government hands out patent monopolies. This is the case with expensive drugs and tests. In almost all cases drugs would be very cheap without patent protection as would even the most high tech medical tests and scanning procedures. However, patent monopolies can allow firms to charge exorbitant prices.

This is important in this context because if we deny this "expensive" care to the poor, we are not actually saving resources for society, we are just preventing them from getting care that could have important health benefits. The logical way to get around this problem is to consider more efficient mechanisms than patent monopolies for supporting biomedical research.

Unfortunately, because of the power of the pharmaceutical and medical supply industry, economists rarely consider alternatives to patent protection and the media will rarely allow the issue to be discussed. (General Electric, a major supplier of medical equipment, owns NBC.)

--Dean Baker

The Washington Post tells us that $407 billion deficit newly projected for 2008 is a "near-record." It isn't, the deficit measured as a share of GDP is 2.8 percent. Even adding in the borrowing from Social Security would only get us a bit over 4.2 percent, well below the deficit of 6.0 percent of GDP in 1983.

The Post article does give the deficit measured as a share of GDP, but the lead is the discussion of the near-record deficit. Focusing on just the nominal deficit, without comparing it to GDP is just nonsense. The United States also has the largest debt and deficit in the world. Is there anyone who would prefer the fiscal situation of Zimbabwe, even though its deficit is not even a tenth as large as the U.S. deficit?

The media should be focused on presenting information in ways that are informative. Telling us that the 2008 deficit is a "near-record" is misleading, not informative.

The WSJ also deserves grief for saying the deficit "doubled" in its headline. So what? Suppose the deficit had been $40 billion in 2007, then it would have increased by a factor of ten. Again, the point is supposed to be to provide information, not scare people, right?

--Dean Baker

The Wall Street Journal turned to a number of economists who were surprised by the housing crash that led to the need for a bailout of Fannie and Freddie, to tell its readers about the impact of the bailout on the federal budget deficit. The surprised economists all said that the bailout would lead to a substantial increase in the deficit and force the next president to change their budget plans.

In fact, there is no reason that the next president should be terribly concerned over the deficit caused by the bailout, as any non-surprised economist could have told WSJ readers. The expense of the bailout was effectively incurred when Fannie and Freddie first made the losses that put them into bankruptcy.

In effect, Fannie and Freddie, since they were operating with an implicit federal guarantee, were spending taxpayer money when they made the decision to buy up mortgages that would go bad. The taxpayers suffered those losses in 2004, 2005, 2006, and 2007, when they made bad decisions in the mortgage market. The bailout is effectively just an accounting exercise where we are acknowledging bad debts incurred in prior years.

This would be comparable to a business where it is discovered that a manager had been ripping off millions of dollars over the last five years. They might find out about the theft in 2008 and record the loss in that year, but in reality the loss had been incurred in prior years. Similarly, the deficits associated with the Fannie/Freddie bailout were in reality occurred in past years.

There is no reason to be concerned about the deficit it will create in 2008, because the deficit had actually been incurred in prior years. There will be no crowding out of investment or net exports (the reasons that economist worry about deficits) due to the money spent on the bailout in 2008.

The WSJ should have found an economist who could have explained these facts to readers.

--Dean Baker

As the housing bubble expanded in 2004, 2005, and 2006, NPR almost never could find any economists who thought an unprecedented and unexplained $8 trillion run-up in house prices was a problem. This morning, NPR again was unable to find any economists who thought that the bursting of this bubble would continue to be a serious problem, even after the federal takeover of Fannie and Freddie.

All the economists who discussed the impact on the housing market and the economy thought that this marked a major turnaround for the housing market. While the takeover did eliminate a major source of uncertainty, there is still a massive oversupply of housing by every measure and house prices are still far above trend levels in many parts of the country. Furthermore, the economy is continuing to shed jobs, which will put more downward pressure on the housing market in the months ahead.

After having largely excluded those warning of the housing bubble from its airwaves when the bubble was expanding, NPR is again presenting the same chorus of wrong economists.

--Dean Baker

Why didn't everyone support Newt Gingrich's plan to cut funding for National Public Radio? The major political piece on Morning Edition was a discussion of oil drilling in offshore protected areas. NPR told listeners that the Democrats are on the defensive because polls show that the public overwhelmingly supports it.

