The Washington Post again committed the cardinal sin of not putting budget numbers in context. It ran an article today touting the doubling of aid to Africa during the Bush administration. While this is mostly good news for the people of the region (restrictons on funding for items like condoms and the usual cronyism make the aid less useful than it might otherwise be), it would be helpful to readers if the article put the money involved in some perspective.

The current aid level of about $4 billion comes to about $5 per African. That's helpful, but not exactly a windfall. More importantly people should not be deluded into thinking that this aid is a big deal for the U.S. government. The current appropriation is equal to a bit more than 0.16 percent of federal spending. In other words, we spend just under $9,000 per person, about $14 of this money goes to people in Africa. Since a large portion of the public thinks that foreign aid comprises a large portion of their tax bill, a bit of context would be very helpful in educating the public.
(Brad DeLong got to this one before me -- caught me napping.)

--Dean Baker

The New York Times editorial page has moved far on Social Security, leaving the chorus of crisis mongers to be an important voice of reason in last year's debate. However, it now appears to be regressing.

Today's lead editorial notes the plans of Chile's government to overhaul the privatized Social Security system that had served as a model for proponents of privatization in the United States. The basic story is that the system did not deliver -- it was not providing Chile's workers with a secure retirement.

While the discussion of Chile is on the money, the piece then goes on to make the case for addressing the projected shortfall in the U.S. system. It argues for the need for a balance of benefit cuts and tax increases to address the projected shortfall. This discussion includes the bizarre assertion that the program would only be able to provide an average replacement rate of 10 percent if its shortfall was addressed with benefit cuts alone.

It is not clear where this number comes from, but the CBO projections show a very different picture. Until 2046, the program can pay all scheduled benefits with no changes whatsoever. After 2046, Social Security is projected to be able to pay close to 80 percent of projected benefits, with this ratio gradually falling over subsequent decades. However, even in 2080, it is still projected to be able to pay 75 percent of scheduled benefits.

With an average projected replacement rate of 35 percent, this means that even in the distant future, Social Security would be able to replace more than 25 percent of an average worker's pay, assuming that no taxes for the program are ever raised.

We may at some point want to raise SS taxes (raising the wage cap would be the obvious place to start). We may even decide at some point to reduce scheduled benefits. But, let's use real numbers to make the case, not some scary numbers from nowhere.

--Dean Baker

The NYT has a good article today on the surge in primary school enrollment in sub-Saharan Africa. It points out that after stagnating for nearly two decades, primary school enrollment rates have begun to soar across sub-Saharan Africa.

While the article includes much useful information (including the problems providing adequate classroom space, textbooks, and teachers for so many students) it leaves out a very important element in this story. It fails to mention the importance of public protests and pressure from non-governmental organizations in forcing the World Bank and International Monetary Fund to change their policy in this area. Prior to 1998, it was common to include clauses requiring fees for primary school enrollment in the structural agreements that countries signed to get loans from these institutions. The fees would improve a country's financial situation by both raising revenue and reducing enrollment, and therefore the need to pay for public education.

Fees for primary education and basic health care were a primary target of the protest movement of the late 90s. In a bill reauthorizing funding for the IMF, they managed to get Congress to include a provision requiring the U.S. representatives to these institutions to actively oppose any loan that included such fees as a condition. They also kept up the pressure after the fact when the I.M.F. reached an agreement with Tanzania that included a provision for charging fees for primary school enrollment. (The Treasury tried some Clintonian nonsense to claim that the provision in the IMF reauthorization bill effectively had no meaning. Congress refused to accept that it depends on what your definition of "is" is.)

While it is just a first step, it is great to see that millions of children will at least now get a chance to go to school. But, we should be clear about the history of this development. It was not just the wisdom of international donors. The change came about in large part because of noisy and sometimes obnoxious and disruptive protests and the persistance of the outsiders in trying to get the "experts" to think differently.

[Full disclosure: Robert Naiman, who worked at the Center for Economic and Policy Research at the time, did much of the background research on the Tanzania loan for the NGOs that pressed the issue with Congress.]

--Dean Baker

In the interest of providing the public with better reporting on economic issues the association of economic reporters approved the following list of resolutions for 2007:
(Okay, no such association exists and this list is completely invented, but I can dream.)

1) Put Numbers in Context

Virtually no one can attach any meaning to the $40 million appropriation for a particular earmark, the $196 billion transportation budget for the next six years, or the projected $70 trillion budget shortfall over the infinite future. These numbers can be made meaningful by putting them in some context. In the case of budget items, this is probably best done as shares of total spending and/or as per person expenses. In the case of deficits, the appropriate denominator is GDP over the relevant time frame (annual GDP for a current year deficit, all future GDP for an infinite horizon calculation). These calculations require almost no extra time from reporters and zero extra space (substitute a percentage or per person number for a meaningless million, billion, or trillion dollar figure).

2) Separate Health Care Cost Projections from Other Projections

The projections of massive future deficits and tax burdens are all driven by projections that health care costs will continue to explode. If these projections prove true, then the economy will be wrecked regardless of what we do with the public sector health care programs. It is misleading to imply that these huge deficit projections indicate fundamental budgetary imbalances, as opposed to the fact that we have a serious problem with our health care system. In particular, combining Medicare and Social Security to imply that the projected budgetary problems are primarily demographic in origin is basically lying.

3) Stagnant or Declining Populations Are Not a Crisis

There is no fundamental problem with a country experiencing zero or negative population growth, as is the case for many rich countries. This scenario implies a rising ratio of retirees to workers, but we have always had a rising ratio of retirees to workers, and we have generally enjoyed rising living standards (on average). Productivity growth generally swamps the impact of demographics (it takes fewer people to make a car, handle bank transactions, or staff a retail store) so there is no problem associated with the fact that a smaller share of our population may be working in the future. Also, many jobs don’t need to be done – convenience stores don’t need to be open 24 hours, lawns don’t have to be mowed as frequently, restaurants can be cafeterias. In addition, in a world where scientists recognize global warming as a serious problem, a smaller number of people in the high per capita polluters is a good thing.

4) Social Security Does Not Face a Crisis, So Stop Asserting That It Does

The latest projections from the Congressional Budget Office show that the program can pay all scheduled benefits until 2046 with no changes whatsoever. This would not fit most people’s definition of a crisis. This means that if you want to use “financially distressed” “fiscally threatened” or some equivalent adjectival phrase to refer to Social Security, talk to your editor about getting an opinion piece. Such phrases do not belong in a news story.

5) Use Purchasing Power Parity When Discussing the Size of China’s Economy

Much of the country has little idea of how large China’s economy is relative to the U.S. economy because reporters routinely use exchange rate conversion measures of China’s GDP. By this measure, China’s economy is hovering near $2.5 trillion, less than one-fifth the size of the U.S. economy, behind Japan and Germany. However, by the purchasing power parity (PPP) measure, China’s GDP is now close to $10 trillion, approximately 75 percent of the size of the U.S. economy. For most purposes economists would use the PPP measure. To make one simple point on its merits, if you use the exchange rate measure, then you think that China is exporting one-tenth of its annual output to the United States.

