The NYT seems very eager to side with the recording industry in its protectionist question. How else can one explain the constant use of the term "piracy" to describe unauthorized duplication of recorded music. The NYT, which harshly denounces protectionist measures designed to benefit manufacturing workers, again committed this sin today in a column on the University of Oregon's refusal to comply with a subpoena seeking records on its students.

From the article, it appears as though the students had shared music files, which they may have purchased, among themselves. It is not evident that this is violating any law (last I checked, I can lend a CD to a friend), even if the recording industry doesn't like it. Rather than asserting that an act of "piracy" has been committed, the paper could simply substitute the more neutral term "copying." In most cases, it will have room for the additional letter.

--Dean Baker

After my previous close encounter with Michael Dobb, the Post’s post-modern fact-checker (“depending on the statistics you use, Mexican economic growth over the last two decades has been either 337 percent, 125 percent, or 83 percent.”), I was prepared to ignore his latest attack on Democratic presidential candidate John Edwards. After all, I have limited experience in a world where any number is as good as any other number. But, here at BTP we maintain a commitment to the real world and real numbers.

So, here’s the deal. Mr. Dobb lists as one of the big fibs of 2007 Senator Edwards’ statement that NAFTA cost us a million jobs. By way of response, he cites a study by the Congressional Research Service (CRS) that reports that NAFTA had “little or no impact” on the aggregate number of jobs in the United States.

While Dobbs wants to use this discrepancy to imply that Edwards is a big liar, there is actually a very different story at play here. Edwards was referring to the number of jobs lost in the United States due to the fact that the U.S. ran a trade deficit with Mexico of close to $80 billion last year. This trade deficit is approximately equal to 0.6 percent of GDP, which means that, other things equal, GDP in the U.S. would have been 0.6 percent higher if we had balanced trade with Mexico. If we assume that job loss was proportionate to GDP loss, then a 0.6 percent drop in employment would correspond to roughly 840,000 jobs, a figure not hugely different from Senator Edwards 1 million figure.

Of course, other things are not equal. There was job growth in other sectors that largely offset the jobs lost from NAFTA, hence the CRS statement that NAFTA had little or no impact on the number of jobs. So is Edwards a big liar because he only talked about the gross job loss from NAFTA rather than its net effect on employment?

Well, that seems a real stretch to me. Politicians routinely talk about the jobs they create from some particular project or policy. For example, it is very common for a politician to say that building a highway created X thousand jobs or that exports to country Y created Z thousand new jobs. These claims also refer to gross job creation. If we asked our friends at CRS, they would almost certainly answer that these policies had “little or no impact” on the aggregate number of jobs in the United States. In other words, these jobs gains are mostly just displacement. Workers who would have otherwise have been employed elsewhere are instead employed building a highway or exporting goods to country Y.

So Edwards was using a job loss figure in a way that is standard for politicians, and in fact newspapers and policy wonks, to talk about job creation. Should he have pointed out that his figure was a gross number and did not mean a net loss of jobs? I would have liked to see this, but I would also like to see newspapers put budget numbers in context too. Edwards was using numbers in a way that conformed to industry standards. For this, he does not deserve to have the Post call him a liar.

--Dean Baker

Addendum: It has been pointed out to me that Edwards said "millions" of jobs, not 1 million jobs. If this is correct, then Edwards did make a serious exaggeration that deserves to be corrected.

Okay, holiday break time at BTP. I'll be back on the weekend. Until then, remember, don't believe anything you read in the paper.

Happy Holidays!

--Dean Baker

That's the annualized rate for the last three months from the Case-Shiller index. This is really big news.

--Dean Baker

That's the word from the NYT. According to the article people are fleeing Denmark because of its 63 percent top marginal tax rate. The net rate of departure is supposedly 1000 people per year, approximately 0.002 percent of the population. The article tells us that this net rate actually masks a more rapid rate of departure of high-skilled people, who are being replaced by less-educated workers.

The article presents little evidence that the economy is suffering from this exodus. Denmark currently has a 3.6 percent unemployment rate. Its economy is projected to grow by 3.5 percent in 2007. The article warns us that growth will fall to 1.0 percent over the next three years. (The main reason for the projection of slower growth is a U.S. style housing market crash. Denmark's central bankers were no smarter than Alan Greenspan.) Of course, since Denmark's population is barely growing, that translates into about 0.7 per capita growth, the number that economists usually care about. That's not great, but not exactly a nightmare.

In terms of sustainability, Denmark has a budget surplus of more than 2 percent of GDP (equivalent to $280 billion a year in the U.S.) and a debt to GDP ratio of around 26 percent. Its current account surplus is also in excess of 2 percent of GDP.

In short, if Denmark is suffering because a relatively small number of highly educated workers find the tax rate too high, there is not much evidence in the data.

--Dean Baker

The WSJ reported the bankruptcy and shutdown of MAXjet Airways. The piece discusses the financial situation of the airline and the efforts that are being made to accommodate ticket holding passengers.

All of this is well and good, but what happened to the airline's employees who got a layoff notice in their Christmas stocking? Did they get severance pay? Will they be picked up by another airline? The WSJ doesn't tell us. It doesn't seem too touchy and feely to include two sentences about what happens to the employees of a defunct airline, especially when the collapse occurs in the middle of the holiday season.

Grinch award goes to the WSJ for this one.

--Dean Baker

Not according to the Washington Post. In a lengthy page 1 article discussing the implications of the dollar's fall, the size of the trade deficit does not appear once as a causal factor. Of course the deficit is not the only factor behind the decline, but the fact that the United States had been throwing out $800 billion more dollars on international currency markets each year than people needed to buy our exports surely plays some role in the decline. In fact, back in the old days, economists used to talk about changes in currency values as the mechanism that adjusts trade imbalances. (That's a joke -- they still talk about exchange rates adjusting to correct trade imbalances. Papers like the Post just don't like to acknowledge this fact.)

Most of this article is equally confused. For example it tells us about a Kenyan coffee grower who is being hit because he sells his coffee for dollars that are rapidly losing their value. Well, coffee is priced on a world market. Its price fluctuates by the hour. If the dollar lost 90 percent of its value, then coffee would simply sell for ten times as much, measured in dollars, unless coffee was also declining in value. If coffee is declining in value, then the farmer's problem is the decline in the value of coffee, not the decline in the value of the dollar. The story would be different if the coffee grower was locked into a longterm contract denominated in dollars. This may be the case, but the article doesn't say anything about longterm contracts.