Is that so? Does the public think it's good to just drill for fun? Does the public want to drill in the basement of the White House? In Arlington Cemetery?

The public wants to drill in offshore protected areas because they think it will lower the price of gas. The public believes that drilling will lower the price of gas because the Republicans told them that drilling will lower the price of gas and the media has not corrected this lie. Instead of telling the public that drilling in offshore protected areas will have no impact whatsoever on the price of gas for the next decade and that the eventual impact in 15-20 years will only be around 3-4 cents a gallon, NPR told listeners that polls show that voters favor drilling.

--Dean Baker

In a discussion of Senator McCain's support for privatizing SS, the WSJ told readers that privatization "could help balance the books long term because government obligations would drop." This is not true.

If the government just reduces the benefit in accordance with the money pulled out of the system for private accounts, then it leaves the programs finances unchanged. The saving only comes from cutting benefits. This is what President Bush proposed in 2005, and Senator McCain endorsed.

--Dean Baker

Okay, this is a bit of gloating. After having debated the economists at Fannie and Freddie more than a dozen times over the past six years, I am going to take the opportunity to say that I was right and they are bankrupt.

Their economists consistently dismissed the possibility that there was a housing bubble and were enraged at the suggestion that these two corporate giants could face financial problems. Of course there was a housing bubble and it was inevitable that it would collapse and impose serious strains on Fannie and Freddie.

As I said back in September of 2002:

"If housing prices fall back in line with the overall rate price level, as they have always done in the past, it will eliminate more than $2 trillion in paper wealth and considerably worsen the recession. The collapse of the housing bubble will also jeopardize the survival of Fannie Mae and Freddie Mac and numerous other financial institutions."

--Dean Baker

There is an old myth developed by rich people at some point in the distant past that paying taxes on dividends amounts to "double-taxation." The argument is that profits are already taxed at the corporate level, so taxing money when it is paid out as dividends to shareholders is taxing the same profit a second time. Gregory Mankiw, a Harvard University professor and former top economist in the Bush administration, pushes this line in a column in the NYT.

The trick in this argument is that it ignores the enormous benefits that the government is granting by allowing a corporation to exist as a free standing legal entity. The most important of these advantages is limited liability. If a corporation produces dangerous products or emits dangerous substances that result in thousands of deaths, shareholders in the corporation cannot be held personally responsible for the damage. The corporation can go bankrupt, but beyond that point, all the shareholders are off the hook, the victims of the damage are just out of luck.

By granting corporate status, the government has allowed investors to shift risk to society as a whole. In exchange for this and other privileges of corporate status, the corporation must pay income tax on its earnings. We know that investors consider the benefits of corporate status to be worth the price in the form of the corporate income tax, because they voluntarily choose to form corporations. If investors did not consider the benefits of corporate status to outweigh the cost of the income tax, then they are free to form partnerships which are not subject to corporate income tax. In this way, the corporate income tax is a completely voluntary tax. Anyone can avoid the tax by investing in a partnership, or alternatively, any corporation can be restructured as a partnership.

The complaint about double taxation is an effort to get the benefits of corporate status for free. It is understandable that rich people would want to get benefits from the government at no cost, just like most of us would prefer not to pay our mortgage or electric bill. But, there is no reason for government to be handing out something of great value (corporate status) for free. If rich people don't like the corporate income tax, they have a very simple way to avoid it -- don't invest in corporations. The problem is that the rich are just a bunch of whiners.

--Dean Baker

The Washington Post editorial board has long been on a crusade to cut Social Security. Unfortunately this crusade continually bleeds over into its news reporting. This happened again today when it described Social Security as a "tough issue."

There is nothing "tough" about Social Security. The Congressional Budget Office projects the program to be fully solvent through 2049, more than 30 years after the latest date that the next president can leave office. Social Security is an issue like U.S. relations with Denmark, it's not a problem, however much the Post might like to make it one.

--Dean Baker

The Post tells us that the Republicans are pushing offshore drilling in environmentally sensitive areas as part "an 'all of the above' strategy to lower gasoline prices and decrease dependence on imported oil. This is what the Republicans claim but it cannot be true, since there is not enough oil in these areas to have more than a minimal impact on gas prices (e.g. 3-4 cents per gallon) and even this benefit will not be realized for close to two decades.

