Greg Mankiw must know better than he indicates in his analysis of the debt in today's NYT. He complains that efforts to use large-scale stimulus to boost the economy may put excessive burdens on our children.

Let's work with this one for a moment. Suppose the stimulus option is spending an additional 4 percent of GDP (@$600 billion a year) for the next two years. Some of this money would go to consumption uses (e.g. health care, food stamps etc.) and some would go for investment purposes (e.g. infrastructure and energy conserving building retrofits). As a result of going the stimulus option, the economy will grow faster (or contract less) and return to high levels of employment more quickly than if we follow Mankiw's advice and decide not to spend the money in order to avoid passing on debt to our children.

Okay, where are we after two years in the stimulus versus no stimulus case? Using some very crude numbers, let's say that our spending had an average multiplier effect of 1.25. In other words, the secondary impact on the economy that results from people spending the money that they get paid to build roads or retrofit buildings adds an addition 25 percent to economic output beyond the original effect (this is a very modest assumption).

This means that our economic output will be 5 percent larger over the next two years than would otherwise be the case. Assuming that employment is roughly proportional to output, as a result of the stimulus as additional 7.5 million people will be employed over the next two years as compared to the non-stimulus scenario.

Okay, under the absurd assumption that the economy has completely recovered in 2011 in both cases (it will recover much more quickly in the stimulus case than in the no stimulus case), let's see what we have done to our kids.

In the stimulus case, we spent an amount equal to 8 percent of GDP (we'll ignore any growth in the GDP that affects the denominator in this story). However, the additional growth to the economy led to additional tax receipts. Since government revenues are approximately equal to 20 percent of output, if output expanded by 5 percent, then revenues grew by an amount equal to 1 percent of GDP. This means that if we spent an amount equal to 4 percent of GDP boosting the economy, then the debt grew by an amount equal to 3 percent of GDP each year for a total increase in the debt burden over the two years of 6 percent of GDP (an amount that is in the ballpark of the budgetary cost of the Iraq War).

While those of us alive today will all benefit from the increased output and employment due to the stimulus, what have we done to our kids? First, we should be clear that we gave them a more productive economy. Suppose that just one-quarter of the stimulus (1 percent of GDP) goes to useful investment projects such as roads that are actually needed or retrofits that reduce energy consumption in future years. If we assume that the payback on this investment is 10 percent a year (a standard assumption), then this public investment will have permanently increased output by an amount equal to 0.2 percent of GDP (10 percent of 2 percent) or approximately $30 billion a year.

This isn't the only effect. The additional output is likely to increase private investment -- companies are far more likely to expand and get new equipment when they see demand than when the economy is in a severe slump. If we assume that the additional private investment is equal to 10 percent of the GDP growth created by the stimulus, then investment will have increased by an amount equal to 1 percent of GDP (10 percent of 10 percent) over the two year period. Again, assuming the return on this investment averages 10 percent, this will have permanently boosted our annual output by an additional 0.1 percent, or another $15 billion a year. This brings the total growth dividend from the stimulus to $45 billion or 0.3 percent of GDP.

A full account of the growth benefits would also add in the gains from increased education. It is likely that more people will be able to attend college or receive other post-secondary education either as a direct result of education support in a stimulus package or as indirect result of families with jobs being better able to support the education of their children. Additional education would also be expected to increase economic output, but we'll ignore any growth dividend for the moment and see what we've done to out kids by spending so much money on this stimulus package.

Okay, we have increased our debt by an amount equal to 6 percent of GDP. Let's assume that the real interest rate on government debt is equal to 3 percent, an interest rate far higher than we have seen in recent years. This means that the additional debt will have increased the tax burden on our kids by an amount equal to 0.18 percent of GDP (3 percent of 6 percent), or approximately $27 billion a year at current output levels.

However, the growth dividend from the stimulus will cut this burden in half. Since GDP will be 0.3 percent higher as a result of the stimulus, the government will take in an additional amount of tax revenue equal to 0.06 percent of GDP each year (20 percent of 0.3 percent), which leaves a net interest burden from the stimulus of 0.12 percent of GDP or approximately $18 billion a year.

So, if we are evil to our kids and use deficit spending to boost the economy, they will be forced to pay an additional tax burden in perpetuity equal to 0.12 percent of GDP. But wait, when we are all dead (Mankiw's scenario) who will be collecting this interest? That's right, our kids will be collecting the interest. (We're ignoring foreigners, since foreign ownership of government debt and other U.S. assets depends on the trade deficit, which in turn is primarily the result of the over-valued dollar, which has little direct relationship to the budget deficit.)

So, we will be taxing our children, some of whom own the debt and some of whom don't, to pay interest to those of our children who do own the debt. This can make our kids worse off insofar as taxes lead to economic distortions, but the transfer itself is entirely among our kids -- it doesn't go to us, we're all dead.

So, in the stimulus story, we have handed our kids a more productive economy than in the no stimulus story. We also may have created an economy in which tax distortions are somewhat larger (although the plunge in stock values means that after-tax returns are likely to be far higher in the future even with higher tax rates, than they were in the pre-crash years), but any plausible measure of the distortions resulting from the additional tax burden will be dwarfed by the addition to GDP resulting from the stimulus. (If the tax distortions are equal to 25 percent of the tax collections, then they will be equal 0.03 percent of GDP [25 percent of 0.12 percent]. The stimulus permanently raised output by 0.3 percent.)

In short, if we think about our kids, we should do the opposite of what Mankiw argued. We should support a big stimulus package that is focused on investments for the future. This is essential for sustaining the economy now and it will help our kids for decades to come.

--Dean Baker

The proponents of recent trade deals are protectionists. They just supported giving huge subsidies to the U.S. financial industry in the form of trillions of dollars of loans at below market interest rates. Of course these folks also support using trade deals to increase protection for the U.S. pharmaceutical, entertainment and software industries by increasing the strength of patent and copyright protection.

In short, these folks are not "free traders," although the adjective "free" undoubtedly helps them sell their trade agenda. It is understandable that these folks would call their deals "free trade" pacts to make them more palatable to voters, but why does an ostensibly impartial newspaper like the Wall Street Journal pick up their sales pitch?

--Dean Baker

Okay, this one requires an incredibly big ARGHHHHHHHHHHHHHHHHHHHHHHH!

In a discussion of plans for an internationally coordinated fiscal stimulus the Post told readers that "while China and Japan enjoy a surplus of reserves, spending increases will drive the United States, Britain and many other European countries deeper into debt."

What on earth is this supposed to mean? Japan has the largest government debt relative to the size of its economy of any major industrialized economy. The article is obviously referring to its trade and international asset position. Japan is a huge net international creditor since it has been running large trade surpluses for decades.