6) Trade Deals Do Not Mean “Free Trade,” so Don’t Call Them “Free Trade Agreements”

Everyone likes freedom. That is why politicians who put forward trade agreements call them “free trade” agreements. But, these deals are not free trade agreements. They don’t free all types of trade (they do little or nothing to remove the barriers that protect doctors, lawyers, and other highly paid professionals) and they actually increase some types of barriers to trade, most notably by increasing the strength of patent and copyright protection.

Back in the 80s, President Reagan dubbed the controversial MX missile, the “Peacekeeper.” To their credit, reporters continued to use the neutral “MX” term to refer to the missile. In discussing the current round of trade agreements, it would be more accurate (and save space) to simply refer to them as “trade” agreements, rather than free trade agreements.

7) The Stock Market is Not the Home Team: A Rising Stock Market Is Not Good News

A run-up in stock prices means that people who own stock are richer. Stock prices can go up because the future of the economy looks brighter and therefore the future prospect for corporate profits also looks brighter. In this context, where everyone stands to gain from more economic growth, a rising stock market can be seen as a good thing. However, the stock market may also rise because investors anticipate redistributions from wages or government to profits. In this case, the rise in stock prices is purely redistributive. Alternatively, the rise in stock prices may be just an irrational bubble, like in the late 90s. This is also not good news.

Unless a reporter can identify the cause of a run-up in stock prices, he/she cannot say whether it indicates good news for the economy as a whole. Therefore, it should not be reported as good news.

8) The Fed Makes Policy Choices

The Federal Reserve Board must decide how much it should it focus its policy on limiting inflationary risks as opposed to sustaining economic growth and high levels of employment. This is a policy choice involving both its assessment of the relative risks and the relative costs of higher inflation verse higher unemployment. The public should be aware of the choices that are being made on its behalf.

It is important to realize that, contrary to frequent assertions, there is no consensus among economists on Fed policy. There was a consensus in the mid-90s. The vast majority of economists believed that if the unemployment rate fell below 6.0 percent, the inflation rate would increase and soon reach dangerous levels. The prolonged period of low unemployment in the late 90s, and in the current decade, have proven that this view was wrong. At this point, there is no widely accepted view on the relationship between inflation and unemployment.

9) People Who Work for Trade Associations Are Not Neutral Commentators and Should not be Treated as Such

Okay, this one seems really dumb, but how often do you see a news report in which the views of the spokesperson for the National Association for XXX or the American XXX Association are presented as objective analysis on an issue? This really should be a no-brainer.

These people have an agenda. They are paid to get their industry’s perspective into the media. They may be knowledgeable commentators on a topic and it is certainly appropriate to share their views with the public, but it is absurd to imply that they are disinterested observers. They don’t get paid their salaries to be disinterested observers.

Okay, lacking any great inspiration at the moment, I’m stopping at 9. Perhaps a creative commentator will give me a 10th item to round out the list.

Here's # 10 (inspired by Beowolf's comment):

10) You Don’t Know What Politicians Think or Believe, so Don’t Tell Readers

Saying things that you don’t believe is a job requirement for being a politician (left or right). Politicians say what they think will advance their career and get them re-elected, which is not necessarily what they think about the world.

This means that when a politician says that he/she is supporting a particular policy because they believe in “the market” or “small government” or the “need to protect the weak,” the statement should never be presented as being what they actually think. In other words, give the comment to the readers in quotes, don’t tell readers that Senator X believes in the market or Representative Y believes in helping the poor.

The basic line for reporters is that you are not close enough to a politician to know their inner most thoughts. If you are close enough, then your relationship is too personal and you cannot report on this politician objectively.

-- Dean Baker

It is standard wisdom that globalization has led to a redistribution from wages to profits. In fact, an NYT column by Tyler Cowen actually presents this redistribution as a reason to cut Social Security and Medicare benefits. (For low income workers, the cuts are offset by contributions to private accounts.)

I hate to ruin a story line with evidence, but the profit share of corporate income just returned to the level of the 90s' cyclical peak this year. Since profits are usually revised downward, it remains to be seen if we will exceed the profit share of the 90s cycle in the current cycle. While there was a shift from wages to profits in the 80s and 90s, if we don't cross the 90s profit peak in this cycle, it would mean that the huge increase in trade and the trade deficit over the last decade did not lead to a redistribution from wages to profits. This implies that globalization does not necessarily entail a shift from wages to profits.

Of course, most workers have benefitted little from the economic gains over this period, as the median wage has risen by only about 5 percent over the last decade. There was redistribution in this story, but it went to the high end workers who are largely protected from the effects of globalization (CEOs, doctors, lawyers, Wall Street investment bankers).

Those who want to alter a pattern of economic development that produces little benefit for the bulk of the population better at least be clear on where the money is going.

--Dean Baker

The Financial Times reports that the value of euro notes in circulation worldwide now exceeds the value of dollar notes. This should tell us two things.

First, the dollar is not essential to world finance. People are happy to hold euros and other currencies, no one needs to hold dollars. Second, the euro passing the dollar is not some sort of cataclysmic event. As long as people still have faith in the basic soundness of the dollar, they will be happy to hold it, even if it slides to number 2 by some measures. Of course, if investors become convinced that the currency is on a downward path, then it could lead to a serious run.

In short, the world does not need the dollar, but it is also not anxious to throw it in the toilet, or at least not yet.

--Dean Baker

The NYT has a good piece about how some of the insurance companies in the Medicare drug plan failed to notify seniors of changes in their plan. These changes often involve higher prices and the dropping of some drugs from the plan.

Of course, even seniors who did get notified would have to read through 30-40 page booklets. That sounds like a great holiday present for elderly people, many of whom have bad eyesight and problems concentrating.

It will be interesting to see if the new Congress takes any substantive steps to fix this nonsense. The obvious way to have created the drug benefit would have been to let Medicare offer its own plan as an add-on to the traditional program. The insurers within Medicare could do the same, with an equal subsidy and they could compete in the market. This would have made a simple low cost option available to all Medicare beneficiaries.

The brave men and women who occupy Congress say that the insurance and drug industry have too much power to allow for a Medicare sponsored drug plan. So, we compromise. We put in place an efficient user-friendly system and then cut the insurance and pharmaceutical industries checks for the amount of profit that they would have made off the taxpayers under the current system.

The system is called "Temporary Assistance for Needy Corporations (TANC)." The companies that are unable to compete in the market will get checks for their lost profits from the government for 10 years. This will allow their CEOs to still get multi-million dollar compensation packages and their shareholders will still get big dividends, the big benefit for the public will be that seniors won't have to deal with so much nonsense when trying to get the health care that they need.

Oh yes, the other benefit is that we won't have to continue to pretend that policies that redistribute income upward have anything to do with the free market.

--Dean Baker

"Determined to banish their image as shameless fearmongers who constantly raise the threat of terrrorism for political purposes, the Republicans are planning a new approach to foreign policy." Well, the Washington Post didn't write that sentence, instead the lead story in today's paper began "Determined to banish their old tax-and-spend image, Democrats want to shrink the federal deficit, preserve tax cuts for the middle class and challenge the president to raise money for the Iraq war when they take control of Congress next week."

Sorry to bore people with the facts, but the ratio of debt to GDP has consistently fallen under Democratic administrations, while it has risen under the last three Republican administrations. Spending as a share of GDP fell sharply in the Clinton years, while rising sharply in the Bush years.