The most likely reason that the Republicans want drilling is to create a wedge issue so it looks like they care about ordinary working people, while Democrats only care about the environment. Since more drilling will not actually affect the price of gas, the Republicans are just taking this position for appearances.

Reporters have the time to evaluate the accuracy of politicians' claims, most voters do not. They should not be passing along inaccurate claims as though they are true.

--Dean Baker

We will know the answer to that one soon. President Bush said in his radio address today said that the oil in the offshore protected areas is equal to 10 years of current production.

No, that is not true. The Energy Information Agency, the government agency responsible for making estimates of oil reserves, calculates that there are approximately 8 billion of barrels of oil in the protected areas. Current production is approximately 3 billion barrels a year. That implies that the oil in the offshore protected areas is equal to less than 3 years of annual production, not ten years. That means that President Bush is off by a factor of more than three.

It actually is somewhat worse. U.S. production is only equal to 40 percent of consumption. Consumption is the more relevant factor in determining the importance of this oil. The oil in offshore protected areas is equal to only a bit more than a year of domestic consumption.

In other words, President Bush was completely misrepresenting the importance of oil in offshore protected areas. Why isn't this major news? Do the NYT, Washington Post, NPR, and Lehrer News Hour believe that President Bush lies so often that it can't be treated as news?

--Dean Baker

One of the first pieces of data to come out each month is chain store sales. The coverage reports year over year comparisons of spending at the major retail chains. (Just three chains, Wal-Mart, Costco, and Target account for more than 80 percent of the chain stores sales included in the report.)

The reporting is always expressed in nominal dollars. This can be misleading, since the same nominal increase will mean a smaller increase in real sales in a period of high inflation than low inflation. In the last year, the CPI index for commodities excluding food and energy rose by 0.6 percent. By contrast, the CPI for this category fell 0.8 percent in the year from July 2006 to July 2007. (This is not a perfect measure of inflation for these stores since it includes cars, which they do not sell, and excludes food and gas, which are sold in some chain stores.)

Articles reporting on the growth in retail sales should make some effort to account for the effect of inflation.

--Dean Baker

Marketplace had a segment this morning noting that a group of actuaries wants to raise the retirement age for Social Security. It noted that the program is running a $200 billion surplus now, but that it will have a deficit in just 7 years due to retiring baby boomers.

This is not true. The $200 billion surplus refers to total revenues, both taxes and interest on the government bonds held by the program. The program is projected to continue to have an annual surplus until the middle of the 20s. It will not fully draw down its bond holdings until 2046, according to the latest projections from the Congressional Budget Office.

It is understandable that a group of actuaries might want to raise the retirement age because of the possibility of a Social Security shortfall almost 40 years in the future, but Marketplace should not misrepresent the facts to help advance their case.

--Dean Baker

The Associated Press (AP) ran an article that praised Senator McCain's acceptance speech as "a bipartisan pitch." The article outlined the main themes, but politely managed to ignore the fact that Senator McCain found it necessary to completely misrepresent Senator Obama's health care proposal.

Senator McCain claimed that Obama's proposal would force people into a health care plan run by government bureaucrats. This is not true. Senator Obama's plan would give people the option of buying into a publicly run Medicare-type plan, but this would only be an option. Under Senator Obama's plan, no one would be forced to join the public plan, they would be free to stay with their current plan if they chose.

Senator McCain also misrepresented his plan on taxes for ordinary people. He claimed that he would not raise taxes, but his health care plan would raise taxes for tens of millions of middle income workers. McCain proposes making employer payments for health care taxable income. This will be a substantial tax increase for many workers. It also would have been appropriate to note this misrepresentation since Senator McCain has made low taxes so central to his campaign.

As a rule AP is not hesitant to criticize presidential acceptance speeches. The headline for its article on Senator Obama's speech was "Obama Spares Details: Keeps Up Attacks."

It is worth noting that most other news accounts seem to have ignored Senator McCain's misrepresentation of Obama's position on this important issue.

--Dean Baker

This NYT article discussing the reaction to the losses that it has suffered on dollar denominated holdings implies that the people running China's central bank had no idea what they were doing. The article implies that the bank was surprised by the fact that they lost money on these holding. If this is true, it is truly incredible that a major economic power would allow such inept people to run its central bank.

