The Census Bureau reported that new homes sold at a 728,000 annual rate in October, up from a 716,000 annual rate reported for September. Bad things will happen to anyone who highlights this increase. The September sales data were revised down by 54,000 from a previously reported annual rate of 770,000. This means that the annual sales rate for October is 42,000, or 5.5 percent, lower than the previously reported September rate. If this number is not revised downward we can be happy about the change in direction from the September rate, but we are still looking at much lower sales than we had been before this release.

The really big news in this release was a 8.6 percent drop in the median sales price, putting it 13 percent below the year ago level. The monthly data here are very erratic, but this is a very sharp drop and suggests some serious discounting to unload homes.

[Okay, someone at USA Today is in big trouble. The headline is "Price of new home tumbles in October even as sales rise." Toward the end of the article we find out about the downward revision to the September data and that October sales were far below expectations, but this is too little, too late.

--Dean Baker

I can get as excited as anyone else about the possibility that the Fed may cuts interest rates, but I still think the media should have given a bit more attention to the two big economic reports released yesterday and perhaps a bit less to the hints coming from the Fed.

For those who missed it, both existing home sales and durable goods orders fell in October. Which report is considered worse probably depends on what you had been expecting, but neither is good news.

Existing homes sold at a 4.97 million annual rate in October. This is down 1.2 percent from September and 20.7 percent from the year ago level. Sales are down by more than 30 percent from their peak levels in 2005.

The worst news was probably on the price side. The median house price for October was $207,800, down by 5.1 percent from year ago levels. The median house prices in the South and West were 6.7 percent and 6.9 percent below year ago levels, respectively.

The price decline is worse than it looks for two reasons. First, the indexes measure contracted prices. These days there is frequently money going from sellers to buyers at closing (e.g. for repairs, closing costs etc.) that will not appear in the contracted price.

The second reason that the price situation is worse than it looks is that the collapse of the subprime market should make the median home sold today somewhat more upscale than the median home a year ago. The subprime buyers were disproportionately at the low end of the market. If a large portion of these buyers get knocked out of the market, then the median home is pushed higher up the distribution. We have indexes that hold the mix constant (the Case-Shiller index and the House Price Index), but we won't have October data for at least a month. In the mean time, the picture from this release is not good. With house prices falling year over year, anyone who bought a place last year with little or no downpayment now has negative equity.

The Census Department reported that new orders for durable goods were down by 0.4 percent in October, following sharp drops the prior two months. Excluding transportation, orders were down by 0.7 percent. New orders for non-defense capital goods, the category that corresponds to equipment investment in the GDP accounts, were down by 3.1 percent for the month, 2.1 percent if aircraft orders are excluding. For the year to date, new order are up by 2.8 percent from year ago levels, while shipments are up by just 0.5 percent. (These numbers are nominal, but inflation in this sector has been close to zero.) Excluding aircraft, new orders are down by 1.7 percent and shipments are down by 0.5 percent.

The two reports together give us a story of housing in a full-blown collapse and investment stagnating, if not actually declining. It is hard to reconcile this data with a story of a healthy economy. With the savings rate already near zero, there is not going to be another consumption boom, so this only leaves trade as an engine of growth. It had a very large contribution to GDP growth in the 3rd quarter (1.4 pp), but it is hard to believe that the recent rate of improvement in the trade deficit can be sustained. In short, it looks like we have some very serious problems ahead, even if the Fed cuts interest rates.

--Dean Baker

Ruth Marcus is on the warpath again arguing that those who don't want to jump in line on the SS crisis train are bing irresponsible. Read it and weep.

A couple of quick points are in order. To claim unanimity of forecasts agree with SS trustees is simply false. The trustees assume that productivity growth will be markedly slower over the longterm horizon than its post-war average. They also assume that immigration will slow sharply from its rate over the last decade. Both assumptions make the projections for the program look considerably worse. One need only step over to the non-partisan Congressional Budget Office's website to find more positive projections on these variables. [I have been corrected on one of these points. Apparently CBO also assumes that the rate of immigration will fall when the baby boom generation retirees.]

The second key point to keep in mind is that the idea that taking steps earlier rather than later makes things easier means that it is better to either raise taxes on a cohort that has seen 30 years of wage stagnation or to cut their retirement benefits, even though most have accumulated little for retirement other than their SS. Even the trustees project that the typical worker will have a wage that is about 35 percent higher in 2040 than what workers earn today. Only the Post would argue that it's better to raise taxes and/or cut benefits on much poorer workers today than to risk the possibility that we may have to raise taxes or cut benefits on the much wealthier workers of the future in order to cover the greater cost of their own retirement (they are projected to live longer also -- that's the real problem. We're so cruel to our children.)

--Dean Baker

In an article reporting on China's refusal to raise the value of the yuan the NYT reports that "some trade experts say that even if Beijing did allow a sharp increase in the value of the yuan, there is no guarantee that this would lead to an immediate change in the trade balance."

A rise in the value of the yuan would lead to an increase in the price of Chinese imports in Europe and the United States. It would reduce the price of imports from Europe and the United States in China. Virtually all economists believe that demand does respond to changes in prices, which means that a rise in the yuan would reduce China's exports and raise its imports.

It would have been helpful if the article had identified the "trade experts" who do not believe that prices affect demand. They are a certainly a small minority among economists.

btw, Floyd Norris had an excellent piece that included a chart showing the sharp drop in China's imports from Europe coinciding with the soaring value of the euro relative to the yuan.

--Dean Baker

Undoubtedly millions of listeners are asking this question after hearing NPR's interview with Nicolas Retsinas this morning. Retsinas is the director of the Joint Center for Housing Studies at Harvard University. The Center gained fame for touting the increases in home ownership over the last decade and dismissing talk of a housing bubble. If Mr. Retsinas' assessment of the future prospects for the housing market are as accurate as they were in the recent past, it's not clear that he has much information to convey.