The idea that the Democrats have been reckless spendthrifts is an invention of their political opponents. It should not be treated as an accurate characterization of their policy. (For the record, I am not an admirer of their fiscal conservatism, I personally think that they have carried it too far.)

--Dean Baker

The country's private pension system is broken, so there is nothing wrong with creating new systems of private accounts in addition to Social Security. However, there are grounds for suspicion about the motives of people who propose such accounts using public funds, esepcially when they make up numbers.

As part of its ongoing Jihad against Social Security, the Washington Post published a column by Republican senator Jeff Sessions advocating such accounts, with the usual invented numbers. Basically, it allowed Mr. Sessions to use preposterous rate of return assumptions.

Mr. Sessions claims that $1,000 invested at birth would grow to between $50,000 and $100,000 by age 65. This implies a rate of return of 6.2 and 7.3 percent. This would only be possible if we assume that all the money was invested stocks (the normal assumption for these calculations is 60 percent) and we assumed that stock returns would be substantially higher than future profit growth projections will allow.

During the Social Security debate last year I challenged all the supporters of President Bush's plan to produce a set of projections for capital gains and dividend yields that would equal the 6.5 percent to 7.0 percent return for stocks assumed in their calculations. (This was the famous "no economist left behind test.") No one could produce the 3rd grade arithmetic that could reconcile these numbers. (Steve Goss, the chief actuary for SS said that he could do it, if stock prices first fell by 16.5 percent -- an assumption that he neglected to include in his projections.)

Anyhow, the invented numbers are back in the Washington Post. For these interested in reality, using plausible return assumptions (given the SS trustees or CBO profit growth projections), the $1,000 will grow to about $12,000 to $13,000 by age 65. Maybe we should collect the difference from the Washington Post editors.

--Dean Baker

Well, they certainly seem to have lost the ability to talk about it coherently. The peaceful disintegration of the Soviet Union and the subsequent course of Russian history is a remarkable story. Unfortunately, one gets very little of the real picture in the Washington Post's piece marking the 15th anniversary of the collapse.

For most of the Russian people, the main story is a devastating economic collapse, which led to a decline in per capita GDP of more than one-third from 1990 to 1996. The standard of living for the typical Russian might have fallen even more sharply, as a small group of well-connected business people sezied control of much of the country's wealth. This is indicated by the extraordinary drop in life expectancy in Russia. As the box accompanying the article shows, life expectancy for men fell from 61.9 years in 1992 to 58.9 years in 2004. For women, the drop was from 73.7 years to 72.3 years.

Russia's economy has since rebounded, regaining most of the lost ground during the 8 years of sustained growth since 1998. But, the article provides readers no basis for assessing the impact of this rebound on the lives of average Russians. It gets the aggregate numbers completely wrong, telling readers that Russia's "economy has grown fivefold under Putin," and providing no information on median income, wages, unemployment rates or other data that might provide insight into the well-being of typical families. (The aggreate numbers appear to be based on a currency conversion calculation of GDP. This provides almost no information on living standards or growth rates. Economists use purchasing power parity measures of GDP for these purposes. The idea that an economy could grow fivefold in less than a decade is absurd on its face. Actual growth was close to 50 percent, which is still a very impressive pace.)

Russia is and will continue to be a very important actor in world politics. It would be helpful to have news reports that give the public more insight into the situation inside the country.

[It is worth noting that Russia's rebound in 1998 followed its break with the IMF and the Clinton administration. In his book, Robert Rubin talks of how he gave up the country as lost because it was unwilling to "reform."]

--Dean Baker

The BBC had a short article on the possibility that Venezuela will shift from trading its oil in dollars to trading in euros. This article gives me an opportunity to trash two common myths about the meaning of such a shift among producers.

The first issue is the importance of the shift to the value of the dollar. A story often circulated across the web is that there will be dire consequences for the dollar if oil producers made this shift. Some simply arithmetic should quickly eliminate such concerns.

Currently oil consumption is about 85 million barrels a day. Let’s assume that a bit more than half, or 45 million barrels a day, crosses international borders. Now, let’s say that the bill for this trade is all paid on the same day of the month everywhere in the world. This would mean that if all payments were made in dollars, oil consumers would need to come up with $81 billion (45 million barrels*$60 per barrel*30 days) once a month to pay for their oil. World-wide holdings of dollars currently exceed $2 trillion. This means in this extreme scenario, a switch from dollars to euros would reduce the demand for dollars by about 4 percent.

Now to make this scenario considerably less ominous, remember that payments are not all made on the same day of the month – if oil payments are even distributed over the course of the month, then the oil transactions demand for dollars is just $2.7 billion. Furthermore, much of this trade already takes place in euros, yen or other currencies. There is no law requiring that the trade takes place in dollars even now. In short, those who have been worried about this switch should find something else to lose sleep over.

The second myth is that oil producers are somehow hurt when oil is priced in dollars, if the dollar falls. The problem with this story is that the price of oil is set in a market; the dollar is just the unit of account.

Suppose the price of oil is $60 a barrel and the dollar is worth a euro. This means that oil producers would get 60 euros for a barrel of oil. However, if the dollar is only worth 0.75 euros (roughly the current price), then oil producers will get 45 euros for a barrel of oil. Suppose they decide to price their oil in euros. Then the market price of oil would be 45 euros – no one has gained, no one has lost.

(There is a side issue about long-term contracts. If an oil producer signed a long-term contract denominated in dollars, and the value of the dollar fell, then they get hurt. But, if they anticipate that the dollar will fall through time, then they can just write their contract accordingly.)

--Dean Baker

While we still may have some surprises in the December data, it looks like 4th quarter GDP growth is likely to come in at under 2.5 percent, driven down by declines in both residential and non-residential construction, as well as a drop in equipment investment. Hours are on track to grow at about a 1.6 percent annual rate, which means that productivity growth for the quarter will be less than 1.0 percent. Yet another quarter of weak productivity should raise some eyebrows. If we take 1.0 percent as the number for the 4th quarter (which is likely high), this would be the picture since the fourth quarter of 2005:

05:4 -- -0.1%
06:1 -- 4.3%
06:2 -- 1.2%
06:3 -- 0.2%
06:4 -- 1.0%

This gives an average annual growth rate of just 1.3 percent over these 5 quarters. That compares to more than 3 percent from 2001-2005. But, revisions will make the data look even worse. BLS will add in 810,000 jobs to the establishment survey as of March 2006, in its annual benchmark revision. This will lower productivity growth for the 4th quarter of 2005 and first quarter of 2006 by approximately 0.6 percentage points. Output growth in the non-farm sector was also revised down by 0.4 pp for the 3rd quarter in the final GDP report released yesterday. This will lower productivity growth by the same amount. The revised productivity data for the last five quarters will look something like:

05:4 -- -0.7%
06:1 -- 3.7%
06:2 -- 1.2%
06:3 -- -0.2%
06:4 -- 1.0%

This gives an average annual rate of productivity growth over these 5 quarters of just 1.0 percent, definitely cause for concern.

--Dean Baker

No one can be happy about the situation in Iraq, but the media do the public a serious disservice when they misrepresent the choices available. The Wall Street Journal commits this sin today when it quotes a senior fellow at a "liberal think tank" as saying "whatever you think should happen in Iraq, the fact is we have troops there and we have to fund them."