Similarly, the article recounts the situation of foreign workers in the United Arab Emirates, who it says have seen their savings wiped out because of the decline in the value of the dollar. This would only be the case if the workers held their savings in dollars. That may be the case, but this then raises the question as to why they held their savings in dollars. Did they not have the to option to hold savings in euros or other currencies, or did they simply make the wrong choice? Again, the article does not tell us.

The sharp fall in the dollar over the last five years is a big deal for people in the United States and the rest of world. However, when the Post devotes a front page story to the topic it should at least make sure that it conveys some real information. This one doesn't.

--Dean Baker

NPR had an interesting segment this morning on the issue of Medicare's payment for experimental drugs under the new prescription drug plan. The piece reported that these drugs can be very expensive. Of course, in almost no cases are these drugs actually expensive to produce. They are expensive because of government granted patent monopolies.

It would be useful if NPR would occasionally talk about the costs of this patent protection. Economists typically get very upset over tariffs or quotas that raise the price of imported goods by 10-20 percent. In the case of the drugs mentioned, patent protection is raising the prices by several thousand percent. It would have been useful to note this fact.

--Dean Baker

The NYT has a good article telling readers that many state and local governments are facing the prospect of revenue shortfalls as property tax assessments get revised downward. This problem, which is likely to get much worse over the next couple of years, was entirely predictable. This point should have been made in the article.

--Dean Baker

The NYT editorial board warned readers about the dangers the economy faces if a new president abandons the Bush-Clinton-Bush (BCB) trade agenda. It tells us that “throttling trade — say, by reconsidering existing agreements — would hurt a lot more people than it helped.” It would be interesting to see any evidence that supports this assertion.

But let’s put this point aside. We can grant that removing protectionist barriers does in general lead to more economic growth. The biggest protectionist barriers in the economy at present are those that protect highly educated professionals like doctors and lawyers and the reporters that work at the NYT. If we could bring in enough fully qualified doctors from the developing world to bring the wages of our physicians down to West European levels it would save patients in the United States close to $80 billion a year on their health care. This swamps the gains from NAFTA, CAFTA, and the other trade deals that the NYT editorial board is concerned about.

Why does the NYT never say anything about protection that benefits professionals and keeps their wages far above world market levels? The models are the exact same whether the item in question is “shoes” or “physicians’ services.” Does the NYT editorial board not recognize professional restrictions as a form of protectionism? Does it not recognize visa rules that require employers to first seek out a citizen and to pay a comparable wage as a form of protection? Suppose that Wal-Mart was required to first try to buy domestically made shoes before it could import them from China, and even then had to pay the domestic price? Wouldn’t that be protectionist? [For the record, highly paid workers have been the big winners from trade. Profit margins have not increased over the last decade.]

And, while we’re on the topic, why doesn’t patent protection that raises the prices on prescription drugs by four or five hundred percent count as protectionist. Does the NYT have any studies that show that patent protection is the most efficient way to finance research? I very much doubt this.

The basic story is that the NYT editorial board is very upset by forms of protection that have the effect of protecting low and middle income workers. It is perfectly willing to accept those forms of protection that redistribute income upward – even when these forms of protection impose very large costs on the economy.

--Dean Baker

There is no dispute that there has been a massive upward redistribution of income over the last quarter century. There is dispute about the causes.

The NYT is anxious to tell us that a big part of the upward redistribution was just “basic economics.” It tells readers that:

“One reason for the change is basic economics. In a global, high-technology economy the most successful workers can be more productive and can play on a bigger field.”

Is that so? How about the fact that in a global, high-technology economy the “most successful” workers face a much bigger group of competitors who can depress their wages. Isn’t that also “basic economics”?

The fact is that CEOs and other highly paid workers have seen their pay explode in ways that is not matched by the most highly paid workers in Europe, Japan, and other wealthy countries. Perhaps it is “basic economics” that allows an incompetent CEO at Home Depot to walk away with a $210 million severance package, but there are alternative explanations, like crony capitalisms in which the insiders get to rip off the company to fatten their wallets. This also seems the best description of how the executives at major banks, who incurred multi-billion dollar losses on securities backed by subprime mortgages, got tens of millions in severance pay on their way out the door.

Is it basic economics or government intervention in the form of copyright monopolies that made Bill Gates fabulously wealth? The tightening and extension of patent monopolies (partly through “free” trade agreements) also explains the wealth of Pfizer, Merck, and the rest of the pharmaceutical industry as well as the thousands who have made their fortune through this route.

It is very much a debatable question as to whether there is anything intrinsic to the economy that lead to the explosion of inequality in the last quarter century. If someone at the NYT wants to make this case, then they can be given the opportunity in an oped column. Unsubstantiated assertions like this do not belong in a news article.

--Dean Baker

The Washington Post had a good story on the dealings of the electronics retailer Circuit City. Unfortunately, it was buried in the business section where no one will see it. It should have been plastered at the top of the front page.

The basic story is that last March, the wise men who run Circuit City came up with the brilliant idea of laying off their more senior salespeople, who get $14-$15 an hour, and replacing them with new hires who get around $9 an hour. It turns out that this move was not very good for business. One of the reasons that people go to a store like Circuit City, rather than buying things on the Internet, is that they want to be able to talk to a knowledgeable salesperson. Since Circuit City had laid off their knowledgeable salespeople, there was little reason to shop there.

Apparently Circuit City came to this same conclusion earlier this fall and tried to hire back some of the people it had dumped. In any case, things have not gone well for the bottom line. The company is now losing money and its share price is down more than 75 percent from its value earlier this year.

We all know what happens when you mess up in the dog eat dog world of big business -- you get retention awards (that's because your stock options aren't worth anything). The Post reports that Circuit City's executive vice-presidents will get retention awards of $1 million each. That's 35 years worth of pay for one of sales clerks who earned $14 an hour. And that's just the bonus.

This touching account of Santa Claus visiting Circuit City's executive suites belonged on the front page of the Post and every other newspaper. What better way to get in the Christmas spirit?