It is almost inconceivable that anyone who followed economic data did not realize that the dollar would decline from the level it has reached in 2001 and 2002. The United States had a large and growing trade deficit. It was throwing hundreds of billions of dollars into international currency markets every year for which there was no obvious demand.

It was understandable that China's central bank might buy up dollars in a conscious effort to keep the dollar high and thereby sustain its export market to the United States. This would mean that China was effectively paying people in the United States to buy its exports. This would be a reasonable growth strategy if China for some reason lacked the capability to generate this demand internally. (Otherwise it would make more sense for China to pay its own people to buy its goods rather than people in the United States.)

However, it would be bizarre if China's central bank bought up dollar denominated assets in the last 7-8 years thinking that they were making a good investment. It is difficult to understand how they thought they would make money on their dollar holdings. Apart from buying bonds from Zimbabwe, it's hard to imagine how they could have made a worse investment.

If the people who run China's central bank are really this ignorant, that should have been the headline of the article, which should have been on the front page.

--Dean Baker

Suppose some right-wing type is enraged at seeing a sign that calls President Bush bad names. Suppose he tears the sign down. Suppose the owner of the sign calls the police and asks to have this person arrested. My guess is that the police tell the caller to calm down and get over it. After all the police have more important things to do.

While the police are unlikely to get involved in protecting property of little intrinsic value when it comes to protecting political speech, they are very willing to get involved in protecting property of little intrinsic value in protecting copyrights and corporate profits. It is remarkable that the NYT can give instructions on seeking out legal downloads without ever commenting on the great lengths to which the government will go to protect songs that are worth 75 cents.

--Dean Baker

The NYT notes that Germany has one of the highest gender pay gaps across Europe telling readers: ""while the wage gap between women and men is narrowing across the European Union and in the United States, it is stagnant in Germany."

The numbers it presents don't quite support this case. The NYT reports that from 2000 to 2006 (the most recent year for which data is available) "German working women on average have gone from earning 26 percent less than men to making 24 percent less than men." By comparison, in the United States "the number has bounced between 23 percent and 24.5 percent" over the same period. (The gap dropped by a percentage point in 2007.)

The article discussed the difficultly that German women face in dealing with the demands of their jobs and family and also in getting access to child care. While these are undoubtedly serious problems for German women, they are also serious problems for U.S. women. Unlike their counterparts in Germany, working mothers in the United States have no guarantee of paid time off when they have a child, and many cannot even count on receiving unpaid leave.

While Germany ranks behind many other European countries in promoting family friendly work policies, it does not rank behind the United States. It is ridiculous to portray Germany's policies in this area as being uniquely dysfunctional.

--Dean Baker

The NYT discusses the Food and Drug Administration's drug approval process which often allows drugs on the market before there is direct evidence of their effectiveness. It would have been worth noting how government patent monopolies distort this process.

Drug companies are anxious to gain patent rents and therefore will aggressively lobby the FDA to approve their drug, whether or not their has been sufficient testing. By contrast, in cases where there are already a number of drugs to treat a specific health condition, like those discussed in this article, it would be socially beneficial to require long and extensive testing, since there is little reason to believe that a new drug will offer substantial addition benefits.

The article quotes an industry representative as complaining that such a requirement would be expensive and discourage the development of new drugs. Of course that is precisely the desired outcome. We would rather see drug companies pursue cures for health conditions where current treatments are inadequate than try to develop copycat drugs. This point should have been discussed explicitly in the article.

--Dean Baker

In an interesting article about the increasing number of workers who are withdrawing funds from their 401(k) plans, the Post told readers that "401(k) plans are replacing employer-sponsored pension plans and Social Security as the main source of retirement savings for many Americans." No, that actually is not true.

The median wealth for late baby boomers (workers age 45 to 54) is around $170,000, with most of this being equity in their home. Even for workers in the second wealthiest quintile the median wealth is only $250,000, with roughly half being home equity. This means total non-housing wealth (including personal savings and family businesses, in addition to 401(k)s) will be around $125,000 for this group. By comparison, these households can expect around $20,000 a year in retirement from Social Security.

Two-thirds of retirees receive the majority of their income from Social Security. The share of the population that will receive more of their income from a 401(k) plan than Social Security is relatively small.

--Dean Baker