Actually, we don't have to fund the troops to be in Iraq. If Congress chose, it could summon the commander of our forces to devise a plan for a safe withdrawal of our troops and calculate a price tag. It could then appropriate the money needed to carry through this task -- end of story, end of funding.

The senior fellow at a liberal think tank may not like that option, but it is one that exists, and the Wall Street Journal should not have uncritically presented a quote that implied otherwise.

--Dean Baker

The NYT has a good piece showing the inefficiencies associated with the "Clean Development Mechanism" that some misguided geniuses included in the Kyoto agreement. The premise is reasonable: it's generally cheaper to reduce emissions in poor countries than rich countries, therefore why not allow polluters in rich countries to pay to reduce emissions in poor countries, therefore why not allow polluters in rich countries to pay to reduce emissions in poor countries, as an alternative to reducing their own emissions?

The problem with the CDM is that it applies this principle on a case by case basis, which is extremely inefficient and also creates many opportunities for fraud an abuse. The obvious alternative would have been to assign the developing countries emission quotas under Kyoto that are essentially equal to their baseline growth path. Then allow them to sell any reductions against this baseline to the rich countries. This would have given the developing countries very large incentives to find ways to reduce emissions with much less opportunity for abuse (countrywide emissions can be reasonably well measured).

My environmentalist friends have always insisted that developing countries refused to be subject to Kyoto limits. However, setting limits that are just equal to baseline emissions growth, and making them sellable, is effectively just giving developing countries money. I find it hard to believe that the leaders of developing countries are so resistant to accepting money. I suspect that if this deal were ever laid on the table, any developing country leaders who vigorously held out against accepting money would soon be out of work. (I did a short paper on this some time back with my friend Jim Barrett.)

--Dean Baker

The Washington Post writes again on Social Security, describing the system as the "fiscally imperiled Social Security system." For the facts, CBO says that if nothing is done, the program first faces a shortfall in 40 years. It's too bad the Washington Post doesn't give the same attention to the problems (e.g. global warming, rising health care costs, the increasing prison population) that will impose much larger costs on the country. But, hey, it's a jihad.

--Dean Baker

The producer price index showed that the core finished goods index jumped 1.3 percent in November, more than reversing a 0.9 percent decline reported for October. Much of the story was passenger cars and light trucks. They rose by 2.2 percent and 13.7 percent, respectively after showing October declines of 2.3 percent and 9.7 percent. This reflects the timing of discounts, which was an important factor holding down the November CPI.

The moral of this story is that price data (like most data) are very erratic. You can never make too much of a single month's data. If the data look very different from prior months' data, then the odds are that it is an aberation which will be reversed in future months.

--Dean Baker

The Wall Street Journal reported today on the split between the Wall Street oriented Rubinite/Hamiltonian wing of the Democratic wing and the more working class oriented populist wing of the party. There is little doubt which side the WSJ is on.

The article comes right out swinging, telling readers that Robert Rubin “redefined the formerly protectionist, free-spending party as a champion of free trade and balanced budgets.”

Hmmm, that’s objective reporting? Is it a fact that the pre-Rubin party was “free-spending?” According to my copy of the Economic Report of the President, the ratio of government debt to GDP fell from 56.1 percent in 1960 to 42.5 percent at the end of 1968. During the Carter administration the debt to GDP ratio declined from 36.2 percent to 33.3 percent. As I recall, both Walter Mondale, the 1984 president nominee, and Michael Dukakis, the 1988 nominee, ran on platforms of deficit reduction. I am sure that there were free-spending Democrats out there, but they don’t seem to have been calling the shots even in the pre-Rubin era.

Calling the pre-Rubin party protectionist and Rubin a free-trader is probably even more inaccurate. The Democrats had supported a long-range of trade agreements through the whole post-war period. On the other hand, the Clinton administration was perfectly happy to accept and even increase protectionist barriers that supported the income of highly paid professionals like doctors and lawyers. Its trade agenda was mostly about eliminating barriers that protected less-educated workers from competition with low-wage workers in the developing world (benefiting guess who?).

The “free-trade” Rubinites also deserve special mention for putting the TRIPs provisions into the WTO. TRIPs imposed U.S. style copyright and patent protections on the developing world, the largest increase in protection in the post-war era.

The article also neglects to mention Robert Rubin’s unaffordable tax cut – his high dollar policy. This was great for short-term politics. The high dollar kept inflation down and raised living standards by making low-cost imports available. An over-valued dollar is of course unsustainable in the long-run. It leads to large trade deficits, which cannot be sustained in the long-run any more than the large budget deficits created by President Bush’s tax cuts. (The current account deficit is presently more than twice the size of the federal deficit, even after adding in the money borrowed from Social Security.)

The high dollar also has important distributional consequences, shifting income from workers in the unprotected sectors of the economy (i.e. manufacturing) to people in the protected sectors (e.g. doctors, lawyers, Wall Street investment bankers).

I could go on citing other passages that portray Mr. Rubin and his followers as the fonts of well-considered policy in contrast to the well-meaning but disoriented populists, but you can read the article for yourselves. I will just mention my favorite item. I see that my former employer, the Economic Policy Institute, appears in this article as an “advocacy group.” Get out your ad hominems, this is going to get nasty.

--Dean Baker

In an article that discusses a serious issue, the laibility of state governments for retiree health benefits, USA Today also tosses in a bit of holiday fearmongering. It tells people that the liability of all levels of government for retirement pension and health benefits is at least $57.8 trillion, or $510,000 per household.

So as to avoid ruining anyone's holiday spirit, income by the same measure is projected to be around $1,000 trillion or more than $10 million per household. This context should have been included in the story, but I guess they couldn't find the room.

One other important point, about two-thirds of this projected liability would disappear if health care costs only increase due to aging and otherwise rise at the same pace as per capita income. This is yet another disaster that is predicated on exploding health care costs. If we ever fix our health care system, then most of the basis for this scare story disappears.

(Thanks to Peter Hart from Fairness and Accuracy in Reporting for the tip.)

--Dean Baker

According to the NYT, drug giant Eli Lilly knew that Zyprexa, a drug used to treat schizophrenia, had a number of serious side effects, but decided not to trouble doctors with this information.

The NYT has done a great job over the last decade uncovering cases where the pharmaceutical and medical supply industries have engaged in unethical behavior to promote use of their products. This usually has meant concealing evidence of potential harm, but they also engage in a wide variety of unethical sales practices that often take the form of kickbacks to doctors for prescribing their products.

What has been largely missing from the NYT coverage is any economic analysis of this issue. As anyone who has ever sat through an intro econ class should recognize, these sorts of abuses are exactly what we would expect when the government gives companies patent monopolies that allow them to charge prices that are far above the cost of production.

Most readers will see this last sentence and comment that we need to give the companies patent monopolies in order to allow them to over research costs. This is not true, and the fact that so many people believe it shows the enormous failing of the media on this topic. Patents are one way in which to support research. There are many other possible mechanisms, including direct government funding, which we already do to the tune of $30 billion a year through the National Institutes of Health.

Given the enormous cost of prescription drugs and medical supplies and the continuing patterns of abuses by companies seeking to maximize their patent rents, we should be having a national debate over the best method of financing research. As it is the topic goes virtually unmentioned. (Eduardo Porter provided an important exception, doing a piece on the topic in November of 2004.) Here's my outline of the issues.