--Dean Baker

The NYT reported on new measures of purchasing power parity GDP from the World Bank that show China to be about 40 percent poorer than the old measures. The article notes that some economists question the accuracy of the new measure. It would have been helpful to explain a bit more the reasons for skepticism.

The new measure puts China's per capita GDP in 2005 at $4091, this would be at the level of one of the poorer countries in Latin America. The reason why this seems problematic is that China is reported as having had extraordinary growth over the prior quarter century so that per capita GDP (measured in constant units of Chinese currency) is reported as being 680 percent higher in 2005 than it was in 1980. Given the $4091 figure for 2005, this growth path would imply that China's per capita income in 1980 was about $525 (in 2005 dollars), which would make it far poorer than any country in Sub-Saharan Africa at present.

There is no doubt that China was a poor country in 1980, but it had a life expectancy of close to 70 years, near universal literacy and its population generally had food and clothing. These are not features that one would expect to see in the poorest country in the world.

In short, one must either reject the new measure for China's PPP GDP or reject the growth rates that have been reported over the last quarter century. I don't know which is more suspect, only that the two are inconsistent given plausible views about China's 1980 living standards.

--Dean Baker

Addendum: For comparison with China's implied 1980 per capita GDP of $525 (in 2005 dollars), we have the following numbers on per capita income for 2005 from the IMF (using the old data):

Chad -- $1,729
Congo (Democratic Republic) --$800
Ethiopia --$1,026
Niger -- $915
Nigeria -- $1,153
Zambia -- $1,109

The NYT reports that Europeans are rushing to buy Manhattan condos, taking advantage of the rise of the euro against the dollar. I guess that losing tens of billions in securities backed by subprime mortgages whetted Europeans appetite for U.S. real estate.

The article cites the example of a Belgian couple who just bought a condo for $1.7 million, which will rent for $7,500 a month. The broker who sold the place is quoted as saying, "what else could they do with their money?"

Let's see, suppose the condo fees are $1,000 a month, probably a ballpark figure for a high end Manhattan condo. That leaves our couple with $6,500 a month or $78,000 a year in rent on their condo. Now lets, imagine that the condo goes vacant an average of 2 months every four years due to turnover. This reduces average annual net rental income to $74,250. That is a return of 4.4 percent on their investment.

Now, let's assume that property taxes are 1.0 percent a year. This gets us down to a real return of 3.4 percent. Now, if condo prices keep pace with inflation, then the 3.4 percent real return would be on a par with what our Belgian investors would get on high-rated corporate debt. Of course, they don't have to deal with the hassle of being landlords to get a 3.4 percent real return on corporate bonds.

Now suppose that the condo falls by 10 percent in real terms over 5 years at which point they decide to sell. If we assume 10 percent round trip transactions costs, then we're looking at a negative return of 1-2 percent over this period.

Yeah, what else could they do with their money?

--Dean Baker

USA Today celebrated the prospect of increased crowding and worse problems with global warming today. That's right, it told readers that a rise in the fertility rate in the United States is good news because: "A high fertility rate is important to industrialized nations. When birthrates are low, there are fewer people to fill jobs and support the elderly."

Okay, let's think about this one for a moment. Do we have a problem that there are too few people to fill jobs? I haven't heard about that one. It seems to me that we could do with more jobs for the people we already have.

What does it even mean in a market economy to say that we have too few people to fill jobs? Seriously, this is complete nonsense. If there are too few people, then the wage rises. If the employer doesn't want to pay the wage necessary to attract a worker, then the job doesn't exist, so what?

As far as not having enough workers to care for our elderly, again this is nonsense. Productivity is growing at least 1.5 percent a year and possibly as much as 2.5 percent a year if we can get back to 1995-2004 rate. Even the slower rate of productivity growth will swamp the impact of a higher ratio of retirees to workers. In other words, even if our working age population falls relative to our retired population, we will still be much wealthier on average.

This piece belong in the opinion section, it has far more misinformed assertions that actual news content.

--Dean Baker

When the Fed announced plans to allow banks to borrow $20 billion in short-term reserves through an anonymous auction system, it was widely reported that anonymity was important because borrowing reserves carried a stigma. The NYT reported the results of the auction yesterday and repeated the assertion about Fed borrowing carrying a stigma.

The only problem is that the results of the auction seem to contradict the assertion. The money was lent at a 4.65 percent interest rate, 0.1 percentage point less than the discount rate. In other words, banks were willing to pay less to borrow money anonymously than they would have been required to pay to borrow the money openly. If there was actually a stigma attached to openly borrowing from the Fed, then we should expect that banks would be willing to pay an interest rate premium to borrow anonymously.

This result again raises questions about why the Fed is conducting the auctions this way. The financial system got into its current mess in large part because of a lack of transparency. If some banks are having trouble remaining liquid, why should the public as a whole not have this information. Certainly some insiders have this information, and in U.S. financial markets it is always reasonable to be concerned about creating profit making opportunities for insiders at the expense of outsiders.

--Dean Baker

The Environmental Protection Agency ruled that California and 16 other states could not set their own emission standards for cars sold in their states. In its article reporting this decision, the NYT quoted EPA administrator Stephan L. Johnson saying "the Bush administration is moving forward with a clear national solution, not a confusing patchwork of state rules."

It would have been helpful to readers to point out what this "confusing patchwork of state rules would imply." The state rules would set mileage standards that are higher than the national level for the mix of cars sold in the affected states. An auto manufacturer could adjust its mix of cars sold in each state in order to meet whatever target is set. This process can be managed easily with an Excel spreadsheet. It is not clear why any auto manufacturer would find this process confusing.

--Dean Baker

This should have been the headline on this article. I doubt many readers would have understood that this is exactly the nature of the industry's proposal. Most businesses would like it if the government would step in and pick up their money losing operations. Usually, they would not be so brazen as to publicly suggest such a move. Remarkably, readers of this article may not realize how outlandish the industry proposal really is.

--Dean Baker

The WSJ has a good piece this morning reporting on some of the mechanisms through which sellers kickback money to buyers. These kickbacks typically do not get included in the contracted price, which is the basis for all the house price indexes. Insofar as sales include kickbacks, the decline in house prices will be larger than the indexes are showing.

In his desperate effort to preserve his legacy, Alan Greenspan has been saying that the only thing that he could have done to stem the housing bubble was to raise interest rates. This would have crashed both the bubble and the economy.