While the United States, Britain and some other European countries are now running trade deficits (most rich countries other than the United States are still international creditors), trade deficits are not directly affected by government borrowing. While the U.S. trade deficit will be larger, other things equal, if the U.S. economy grows more rapidly (we will purchase more imports), if other economies also grow more rapidly as a result of coordinated stimulus (which increases demand for U.S. exports), then the U.S. trade deficit may not be increased by this stimulus plan.

The primary cause of the trade deficit is the over-valued dollar. The Post has almost never made this point to readers and quite frequently makes incorrect assertions like the one in this article.

--Dean Baker

President Bush said that he wants to "reduce American dependence on imports to meet the continuing demand for oil and gas," but does that mean this is the actual reason that he has opened up more land for drilling, as the Post tells us today? If we open more land for drilling, in addition to the environmental risks, we will more rapidly deplete U.S. reserves of oil and gas.

If the Bush administration is really concerned about protecting the country's energy security, it would probably make more sense to conserve the oil and gas inside the country, rather than drill it out at a time when foreign supplies are readily available. There is no obvious gain to the country by having a modest reduction in imports during the current period (except for protectionists).

An alternative explanation is that President Bush wants to help out oil and gas companies who have contributed generously to his campaigns as well as the campaigns of other Republicans. That explanation may not be right, but it is at least as plausible as the explanation that the Post gave readers.

--Dean Baker

Why do reporters keep telling us that the economy's problem is a credit crisis? Yes, consumers and businesses can't get credit as easily as they could a year ago. There is a really good reason for tighter credit.

Tens of millions of homeowners who had substantial equity in their homes two years ago have little or nothing today. Businesses are facing the worst downturn since the Great Depression.

This matters for credit decisions. A homeowner with equity in her home is very unlikely to default on a car loan or credit card debt. They will draw on this equity rather than lose their car and/or have a default placed on their credit record. On the other hand, a homeowner who has no equity is a serious default risk.

In the case of businesses, their creditworthiness depends on their future profits. Profit prospects look much worse in November 2008 than they did in November 2007 (of course, to clear-eyed analysts, they didn't look too good a year ago either).

While many banks are obviously at the brink, consumers and businesses would be facing a much harder time getting credit right now even if the financial system were rock solid. The problem with the economy is the loss of close to $6 trillion in housing wealth and an even larger amount of stock wealth.

Economists, economic policy makers and economic reporters virtually all missed the housing bubble on the way up. If they still can't notice its impact as the collapse of the bubble throws into the worst recession in the post-war era, then they are in the wrong profession.

--Dean Baker

The Washington Post described the Employee Free Choice Act (EFCA) as a"law offering a card checkoff as an alternative to secret-ballot elections for union representation." Actually, workers can already organize through card check rather an election supervised by the National Labor Relations Board.

However, at present the manner through which the certification occurs is left in the hands of the employer. The ECFA would let the workers decide which route they wanted to follow.

--Dean Baker

In the case of the Washington Post, it's something like 100,000.

--Dean Baker

The Washington Post argues that Larry Summers is just the person to fix Fannie and Freddie because he has such a clear understanding of what went wrong. This one should bring cries of horror from everyone.

Contrary to what the Post asserts (attributing the same view to Larry Summers), Fannie and Freddie did not go down because they were quasi public institutions protected from effective regulation. They went down because, like their counterparts in fully private institutions, their management was either too dumb to recognize the housing bubble, or sufficiently greedy that they were prepared to let companies go bankrupt so that they could earn high fees and bonuses until the bubble burst (with million of homeowners being nailed in the fallout).

Fannie and Freddie's private sector competition, Bear Stearns, Merrill Lynch, Citigroup etc. did no better in avoiding junk mortgages than Fannie and Freddie. In fact, they dove in earlier and farther, creating a market environment in which Fannie and Freddie had jump into the muck to preserve their market share.

Fannie and Freddie were big boys, and all they do is buy mortgages, so there is absolutely no excuse for their incredibly bad judgment. But arguing that they had some special protection because of their quasi public status -- as though they would not have delved deep into the junk if they had been completely private -- is one of the most ridiculous claims ever to appear in a Washington Post editorial.

--Dean Baker

The NYT reported on a study showing that cheap diuretics were more effective than expensive patent protected drugs in combating hypertension. The article reports on the drug industry's efforts to limit the impact of the study.

--Dean Baker

The Post told readers that "this downturn is the result of a profound financial crisis that has caused lending to dry up." This is really incredible. The country has lost more than $5 trillion in housing wealth because of the collapse of a housing bubble and the Post still isn't talking about the bubble.

The Post's most frequently cited expert on the housing market during the boom years was David Lereah, the chief economist for the National Association of Realtors and the author of the 2005 best seller, Why the Housing Boom Will Not Bust and How You Can Profit From It. As a result, Post readers would have seen almost no warnings about the bubble and were not surprised when the housing market began to plunge in 2006.

In addition to leading to a fall in residential construction of more than 50 percent (3 percent of GDP), the loss of $5 trillion in housing wealth would be expected to lead to a fall in annual consumption of between $250 billion and $350 billion (1.7-2.3 percent of GDP). This is the primary cause of the downturn. It is remarkable that the Post still hasn't noticed either the bubble or the impact that its collapse has had on the economy.

--Dean Baker

Larry Summers is a very good economist who has written many important articles, but a fearless truth teller? That's what David Leonhardt calls him in the NYT today.

I have yet to hear Summers advocate any policies that would cause serious pain to Wall Street.There are few more blatant problems in the U.S. economy than its bloated financial sector. Taking on the financial industry is something that would take real courage, given the industry's influence in the Democratic party.The fearless truth teller might want to examine a very good piece written twenty year ago that outlined the case for a securities transaction tax. Yes, that article was written by an economist named Larry Summers.

Leonhardt also finds it very impressive that Summers recognized that the economy was facing a serious downturn last December. I suppose that puts him ahead of Senator McCain telling us that the economy's fundamentals are sound back in September, but recognizing the imbalances created by the housing bubble in December of 2007 hardly makes one a visionary.

--Dean Baker

The NYT tells us that President Obama's plans to increase taxes on the wealthy are not part of his stimulus package. It would be very surprising if they were since tax increases, even on wealthy people, are not stimulus. His plan to withdraw from Iraq is probably not part of his stimulus package either.

--Dean Baker

This editorial makes the points well (although the East Asian bailout belongs on the minus list -- it leads to the over-valued dollar and huge trade imbalances that are at the root of many of our problems).

--Dean Baker

The Washington Post, which is obsessed with cutting the pay of autoworkers earning $57,000 a year, did not even bother to tell readers what pay cuts Robert Rubin and other top executives at Citibank will receive as a result of conditions in its latest government bailout.

--Dean Baker

In its discussion of President-elect Obama's proposed stimulus package the Post told readers that "the annual federal deficit is already spiraling towards $1 trillion."

It's not clear where this trillion dollar figure came from. It is much higher than the most recent CBO estimate, which is $438 billion. The Post may be including the money for the bank bailout, however this would be misleading. The government is getting assets for this money and will at most lose a fraction of the $700 billion appropriated.