(I didn't give the whole story, Eli Lilly was also promoting off-label uses.)

--Dean Baker

Most people probably saw the news about the sharp fall in the incidence of breast cancer. This was attributed to a drop in the use of hormone replacement treatment for menopause. And why were so many women getting hormone replacement treatment? Well, the pharmaceutical industry pushed it as a way of combatting aging.

That is the incentive structure created by the system of patent financed research. Government patent monopolies give drug companies huge mark-ups on each prescription they sell, which means that they have enormous incentive to try to get their drugs used as widely as possible. The fact that they may not be entirely safe is secondary. CEOs don't get $100 million paychecks for saving lives, they get this money by boosting the bottom line (and putting their friends
on the compensation committees).

--Dean Baker

Real wages have risen less than 2 percent over the last five years. Because of the sharp drop in gas prices over the last four months, real wages have grown rapidly over this period. Of course, once oil prices stop falling (as they already have) real wages will be growing in the range of 1.0-1.5 percent annually, well below the 2.7 percent rate of productivity growth of the last five years.

Since real wage growth is clearly trailing productivity growth, why are reporters so obsessed with the idea that wage growth is causing inflation?

If there is cause for concern about inflation in the current economy, it is due to the fact that productivity growth may have slowed back to its pre-1995 rate or that the falling dollar is leading to rising import prices. These are topics that deserve more attention. The media should be discussing these issues instead of obsessing that workers may finally be getting a share of productivity growth.

--Dean Baker

Suppose Wal-Mart had to certify that it could not find any adequate shoes/pants/toys/toasters etc. made in the United States before it was allowed to purchase these items from a foreign supplier. Suppose further that the company and its managers could be fined and possibly jailed if they lied. Odds are that Wal-Mart would not buy much from abroad.

This is the law now for firms that want to hire bright and well-qualified professionals from the developing world, many of whom would be happy to work for less than half the wage of their U.S. counterparts, just as is the case with manufacturing workers. In other words, as BTP regulars know, professionals in the U.S. are protected from competition, less educated workers compete on the world market.

Why is this so hard for the people who write in major media outlets to understand? Someone should ask Thomas Edsall.

--Dean Baker

I have never been one to lose sleep over modest rates of inflation (2 percent to 4 percent), but I think that some of the reporting may have overplayed the low inflation in the November CPI. Both the overall and core CPI were flat, which brings the annual rate of inflation to -3.9 percent over the last three months, and just 1.6 percent in the core.

While the negative rate in the overall CPI is obviously due to a one-time drop in energy prices, there were unusual factors pushing the core rate lower as well. For example, airfares (a core component that is largely driven by energy prices) fell by 4.8 percent in November. They have fallen at a 27.1 percent annual rate since July. Car prices, which account for 10.2 percent of the core index, fell 0.8 percent in November and have fallen at a 5.7 percent annual rate over the last three months. This is attributable to heavy discounting by the big three trying to pare their inventories of unsold cars. This pace of decline will not continue and may even be partially reversed in future months. It looks like Wal-Mart got into the picture also, as its $4 generic sales led to a rare 0.7 percent decline in the prescription drug index in November.

I identify a couple of other seeming anomalies in my price byte. The basic story is that almost all the odd numbers look to be on the low side (hotel costs rose somewhat more than normal), which could mean price reversals in December and January. In other words, inflation may not be dead yet.

--Dean Baker

The Post once again raises fears that less educated workers might gain some of the protection currently enjoyed by more educated workers. In an article on Treasury Secretary Paulson's trip to China, it quotes without comment Senator Schumer's comment that China's continued refusal to raise the value of its currency could damage the "increasingly fragile consensus for free trade."

Of course, there is no such consensus and Mr. Schumer does not support free trade. He has not been active in any efforts to remove the barriers that protect doctors and lawyers and other highly paid professioanls. Mr. Schumer's focus has been in removing any barriers that protect less-educated workers from competition with the developing world.

There is no economic theory that implies that protection for less educated workers is more harmful than protection for highly educated workers. It would have been interesting if the reporter had asked Mr. Schumer why he is so worried that manufacturing workers might get some of the same protections currently enjoyed by people like himself (Schumer was a lawyer in his pre-politician days).

The NYT didn't do much better with the China story. It includes without comment the statement that China wants the U.S. to increase its savings rate as a way to reduce its trade deficit with China. Well, a higher savings rate will only reduce the trade deficit if it leads to a recession or at least substantially slower growth. This one is pretty simple. U.S. demand for imports from China depends on the value of the dollar and the level of demand in the U.S. economy. A higher savings rate can reduce demand in the U.S. economy, but the idea that China would suggest the U.S. should reduce its trade deficit by having a recession is rather peculiar.

It's also worth notiing that China's currency policy has been one of the main factors lowering the U.S. savings rate. China's central bank has bought hundreds of billions of dollars of U.S. treasury bonds. This has kept long-term interest rates extraordinarily low, which in turn has fueled the housing bubble. The unprecedented run-up in housing prices has allowed people to borrow against their homes at an incredible pace, giving us the first negative savings rate since the depression. While the Fed deserves blame for not trying to counteract this effect and acting to burst the bubble, China's policies are a major factor behind the record low U.S. savings rate.

--Dean Baker

The credit rating agencies are the umpires of the financial world. They are supposed to be giving objective assessments of the financial status of the companies they rate. This is why it is big news that Standard & Poors may have altered its rating of Portland General Electric at the request of the company. David Cay Johnston deserves credit for tracking this one down. The NYT should not have buried the piece in the distant recesses of the business pages.

--Dean Baker

NPR presented an interview with Wall Street Journal reporter David Wessel this morning in which he asserted that controlling inflation is the Fed's charge. This is not true. The law says that the Fed is obligated to run its monetary policy in order to promote price stability and high levels of employment, and specifically sets 4.0 percent as a target unemployment rate.

Many economists would like to ignore the second goal, but that is not the law.

--Dean Baker

Did anyone get a 6 percent (nominal) wage increase last year? Congratulations on your "skyrocketing" paycheck.
This is the term that the Post applies to Social Security expenditures, which have risen at an average rate of 5.2 percent in the last five years and are projected to rise at a 5.5 percent rate over the next five year (both in nominal dollars). This leaves Social Security expenditures virtually unchanged as a share of GDP over this period.

Social Security expenditures are projected to rise more rapidly in the future, but they clearly are not "skyrocketing" at present. A little greater commitment to reality on this topic would be useful.

--Dean Baker

In the wake of some of the comments from my last post, I thought I should make a few points on inequality and trade.

1) High-end professionals like doctors and lawyers have been winners in the economy of the last quarter century. It is not true that only the very wealthy have benefited. (If only the wealthy had benefited, then it would be much easier to win the political battle to change the system)

According to the latest State of Working America (the bible for data on the economic well-being of the country’s workers), real wages for workers at the 90th percentile rose by 26.7 percent over the last quarter century, and 5.1 percent over the last five years. These are workers who are more highly paid than 90 percent of the workforce, but less highly paid than the top 10 percent. Workers at the 95th percentile saw their real wages rise by 33.2 percent over the last quarter century. Clearly these workers are doing just fine. Reliable wage data for higher paid workers is not available, but they would almost certainly be doing even better.