It would be good if reporters asked him about alternatives, like imposing the sort of regulations advocated by fellow Fed governor Ned Gramlich in 2000, and just imposed by the Fed yesterday. At the least, these regulations would have stemmed some of the abuses in the mortgage market we saw in the last three years.

I would have had Greenspan lay out the case for the existence of the bubble at his congressional testimonies and other public speaking appearances. But, if he has trouble with graphs, at the least he didn't have to deny the existence of a housing bubble, as he did repeatedly over this period.

Greenspan failed disastrously in dealing with the housing bubble and he should not be allowed to rewrite history to exonerate himself.

--Dean Baker

NPR reported that the government has promised $45 trillion more than it can deliver for Social Security, Medicare, and other benefit programs. It also informed us that the number increased by $1 trillion over just the last year.

What does this mean, how much money is this? Listeners would have no idea from NPR, they were just told that we better fix these programs.

Let's think about how a news reporter might have dealt with these numbers. First, a news reporter might have tried to put this number (a really big number) into a context in which listeners could make some sense of it it, instead of just using it to try to scare listeners.

Suppose the news reporter had told us what this number is -- the projected shortfall for Social Security and Medicare for current participants, under the assumption that no one else ever starts working in the United States. The $45 trillion is the discounted (using a 3 percent real interest rate) value of this projected shortfall.

I don't know a single economist anywhere who thinks that the U.S. economy is going to stop having new workers. There are a lot of kids in the schools who will eventually graduate, at least some of them plan to work when they are adults. So this number does not sound very scary on its face since it has nothing to do with anything we will see in the world.

How about telling listeners why the number grew by $1 trillion from 2006 to 2007, I don't recall any big boosts in SS benefits approved by Congress. The reason for the growth is that we are measuring the shortfall in 2007 dollars instead of 2006 dollars. 2007 dollars are worth about 3 percent less than 20006 dollars due to inflation. Are you scared yet?

How about expressing this as a share of projected income over this period -- the share would be around 6 percent. I guess that is not as scary as $45 trillion.

Finally, NPR could try to give its listeners a sense of where this shortfall is coming from. Of course, this would require that its reporters were familiar with the Congress Budget Office, which is apparently too much to ask of its busy reporters. If they went to the homepage of the website, NPR's reporters would find a little graph showing that the growth in projected spending over the next 75 years is overwhelmingly due to the government health care programs, most importantly Medicare and Medicaid. In other words, the scary stories of government deficits are in fact scary stories about health care costs being out of control.

This makes NPR's tale of a $45 trillion shortfall in reality an argument for reforming health care, not a general concern for government excess. However, that is not the message that NPR gave its listeners.

--Dean Baker

It would be helpful if the many articles reporting on economists' predictions about the future state of the economy reminded readers that economists do not forecast recessions. For whatever reason (I don't care to speculate), economists are notoriously bad at seeing recessions coming, even when they are right in front of their face.

In the fall of 2000, not one of the "Blue Chip 50" forecasters saw the 2001 recession coming. The Philadelphia Fed's Livingstone Survey in December of 2001 saw nothing but clear skies ahead. Even in June of 2001, three months after the recession is now dated as having begun, the wise forecasters still saw a relatively healthy scenario, including a 1455 S&P 500 by the end of 2002 (try 900).

One of my favorite Greenspan moments was when he spoke confidently at a Fed meeting in July of 1990 that the economy looked healthy for the immediate future. The recession is now dated as having begun in June of 1990.

The point here is that there is an incredible bias among economists that prevents them from seeing recessions until they are well underway. (I'm the only one that predicts recessions that don't happen.) This information should be included in a cautionary note in articles on economic forecasts.

--Dean Baker

[Addendum -- more on Greenspan and the 1990 recession, which began in July, courtesy of Macroblog, via my friend Lee Price:

As we look back at the '90 recession, here are a few quotes from Fed
Chairman Alan Greenspan (bear in mind that the recession started in
July, 1990):

"In the very near term there's little evidence that I can see to
suggest the economy is tilting over [into recession]." Greenspan, July 1990

"...those who argue that we are already in a recession I think are reasonably certain to be wrong." Greenspan, August 1990

"... the economy has not yet slipped into recession." Greenspan,
October, 1990]

I usually think that the benefits of economic reasoning are hugely oversold. However, the efforts to slow global warming have suffered badly from the lack of such reasoning, which is often just commonsense.

The NYT has a column today outlining a plan that would tax the carbon emissions associated with goods that are exported from developing countries like China to wealthy countries like the United States. The purpose of the tax is to eliminate a method of avoiding emission caps on wealthy countries – have carbon intensive goods produced in the developing world.

While this reasoning is sound, the plan is explicitly designed to avoid taxing emissions in China that are directed towards its own consumption. This one should cause readers to ask “why?”

We know that the Chinese, as recent industrializers, can’t be held responsible for the huge accumulation of greenhouse gases (GHG) over the last 150 years. We also know that even with their incredible growth over the last quarter century they emit less than one-fourth as much GHG on a per person basis as we do in the United States. However, many of the easiest reductions of GHG are in the domestic sector of China and other developing countries. Why not give them incentive to take advantage of these opportunities?

This can be done without penalizing developing countries, by bringing them into a system of emission caps, like Kyoto, where permits can be freely traded across countries. The developing countries are then given caps that are close to their baseline growth path for a substantial period of time (e.g. 20 years). The caps for wealthy countries are then wedged down to levels that restrain world-wide emissions to acceptable levels.

In this story, economic growth in developing countries is not slowed by emission caps. In fact, they can earn money by reducing GHG, creating a clear green path to development.

This system has the desirable effect of giving everyone everywhere in the world the same incentive to reduce GHG. That is exactly what we should want. Otherwise, we may be spending $10 in the U.S. or Europe to bring about the same emission reduction that would cost $1 in China. If we had infinite money or infinite time, then we may not care about such discrepancies, but in the real world, this is a big deal.

--Dean Baker

The Post headline told us that the Senate passed a "huge" farm bill yesterday. The first sentence tells us that the tab is $286 billion. Is everyone really scared yet?

Okay, now for the trivia question. How long a period is covered by this $286 billion is spending? And, for the really nerdy among you, what share of federal spending is going to this bill?