The article also asserts that this spending may make it more difficult for the government to pay for Medicare and other programs in future years. This is not clear. If the stimulus boosts the economy it will lead to more tax revenue in future years. More importantly if it makes the economy stronger and prevents a prolonged downturn, it will make it much easier to raise the revenue for Medicare and other obligations in future years.

--Dean Baker

USA Today reported that 30-day delinquencies on car loans are up by 8.1 percent from year ago levels. It notes that some people may have bought a more expensive car than they can afford. It also notes the rise in unemployment.

It doesn't mention the housing crash. The loss of home equity will be a major factor in rising default rates on all forms of consumer credit. In prior years people who fell behind on debt payments because of job loss, health problems or other issues would have been able to withdraw equity from their home to pay their debts. This is no longer an option for tens of millions of homeowners who now have little or no equity.

--Dean Baker

In 2007 Countrywide changed its status to become a thrift institution so that it could be regulated by the Office of Thrift Supervision rather than the Office of the Comptroller of the Currency. They did this to get less regulatory scrutiny of their lending practices. The story isn't new, but it's still good that the Post took the time to tell it.

--Dean Baker

The Post is getting really scared, but not enough to think clearly. The obsession with deflation is positively bizarre. Just imagine we had a situation like Japan did a few years back where prices were dropping at the rate of almost 1 percent a year. Who would buy a car today, if they knew that they could get it for almost 0.1 percent less next month?

What is most disturbing about this piece is the unmitigated praise for the selection of Timothy Geithner. Geithner may do a fine job at Treasury, and we should all hope that he does, but let's not forget that he was in the middle of the policy team that gave us this economic mess. He was a top official in the design of the East Asian bailout that set us up on the over-valued dollar, bubble-driven growth course. He also thought that one-sided financial deregulation was just fine.

The Post thinks its important to evaluate school teachers by their performance. Why is it so reluctant to use performance as a criterion to evaluate economic policymakers?

Finally, in this moment of fear, I can't resist reminding BTP readers of one of the great Post editorials of the past. Last January, the Post warned readers against fiscal stimulus:

"There is not yet any proof of a recession, defined as two straight quarters of negative growth; Mr. Bernanke said yesterday that the economy probably grew "at a moderate pace" in the past three months. Nor is there any consensus that a recession, if one comes, will be severe; Goldman Sachs thinks it's likely to be short and mild."

--Dean Baker

Good piece in the NYT.

--Dean Baker

The subhead of a Washington Post article on France's policies to help families with young children told readers that "Vast Welfare Support Network Is an Enduring Government Feature, Even During Financial Downturns." Okay, so this means that France would not be cutting back spending that provides an important source of support for families "even during financial downturns."

Why would anyone expect that France would cut back this spending precisely at the time when both the families and the economies need it most? This would be unbelievably foolish policy. If these programs are not desirable, then the time to cut them would be when the economy is strong, not when the economy is weak.

The article does provide a basis for the subhead: "in seeking to reduce government expenditures as the economy grinds to a no-growth halt, he [France's President Nicolas Sarkozy] has not broached any cutbacks in the network of child-rearing subsidies, which would be even more politically sensitive." It would be truly astounding if Mr. Sarkozy is actually cutting France's budget in response to slowing growth. Just about every country is using increased spending as a way to boost growth. If the article's claim is true, then the Post and every other paper should be running front page articles reporting that a major country is pursuing incredibly foolish policies that will damage both its own economy and the world economy.

--Dean Baker

Both the Post and Times told readers that President Obama picked an economic team committed to "free trade." This is not true.

The top members of President Obama's team, and certainly his Treasury Secretary designate Timothy Geithner, supported the use of federal funds to bail out the banks. Giving $350 billion in loans at below market rates (coupled with government guarantees for deposits) was a massive subsidy to U.S. banks that give them an enormous advantage in international competition. Such subsidies are a clear form of protectionism.

While these officials may want to call themselves "free traders," it is not an accurate description of their approach to economic policy and the media should not use it except in a quotation.

--Dean Baker

The Washington Post warned us of the evils of deflation in a front page story. The Post, whose main expert on house prices during the boom years was David Lereah, the chief economist for the National Association of Realtors, told readers that:

"'Everyone is having these huge sales, and consumers know if they wait longer, the chances of them not having a good selection is fairly small and the chances are that the prices will be lower,' said Charles McMillion, an economist who runs MBG Information Services. 'So why buy today? This is exactly why economists are always scared to death of deflation.'"

Okay, so let's parse this one. If prices are falling, why should we buy items today when we can get them for a lower price next month? That's a real good question.

Has anyone bought a computer in the last two decades? I have run across a few people who have. According to the Commerce Department, computer prices have been falling at the rate of more than 30 percent a year over most of the last two decades. If people felt that it made more sense to wait for prices to drop, we should expect the computer market to have been very weak. That isn't quite consistent with the explosion in computer sales over this period.

But, returning to the other items that might fall in price, if we turn to Japan, which supposedly suffered from deflation for a decade following the collapse of its bubbles, the rate of deflation was typically less than 1 percent a year. (Prices did rise in some years during this decade.)

This means that for a typical item in a typical year, the price would be falling at a rate of less than 0.1 percent a month. That means the pair of pants that i could buy today for $30 will cost just $29.97 cents next month. If I put off buying for two months, then I would only have to pay $29.94. You could easily understand how this would discourage consumption. Of course, the actual rate of deflation was slower in most years.

Now, there is a real sense in which falling prices do pose a problem, but that it primarily with houses, which do not even appear in the inflation indexes. Falling house prices reduce the wealth of homeowners and can put those with a mortgage underwater. This is a huge problem, but it is not the deflation story highlighted by the Post.

It is true that economies that are experiencing economic weakness are more likely to see deflation than other economies. But this confuses cause and effect. The deflation is a symptom, not a cause.

There is one final point worth noting about this issue. The "deflation" highlighted in this article is primarily the result of a plunge in commodity prices. This plunge reversed a sharp uptick in the price of oil and other commodities over the last two years. It is not clear that commodity prices will continue to fall. In fact, it is entirely possible that prices will quickly reverse course and rise sharply from current lows. This would quickly eliminate the Post's concerns about deflation.

--Dean Baker

The NYT reports that fewer elderly people are moving into assisted living facilities even when their health would make it desirable, because they are having trouble selling their homes. Add this one to the "who could have known?" list.

This is yet one more entirely predictable consequence of Alan Greenspan's "bubbles are cute" policy. Of course some hard questions should be asked of the experts cited in this article, like "how could you not have seen this coming?"

In fact, even if the housing market were not in a bubble it would be desirable to promote more rental options for seniors for precisely this reason. Housing is always an illiquid asset and for most people it is their major source of wealth. If a person's health were to suddenly deteriorate and require them to move into an assisted living facility, they could be forced to sell their home at a large loss.