--Dean Baker

[addendum -- thanks to John (below)]

More Than a Bubble Keeps Housing Prices Sky-High

by Nicolas P. Retsinas
May 20, 2004
Reprinted from the Los Angeles Times

David Brooks' column is full of nonsense on trade this morning. The point is to propagandize on behalf of current trade policy, which is taking a beating in popular opinion as of late. Brooks includes a wide range of factors which are somehow supposed to imply that the current trade policy is good.

Just to to take a couple of my favorites, Brooks points out from 1991 to 2007 the trade deficit grew to $818 billion from $31 billion. "Yet, .... during that time the U.S. created 28 million jobs and the unemployment rate dipped to 4.6 percent from 6.8 percent."

Let's see, according to my calculator, the sun came up 5,840 times during this period. Therefore, by Brooks logic, trade must facilitate astronomical processes. For those familiar with economic theory, the expected impact of trade would be on wages, not the number of jobs. And most workers have seen very small wage gains over this 16 year period as the bulk of the benefits of productivity growth have gone to highly-paid workers.

Brooks also cites a study by Robert Lawrence and Martin Baily that purports to show that 90 percent of the jobs lost in manufacturing are due to domestic causes. I have no idea what this is supposed to show. A trade deficit of 6 percent of GDP (now closer 5 percent) corresponds to at least 3 million lost manufacturing jobs. Does it make any difference for anything in the world how these lost jobs are divided between the loss of existing jobs or the failure to create new jobs? It certainly doesn't matter for any economic theory with which I am familiar.

Brooks also extols the fact that the people in this country have lots of kids -- that's great if you like global warming, otherwise it doesn't seem like such a great thing. Perhaps the best line is that the United States "benefits from low levels of corruption." This is probably because actions like having a CEO wreck a company, and then get a hundred million dollar severance package, are perfectly legal.

But the most serious inaccuracy in the Brooks piece is the claim that "once there was a bipartisan consensus behind free trade." This is not true. The bipartisan consensus was behind trade policies that put less educated workers in competition with low-paid workers in the developing world. There has never been support for measures that would put our investment bankers, our lawyers, our doctors and our columnists in direct competition with workers in the developing world. (Perhaps Brooks does not know that if I opened a newspaper, and staffed it with foreign reporters and columnists who I quite explicitly paid one-half the wage of their comparably qualified U.S. counterparts, I would be arrested.)

The public has turned against trade policies that were designed to lower the wages of middle class workers and have had this effect. Brooks is among the small group of people who have benefited from these trade policies. Now he is unhappy, that's the story.

--Dean Baker

I praised the Post a couple of weeks ago for printing a coherent column by Robert Ball in support of protecting the current level of Social Security benefits. This was an extraordinary departure from its never-ending drumbeat of SS crisis news stories, columns, and editorials.

Since that day, the Post has run a strange column by Ruth Marcus, a former editor, that seemed to attack Paul Krugman for changing his mind on Social Security. In another forum, I quipped about this column that "the UFOs have landed," referring to a nutty effort to discredit Social Security by claiming that more young people believe in UFOs than they will receive a Social Security check.

Well, today the Post actually has the UFO story in its full glory. It appears in an oped column by Amity Shlaes which is apparently further payback for the Robert Ball column. It looks like we must pay a high price for this modest dissent from the Post's dogma on the SS crisis.

On the substance, I am not quite sure why the opponents of SS believe that the effectiveness of their lies is a basis for gutting the program. This would be comparable to claiming that tens of millions of people believe that Saddam was responsible for September 11th, therefore we should invade Iraq. The fact that the public has been so terribly misled on the financial condition of its most important social program (even if they don't actually believe in UFOs) is a strong argument for putting off any changes until the public can learn the true facts of the situation.

After all the basic issues about the SS program -- how much money it should provide in retirement, how much people should be taxed in their working years, and how late in life they should have to work -- are issues that should be decided democratically, not by people who control major media outlets. And the public cannot possibly make such decisions in an intelligent manner when they are being deliberately misinformed about the true financial status of the program.

--Dean Baker

That is the only possible conclusion that one can draw from its report this morning on the health care proposals of the presidential candidates. It asserted that Dennis Kucinich explicitly supports "socialized medicine."

Kucinich has openly supported a universal Medicare plan that would extend a Medicare-like insurance program to the entire population. The difference between such a program and socialized medicine is that the providers would still remain private under Mr. Kucinich's plan, as is the case with Medicare. This is different from socialized Medicine in places like England or Denmark, where the government directly provides health care.

Is NPR really unable to find a reporter who recognizes this distinction or did it feel a need to slur ("socialized medicine" is a slur in the current political context) Dennis Kucinich for some reason?

--Dean Baker

Imagine that Australia signed a free-trade agreement that allowed it to export up to 100,000 cars a year to the United States. Those of us who are English speakers might ask how a quota of 100,000 cars amounts to "free-trade."

Unfortunately, the NYT doesn't ask such questions. In touting the successes of outgoing Australian Prime Minister John Howard (he was defeated in an election over the weekend), the NYT reported that he signed a free-trade agreement with the United States and also won permission for as many as 10.500 professionals a year to enter the United States. In other words, the fact that a strict quota still exists on professionals, limited trade in professional services, does not seem to discourage the NYT from using the phrase "free-trade" to describe a trade agreement. Of course the agreement was not about free trade. In addition to not freeing all trade, it also increased some forms of protectionism, most notably copyright protection and patent protections on prescription drugs.

It is striking that we can have such explicit barriers on the entry of professionals, thereby restricting foreign competition for doctors, lawyers, and other highly paid professionals, and no one calls it protectionism. It is also striking that none of the "free-trade" economists ever raises an issue about these restrictions. Where are the editorials denouncing these professionals as knuckle-scraping Neanderthals unable to compete in the global economy?

--Dean Baker

The Wall Street Journal had a piece discussing U.S. trade policy in which it repeatedly referred to the trade policies promoted by the Clinton and Bush administrations as "free trade" and described the opponents of these agreements as protectionists. This is inaccurate.