You won't find the answer to either of these items in the Post article. The answer to question #1 is 5 years. In other words, the Senate is not proposing to spend $286 billion on this "huge" farm bill this year, but rather over the next five years. That comes to $57.2 billion a year.

Is this a big deal? Well, it's equal to about 1.5 percent of projected spending over this period. It comes to about $190 per person per year.

It is really incredible that the Post could publish an article about a multi-year spending bill that never tells its readers how many years are covered. This is inexcusable. Did the reporter think that all the Post's readers have been following the debate so closely that they knew the bill covered five years? Or, did the reporter think that this is an unimportant piece of information?

It would also help to put the $286 billion in some context. Just printing a huge number like this is a meaningless fraternity ritual. Reading that a bill costs $286 billion over 5 years means nothing to anyone except for a small number of budget wonks. $286 billion is a really big number. It is also a really big number if you add a zero or take away a zero.

I have talked to many reporters and editors about writing large budget numbers without any context and not one has ever tried to tell me that the typical reader (even the well-educated ones) can attach any meaning to such big numbers. So why does the media keep doing this sort of budget reporting?

It is well-documented that the public is very poorly informed about the budget. A large portion of the public think that small items like welfare and foreign aid constitute the bulk of the budget. Or, they believe that if we eliminated pork barrel spending, like the famous bridge to nowhere, we could balance the budget and cut everyone's taxes.

Of course this is not true, but the problem is not that the public is stupid. The problem is that the media does a horrible job reporting on the budget and they refuse to change even when there are simple and obvious ways to do better reporting. When you read horrible news articles like this piece on the farm bill, it is difficult not to take pleasure in the trend of declining newspaper readership. If we no longer had newspapers to give us "news" like this, it would be no loss.

--Dean Baker

The media have a bad habit of assigning motives to politicians when they have no possible way of knowing what actually exists inside their heads. The NYT gives an especially egregious case of this silly mind-reading in its discussion of the international conference on global warming in Bali, Indonesia.

The NYT told readers that:

"The differences in philosophy at the meeting were striking and fundamental. European Union negotiators said they favored specific government-imposed caps on emissions and wanted industrial countries to lead the way.

The United States favored relying on "aspirational" goals, research to advance nonpolluting energy technologies and a mix of measures, including mandatory steps like efficiency standards for vehicles and appliances — but all set by individual nations, not mandated by a global pact" (emphasis added).

How does the reporter know that the U.S. delegation, or President Bush, has a different philosophy than the leaders of the other countries represented at the talks? Is it possible that he is simply more indebted to industries that stand to lose from restrictions on greenhouse gas (GHG) emissions (e.g. coal, oil, and autos) than his counterparts in other wealthy countries? Perhaps their environmental groups are more effective in pressing their case in national politics.

It seems at least possible, if not likely, that the different approaches to climate change on display at Bali have far more to do with political pressure than with philosophy. It would helpful to readers if the NYT reporters can avoid making assertions which they do not know to be true.

btw, this article also comments in passing that China and India (who also refuse to agree to caps) will soon surpass the U.S. as the largest emitters of GHG. It would have been helpful to point out to readers that on a per capita basis that these countries still emit less than one-fourth as much GHG as the U.S.. It might also have been helpful to point out that since these countries are far poorer than the U.S., and did not create the problem, it is virtually inconceivable that they will agree to substantial restrictions on emissions unless the rich countries pay them to accept restrictions. NYT readers who care about global warming would probably want to know this information.

--Dean Baker

In its coverage of the last pre-Iowa Democratic debate, NPR felt the need to repeatedly refer to the trade policies pursued over the last quarter century as "free-trade" policies even though this is not true. These policies only liberalized some forms of trade. More educated workers like doctors lawyers, and NPR reporters still enjoy substantial protection from international competition. These trade deals also increased protectionist barriers in the form of patent and copyright protection.

The main focus of trade liberalization over this period was to remove barriers to importing manufactured goods, which had the effect of putting less educated (non-college educated) workers into direct competition with low-paid workers in the developing world. The main beneficiaries of these trade deals have been the most highly educated workers, who remain largely protected from international competition. (Profit shares have not increased, as lower labor costs were largely passed on in lower prices.)

It would be more accurate if NPR referred to recent trade deals as "trade agreements we like" than "free-trade" agreements.

--Dean Baker

The NYT was quick to pronounce the November retail sales report as stronger than expected. There is no doubt that 1.2 percent growth compared with October levels looks strong on its face, but the rise in producer prices reported on the same day should raise questions.

First, more than half the gain in reported sales was due to higher gas sales. This was due to higher gas prices, not a rush to the pumps. Pulling out the surge in gas sales, retail sales were up by just under 0.6 percent.

This is still a decent pace, except that we don't yet know how much of this was due to higher prices, as opposed to greater sales volume. If the price of retail goods and services other than gas rose by 0.3 percent, than we are looking at a rather modest real growth rate in the 0.2 to 0.3 percent range. Since this follows a month of essentially no growth, that doesn't look particularly strong. This is especially the case, since the earlier than usual Thanksgiving undoubtedly shifted some holiday shopping forward into November.

[addendum: the November CPI data showed non-shelter prices rising 1.0 percent. This implies real growth of retail sales of approximately 2.0 percent. Given the early Thanksgiving this year, that looks extremely weak.]

--Dean Baker

The reason for asking, is that this seems to be the view of the Fed. Why else would its new "Term Auction Facility (TAF)" allow for banks to secretly borrow reserves from the Fed?

Those of us who think that Wall Street folks might not always be entirely honest, might suspect some insiders
will trade stock based on the fact that they know certain banks have borrowed heavily through the TAF. This could allow for substantial profits at the expense of the outsiders who don't know about this borrowing.

Given recent events and disclosures about SIVs, CDOs, CMOs and other creations of the wizards of Wall Street, it seems reasonable for reporters to ask the Fed about how it will prevent such insider trading. I look forward to reading the answers.

--Dean Baker

The markets are supposed to be surprised by the high rates of inflation shown in the producer price indexes this morning. The overall finished goods index rose by 3.2 percent, driven by a 14.1 percent jump in energy prices. The core index rose by 0.4 percent, the largest increase since February. The core intermediate goods index rose by 1.0 percent, suggesting more inflationary pressure down the road.