Sound government policy would promote rental options so that seniors would not feel the need to buy or stay in the homes they already own in order to have good secure housing. It would be helpful if the media could find housing "experts" who understood such basic points.

--Dean Baker

The WSJ performs a valuable service by finding the 25 people who got paid the most to tank their company's stock. As they say, it's good work if you can get it.

--Dean Baker

I've been busy lately, so I have let several of those references to the famous $70 an hour pay received by UAW members pass unchallenged. Fortunately Felix Salmon is on the job.

Any reporter who repeats this number should get an immediate 10 percent pay cut. It is simply untrue and it is hugely irresponsible to pass along such falsehoods at a time when the survival of the industry is being debated. It is a very different story if the total compensation of autoworkers is $40-$45 an hour, as opposed to $70 an hour.

--Dean Baker

In its top of the hour news segment on Morning Edition NPR presented an analyst from the BBC who said that the Asian stock markets fell because investors are worried that the U.S. economy might slip into a recession. The United States has been seeing very bad economic data for the last two months. If there were any investors who didn't already realize that the U.S. economy is in a recession, then they should have not be managing investments.

--Dean Baker

The media mostly reported that industrial production rose in October, partially reversing the sharp drop in September. This one really missed the boat.

First, September's data was depressed by storms at the beginning of the month, as well as the strike at Boeing. We should have expected some bounceback. What is striking is how little we got.

The report showed a 1.3 percent rise. But this is deceptive. The September data was revised downward. If we compare the October index to the unrevised data, industrial production is exactly where we thought it was in September.

But wait, it gets worse. If we just focus on manufacturing, which is less prone to erratic fluctuations than the mining and utility components, we see that October's level is 0.9 percent below the unrevised level from September. It is down 3.4 percent from the unrevised level from August and 4.3 percent from the July level. This is a serious downturn.

--Dean Baker

I don't mean to picky, but it would be reasonable for USA Today to remind readers that the forecasters whose views it presents in the article, "Economic forecasters' survey says recession to last 14 months," all somehow managed to overlook the massive housing bubble. They were therefore caught by surprise when it collapsed, pushing the economy into the most severe downturn since World War II. Readers may have found this background helpful in assessing the predictions from this group of economists.

--Dean Baker

Let's imagine that the economy in Venezuela gets really bad in the next few years. Will the Post write about how Hugo Chavez had to cope with enormous economic turmoil?

That's unlikely. The Post would most likely be running articles that tell readers how Chavez's policies led to an economic disaster.

But, a different standard is applied to our economic chieftains who pursue policies that the Post endorses. The first part of a two-part profile of Treasury Secretary Henry Paulson's actions in the crisis is headlined "A Conversion in 'This Storm.'" The headline implies that the economic crisis is something that came out of the blue as opposed to being an entirely predictable result of the economic policies pursued by Paulson and his predecessors.

The point is extremely simple. There was a huge housing bubble that should have been visible to any competent economic analyst. The bubble was fueled by an enormous chain of highly leveraged finance. (As head of Goldman Sachs, Mr. Paulson personally made hundreds of millions of dollars from this bubble.)

It was entirely predictable that the housing bubble would burst and that its collapse would have a huge impact on the financial system and the economy as a whole. There is zero excuse for Paulson being caught by surprise by a "storm" that he helped create. The Post should not be in the business of covering up for Paulson's massive failure.

--Dean Baker

The NYT gave Treasury Secretary Henry Paulson the opportunity to defend his handling of the financial crisis. The piece justifies his change in course where he subsequently rejected the original TARP plan that he urged Congress to pass.

While this change of course was striking, it is even more striking to see Paulson talk about the crisis like a hurricane that just came out of the sky. The piece begins:

"We are going through a financial crisis more severe and unpredictable than any in our lifetimes. We have seen the failures, or the equivalent of failures, of Bear Stearns, IndyMac, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae, Freddie Mac and the American International Group. Each of these failures would be tremendously consequential in its own right. But we faced them in succession, as our financial system seized up and severely damaged the economy."

Yes, it was a really severe financial crisis, but it was also an entirely predictable financial crisis. A competent Treasury Secretary would not have been caught by surprise by this crisis. In fact, a competent Treasury Secretary would have been attacking the housing bubble and the over-leveraged financial system that laid the basis for this crisis from the day that he/she took office.

Instead, Secretary Paulson insisted that everything was just fine, refusing to consider that there were any serious problems in the housing market. Even when things began to unravel in 2007, he still insisted that everything was fine, minimizing the severity of the crisis at every point. Of course it is probably worth mentioning that Mr. Paulson personally made hundreds of millions of dollars at Goldman Sachs from the practices that further inflated the bubble.

In short, we have one of the chief arsonists telling us about his heroic efforts to combat the huge fire he faced. Somehow, I don't think many people will be applauding Mr. Paulson.

--Dean Baker

The New York Times told readers that GM's autoworkers are paid $70 an hour (including health care and pension). This is not true. The base pay is about $28 an hour. If health care cost per worker average $12,000 per year, that adds in another $6 an hour. If the pension payment takes up 25 percent of base pay (an extremely high pension), that gets you another $7 an hour, bringing the total to $41 an hour. That's decent pay, but still a long way from $70 an hour.

How does the NYT get from $41 to $70? Well the trick is to add in GM's legacy costs, the pension and health care costs for retired workers. These legacy costs are a serious expense for GM, but this is not money being paid to current workers. The person on the line in 2008 is not benefiting from these legacy costs.

It would be helpful if the NYT could get its numbers straight. It certainly can affect public support for a bailout if they are led to believe that autoworkers are paid much more than is actually the case.

--Dean Baker

Market Place radio presented a comment by University of Maryland economist Peter Morici on the bailout of the Detroit auto makers. Mr. Morici said that the auto companies will face bankruptcy, the only question is whether it is now or three years from now.

While this is presumably meant as an argument against the bailout, it misses the main argument as to why a bailout is needed. The economies of Michigan and Ohio are still heavily dependent on the Big Three. If these companies go under at the moment, it will mean that a whole group of suppliers suddenly incur large losses due to the money owed to them by the Big Three, which they will not receive, as well as their lost orders. This will lead to a large second wave of bankruptcies as many suppliers go under. In addition, state and local governments will see plunging tax revenue.

While this process will be extremely painful for the region at any time, it will be devastating in the middle of the current recession. The federal government would have to step in with large amounts of money so that governments in the region can continue to provide essential services and to support the unemployed workers. In two or three years we can reasonably hope that the economies of the region have rebounded enough so that they could withstand a bankruptcy, if it occurred.

--Dean Baker

The NYT's attachment to the idea of a house price support program is truly bizarre. Somehow, they seem to have not noticed the $8 trillion housing bubble. While it is true that the deflation of the bubble is at the core of the country's current economic problems, how does the NYT think that the government can keep house prices at bubble inflated levels.