The trade deals advanced by these administrations mostly reduced trade barriers that protected less educated workers, while leaving protections for the most highly educated and highly paid workers largely in place. This had the predictable effect of shifting income from people like auto workers textile workers and custodians to people like doctors, lawyers, and investment bankers. (The benefits went primarily to highly paid workers, there was little shift from wages to profits over this period.)

The deals also tightened up some form of protectionism, such as patents and copyrights. Most of the deal imposed much more stringent rules in these areas on developing countries, which raised the price of prescription drugs, recorded music and videos, and other products. The effect of this increased protectionism would likely be slower growth in developing countries and the world as a whole.

No one cited in this article actually is a supporter of free trade. The main dispute between the people cited in the article is whether they want to protect the wages of less educated workers in the United States or whether they only want to protect the wages of doctors, lawyers, investment bankers and other highly paid workers. The WSJ identifies the latter group as supporting free trade. This makes their position sound more attractive to many readers, but it is not accurate.

--Dean Baker

The Census Bureau released data on housing starts for October that left many news reporters confused. The problem is that the two main measures went in opposite directions. Housing starts increased by a modest 3 percent from September levels, led by a 46.5 percent jump in starts in apartment buildings. However, authorizations fell by 6.6 percent continuing their long downward path.

A quick look at the regional breakdown would eliminates the seeming mystery. Starts in the Northeast rose by 8.5 percent, while starts in the Midwest surged by 21.1 percent. Starts in the South fell by 4.6 percent. The West saw a 5.6 percent increase in starts, which was not enough to reverse an 11 percent drop in September.

The story here is that better than usual weather in the Northeast and Midwest allowed for starts to move more smoothly than might ordinarily have been the case. The drop in permits, which are less affected by weather, gives the better picture of the housing market.

btw, the falloffs in starts is striking. The rate for October is down by 40.6 percent from the year-round level in 2005. Starts of single family units are down 48.5 percent from the 2005 level. In the South, starts on single family units are down 51.3 percent and in the West 54.0 percent. And it ain't over yet.

--Dean Baker

Robert Reich used his Marketplace commentary this morning to point out that the Federal Reserve Board had the power to prevent many of the abuses that we saw in the mortgage industry over the last few years, but declined to use it. He then called on Congress to appoint new governors to the Fed who would be be prepared to hire the staff necessary to seriously enforce Fed rules.

One point that would have been worth noting in this picture is that the Fed writes its own budget. The Fed enjoys a unique status as a quasi public entity. It does not get its budget from Congress. It simply writes up a budget, drawing on fees from banks and interest on the assets it holds (the bonds that it buys with federal reserve notes), and sends it to Congress. Congress is informed of the Fed's budget, it does not ever vote on it.

It might be reasonable to subject the Fed budget to the same level of scrutiny as all other federal agencies. Also, the next time that we decide that we have make across the board cuts to items like enforcement of labor laws, food safety standards, and other areas of domestic spending, perhaps the Fed's economic research should be among the line items facing cuts. The impact would be trivial (it's less than 0.01 percent of federal spending), but it might make the other cuts go down better.

In any case, very few people are aware of the Fed's peculiar status, which could use some explanation in news stories.

--Dean Baker

The Washington Post had an article today about continuing credit problems due to the housing crash. The article is filled with comments from the "who could have known?" school of economics who were surprised that the housing bubble burst. While it is interesting to readers to hear economists explain why they had no idea what was going on in the economy, it would also be useful to include analysis from economists who understand the housing and credit markets and were not surprised by recent developments.

--Dean Baker

That's the first sentence of a WSJ article on the problems facing the two giants of the secondary mortgage market. This is yet another one that cries out "expected by whom?" Were the expectors surprised that a record run-up in house prices led to near record rates of construction? Were they surprised that near record rates of construction over four years led to an oversupply of housing? Were they surprised that an oversupply of housing led to downward pressure on prices? Were they surprised that falling house prices led to higher default rates? Or were they surprised that higher default rates caused problems for Fannie and Freddie?

Maybe the WSJ should broaden its sources to include people who are not surprised by this sequence of events.

--Dean Baker

NPR made its contribution to the anti-Social Security crusade today with a totally uncritical discussion of the "Fiscal Wake-Up Tour," which highlights the country's long-term deficit. The piece implies that the tour is comprised of a balanced group of policy analysts by describing the Brooking Institution as "left-leaning," a description that is inaccurate and which Brookings economists would almost certainly find objectionable.

As noted many times here, the story of the long-term projected deficit is almost entirely a story of exploding health care costs. Demographics and Social Security are really a small part of the story. If the Wake-Uppers were really concerned about the projected deficit then they would support Medicare Choice Plus which would slash the projected deficit simply by giving beneficiaries more choice.

--Dean Baker

The single change that would most greatly improve economic reporting would be a requirement that all numbers be placed in a context that made them meaningful to readers. We know that many of the numbers that appear in reports on the budget or the economy are not currently meaningful.

For example, seeing that a transportation bill will cost $196 billion over the next six years is absolutely meaningless to everyone but a few budget wonks. If a zero were added or subtracted to this number it would probably mean almost exactly the same thing to most readers. An article could substitute "really big number" for "$196 billion" and still provide as much information. The simple alternatives are to express the sum as a share of total spending or on a per person basis, both of which would provide metrics that are immediately understandable to most readers.

Editorials in the NYT and Post today give us excellent examples of why the current method of expressing these numbers is such bad reporting. The NYT editorial praised congressional Democrats for standing up to President Bush on the war in Iraq: "house Democrats distinguished themselves this week when they stood up to the White House’s latest military funding steamroller: approving only $50 million of the additional $196 million the president requested for the wars in Iraq and Afghanistan."

That's right folks, the editorial said "millions." They meant "billions." Oh well, we all knew that. Of course, it is hugely important that the sum in question is $196 billion and not $196 million. This is approximately 6 percent of projected spending in 2008, about $660 for every person in the country. That is real money -- about 28 times the disputed SCHIP appropriation. If the NYT had expressed the sum in some context that made it understandable to readers, an error of this sort never would have made its way into print. Its editorial could then have informed readers rather than confuse them.