These increases are not a surprise to folks who paid attention to the import/export price data reported yesterday. There were big jumps reported for both the price of non-oil imports and non-agricultural exports, as noted here. A falling dollar does affect the rate of inflation, but it can take time.

--Dean Baker

The monthly data on import and export prices typically do not get much attention. This month should be an exception. Non-oil import prices rose by 0.7 percent after rising by 0.5 percent last month. This suggests that the fall in the dollar is finally showing up in higher import prices. The Fed is now facing the decision in very concrete terms, will it accept this inflation and keep lowering interest rates to try to offset the impact of the housing crash, or does it try to keep inflation within its comfort zone at the cost of letting the economy fall into recession.

--Dean Baker

In an article discussing how the housing downturn and credit crunch has affected the economy, the NYT compared the127,000 rate of monthly job growth to the 186,000 rate over the prior year. This comparison may understate the falloff in job growth.

Job growth numbers through March of this year were revised in accordance with data from state unemployment insurance records. This lead to a downward revision of 300,000 for the prior year, an average of 25,000 a month. Currently, the Labor Department has been adding approximately the same number of jobs to the estimates from its establishment survey this year through its "birth/death" model as it did last year. This imputation is supposed to pick up the jobs created in new firms that could not be included in the survey.

If the economy is growing at the same rate as it did last year, then the Labor Department is probably still overstating job growth in the period since March of this year by about 25,000 a month. If the economy has slowed from its rate of growth in the same months of 2006, then the overstatement would be even larger.

--Dean Baker

The NYT gets this one wrong in an otherwise good column on the situation in some of the formerly hot markets. Over the hundred years from 1895 to 1995, real house prices did not rise, according to a data series constructed by Robert Shiller. By comparison, real family income grew at an average annual rate of close to 2 percent a year.

This distinction is important. If house prices fall back to their trend level then we should expect to see a real decline of approximately 30 percent, not the 15 percent suggested in this article.

--Dean Baker

One of the areas of surprising (to me) strength in the U.S. economy thus far this year has been the improvement in the trade deficit. Strong growth in exports coupled, with sharply slower growth in imports, has offset some of the impact of the housing crash.

For this reason, I was struck by an article in the Financial Times this morning telling readers that the declining dollar had done almost nothing to redress international trade imbalances. The FT supports its case with a chart that shows the U.S. trade deficit hovering near $800 billion since early 2005.

The problem with the FT chart is that it is showing imbalances in nominal dollars. The U.S. trade balance has been increased by the sharp rise in oil prices over the last two years. In real terms it has fallen substantially since its peaks last year. For 2007 to date, the trade deficit in real terms is down by more than 6 percent, and a year over year comparison of the last quarter shows a drop of 11.7 percent. It is hard to believe that anyone could have expected a more rapid decline.

The FT charts conceal large changes in trade flows because they only look at nominal flows. Since the rising price paid for oil has largely offset the change in trade flows, it appears that little has changed. (Actually, even here the FT is not really conveying the information on its chart well. The deficit had been rapidly growing until 2005, at which point it leveled off. This is an important change, with the deficit shrinking as a share of GDP over the last two years, as opposed to growing.)

The article also asserts that China is prevented from raising the value of the yuan relative to the dollar because it would mean that they would lose money on their holdings of dollar reserves. The Chinese central bank surely knew that it would lose money on these reserve holdings when it first acquired them. It is hard to believe that this could be a major concern in their decision to set the value of the yuan.

It is also worth mentioning that a higher-valued yuan would do much to address the major problem for China cited in the article, an overheated economy and rising inflation. Raising the value of the yuan would reduce the price of imports, thereby dampening inflation. It would also reduce China's trade surplus, or at least slow the increase, thereby slowing economic growth.

--Dean Baker

A few days ago I beat up on the Post editorial board for yet another failed attempt at dispassionate analysis in their "ideas primary." The Post attacked the leading Democratic presidential candidates for their statements on trade. It was especially angry that they attacked NAFTA, which the Post pronounced as a great success, especially for Mexico. To support its case, the Post told readers that Mexico's GDP had more than quadrupled since 1987.

As I pointed out, this is absurd. Mexico has actually had slow growth for a developing country over the last twenty years. (NAFTA went into effect in 1994, so I'm not sure where 1987 came from in any case.) According to data from the IMF, Mexico's GDP has risen by 83 percent since 1987, which is considerably short of quadrupling by most definitions of the term.

Remarkably, my post prompted an investigation by Michael Dobbs, the reporter who runs the Post's "Fact Checker" section, which assesses claims made by the presidential candidates and their campaigns. We had several lengthy discussions in which I tried to explain the measurement issues involved. (Mr Dobbs did catch two errors in my original post. I had used a wrong number to calculate 67 percent GDP growth for Mexico, instead of the 83 percent figure obtained from the IMF numbers. I had also used dollar signs when I meant constant value pesos. Unfortunately, my proofreader doesn't come in until 7:00 A.M. and I had done the initial post at 5:00.)

Anyhow, Mr. Dobbs did a write-up of this issue yesterday in which he seemed to come to the conclusion that there are different ways to measure growth, and you get to pick the one you like best. While I tried to explain that this is not true, I apparently could not convince the Post's fact checker.

So, rather than explain the argument as to why my measure (constant prices, own currency) is the appropriate measure, let's just say that the Post should use the same measure everywhere. So, if the Post wants to use the methodology from its NAFTA editorial to report GDP growth for Mexico (purchasing power parity, measured in current international dollars), presumably it should use the same methodology to report GDP growth for other countries.

According to the Washington Post methodology, Argentina's economy has grown by 73.4 percent from 2002 to 2007, an average of 11.6 percent annually. Venezuela has done almost as well, growing 64.6 percent, an average annual rate of 10.5 percent.

We find that even the welfare states of West Europe do very well by the Post methodology, with France growing by 25.7 percent (4.7 percent annually), Germany growing 22.8 percent (4.2 percent annually), and Italy growing 20.5 percent (3.8 percent annually). Even Japan has a dazzling growth record with the Washington Post methodology, growing 26.9 percent from 2002 to 2007, an average of 4.9 percent a year.