At present, there is a massive oversupply of housing which shows up in the inventories of unsold new and existing homes, as well as record vacancy rates. How does the NYT think that this oversupply can be reduced unless prices fall? Suppose the government subsidizes the purchase of homes to make the inventory affordable at current prices. This can temporarily reduce the backlog, albeit at a considerable expense to the government.

But, if prices stay at current levels, then construction will resume at excessive levels and we will again generate an excess inventory of homes. This would require even larger subsidies in future years, unless the NYT wants to have restrictions on housing construction to limit supply, like restrictions on the production of wheat or corn.

The government could maintain such restrictions on supply, but this sort of unaffordable housing policy would lead to large economic distortions. (Builders might hide housing as office buildings, or alternatively would pay off officials to be allowed to build housing without authorization.)

If the idea is that we will just temporarily maintain bubble-inflated house prices and then let fall at some future date, then we are just putting off the pain and encouraging another group of home-buyers to be suckers, paying far more than their home is worth. It is hard to see as good policy.

The NYT should read its columns trashing farm price supports. If they substitute the word "house" for "farm," they would probably have a pretty good argument as to why today's editorial is misguided, although the potential damage in this case is likely to be a couple orders of magnitude larger.

--Dean Baker

Suppose that the U.S. government decided to lend $700 billion at below market interest rates to manufacturing firms. In addition, it offered to guarantee trillions of dollars of the borrowing by the firms in this sector. That looks like protectionism, and no doubt respectable people everywhere would be denouncing any knuckle-scraping Neanderthal who supported such measures.

So why is it not protectionism when the U.S. government lends $700 billion at below market interest rates to the financial industry and offers to guarantee trillions of dollars of the borrowing by the firms in this sector? By some bizarre twist of logic, government subsidies to the financial industry, no matter how large, don't count as protectionism, while government subsidies to other sectors are an offense to right-thinking people everywhere.

That is no doubt the way that the financial industry would like the public to see the world and apparently also the way the G-20 political leaders would like the public to view the world. It is also the perspective adopted by the Washington Post, but it is not an accurate description of reality.

Protectionist measures can slow growth and they can be very harmful to developing countries. That is especially true of the protectionist measures that the wealthy countries recently implemented for their financial industries. Unfortunately, at the G-20 meeting, there was apparently no recognition of the damage that these measures had inflicted by promoting capital flight from the developing world. There was no recognition of this fact in the media coverage either.

--Dean Baker

The NYT reported today on the political philosophy of that renowned political philosopher, George W. Bush, and how it prevented it from reaching agreement on many issues with the other leaders at the G-20 summit. According to the NYT article "it was clear that bridging ideological gaps among nations afflicted with different versions of the economic contagion would provide the new president and other world leaders with a daunting challenge."

Maybe the problem is ideology but there is an alternative explanation. The financial sector is an extremely powerful interest group in the United States. It is relatively less powerful in countries like France and Germany, where the financial industry is a smaller share of the economy and other interest groups, like unions play a more important role.
Suppose the President Bush and other U.S. politicians feel the need to respond to the demand of a key interest group that plays an important role in their election. Suppose that the leaders of other countries instead feel the need to respond to the demands of others economic actors who have been hurt by the financial sector?

I don't know if my description of the motivations of President Bush and other leaders is correct, but the NYT certainly does not know that it is wrong. It is worth noting that the people at the G-20 meeting all got there because of their success in politics, not political philosophy. It would be best if reporters refrained from imputing motives that they cannot know. News reporting should just tell us what the politicians said and did and not speculate about their thoughts.

--Dean Baker

Last week I saw a Thomas Friedman column in which he promised to stop providing his misguided judgment on important public issues. Unfortunately, I was reading a parody.

Friedman is still weighing in on major issues with his NYT column. Today he is trying explain the economic crisis. Apparently no one told Mr. Friedman about the housing crash. He thinks that people have stopped spending because of the plunging stock market even though the vast majority of families own little or no stock.

Of course most people do own their home. The loss of more than $5 trillion dollars in home equity ($70,000 per homeowner) is the main factor explaining the falloff in consumption.

Mr. Friedman's remedy to the economy's problem is to persuade people to go shopping. If he noticed the crash of the housing bubble, he would realize that people are unlikely to go shopping because they desperately need to rebuild their savings. Millions of people are approaching retirement with no pension, no saving, and no home equity. These people are not likely to go shopping despite Mr. Friedman's urging.

Friedman is also unhappy about "left-wingers" who "think we can punish Wall Street while protecting Main Street." Well actually, it is very easy for people who know economics to design ways to punish Wall Street without harming Main Street. For example, we can keep the banks afloat while limiting executive pay to $2 million and prohibiting dividend payouts to shareholders.

If Congress were just acting in the public interest, it is difficult to understand why it would pursue any other policy. The public has no interest in rewarding incredibly rich and incompetent bank executives with taxpayer dollars, nor the shareholders of these companies.

It is especially striking to see Friedman's hostility to those who want to limit the pay of Wall Street executives. These executives can earn tens of millions of dollars a year. By contrast, in past years Friedman has used his column to rail against unionized textile workers who earn $12 an hour.

--Dean Baker

Like the Bush administration, the Washington Post strongly supports a policy of selective protectionism. Their policy of selective protectionism gives the most highly educated workers, like doctors and lawyers substantial protection against competing with their lower paid counterparts in the developing world. At the same time, it tries to remove any barriers that provide similar protection to less-educated workers, like autoworkers or textile workers.

According to economic theory, the effect of this policy of selective protectionism is to redistribute income from less-educated workers to workers with college and advance degrees, a process that we have actually seen clearly over the last quarter century. Since it is hard to find political (or economic) justifications for this sort of policy of upward redistribution, it is helpful to disguise it.

Political proponents of this policy call it "free trade," concealing the one-sided nature of the opening to trade. The Post adopts the rhetoric of its political allies in two front page articles today. A neutral account would simply refer to "trade," an approach which would also meet journalistic concerns about saving space.

--Dean Baker

During the bubble years I had several debates with Freddie Mac's chief economist, Frank Nodthrift. He always assured audiences that the housing market was just fine and that nationwide house prices never fall. I always hoped that he was telling his employer something different than what he was saying in these public forums.

Apparently he wasn't and neither are his successors. The Post reports that Freddie Mac just got $13.8 billion from the government as part of its bailout. Explaining the need for the money, the article cites a comment from Freddie Mac: "After leveling off earlier this year, the company said, housing prices nationwide resumed their steep decline recently."

Ummm, no that is not true. House prices were falling very steeply early this year according to the Case-Shiller index, dropping at a rate of close to 2 percent a month. The Post should have called attention to the inaccuracy of this assertion by Freddie Mac and devoted a major article to their efforts to misrepresent the state of the housing market.