The Post editorial raises the opposite issue, the whole point is confusion. As regular BTP readers know, the Post is engaged in a no holds barred war against Social Security. (I will not comment on the allegations of waterboarding on 15th Street.) The Post warns readers that the Democratic presidential candidates don't have a plan that will fully close the projected $4.75 trillion Social Security shortfall over the next 75 years.

This is intended to sound really scary to readers. After all, as my debating partners on the Social Security privatization circuit always used to say, "that's 'trillion' with a 't.'" Since most people don't have a good idea of what $4.75 trillion over the next 75 years means, it might have been useful to express the sum as a share of projected income over this period. By this measure, the SS trustees projected shortfall would be approximately 0.7 percent of projected income. The shortfall projected by the non-partisan Congressional Budget office is approximately 0.6 percent of projected income over this period. By comparison, annual spending on the wars in Iraq and Afghanistan now comes to 1.3 percent of national income, approximately twice the size of the projected SS shortfall.

In this case, context would directly undermine the goal of the Post editorial. The intent is to scare people, not to provide information. However, if it was standard practice to place big numbers in a context in which they could be understood, the Post would not be able to get away with this cheap trick.

--Dean Baker

The NYT lists the issues troubling OPEC as it meets this weekend and includes the falling dollar: "the dollar, the currency usually used in oil trading, is falling," While it's true that the dollar is falling, this need not be a concern for OPEC. OPEC has no obligation to trade oil in dollars (except where it has long-term contracts that have a price specified in dollars) and it has no obligation to hold dollars even if it trades its oil for dollars.

If OPEC countries are being hurt by holding dollars then this is simply due to the stupidity of its money managers. They can readily protect themselves from the falling dollar, if they choose to do so.

--Dean Baker

Just as President Bush has been waging a war on terrorism, the Washington Post has long been waging a war against Social Security, with about the same level of success. The Post fired another shot today, providing a partial endorsement of former Senator Fred Thompson's plan to cut benefits if elected President.

Senator Thompson's plan provides for cuts in benefits that increase through time. Twenty years after it is implemented, benefits would be 20 percent below currently scheduled levels, after forty years benefits would be 35 percent lower, and after 60 years they would be 48 percent lower.

While these cuts in benefits would be far more than enough to put the program in surplus over its seventy five year planning horizon, the Post still isn't happy. It complains "but he neglects to make clear that fully half of that solution would come from transferring general revenue funds to the Social Security system."

Mr. Thompson probably "neglects" to make this point clear because it isn't true. We can see this with simple arithmetic. The SS shortfall is equal to 1.9 percent of projected payroll according to the SS trustees. The non-partisan Congressional Budget Office puts the shortfall somewhat lower. If we add this to the 12.4 percent payroll tax, this implies a shortfall that averages 13.3 percent of benefits (1.9 percent divided by 14.3 percent). The Thompson plan achieves this level of benefit reduction after 14 years, with the cuts growing further over the 75-year planning horizon. (Thompson's cuts apply to new beneficiaries, but I have ignored the $2 trillion accumulated surplus in the trust fund and the revenue from taxing SS benefits in this calculation.)

Let's hope the Post's editorial board sharpens up its arithmetic skills before its next intervention in this debate.

--Dean Baker

The Wall Street Journal reports that Oklahoma Senator Tom Coburn was blocking a bill that would increase the flexibility of the Federal Housing Authority because the bill could "expose American taxpayers to $1.6 billion [in liabilities] over five years," and therefore should not rushed through.

This sum is equal to approximately 0.01 percent of projected spending over the next five years. It is approximately equal to what the country spends every three days on the wars in Iraq and Afghanistan. If the number is correct (Mr. Coburn may have meant "trillion" rather than "billion"), then the potential risk from this bill does not seem especially large, as should have been pointed out to readers.

--Dean Baker

Floyd Norris does a very nice job outlining the story of CDOs, SIVs, and other forms of creative financing that have led to losses in the tens of billions of dollars at some of the world's largest financial institutions. I'm not sure about his conclusion: that the Fed will engineer a large spread (high long-term interest rates and low short-term rates) to allow the banks to rebuild their balance sheets. This is not so easily done, but the rest of the story is on the money and makes painful reading (what do these guys get paid big bucks for?).

--Dean Baker

The NYT should have mentioned this fact in its article discussing a proposed bill that would tighten rules on mortgage lending. The article quotes Republican Representative Adam H. Putnam criticizing the legislation, saying that more flexible mortgage rules have increased homeownership.

It would have been helpful to note that homeownership rates have been falling for the last year and are now back to the level they were at in the second quarter of 2003, before the worst of the abuses in the mortgage industry. (The drop in homeownership rates for blacks has been even sharper, falling 3.0 percentage points.) This decline is virtually certain to continue with foreclosure rates at near record levels in the third quarter of 2007.

--Dean Baker

David Leonhardt used his column today to tell readers that bubbles in the form of over-valued stock or housing markets are bad news. As we say here in the nation's capitol, better late than never.

Unfortunately, Leonhardt does not make the next step and discuss whether the Fed should follow policies to prevent bubbles from growing to the point where they cause so much damage. That would seem to be the obvious implication of his column, but it would imply a radical shift from the current "bubbles are fun" view at the Greenspan-Bernanke Fed.

--Dean Baker

The NYT article reporting on the conservatives' narrow victory in Denmark's election wrongly identified the Danish People's Party as taking "a hard line against immigration and Denmark’s generous welfare state."

Actually, the Danish People's Party strongly supports Denmark's welfare state (for native Danes) which is one of the reasons it is attractive to many voters. Denmark's Social Democratic party has been willing to accept some cuts to the welfare state. This has led some voters to switch from the Social Democrats to the Danish People's Party.

The article also got the outcome of the election wrong. The conservative coalition retained its majority by one vote. It will not need to form a coalition with the centrist New Alliance Party as claimed in the article.