The Post has never used these numbers in discussing growth for other countries. This is not a debatable point. The Post used an inappropriate methodology to try to convince readers that NAFTA has been a glowing success in Mexico. It hasn't been a glowing success, and it is time that the Post came clean with its readers on this point.

--Dean Baker

The reporting on the November jobs report was remarkably positive. This was the result of misreading the meaning of some of the data.

Starting with the raw numbers, the 94,000 job gain is mediocre at best. If sustained, it would imply rising unemployment. However, the number of jobs created over the last two months was revised down by 49,000 in this report, meaning that we only have 45,000 more jobs in November than we thought we had in October. Job growth over the last four months has averaged 100,000, with private sector growth averaging just 66,000.

Even this could be somewhat of an overstatement. The birth/death imputation for new firms not captured by the survey has been running slightly higher than it did for the same months last year. The benchmark revision, based on unemployment insurance filings, showed that we were overstating job growth last year by 300,000 or 25,000 per month. If the economy is growing no faster this year, then job growth would be overstated by at least as much.

The wage growth data is also far less encouraging than reported. While the increase of 8 cents an hour in the average hourly wage implies a 0.5 percent increase for the month, this number came with downward revisions to growth for the prior two months. Comparing the last three months with the prior three months, wages have been growing at just a 2.9 percent annual rate. This is a full percentage point less than their growth rate earlier in the year and almost certainly not fast enough to keep pace with inflation.

You can get the full story here.

--Dean Baker

In fairness, no one else will either (okay, I can look it up, but I don't have time). The Post reports that the bill includes "$21 billion in revenue increases, including a rollback of $13.5 billion in tax breaks for the five largest oil companies." Is this over 1 year, 5 years, 10 years? I don't know and the article doesn't bother to tell us. [Actually, my other source, the Washington Post, tells me that the $21 billion over an unspecified number of years, are tax incentives -- money going out -- not revenue, money coming in. Hey, no one reads newspapers to get information anyhow.]

My guess is ten years (these bills tend to cover a long time range). That would come to $2.1 billion a year or about 0.06 percent of projected spending. It comes to about $7 per person per year. This is not big money, although to me it is very nice to see Congress take back the give aways to the oil industry.

Why do reporters have such an aversion to writing budget numbers in a way that means anything to readers? Can't they use a calculator?

--Dean Baker

The NYT reports that money appropriated for President Bush's Millennium Challenge Corporation has gone largely unspent, leaving open the possibility that it will be reallocated to other programs. The article reports that $4.8 billion was allocated for the program.

It would have been helpful if the article had placed this figure in some context so that readers would be able to recognize its importance to the budget. The $4.8 billion figure is a multi-year appropriation, Congress has never appropriated more than $2 billion in a year from the corporation. This figure is approximately equal to 0.07 percent of federal spending or $6.70 for every person in the country.

Polls consistently show that the public hugely overestimate the share of the budget that goes to foreign aid. This is partially due to the fact that news reporting rarely places spending numbers in a context that is understandable to their audience. Almost no one can assess the importance of a $4.8 billion appropriation over an unspecified number of years.

The NYT also could have told readers that the $50 billion at stake in adjusting the alternative minimum tax is equal to 1.6 percent of federal spending, approximately 25 times as much as the largest annual appropriation for the Millennium Challenge Corporation.

--Dean Baker

It is unfortunate that most reporting on the rash of foreclosures in the mortgage market continues to focus on the mortgages as the source of the problem. This is leading to seriously misguided policy, since the core problem is falling house prices, not resetting mortgages.

This basic point should be obvious. Suppose house prices had continued to rise by 10 percent a year, as they had been in many hot markets. No one would be defaulting on resetting mortgages, since they could either borrow from the new equity to meet their payments or they could sell their home and put money in their pocket. The reason that subprime borrowers are defaulting in large numbers is that prices are now falling so that they have no equity to borrow against.

The reset can be the event that triggers default as efforts to keep up mortgage payments becomes hopeless, but many subprime borrowers are defaulting even before the reset. The basic problem is that they are in over their head, seduced by the proselytizers of homeownership. These people will obviously not be aided by a freeze on resets. Neither will the people whose mortgage has already reset. And of course the people who tool out fixed rate mortgages will not benefit either. And, moderate income homebuyers who had good enough credit to qualify for prime mortgages also will not benefit from subprime freeze plans.

It is hard to justify not helping these other groups of mortgage holders, but this is exactly what will happen if we proclaim a subprime mortgage reset freeze and then pronounce the problem fixed. The fact of the matter is that the rate of foreclosure will not be hugely affected by the freeze, many subprime borrowers will default even at the teaser rate. In addition, we will continue to see further growth in foreclosures in these other categories of loans. In addition, this policy creates the perverse situation in which the homebuyer who had the sense to request a fixed rate mortgage is paying a higher interest rate than the person who gambled on an ARM. Many homebuyers with fixed rate mortgages were also not given full information about the costs and risks of homeownership when they took out their loans.

This is what happens when policy is designed by people who simply have no understanding of the problem.
And yes, my "own to rent" plan is far better targetted.

--Dean Baker

[The Government Accountability Office has a nice graph (p18) which clearly demonstrates that the problem is not the resets. It shows that more than 10 percent of the subprime ARMs issued in 2006 were seriously delinquent or in the foreclosure process within a year after issuance. This is important because no mortgages reset during this period and the vast majority would not reset until at least the 24 month point. So, resetting rates are clearly bad news for people who are already struggling, but a freeze is not the end of their problems.

The NYT has a good article in today's paper laying out some of the nuts and bolts of the subprime splurge that led to the subprime bust. It would be interesting to know how many bankers made themselves multi-millionaires packaging garbage loans.

--Dean Baker

The Washington Post apparently does not like the Department of Agriculture's loan guarantee program for small businesses. That is the main piece of information that one can get from its lengthy article on the program.

The Post tells us that "since the 1970s" the loan guarantee program has incurred $1.5 billion in losses on $14 billion in guarantees. Is this bad, a loss rate of less than 11 percent? Sounds much better than Citigroup and the Wall Street boys do on their SIVs, CDOs, and other exotic instruments. Since the point here is to promote development not make money, this loss rate is not obviously a scandal as the article implies.