--Dean Baker

That is the only conclusion that readers can draw from an article about the October plunge in retail sales. The article notes that the falloff was one of the sharpest on record. It points to job loss and difficulties and obtaining credit as culprits.

While these were both factors, people who follow the economy would note that homeowners have lost more than $5 trillion in real housing wealth since 2006, close to $70,000 per homeowner. As a result, tens of millions of homeowners have little or no equity in their home. This reduce their consumption both because they have more difficulty obtaining credit and also because they feel more need to save.

This sort of falloff in consumption was entirely predictable outcome of the housing crash.

--Dean Baker

In an article about how AIG is making large payments to its top executives, the Washington Post included the statement from AIG spokesman Nicholas Ashooh, that "this is not taxpayers' money they are going to run away with."

It would have been helpful to tell readers that Mr. Ashooh's statement is not true. AIG has already borrowed more than $100 billion from taxpayers. The more money that it pays to its executives in various forms, the less it will have to pay back. This is the case even if it has segregated some portion of its assets for deferred compensation since it will have to replenish this pool more quickly if it spends more of it presently.

Many Post readers may wrongly believe Mr. Ashooh's claim and not realize that they are paying for AIG's generous deferred compensation packages.

--Dean Baker

The Washington Post told readers that "many economists believe the economy will continue to suffer as long as the pace of foreclosures keeps home prices from stabilizing."

Well, economists with names, who knew enough to about the housing market to recognize an $8 trillion housing bubble (okay, maybe just this one), believe that house prices will continue to fall until the bubble deflates. The government can play useful role by trying to keep prices from overshooting on the downside. It will just be throwing away taxpayer dollars if it tries to stabilize house prices at bubble-inflated levels.

It would be a big step forward if missing the housing bubble was not the main criterion to be quoted as an expert on housing in the Washington Post.

--Dean Baker

The NYT reports on how some wealthy elderly families fear tougher times with the market downturn. While it is an interesting piece, it implies that the people discussed in the article are typical retirees.

According to the Social Security Administration, two-thirds of retirees rely on Social Security for more than half of their income. Only around 10 percent of the elderly have more than $1 million in stock.

--Dean Baker

Treasury Secretary Henry Paulson announced today that he had abandoned plan for his Troubled Asset Relief Program (TARP), his plan to buy bad assets from banks and other financial institutions. This was the bailout that Mr. Paulson said was absolutely essential for the economy's survival back in September. The opponents of the TARP were widely derided in the media as ignorant economic know nothings.

Now that Mr. Paulson has himself decided that the TARP is not a good idea (for which he deserves credit), why isn't the media doing some examination of this recent history? Obviously his claims about the necessity of the TARP were not accurate, and those who repeated them were mistaken.

There were many members of Congress who stuck their necks out to oppose the TARP at the cost of derision from the media and political elites. Even Secretary Paulson now acknowledges that the rescue plan that he presented to Congress was the wrong course of action. The media has an obligation to present these facts clearly to the public.

--Dean Baker

The media should be asking this question. After all, they are trying to hide which banks are in trouble and refusing to give out information about who is borrowing from the Fed. This is exactly the behavior that the IMF and widely cited economists denounced when it was done by the East Asian countries during their financial crisis in the late 90s. Are these practices now good economics because our government is doing them?

--Dean Baker

USA Today reports the results of a new study that indicates that by providing for the widespread use of the cholesterol lowering drug Crestor, many more deaths can be prevented. The article reports that the cost is $500,000 per life saved.

This actually misrepresents the cost to society. The vast majority of this cost is not the cost of producing and distributing additional doses of Crestar. Almost all of this cost is the economic rent that the manufacturer will earn as a result of its patent monopoly. The actual cost of producing the addition drugs is probably not more than $5,000 per life saved.

While the patent system finances research into the development of new drugs, it is an extremely inefficient mechanism for supporting research. It would be helpful in an article such as this to be clear on what the real costs to society would be of more widespread use of Crestar, if the study's results prove accurate.

--Dean Baker

The NYT renewed its call for a house price support program, the equivalent of a farm price support program, except that the costs and economic distortions are far greater.

Whether or not house prices can or should be stabilized depends hugely on which market is being examined. In areas where there either was no bubble or the bubble has deflated, as is the case in large parts of the South and Midwest, it makes sense to talk about stabilizing prices. It would a foolish waste of money to try to stabilize prices in markets like San Diego and Las Vegas where the bubble is still deflating.

There is an enormous glut of unsold homes in these markets which can only be corrected by having the price drop, unless the NYT wants the government to spend hundreds of billions to buy up homes to keep them off the market. The government will also have to restrict new construction in order to keep prices at current levels.

It was a remarkable failure of the economics profession to miss the housing bubble as it grew. It is incredible that the NYT still doesn't recognize the bubble even after it has collapsed.

--Dean Baker

The Financial Times tells readers that:

"Economists have estimated the US budget deficit could more than double next year to almost $1,000bn, raising concerns about whether Mr Obama could deliver on expensive campaign promises including $150bn in investments in alternative energy over the next decade and a $60bn-$110bn plan to provide universal health insurance for Americans."

None of the economists I know raise those concerns. They are believe that the economy is facing a severe recession in which large deficits are absolutely essential to sustain demand and to keep the unemployment rate from rising too high. While there may be economists who do raise concerns that the deficit is getting too large, the Financial Times should identify economists who hold this view instead of implying that most economists believe that the deficit is too large.

--Dean Baker

The Post told readers today that Federal Reserve Board chairman Ben Bernanke "response to the financial crisis has won him plaudits from congressional Democrats who view him as pragmatic and non-ideological." That may be true, but it might also be worth mentioning that Bernanke completely missed the housing bubble. Furthermore, even after it began to burst he repeatedly downplayed its consequences.

In March of 2007, after the first shock waves from the subprime market were being felt, Bernanke assured Congress that the fallout was likely to be restricted to the subprime market. The following year, after Bear Stearns failed, he told Congress that he didn't see another Bear Stearns out there. Six months later, Lehman Brothers and AIG failed. If Bernanke had been quicker to recognize the severity of the problems created by the collapse of the housing bubble, he may have been able to prevent much of the current financial chaos.

--Dean Baker

While the country was distracted by the $700 billion bank bailout, Treasury secretary Henry Paulson made a change to the tax code which removed the limits on the losses that companies that take over banks can subsequently deduct from their taxes. This change meant, for example, that Wells Fargo could deduct the $74 billion in losses that Wachovia had already incurred when it took over the bank. This would provide Wells Fargo with approximately $25 billion in almost immediate tax savings. The law previously allowed Wells Fargo to deduct just $1 billion a year of these losses for a period of 20 years.

The Post article cites various experts who put the cost of this change in the tax code as between $105 and $140 billion. It would have been useful if the Post had placed this figure in some context. Presumably it refers to the tax savings in the near future on takeovers, based on losses already incurred by banks. If the revenue loses are realized over the next three years, then it will be equal to between 2.6 percent and 3.5 percent of projected revenue over this period.