--Dean Baker

The NYT ran a big-time fluff piece for Wal-Mart today, telling readers that it now provides insurance for 100,000 more workers than it did three years ago. To see why the celebration may be premature look at the accompanying charts. They show that just over 60 percent of full-time employees have health insurance and less than 15 percent of part-time employees are covered. The percent of covered employees in each category has only inched up modestly over the last three years. Undoubtedly much of the increase in coverage was simply due to the growth in employment at Wal-Mart.

Wal-Mart's efforts to extend and improve coverage are a good development for people who want to see more workers with access to good health care, but perhaps not as big a deal as this article suggests.

--Dean Baker

They don't do much by way of analysis of a proposal by Republican Presidential candidate Fred Thompson to cut drastically cut Social Security benefits. (A 20-year old would see a benefit reduction of close to 40 percent under Mr. Thompson's proposal.)

The article includes this gem: "economists have said that without changes, the Social Security system will no longer have enough money to pay benefits to all retirees starting in 2041." Presumably it means the Social Security trustees, most of whom are political appointees of President Bush and not economists, where it says "economists." The economists who work at the Congressional Budget Office project that the fund will be fully solvent until 2046, almost thirty years after the latest date that Thompson could possibly leave the White House.

--Dean Baker

Readers who saw the coverage of former Senator Fred Thompson's proposal for cutting Social Security can be forgiven for thinking that the NYT reporters are supporting the strike by the Writers Guild. Thompson proposed changing the SS benefit formula so that benefits would be indexed to inflation rather than wages. Thompson then proposed using general revenue to make up the remaining Social Security shortfall.

If the NYT reporters weren't on strike, the article would have told readers that with Mr. Thompson's proposed benefit cut, the SS program would be in surplus forever. In other words, this change is far more than sufficient to eliminate the shortfall projected by either the Congressional Budget Office or the Social Security trustees. Therefore there would be no reason to ever use general revenue to pay Social Security benefits. Perhaps the NYT will clarify this point for readers after the strike ends.

--Dean Baker

The NYT badly misrepresented the release of data on import prices for September. It told readers that, "in one good sign for the domestic economy, prices of nonenergy imports rose only 0.3 percent last month, a sign that the risk of inflation may be contained." That may not sound like much, but until recently non-energy import prices had been flat or even falling. The index for non-fuel imports stands at 110.0 against a 2001 base. That means that in over six years the index has risen by just 10 percent, an average of 1.6 percent a year. Against this backdrop, a monthly rise of 0.3 percent (@3.6 percent annually) is a serious uptick.

It's also worth noting where the price increases are coming from. The price of goods from China rose 0.3 percent in September and have risen at a 3.2 percent annual rate over the last quarter. By comparison, the index for imports from China stands at 99.0 (with a 2003 base), which means that they had been falling in price until very recently. This means that instead of depressing inflation, imports from China are now adding to it. A process which may accelerate if China decides to revalue its currency against the dollar.

There is no reason to panic over the import price story, but we are beginning to see an uptick in prices which is the expected result of a falling dollar. The rate of increase in import prices is likely to increase further in the months ahead as prices adjust to a lower value of the dollar.

--Dean Baker

That should have been the question asked by the Financial Times in an interview in which Mr. Rubin defended his "strong dollar" position. Mr. Rubin argued that the strong dollar could have been sustained if Bush had not shifted the country from surpluses to deficits.

This calls for a quick trip back to econ 101. The immediate reason that the dollar is falling is that the country has a massive trade deficit that peaked at almost 6 percent of GDP in 2006 (more than 3 times the unified budget deficit). The reason that the country has a trade deficit is because of Mr. Rubin's strong dollar policy. Those who can remember back to the late 90s will recall that the trade deficit began to soar following the run-up in the dollar in 1996-97. In other words, the high dollar brought about an automatic correction process in the form of a large and growing trade deficit.

But, Mr. Rubin says that the high dollar was a good thing, the problem is Bush's budget deficits. Okay, suppose that we had a $300 billion budget surplus (@ 2 percent of GDP) instead of a $170 billion deficit. This would help to bring down the trade deficit as Mr. Rubin suggests. It would bring down the trade deficit by lowering output and employment. With a lower level of income we would buy less of everything, including less imports. If we maintained a low level of output and a high level of unemployment, then in principle we could keep the trade deficit at a manageable level and thereby sustain the strong dollar that Mr. Rubin cherishes.

For most people the costs of high unemployment would not be offset by the gains of a high dollar (cheaper imports and travel to Europe), but apparently for Rubin this is a good trade-off. Since Rubin is likely to carry enormous influence in a future Clinton administration, his eclectic views on this issue deserve serious attention. Voters would like to know if the next president intends to raise the unemployment rate in order to keep the dollar high.

--Dean Baker

The Washington Post reports that Obama is making plans for raising SS taxes and/or cutting benefits if he is elected. It would be appropriate to remind readers that the Congressional Budget Office projects that the program will be fully solvent until 2046 with no changes whatsoever. This is almost thirty years after the latest date that Obama could possibly leave the presidency.

Readers should know that there is no urgency to address the projected shortfall in Social Security although there are many powerful actors who would like to see the program privatized and/or have its benefits cut.

--Dean Baker

The larger than expected fall in the trade deficit reported for September coupled with larger than expected inventory accumulations reported for August and September should lead to a substantial upward revision to an already strong third quarter GDP number. My guess is that this will be an anomaly with growth falling off sharply in the 4th quarter (the inventory growth was most likely due to slower than expected sales), but a figure well above 4 percent is nonetheless striking.

--Dean Baker

Much of the reporting on the prospect that China will begin shifting from the dollar to the euro as its favored reserve currency has misrepresented some key issues. Here are some quick points to remember:

1) The level of the dollar will not determine China's decision, it is the expected direction of change in the future that matters.

This one should be obvious but reporters often get it wrong. A currency is not attractive because it is highly valued, it is attractive if its value is expected to rise. For this reason, the over-valued dollar of the last decade was inherently less attractive than a low-valued dollar that is unlikely to fall further.