Most doctors, lawyers, and accountants are in this top 5 percent. The average hourly wage for a worker at the 95th percentile was less than $42 in 2005. This comes to $84,000 a year, assuming a 2000 hour workweek. The average earnings of doctors (net of expenses) was more than $200,000 in 2005, more than twice what a full-time worker at the 95th percentile would earn.

2) Higher wages for high end workers lower the real wages for middle and low income workers. This is basic and worth reading and rereading until the point is clear. The wages for high-wage workers are a cost of production. They get passed on in the prices of health care, legal fees and all the sectors that directly or indirectly employ high-wage workers. Higher prices for goods and services lower the real wages for the workers who consume them.

Think about it -- $30 an hour might be a reasonably good wage today. Suppose all prices double, then $30 an hour will not be a very good wage. Suppose that the price of all goods and services got cut in half, then someone who was making $30 an hour will suddenly be doing very well.

If the pay of high end workers gets cut, then all the workers at the middle and bottom get a pay increase. This is why I want to see competition put downward pressure on the wages of highly paid professionals – it will raise everyone else’s pay.

Let’s make the case even stronger – if the real wages of high end professionals doesn’t get cut, then people are just wasting their time trying to raise the wages of middle and lower income workers. Higher pay for middle and lower income workers will get passed on in higher prices. If the highest wage workers get pay increases to compensate for higher prices, then there will be another round of price increases, and then middle and lower income workers will end up right back where they started. (Yes, some money could come out of profits, but rising profit shares is not much of the story as the data clearly show.)

3) A main point of the trade deals of the last quarter century has been to put downward pressure on the wages of less-skilled workers by putting them in direct competition with low-wage workers in the developing world. Again, the loss of manufacturing jobs and pay cuts for large segments of the workforce was not an accidental outcome of these deals, or a case where the reality of international trade did not conform to theory, it was the purpose of these deals.

If you put U.S. manufacturing workers in direct competition with low-paid workers in the developing world, you screw manufacturing workers in the United States and benefit highly educated professionals. If you put highly educated professionals in the United States in direct competition with their counterparts in the developing world, you screw highly educated professionals and benefit everyone else. It’s that simple.

--Dean Baker

Former Treasury Secretary Larry Summers got fired from his last job as president of Harvard. He doesn't seem to be doing much better at his current job, working as a columnist at the Financial Times. Today's column rightly notes the anger produced by growing inequality in the United States, but he misses both the dimensions of this inequality and its causes.

First, the problem of inequality did not begin in the last five years as Summers implies in his column. The country has seen a sharp growth in inequality over the last quarter century, as most workers have seen almost no increase in their wages even though productivity has increased by more than 70 percent. This basic fact is extremely important, because Summers seems to think that we have a great economy, that could get messed up by stupid populist policies. To many of us, an economy that fails to produce dividends for the bulk of the population for a quarter century does not look very good. In other words, the economy was messed up by the designers of orthodox economic policies (including Mr. Summers). Certainly ill-formed populist policies could be worse, but the record of Mr. Summers and his fellow economic policy geniuses is one of failure, not great success.

The second basic problem in Summers' analysis is that he doesn't even get the source of the inequality right. He attributes the problem to a redistribution from wages to profits, noting that the bulk of income gains since 2001 have gone to profits. Profits are hugely cyclical, as economists know. Profits fell sharply in the 2001 recession. They have since grown very rapidly, but they are just now coming back to their 1997 share of output, the profit peak of the last business cycle. While there was a redistribution from wages to profits in the 80s and 90s, the upward redistribution that has kept most workers from benefitting over the last decade has been entirely from workers at the middle and bottom to workers at the top.

In other words, the reason that autoworkers, teachers, and dishwashers are falling behind is that doctors, lawyers, CEOs and college presidents are walking away with so much of the pie. This suggests a different range of remedies. At the top of my list is free trade -- trade policies that would make it as easy for hospitals and law firms to hire doctors and lawyers from India and China as it is for Wal-Mart to buy cheap shoes from the developing world. My full list is much longer (get a free download of the Conservative Nanny State for the full story), but we can't even get to first base on a solution until we are clear on the source of the problem.

--Dean Baker

Many reporters are called upon to write year-end pieces that discuss the big events of the year. In its continuing effort to be helpful to the hardworking men and women who report on the economy, BTP has five suggested topics:

1) The End of the Productivity Boom – It could be a bit early, but the evidence is mounting. Productivity growth for the last four quarters averaged 1.4 percent. (This will be revised down by about 0.2 percentage points when 810,000 addition jobs are added into the March number with the annual benchmark revision to the establishment survey.) With productivity growth now looking to be around 1.0 percent for the 4th quarter (2.5 percent consensus GDP forecast, 1.5 percent hours growth), we are looking at 4th quarter to 4th quarter productivity growth of 1.7 percent for 2006, the lowest rate since 1995 when it was 0.9 percent. Of course, this may be a cyclical slowdown associated with the onset of a recession, but that would be worth writing about too.

2) The End of the Housing Bubble – Well, nationwide housing prices are falling (don’t you love all those experts who said that this would never happen), the only debate now is how far and how fast, and how much does the economy get wrecked in the process. In any case, this is big news. The weakness in the housing market has already given a big hit to the economy, and there is likely much more to come.

On the plus side, you can now buy a used copy of David Lereah’s book, Are You Missing the Real Estate Boom? on Amazon for just $1.25.

3) The Convergence of Employment Rates between the EU and the U.S. – According to the OECD, the employment to population (EPOP) ratios for prime age workers (ages 25-54) in the EU 15 and the United States had nearly converged by 2006. The remaining gap is due to lower EPOPs for women among the countries of southern Europe, where cultural factors still work to keep women out of paid employment. Several European countries with strong welfare states, such as Ireland, Sweden, and Denmark, have higher EPOPs than the United States. This should be the end of the myth that welfare state protections lead to unemployment.

4) China’s GDP Crosses $10 Trillion – Reporters typically refer to the size of China’s economy using the exchange rate of measure GDP. This GDP measure takes the value of China’s GDP in its own currency, and then converts this to dollars using the official exchange rate. Economists typically use purchasing power parity measures of GDP to assess a country’s economy. By this measure, China’s GDP would have crossed the $10 trillion mark at some point in 2006, the second country in the world to reach this output level. If China continues on its current growth path, its economy will exceed the size of the U.S. economy in 4-5 years.

Few observers recognize the size of China’s economy and therefore its potential economic, military, and political power in the world. Look for an awakening at the 2008 Olympics in Beijing.

5) The Continuation of Strong Growth in Argentina – Argentina defaulted on its debt in December of 2001. It repeatedly refused to come to terms with the IMF, even as the economy sunk into a severe recession. Argentina eventually crafted a deal with its creditors under which they got around 30 cents on the dollar. This behavior prompted outrage among the economic establishment and especially at the IMF, where the country became known as “the A-word.”

The experts repeatedly projected imminent disaster as the economy began to turn around briskly in the spring of 2002. Argentina’s economy has been growing at more than a 7.0 percent annual rate ever since. In the latest World Economic Outlook, the IMF projects that Argentina’s economy will turn in a solid growth rate of 6.0 percent in 2007, its fifth year of recovery.

Both the NYT and Post came through with some genuinely awful budget pieces today. The articles committed not only the common sin of printing large budget numbers without placing them in any context, they also failed to give readers any sense of the time periods involved.