The article includes several statements from people (some identified, some not) asserting that Congress is reluctant to question Paulson's ruling on this issue because of the harm that such questioning could do to financial markets. While this is possible, it is also possible that their reluctance to question the tax break stems primarily from their desire to appease the banking industry, which is a very powerful interest group. Members of Congress are sometimes known to act more out of concern for important interest groups than their concern for the public good.

The article is actually somewhat unfair to the Post when it asserts that the change in the tax code attracted little attention at the time it was put in place. The Post actually ran a page 3 article on the change at the time it went into effect.

--Dean Baker

The Post tells us how the people who designed the bank bailout were committed to the free market. Interestingly, the key decisions that they made gave the banks much better terms than they could have received from the free market.

Since the post doesn't really know the inner most thoughts of the bailout designers, let's try an alternative hypothesis. They wanted to help the banks as much as possible with public money, yet they wanted to rationalize this give away of taxpayer dollars as somehow consistent with the free market. Their alleged belief in the free market is simply a cover for efforts to aid the rich.

I don't know if this alternative hypothesis is true, but the Post certainly does not know that the story it presented to readers as fact is true. How about we just get the news media to skip the speculation about people's ideologies and just report on where the money went.

--Dean Baker

I don't like to get personal, but their hatred of autoworkers because they earn $57,000 a year is a bit hard to take.

--Dean Baker

No one will lend me $1 billion, that's how bad the credit crunch has gotten. There are probably reporters at major news outlets who would print that.

The news media almost completely missed the housing bubble. They relied almost entirely on sources who either had an interest in not calling or attention to an $8 trillion housing bubble or somehow were unable to see it. As a result they did not warn the public that their house prices were likely to plunge in future years.

Having dismally failed in their jobs to inform the public, reporters are still relying almost exclusively on sources that completely missed the housing bubble. As a result, they are still badly misinforming the public, first and foremost by attributing the economic downturn to a credit crunch.

This is truly incredible. Homeowners have lost more than $5 trillion in housing wealth. There is a very well established wealth effect whereby $1 of housing wealth is estimated as leading to 5 to 6 cents of annual consumption. This implies that the loss of wealth to date would cause consumption to fall by $250 billion to $300 billion annually (1.7 percent to 2.0 percent of GDP). If you add in the loss of around $6 trillion in stock wealth, with an estimated wealth effect of 3-4 cents on the dollar, then you get an additional decline of $180 billion to $240 billion in annual consumption (1.2 percent to 1.6 percent of GDP).

These are huge falls in consumption that would lead to a very serious recession, like the one we are seeing. This would be predicted even if all our banks were fully solvent and in top flight financial shape. Even the soundest bank does not make loans to borrowers who it does not think can pay the loans back (except during times of irrational exuberance).

Obviously the problems of the banking system make the situation worse, but the real cause of the downturn is the collapse of the housing bubble, and the reporters who talk about the economy should know this. (Of course, they should have seen the housing bubble too.)

--Dean Baker

I have nothing against Larry Summers, but I think there is some sense to having people evaluated based on their job performance. Larry Summers thought the stock bubble was cool, ignored the housing bubble, was in favor of the over-valued dollar and gave warmly supported financial deregulation.

This track record arguably make Summers one of the main villains in the current economic crisis. So why does the LA Times tell us that we need his wisdom to fix the situation?

I have no doubt that Summers is very bright, but his brilliance did not prevent him from supporting the policies that got us into this mess. Why do we think that his brilliance will lead him to choose the best policies to get us out of it?

--Dean Baker

Contrary to what the NYT says, the U.S. does not need China to buy its debt. The Interest rate on 10-year treasury bonds is under 4.0 percent. Suppose that China stopped buying bonds altogether, maybe it would rise by 0.2-0.3 percentage points. So what? Does the NYT have an economic model that shows that this sort of increase in interest rates would be disastrous to the U.S. economy? If so, they should share that model with its readers. If not, the paper should stop making assertions for which it has no evidence.

USA Today also gets it wrong.

--Dean Baker

In its top of the half hour news segment NPR wrongly told listeners that the Institute of Supply Management's (ISM) October manufacturing index showed manufacturing at its lowest level in 26 years. That's not true. The ISM index shows rates of change, not levels. In other words, it is comparing October with September, not October with all past times.

The ISM index actually showed that the rate of decline in manufacturing in October was the most rapid in 26 years, which is cause for serious concern. However, the level of output is still well above its level of 1982.

--Dean Baker

That is what readers would conclude from an article that told readers in the first sentence that "The U.S. government is on course for an unprecedented borrowing binge in coming months that could constrain President-elect Barack Obama's economic agenda."

Those who read beyond the first sentence would learn that, "few economists believe the Treasury will be constrained in the next year in its ability to manage its rising borrowing needs or in advancing another fiscal stimulus program." The real problem, according to the experts cited in the article, stems from long-term projections of rising costs, which are driven primarily by projections of rising health care costs. The experts quoted in the article do not identify the immediate costs associated with the bank bailout bill or a stimulus package as being a major problem, as the article implies.

[NPR doesn't either -- their Morning Edition segment repeated this same sort of nonsense.]

--Dean Baker

I usually don't watch much television news. When I do, I realize why. I saw Andrea Mitchell tonight talking about who President Obama will turn to for help in dealing with the financial crisis. The first two names were at the top of the list of people who gave us the financial crisis: Robert Rubin and Larry Summers. This would be a bit like turning to Osama Bin Laden for aid in the war on terrorism.

Rubin and Summers were both major advocates of the one-sided deregulation of the financial industry under which we maintained the security blanket of "too big to fail" for the Wall Street big boys, but gave them the green light to take whatever risks they wanted in order to enrich themselves. It would be difficult to imagine that President Obama would embrace people with such a dismal track record.

--Dean Baker

Yep, that's what David Brooks says at the NYT. Rivers will flow upstream, and the four horseman will ...

Okay, where on earth does Brooks get this? We are facing a serious recession because of the unbelievable incompetence/corruption of Alan Greenspan and his huge contingent of sycophants in the economics profession, business and the media, but years of stagnation or contraction?

It would take some really inept economic policies to keep the economy from growing over any substantial period of time. But, unlike custodians and dishwashers, David Brooks is not a person held accountable for his job performance. He gets to say anything he wants, no matter how far from reality, and still collect his paycheck. It's a great world!

[Addendum: I also have to beat up Brooks' nonsense in this piece about a "Long Boom" that began in 1983. This dating of a long boom depends entirely on how one deals with the recession years 1980-1982. The growth in the years from 1973 to 1980 was comparable to the growth from years 1983 to 1995. The latter was slightly higher using a gross measure of output, growth in the two periods was virtually identical using the a net measure of output. Since we can't eat depreciation, the latter measure reveals more about living standards.