2) Switching reserve holdings from dollars to euros will not necessarily hurt Chinese exports.

China has been quite consciously propping up the dollar against its currency with the purpose of sustaining its export markets in the United States. If it stops buying up dollars, presumably the dollar will decline against the Chinese currency. This will reduce its exports to the United States. However, if it switches to buying up euros, then the euro will rise relative to the Chinese currency. This will make Chinese goods cheaper for people in Europe, which will presumably increase China's exports to Europe. The rise in exports to Europe may not exactly offset the decline in exports to the United States, but the net effect on China's exports should be relatively modest.

3) China's government has claimed that it wants to slow growth to limit inflation. A higher value of its currency would be an effective way to accomplish this goal.

China's economy is now growing at more than an 11 percent annual rate with inflation running at a 5 percent annual rate in recent reports. The central banks has announced several measures aimed at slowing growth which have not been successful thus far. By contrast, a higher value of the currency would slow the growth in China's exports. It would also make oil and other imports cheaper for people in China, helping to alleviate inflationary pressures. In other words, the expected effects of a higher valued currency (and a lower priced dollar) are entirely consistent with the stated economic goals of China's leaders.

4) China will take a hit on its dollar holdings and it knows this.

Many reports have claimed that China can't switch away from dollars because it will lower the value of the dollar, which will cause it to take large losses on the huge dollar reserves that its central bank already holds. China's central bank bought up dollars to sustain China's exports, it was not an investment strategy. They knew that they would likely take large losses on their dollar holdings, but felt that the benefits of sustaining the export market in the U.S. was worth this cost. China will only increase its eventual losses by buying still more over-valued dollars, and its central bank understands this fact.

--Dean Baker

An NYT article reports on how plunging house prices are starting to slow consumption. At one point the article refers to the country's trade deficit and comments that the decision by foreign investors to turn away from the United States could send the dollar plummeting "forcing the Fed to raise interest rates."

This is not true. The Fed would have the option to let the dollar continue to fall until it reached a price at which investors were willing to hold it. The Fed is no more "forced" to raise interest rates in response to a falling dollar than it is to lower interest rates in response to a weak economy. In both cases the Fed will consider it options and then use its judgment to determine where to set interest rates.

It is important that the public recognize that raising interest rates in response to a falling dollar is a policy choice. It is not required by events.

--Dean Baker

The Post calls Giuliani on his use of creative statistics on cancer survival rates.

--Dean Baker

The NYT reported on the likely passage of a new trade deal (wrongly described as "free-trade") with Peru. The article reports on President Bush's claim that increased trade has created jobs noting opponents' assertion that trade has cost jobs.

While some number of workers will lose their jobs due to trade and others will be employed in export sectors, the main effect of trade on workers comes through their impact on wages. The effect of recent trade deals has been to put the 70 percent of the workforce without college degrees in direct competition with low-paid workers in the developing world. More highly educated workers, like doctors, lawyers, economists, and reporters are still largely protected from this sort of competition. The predicted effect of this pattern of trade is to lower the relative wages of less educated workers, a pattern that has been widely documented over the last quarter century. It would have been useful to include this fact in the article.

--Dean Baker

News reports probably should not be providing investment advice, but they certainly can, and should, provide a bit of analysis of stock prices. Like many people, I was stunned to hear that PetroChina, China’s state oil company, has an implicit market valuation of $1 trillion, more than one-third of the country’s exchange rate GDP. (That is an apples to apples comparison, the value of the company is expressed in dollars at the official exchange rate.)

Does this price make sense? Without any special expertise in either the oil market or the specific prospects of PetroChina, it is possible to get a quick assessment with some simple arithmetic. According to published data, PetroChina’s earnings last year were $18.2 billion giving the stock a PE ratio of slightly more than 50 to 1. Let’s say that over the long-term, a PE ratio of 20 to 1 will be the norm for the oil company, allowing for a sustainable real return of 5 percent. Let’s say that it gets to this ratio after ten years in which its profits grow in real terms by 20 percent a year. Let’s also assume that investors would expect a 10 percent real return for investing in such a risky stock. To complete the story, we’ll assume that it pays out 60 percent of its profits in dividends.

What do PetroChina and the world like in this scenario? Well in 2017, the market valuation of the company will be $2.2 trillion (in 2007 dollars). Its after-tax profits will be $113 billion (also in 2007 dollars). This would be equal to 7 percent of all projected profits in the United States for 2017. At its peak, General Motors accounted for about 1 percent of all U.S. profits, so the stockholders in PetroChina are betting that it will grow seven times as large relative to the U.S. economy as General Motors was at its peak.

Suppose we did the same exercise with Google, which currently has a PE ratio of almost 60 to 1. Assuming 20 percent annual profit growth and a 10 percent real return will not quite get us to a 20 to 1 PE by 2017, but close enough (20.9 to 1). In 2017, Google would have a stock valuation of $514 billion (in 2007 dollars) and its annual after-tax profits would be $24.7 billion, or 1.6 percent of all corporate profits.

You can relax the assumptions in various ways (more rapid profit growth, a longer period to get to a sustainable PE, or a higher sustainable PE and therefore lower long-run average return), but none of these paths sound very realistic and/or make the picture sound even more dramatic in terms of profits relative to the size of the economy.

So, do we think that Google will grow to be 1.6 times as large a share of the economy as GM ever was or that China’s state owned oil company will equal 7 GMs or do we think that these shareholders are throwing their money in the garbage?

--Dean Baker

David Cay Johnston has an article in the NYT this morning that reports that the price of electricity for industrial users has risen more rapidly in states that deregulated their electricity markets than in those that largely maintained regulated pricing. There are some disputes about measurement, as the article notes, but the possibility that this could be true is really striking.