For example, the NYT article refers to a provision that would spend $4 billion to clean up abandoned coal mines. Is this a single year appropriation? Presumably not, since that would be more than half of what the country spends on Head Start in year. Of course, if the time period is, say 10 years, then the impact of this proposed expenditure is one-tenth as large.

The Post refers to a series of tax breaks that have a cost of $50 billion. Is this for one year or many? I'm sure that there are people out there who know the answer to this question, but I don't and I doubt very many Post readers do either.

These folks do budget reporting as their day job. It shouldn't be too much to ask that they take the time to write budget numbers in a way that makes them meaningful to their readers. As it is, these numbers basically provide no information whatsoever to readers.

--Dean Baker

Ed Andrews at the NYT did some great investigative pieces a few months back that are likely to bear fruit in the new Congress. He exposed the fact that the government (under Clinton) had given leases to drill on public land, without any royalty provisions. Previous leases had suspended royalty payments if the price of oil was below $34 a barrel, in effect providing some element of insurance to the industry. The new leases eliminated royalties altogether.

The amount of money involved is not huge, about $10 billion over ten years (0.03 percent of projected spending), but it is hard to justify this sort of giveaway to what is currently an incredibly profitable industry. Andrews' article in today's paper indicates that new Congress may take it back.

--Dean Baker

I was asleep at the wheel earlier in the week when I let news reports about the downward revisions to unit labor costs pass without comment. According to several articles (see the NYT, for example) downward revisions to unit labor costs in 2nd and 3rd quarter in the release of the preliminary productivity data for the 3rd quarter alleviated concerns about inflation.

Well, I am not as concerned about inflation as many economists, but my fears were not alleviated by the new data. Quarterly data on unit labor costs are about as inaccurate as any data in the government's arsenal. While the Fed may be relieved to know that labor costs only rose at a 2.9 percent annual rate in the 3rd quarter, after falling at a 1.4 percent rate in the 2nd quarter, surely it was terrified by the fact that unit labor costs rose at a 13.6 percent annual rate in the first quarter.

The moral of this story is that serious people do not take quarterly data on unit labor costs seriously.

--Dean Baker

The NYT had a front page article noting that real wages for most workers have begun rising in the last few months. This is of course good news -- the vast majority of people get the vast majority of their income from working -- if wages don’t rise, most people are not benefiting from economic growth. But the article gets a bit carried away at points.

For example, the lead sentence asserts that “after four years in which pay failed to keep pace with price increases, wages for most American workers have begun rising significantly faster than inflation.”

The use of “significantly” in this sentence can be disputed. It is true that real wages have been rising rapidly in the last few months, but this is because of the plunge in gas prices, that was clearly a one-time event (as later acknowledged in the article). The reality is that nominal wages are rising in a neighborhood of 3.9 percent to 4.0 percent, while the underlying rate of inflation is in the range of 2.5 percent to 3.0 percent, translating into real wage growth of between 0.9 percent and 1.5 percent.

This is a decent rate of real wage growth, but certainly not extraordinary. Average hourly wages grew at a real annual rate of 1.5 percent from the beginning of 1996 to 2000. From 1964 to 1973 real wage growth averaged more than 1.6 percent. So, the current rate of wage growth is respectable, but not extraordinary, especially following almost 5 years of wage stagnation.

These points are noted in the article, but the article also features Ed Lazear, President Bush’s chief economist, saying that “the pay increases are huge, even relative to a period we think of as good.”

The article also implies that income inequality is being reversed commenting “after years of sharply rising wage inequality, the recent rise in wages also appears to be increasing pay for both rich and poor. It then reports that real wages for workers at the tenth decile have risen by 0.1 percent over the last three months, while real wages for workers at the 90th decile have increased by 0.4 percent. That sounds like continuing growth in inequality to me. (The source for this data is the current population survey, which provides very erratic data over such short periods.)

But the most annoying part of the article is the comment, “wages have risen so swiftly that some economists worry that they could push inflation up.” This is true, economists (including Federal Reserve Board chairman Ben Bernanke) are very worried about wage growth, but it would have been worth noting the implication of this statement. It implies that some economists believe that it is unacceptable for workers to enjoy any wage gains – as soon as they start to experience wage gains, inflation is a problem.

Many economists (perhaps most) hold a view like this, but the public should be aware of this issue because it raises fundamental questions about economic policy. Is the Federal Reserve Board always going to turn off economic growth whenever the labor market tightens enough so that workers can benefit? If this is the policy, shouldn’t the people know?

This article could have presented the basic story of wage trends and the Fed’s potential response in a much more coherent manner. As it is, most readers would have a difficult time understanding either.

--Dean Baker

The Wall Street Journal joined the crowd pronouncing the Medicare drug plan a great success, going so far as to tell readers that the Democrats may not be able to bring down the cost of the plan, even if Congress allowed Medicare to negotiate prices. In fairness, the Congressional Budget Office (CBO) also says that Medicare could not get lower prices.

This raises the obvious question -- why do we think that Medicare could not negotiate the same sort of prices that the Canadian government receives? After all, it would actually be a larger buyer. Does CBO think that Medicare is run by bumbling and/or corrupt fools? If that's the case, maybe we can just contract with the Canadian health officials to negotiate on Medicare's behalf, Or, maybe we can have the folks at the Veteran's Administration (VA) do the negotiating, since they also pay prices that are 40-50 percent lower than what the private insurers pay who are in Medicare Part D.

There is little doubt that the government could establish a drug purchasing system that would get drugs for Medicare beneficiaries at the same price paid by people in Canada or the VA. The WSJ tells readers that the Democrats would be ill-advised to follow this route. Lower drug prices are a clear way to save money in a tight budget environment. If the WSJ considers lower drug prices a bad route, then it obviously believes that it is more politically viable to raise someone's taxes and/or cut other spending. It would be interesting to see the suggestions.

--Dean Baker

Austan Goolsbee used his monthly column to report the findings of a study that sought to examine bias in the media by seeing whether they use Republican or Democratic phrases. For example, in the case of President Bush's plans for Social Security, the Republican phrase would be "personal accounts," while the Democratic phrase would be "privatization."

I say nice try, but no cigar. This analysis may be useful for a very narrow notion of bias, but as someone who has been commenting on economic reporting for more than a decade, I would say it misses the real story.

How about comparing the number of articles that refer to the Social Security "crisis" or the need to fix Social Security, relative to the number of stories that refer to the need to fix the country's health care system? I don't know any economist who does not believe that the health care system poses a far more serious threat to the country's economy and the federal budget, yet the media give health care reform a small fraction of the attention they give the long-term shortfall projected for Social Security.

One could argue that politicians don't talk about health care reform, but this raises a cause and effect issue. Politicians do try to bring up health care reform (e.g. dozens of members of Congress have signed on to a bill that would establish a universal Medicare system), but they are generally ignored or ridiculed by the media. Since politicians don't like being ignored or ridiculed, they opt not to talk about the issues that the media doesn't want them to talk about, so they go back to the Social Security crisis.

There are many other ways in which the media narrow debate. For example, when Ben Bernanke was appointed to the Fed, how many times did the media report that there is a consensus on monetary policy among economists? Yeah, I remember that consensus. It held that the unemployment rate could not get below 6 percent without triggering inflation. The consensus within the profession was proven wrong by Alan Greenspan when he kept interest rates low and allowed the unemployment rate to fall to 4.0 percent in the late 90s, and there was only the most limited uptick in inflation.