Since Brooks does not want to count the slump years that we are facing as part of the his "Long Boom" then consistency would require that he not count the 1980-82 recession years as part of the 70s, hence he has no basis in reality for dating his Long Boom as beginning in 1983. So, we can either jettison the period 1983-1995 from the boom years or also include the 70s, that is, if we want to be consistent.]

--Dean Baker

The Economist Magazine told readers that in 2017 Social Security, together with Medicare and Medicaid, "will be starting to bankrupt the country." Of course Social Security will in fact be fully funded for another 32 years past 2017 according to the Congressional Budget Office's latest projection.

With equal validity, we can say that White House lawn maintenance, together with Medicare and Medicaid will be starting to bankrupt the country. The reality is that projections of exploding private sector health care cost imply enormous economic problems for the country, including budget problems as a result of public sector health care programs like Medicare and Medicaid. The real cause of the Economist's bankruptcy is the problems in the private health care system.

[Thanks to Jon Schwartz for pointing this one out.]

--Dean Baker

The WSJ apparently thinks that one-sided financial regulation (government bank bailouts through too big too fail) is still the best path. It notes plans by Senator Schumer to regulate hedge funds and private equity funds and then comments "even though heavily regulated banks that loaded up on risky securities have been at the heart of the financial crisis."

While many banks played important roles in promoting the housing bubble, less heavily regulated mortgage companies were responsible for issuing most of the worse loans. Lightly regulated investment banks like Bear Stearns and Lehman Brothers managed to get themselves in the most danger through over leverage. In short, the WSJ was simply expressing an editorial position in support of one-sided regulation, not providing information to its readers.

The article also misleadingly describes the Brookings Institution as "a liberal-leaning Washington, D.C., think tank." Brookings has academics with a a mix of perspectives, including many conservative and Republican scholars.

Finally, the article has an extremely confused discussion of the relation between the yuan and the dollar. It suggests that the next administration would not want to force China to raise the value of the yuan, because China might retaliate by buying less U.S. treasury bonds, causing U.S. interest rates to rise.

Actually, this is exactly the mechanism through which China would raise the value of the yuan. If the United States wants the value of the yuan of to rise, then it must want China to buy fewer treasury bonds, because that is precisely the action that keeps down the value of the yuan.

The article also claims that the Chinese would never dump their dollar holdings because this would mean that they would take a large loss on these holdings. The Chinese central bank knows that it will take large losses on its dollar holdings. It was willing to accept these losses in order to sustain its export market in the United States. It surely is not scared by the prospect of such losses, since it knew that losses were inevitable when it first began propping up the dollar.

--Dean Baker

USA Today has an article about how many people are withdrawing their deposits from many banks, fearful of their risk of failure, even though the deposits are insured by the Federal Deposit Insurance Corporation. While this behavior appears irrational, it would have been appropriate to mention the fear campaign by President Bush, many members of Congress, and reporters and columnists to gain public support for their bank bailout.

This fear campaign involved frequent references to the Great Depression. This effort to promote unfounded fears created a political environment that facilitated passage of the bailout bill. It also has led to the sort of irrational withdrawals of money from accounts that are insured by the government. It should have been mentioned in this article.

--Dean Baker

The NYT reports on how Depfa, an fast-growing Irish bank, managed to get a school board for a small community in Wisconsin to speculate in complex derivative instruments. The deal is likely to lead to large losses for the school district, even though they had been assured that it was a very safe investment. It generated large fees for Depfa. Local Governments across the country were persuaded to take part in similar deals.

[Thanks to Walter Miale for calling this one to my attention.]

--Dean Baker

Not according to the Washington Post. While the paper had the opportunity to talk to many people who missed the crisis, including a vice chairman of Goldman Sachs, its reporters could not find the time to talk to anyone who saw the crisis in coming for its article on the upcoming financial summit in Washington.

One of the people interviewed expressed the concern that the meeting would result in too much regulation. No one cited in the article raised what would seem to be an obvious concern, the politicians at the summit are too closely tied to the financial industry to promote regulations that will rein in abuses.

The Washington Post failed disastrously in its economic reporting over the last five years by almost completely excluding the voices of those who saw this financial crisis coming. As a result, Post readers would have been completely surprised by the crisis, unless they had access to better sources of economic information. Apparently, its editors have either learned nothing from this failure, or alternatively, they do not care.

--Dean Baker

The Washington Post decided to present some "big ideas" to counteract the recession. The article includes brief comments on each of the four ideas presented.

One of the comments asserts that "some economists think we need to encourage more saving, not less, and that people hoarding stimulus cash isn't necessarily a bad thing." It is unlikely that any economists think that we should be encouraging saving during a recession. More saving during a recession will reduce demand, leading to a steeper downturn and more unemployment. No economist is identified as holding the position attributed to "some economists."

--Dean Baker

Robert Shiller has an interesting discussion of how Alan Greenspan and almost the whole economics profession managed to overlook the $8 trillion housing bubble. Shiller attributed the failure in large part to "groupthink," the fact that no one wants to be standing out from the consensus within the group. According to Shiller, this sort of social pressure forced many of those who had concerns about the dangers of a bubble to tone down their concerns or to just keep them to themselves.

While there is undoubtedly some truth to this assessment, it only presents part of the picture. Challenging the consensus by raising concerns about the housing bubble would have posed serious risks to the careers of those within institutions like the Fed or in the economics profession more generally. On the other hand, completely missing the largest housing bubble in the history of the world carries no consequences for those whose job it was to recognize such risks to the economy.

In other words, the problem is that the personal risks were entirely asymmetric. Raising concerns about the bubble could jeopardize one's career, while ignoring the bubble carried no such risk. Under such circumstances, economists would expect that economists would opt to ignore the bubble.

The remedy that economists would recommend for other workers is to fire those who failed at their job. This would make the risks more symmetric. That way, in the future economists would have incentive to seriously consider arguments about financial bubbles and other dangers to the economy and not just unquestioningly accept the views of their bosses.

Unfortunately, it is unlikely that any economists in government, business, or academia will suffer any serious career consequences for failing to have done their job and warned of the bubble. Economists have enough political power so that they are not held accountable for their performance in the same way as dishwashers or custodians.

--Dean Baker

Federal Reserve Board Chairman Ben Bernanke discussed alternative mechanisms for supporting the mortgage market other than the unlimited implicit guarantee that it had given to Fannie Mae and Freddie Mac.

While it is certainly reasonable to ask whether the government role in the mortgage market can be better structured, the government also has given an implicit (now largely explicit) guarantee to the creditors of all the major banks. Fannie Mae and Freddie Mac do not seem to hold any special status given current policy.

It would have been appropriate for the media to note the government's guarantee of debt at all major financial institutions (except Lehman Brothers) when discussing Bernanke's comments. Many readers might have been wrongly led to believe that the government's guarantee for Fannie and Freddie was the exception rather than the rule.

--Dean Baker