The regulatory policy that states had in place was deliberately to designed to have a cross subsidy, with industrial users paying more so that residential and commercial users could pay less. One expected result of deregulation would be that this cross-subsidy would be eliminating, which would mean that electricity prices for residential and commercial users would rise relative to prices for industrial users. It would be quite striking, if it turns out that even industrial users did not benefit from deregulation.

--Dean Baker

The Financial Times reports that several market analysts now think that the fallout from bad mortgage debt will continue for some time and be much worse than they had expected. Given that these people are paid very high salaries to understand these markets, it would be worth asking why they apparently got this one so badly wrong. It would also be a very good story to report on the extent to which these high priced experts suffer any professional consequences as a result of such a costly mistake.

--Dean Baker

In his business section column today, Greg Mankiw raises some issues about several frequently cited U.S. health care statistics, notably the percentage of the population that is uninsured and the longer life expectancies enjoyed by Canadians.

On the issue of the number of uninsured, Mr. Mankiw points out that many of the 47 million do in principle have access to Medicaid, that some are relatively well off and could afford insurance if they chose, and that roughly 10 million are illegal aliens who presumably would not be covered by a national health insurance plan. While these points are all accurate to some extent they don't negate the fact that 15 percent of the country did not have reliable health insurance last year.

And, it is easy to point out ways in which this number -- 47 million uninsured -- understates the true size of the problem. First, this figure is the number of people who went the whole year without insurance. There were more than 80 million people who went without insurance for at least part of the year. Second, many of the insured are not really protected against catastrophic illness. If a worker is afflicted with a debilitating disease, she would eventually lose her job, which would mean that she would also lose her insurance. If she had sufficient savings, she could continue to buy insurance, but most workers do not have enough savings to pay for their insurance for very long, once they longer have a regular income. In principle, a disabled worker could qualify for Medicare through disability, but this is a long and uncertain process.

As far as the non-coverage of people who are not in the country legally, it is reasonable to hope that Congress will at some point in the not too distant future normalize the status of those currently in the country, and create a legal mechanism for future immigrant workers, so that the country will not continue to have a large number of people who do not have legal residency.

Mankiw notes that factors other than the quality of our health care system raise Canada's life expectancy relative to the United States. This is true, but it is worth noting that Canada and almost every other wealthy country enjoys longer life expectancies than the United States in spite of spending far less per person than the United States. In the case of Canada, per person expenses are 40 percent less, a savings of $2,700 per person per year. The United Kingdom has longer life expectancies than the United States and spends 60 percent less than the United States, a saving of $4,000 per person per year.

If the longer life expectancies in other countries cannot be taken as compelling proof that they enjoy better health care systems than the United States, they can at least be taken as powerful evidence that they do not suffer from markedly worse health care systems. The fact that they are able to deliver comparable outcomes at a far lower cost suggests that the U.S. health care system suffers from very serious inefficiencies.

--Dean Baker

The New York Times reports that former Treasury Secretary Robert Rubin may take over as CEO of Citigroup on an interim basis following the departure of its current chairman, Charles O. Prince III. The article notes that Mr. Rubin's reputation may have been tarnished in recent years because he has been associated with the decisions of Mr. Prince, which have led to large loan write-offs for the bank.

In this respect, it would have also been appropriate to note Mr. Rubin's involvement with Enron. As the NYT previously reported, when the collapse of Enron was imminent, Mr. Rubin phoned a former associate at the Treasury Department to see if he would ask the credit rating agencies to delay downgrading Enron's debt. Citigroup held hundreds of millions of dollars of Enron's debt at the time.

Since there may be important ethical and legal questions surrounding Citigroup's dealings with structured investment vehicles and exotic financial instruments, this piece of Mr. Rubin's background would seem highly relevant at the moment.

--Dean Baker

The October employment report was a very mixed bag as I pointed out in my data byte yesterday. The 166,000 rate of job growth reported in the establishment survey is certainly a respectable pace, but there were good reasons for questioning whether it can be accepted at face value.

First, the Bureau of Labor Statistics (BLS) is imputing jobs for new firms at the same pace as it did last year. We just got the preliminary benchmark revision which showed that job growth had been overstated last year by almost 300,0000, or 25,000 per month. Unless the economy is growing more rapidly now than it did last year, then we can reasonably assume that this imputation is leading to a comparable overstatement this year.

Some of the other peculiarities in the data are an increase of 92,000 jobs in restaurants over the last three months (a 3.5 percent annual rate) even though the Commerce Department reports a decline in real sales from July to September (we don't have October data yet). Also, the number of people employed in real estate is now 25,000 higher (1.4 percent) than its year ago level, even though home sales are down by close to 20 percent.

But even if the picture in the establishment survey is still on net positive, the household data surely is not. The most striking item is the drop in the employment rate (EPOP), the percentage of the population that is employed. This fell by 0.2 percentage points in October. While the monthly numbers on the household side are always erratic, this decline is part of a longer trend. The 62.7 percent EPOP is 0.6 percentage points below the December 2006 level, corresponding to a drop in employment of 1.4 million people.

One of the peculiarities of this cycle is that labor market weakness has expressed itself far more in declining labor force participation rather than measured unemployment. The difference is that the unemployed tell surveyors that they are looking for jobs, whereas to not be counted in the labor force people say that they are neither employed nor looking for work. It doesn't seem plausible that 1.4 million people have just decided that they no longer feel like having a job, so presumably their decision to drop out reflects labor market weakness. (The explanation is not demographic -- the over 55 crew is working more than ever, the biggest falloff is for people between ages 35-44).

Ben Bernanke made exactly this point in a speech at the American Economic Association convention in 2004. In that speech he was justifying the Fed's continuation of its low interest rate policy in spite of a relatively low unemployment rate. Bernanke commented:

"It appears that workers who have lost their jobs in the past couple of years have been more likely to withdraw from the labor force (rather than report themselves as unemployed) than were job losers in previous recessions. Indeed, the labor force participation rate fell sharply between 2000 and 2003, from a little over 67 percent to about 66-1/4 percent. Similarly, the ratio of employment to the working-age population, a statistic that reflects both those who become unemployed and those who leave the labor force, has fallen significantly, by 2.8 percentage points between its peak in April 2000 and its trough this past September. The tendency of recent job losers to leave the labor force likely masks some of the effects of job cuts on the unemployment rate, so that the current measured level of unemployment may understate the extent of job loss or the difficulty of finding new work."