I could go on, as regular BTP readers know, but I think the point should be clear. The biggest problem with bias in the media, at least in its coverage of economics, is the way in which it narrows the frame of debate, not its word choice, although I could come up with a few key phrases here also (e.g. "free trade").

--Dean Baker

The WSJ has an article today reporting on how Europe appears to be outpacing the U.S. in economic growth at present. Most of the article is devoted to the positive aspects of the European economy, but at the very end the article reports the standard line about the need for deregulating the European economy. It tells readers that the U.S. economy has an underlying growth rate of approximately 3 percent, while the underlying growth rate in Europe is just 2 percent.

Well some readers may have noticed that this gap also corresponds to the difference in population and potential labor force growth (@ 1 percent in the U.S. and 0 in Europe). This means that the underlying rate of per capita GDP growth in the two regions in approximately the same. Economists usually look to per capita GDP as most basic measure of economic well-being, not simply GDP.

--Dean Baker

The Jihad continues just blocks from the White House. The Washington Post has yet another column calling for fixing the incredibly solvent (by U.S. standards) Social Security system.

There will be a day where real numbers, actual projections from the Congressional Budget Office in some real world context, will appear in the Washington Post. And then, Washington Post readers will realize that the paper's editors, coumnists, and reporters had been misleading them all these years into believing that Social Security was in a crisis.

Okay, I'll stop dreaming.

--Dean Baker

David Leonhardt uses his column to point out that house prices are declining far more than the standard indices show. He misses my two favorite reasons.

First, sellers often throw in many extras to make a sale now (e.g. help on closing costs, paying for repairs, paying condo fees for a year etc.). Sellers had no reason to make such concessions a year ago. These concessions will not appear in the indices which are based only on sales price.

The other big problem is that the OFHEO House Price Index (HPI) only includes mortgages that are small enough to qualify for the Fannie Mae and Freddie Mac mortgage pools. These are capped at around $360,000, which is a 90 percent mortgage on a $400,000 home. In some of the most overheated markets, this cap puts you below the median home price. That means that much of the action in places like Boston, New York, Washington, and San Francisco will be completely missed by the HPI. It is likely that the price run-up was larger in the higher end homes and the current decline is larger also. THe HPI will miss both. (It is also worth noting that the HPI includes assessments for refinanced homes. The index based only on sales shows less of a year over year increase.)

Following the WSJ yesterday, the NYT also has a good piece on the rapid rise in delinquencies in the sub-prime market. The growth in this market was a serious regulatory failure, as many moderate income people are going to be forced to give up homes on which they cannot afford to make payments -- great way to help people enter the middle class.

(Actually, he does a good job covering some of these issues in an accompanying note.)

--Dean Baker

The NYT has an article reporting on how hundreds of thousands of low-income Medicare beneficiaries may find themselves suddenly paying much more for their prescriptions on January 1, if they don't take the right steps to ensure that they are properly registered to receive means-tested benefits, or that they are enrolled in a plan that provides the drugs they need.

This is yet one more benefit of having competing private plans. I'm sure these seniors can't wait to sift through the various options again. Since this had been an issue that troubled members of Congress prior to the election, it would have been worth mentioning the political implications of these problems.

--Dean Baker

The NYT has a piece examining efforts to require that employers provide workers with at least 7 days a year of paid sick leave. The article has a good discussion of why workers might need paid time off. It then includes the obligatory comments from small business owners who complain that this requirement will raise costs, which will then be passed on higher prices, which will then cut demand and put them out of business.

Does this one make sense? Let's say that if we grant all workers 7 days a year of paid sick leave that the average worker takes 5 of them. This is equal to approximately a 2 percent increase in pay, assuming that there is no offsetting reduction in wages (a very strong assumption). If wages come to 40 percent of total costs, this implies a 0.8 percent increase in prices. If employers manage to offset half of the higher cost of paid sick time with lower wages then the increase in costs is down to 0.4 percent of sales.

--Dean Baker

Had this website been working, I would have been saying a lot about the economic news on Friday. The Commerce Department reported that non-residential construction fell by 0.7 percent in October following a downwardly revised fall of 0.6 percent in September.

This should put to an end silly claims that growth in the non-residential sector would offset plumetting residential construction. The residential sector is twice as large as the non-residential sector, which by itself made such an offset unlikely. Furthermore, there was no basis for any sustained boom in the non-residential sector. There is still plenty of vacant office space, retail stores are cutting back, the manufacturing sector is stagnant or declining -- what would support a boom?

Friday's data also included a release from the Institute of Supply Management that showed the manufacturing sector declining in November and weaker than expectd car sales. In addition, on Thursday we had a sharp jump in weekly unemployment claims (erratic data, but serious cause for concern). Throw in earlier releases showing declining orders for durables goods in both September and October and the continued decline in house sales and prices and you have what could be the beginning of a recession.

Remember, economists and economic reporters are very slow to recognize recessions. For the most part, they did not recognize that we were in the 2001 recession until it was almost over. My guess is that they will not be any quicker this time around. For what it's worth, I put my two cents down on paper last week.

--Dean Baker

Would the Chinese central bank be concerned about the fall in the dollar against the euro and other free floating currencies? Absolutely, the bank is targetting the price of its currency in order to sustain demand Chinese exports. If the dollar falls against other currencies, this means that the yuan is falling against other currencies. Other things equal, this increases demand for China's exports from other countries, which could mean that they would opt to raise the value of the yuan against the dollar to offset this increase. (The Chinese government has been worried about its economy growing too fast.)

Is the Chinese bank worried that this reduces the value of its dollar holdings as the NYT claims? Not unless they are morons, which is not plausible. Virtually every economist in the world believes that the dollar will be falling at some point in the future. The logic is simple. The trade deficit is unsustainable. The only way (other than a prolonged and severe recession) to bring the deficit down is to reduce the value of the dollar.

Certainly the Chinese central bank understands this situation. It is apparently willing to hold large amounts of dollar assets in order to sustain export demand for its products, even though it will have to suffer large losses on its holdings. Since they must know that losses are inevitable, they cannot possibly be too upset about seeing some of those losses take place last week. That was the risk they knew they were taking.

--Dean Baker

BTP is back after being silenced by evil doers inside the Internet. The involuntary break gave me the opportunity to calm down after seeing an NYT personal finance column that told people to assume that they will collect little or none of their Social Security benefits ("Plan to Retire But Leave Social Security Out of the Equation").

The columnist bought the scare stories hook line and sinker. Just to remind everyone, the porjections from the non-partisan Congressional Budget Office show that the program can pay all scheduled benefits through the year 2046, with no changes whatsoever. Even after this date, the program could continue to pay 80 percent of scheduled benefits indefinitely, again assuming that no changes are ever made. Of course, Congress would almost certainly vote to raise taxes enough to sustain benefits, as it did in the decades of the 60s, 70s, and 80s. I base this assessment on the fact that the elderly will be more than twice as large a share of the electorate in the 2046 than they were at the time that Congress voted for prior tax increases (sophisticated political analysis, huh?).

Anyhow, this piece was an outrage -- I am glad that I had two days to calm down.

--Dean Baker