I was glad to see the vice-chair of the Fed focus on what I had considered to often be a better measure of labor market slack than the unemployment rate. Unfortunately, his comments seem to have been forgotten by those covering the employment data.

--Dean Baker

The NYT tells us that Japan is struggling to meet the cost of its aging prison population. While 4.6 percent of the prison population in the United States is over age 55, 12.3 percent of Japan's prison population is over age 60.

Before getting too concerned about how Japan can afford this burden, consider the fact that the incarceration rate in the United States is approximately 12 times as high as in Japan. This means that if the share of elderly prisoners is 4 times as great in Japan as in the United States, then the number of older prisoners relative to the population is about one-third as high in Japan as in the United States. It would have been useful to include this information in the article.

--Dean Baker

A Morning Edition segment today contrasted commercials on Social Security aired by Hillary Clinton and Barack Obama. The segment left listeners with the impression that the next president would have to "reform" the program. Of course this is not true. The Congressional Budget Office projects that the program will be fully solvent until 2046 with no changes whatsoever. This is almost thirty years after the latest date that the next president leaves office.

Unsolicited advice for presidential candidates of either party: cut the budget for NPR and PBS and divert the money to Social Security. Of course the amount of money involved is too trivial to have any real impact on the finances of Social Security, but if we stop the public funding of unfounded fearmongering on Social Security, it could increase public confidence in the program.

--Dean Baker

Just as it took the Fed and most economists an incredibly long time to discover the problems in the subprime mortgage market, it is taking them an incredibly long time to realize that the problems are not restricted to the subprime market.

News stories continue to assert that the financial markets are worried about further write-downs of subprime debt. While lenders will take the biggest percentage hit on subprime mortgages (and Alt-A mortgages, which may be of lower quality), the absolute value of their losses may end up being considerably larger on prime mortgages.

As BTP has pointed out hundreds of times, the underlying problem is falling house prices. Nationwide house prices are now falling at more than a 4 percent annual rate, with many cities experiencing double-digit declines. This means that many recent homebuyers now have negative equity, they owe more than their home is worth. Under such circumstances, many homeowners, including many with prime mortgages, will end up defaulting on their mortgages.

This is why the financial markets are rightfully getting very worried.

--Dean Baker

Paul Krugman takes Republican presidential candidate Rudy Giuliani to task for making up numbers about survival rates for prostate cancer in England. Giuliani (who has prostate cancer) has repeatedly contrasted the 82 percent five year survival rate for the United States with a 44 percent rate for England. He then uses this gap in survival rates as an argument against the "socialized health care" advocated by Senator Clinton and other Democrats.

Of course none of the Democratic presidential candidates are advocating socialized health care, but I suppose Giuliani can be allowed liberal use of a word that he obviously views as pejorative. More importantly, the 44 percent survival rate is simply an invention of a right-wing think tank. The actual number for England is 74.4 percent, with most of the remaining difference likely being due to early survival bias. (Suppose everyone with cancer at a certain stage lives six years regardless of whether they are in the United States or England. If we test people more frequently in the U.S. than in England, we will find the cancer at an earlier phase on average in the U.S. Therefore it will be more likely that people in the United States will survive for five years after their cancer is detected.)

As Krugman points out, the fact that Giuliani is continually repeating a claim that he should know is not true, about the most important domestic issue in the campaign, should be a prominent feature of campaign reporting. It is difficult to see why this is not a more important issue by a factor of about hundred than items like the Edwards' haircut. It will be interesting to see if reporters begin to draw attention to the issue. It will perhaps be even more interesting to see how long Giuliani continues to repeat this lie.

--Dean Baker

Articles on the wage costs of automakers routinely reported that autoworkers were paid in the neighborhoods of $75 an hour. This figure was obtained by averaging the cost of contributions for retiree' benefits over the hours worked by the current workforce. As BTP frequently pointed out, this figure seriously misrepresents workers' compensation, since the payments for retirees are independent of the size of the current workforce and are not received by the current workforce.

This point is worth mentioning now because the contracts signed by the UAW with GM and Chrysler removes retiree health benefits from the company's books with Voluntary Employee Benefit Agreements. This means that workers compensation only covers their current pay. If we looked at direct compensation for current workers, this would likely be in the range of $40 an hour. It seems that someone should be reporting that the auto companies have reduced their labor costs from $75 an hour to $40 an hour.

--Dean Baker

Two days ago, BTP praised the Post for printing a column by Robert Ball arguing that Social Security is essentially sound. Some folks may have wrongly thought I was endorsing all of Ball’s arguments, in particular his argument for investing a portion of the Social Security trust fund in the stock market.

While I am not necessarily opposed to investing the trust fund in the stock market it is important to talk about the costs and benefits honestly. I will leave off discussion of the costs for another day, but we should be clear that any honest accounting shows the benefits to be very minor.

As I demonstrated with my “No Economist Left Behind Test” a couple of years ago, the privatizers were making up numbers when they claimed they could get 7 percent real returns by investing money in private accounts in the stock market. The stock returns that are consistent with the trustees (or CBO’s) projections of GDP growth are approximately 5.0 percent a year.

If you contrast the 5.0 percent real return that you can expect from investing the trust fund in the stock market, with the 3.0 percent return projected for the government bonds currently held, the difference ends up being relatively small. Since we are already past the peak surplus years for the trust fund and heading downward, the amount that is available to invest is also projected to dwindle rapidly through time.

Using the trustees numbers, the gain from investing every projected dollar of tax surplus in the stock market would be equal to approximately 0.09 percent of taxable payroll, less than 5 percent of the projected shortfall. This is arguably still a policy worth pursuing, but the benefits to the program are very modest at best.

--Dean Baker