The article provides several examples of clearly inappropriate and/or fraudulent loans. It is not clear what this is supposed to mean. The program has been around for thirty years, is there any doubt that some of the loans have been misdirected? Does the Post have data on the percentage of loans that were inappropriate? If it does, it did not share it with readers.

The Post also reports the remarkable news that sometimes loans for one business lead to job loss at other businesses. It quotes an unfortunate movie theater owner whose tax dollars help to support his competitor. Guess what? This happens all the time. When we build a new highway, we take away business from all the people who depended on the previously existing road system. That's the way the economy works.

But the worst offense in this story is how badly it misrepresents the dollars involved. It tells us that cost of jobs created under the program can be very high, referring to a $1.3 million loan that created just 5 jobs, a cost of $260,000 per job. Let's check that math. This is a loan guarantee, not a grant. So, how much did the guarantee save the business? Let's say it reduced the interest rate it would have paid by 6 percentage points, a huge reduction. That would mean it is equivalent to a grant of $78,000 per year, or $15,600 per job.

Finally, what about the cost of the program itself. The Post tells us that it has guaranteed $14 billion in loans over more than 30 years, or less than $500 million per year. This is equivalent to approximately 0.017 percent of the current budget or about $1.70 per person. And, this is the value of the loans, not the actual cost to the government, would essentially be just the losses on these loans.

I really have no idea of whether this is a good or bad program. The problem is that the Post article provided no basis to really make this determination and given the size of the program, it certainly did not merit a major front page article.

--Dean Baker

The media continue to insist that the presidential candidates have a plan to keep Social Security fully funded past the years when it is first projected to face a shortfall (2041 according to the trustees, 2046 according to the non-partisan Congressional Budget Office [CBO]). Given this obsession, it is surprising that the NYT can write an article discussing insurers role in the Medicare Advantage program without ever once mentioning Medicare's projected shortfall.

While CBO projects that SS will be fully solvent for almost three decades after the latest date that the next president can leave office, Medicare is first projected to run short of money in 2019. The Medicare Advantage program contributes to this shortfall since it raises costs by an average of 12 percent for the beneficiaries enrolled. Of course this extra cost means profits for the insurance industry.

--Dean Baker

I hate to be rude, but when discussing Fed Chairman Ben Bernanke's assessment of the economy's prospects wouldn't it be appropriate to point out that Mr. Bernanke completely missed the housing bubble. He insisted that there was no bubble right through the run-up (he may still). Furthermore, until this summer he trivialized the risk of any financial problems resulting from bad mortgage debt.

I know that if I went to a surgeon I would want to know that his last three patients didn't survive the operation. Isn't the public entitled to the same information when the financial press conveys Mr. Bernanke's latest views on the economy's prospects?

It looks as though President Bush and several of the leading presidential candidates are finally getting serious about helping people who are being hit by the collapse of the housing bubble. The proposal to freeze the interest rate on adjustable rate mortgages at their teaser rates is far more serious than anything previously placed on the table.

It has two very positive features that distinguish it from grand plans to have Fannie Mae and Freddie Mac buy up all the bad mortgages in sight. First, the benefits are targeted on the homeowners, not the investors. There is no reason to come to the aid of investors holding bad mortgages; they were supposed to have known what they were doing. The second positive feature is that the restriction on resets does not require any government money or new bureaucracy, both of which are definitely big selling points.

However, the interest rate freeze also has some important drawbacks that the media has thus far failed to investigate. The obvious question that should be asked is whether the plan is helping the people who we want to help. The answer here is mixed. It is helping the people who took out adjustable rate mortgages that have not yet reset; a group that includes speculators and wealthy homeowners. (Of course, many homebuyers are defaulting even before the reset, suggesting that they are having problems even paying the teaser rates.) The freeze does not help people who took out fixed rate mortgages or homeowners whose mortgages have already reset.

As far the undeserving gainers, many high income people calculated that they were better off starting with a low adjustable rate for a few years and then taking a chance with the higher rate to which their mortgage would reset in two or three years. These people were and are fully prepared to pay the higher reset rate. It is not clear that there is any public interest served by preventing this reset from occurring.

In the same vein, many speculators who bought houses as investment properties also have ARMs that will reset. These people should have known what they were doing. If the resets cause them to lose their home is there any reason that we should care?

On the other side there are many low and moderate-income homebuyers who either took out fixed rate mortgages or already saw their ARM reset to a higher rate. This freeze does nothing for them. Some people may question the need to help a homebuyer who took out a fixed rate mortgage, since they were not deceived into taking out a mortgage the cost of which jumps in later years, but many of these homebuyers got their mortgages through the same mortgage agents who pushed predatory ARMs. While they may have used good judgment in not going for an ARM (and had the resources to pay a higher fixed rate), is there any reason to believe that the mortgage agents were any straighter with these people about the full costs of homeownership (e.g. taxes, insurance, maintenance costs) than they were with the people who took out ARMs.

The foreclosure rate has been much lower among those taking out fixed rate mortgages, but this is likely due to largely to a self-selection process. The homebuyers who could afford to get fixed rate mortgages were somewhat better situated and will be slower to default. But the default rate is still high and rising among this group and many will be losing their homes without assistance.

It is also important to think about the message the freeze sends to market. It makes the issuance of ARMs considerably more risky for lenders since there is the possibility of a government imposed freeze. This will cause the future rates on ARMs to rise relative to fixed rate mortgages. That is not necessarily a bad thing, but ARMs are not always bad, and we should at least note this as one of the consequences of an across the board freeze.

Anyhow these are issues that the media should be exploring and has not thus far. Of course, my “own to rent” plan does better in terms of providing targeted assistance to those most in need, but even if they don’t end up endorsing my plan, reporters should be asking the right questions. (The own to rent plan would only benefit those who bought a house at below the median price in an area and it is does not distinguish between the type of mortgage the homebuyer had taken out.)

--Dean Baker

If anyone still thought that the Washington Post editorial board could discuss trade in a rational manner, today's editorial on NAFTA proved them wrong. The Post argues the case that NAFTA not only was a net benefit for the U.S. (possibly true, but distribution matters, we'll come back to this) but that "the impact of NAFTA seems to have been both larger and more positive in Mexico than in the United States."

Is that so? Well the Post tells us that "Mexico's gross domestic product, now more than $875 billion, has more than quadrupled since 1987." That's not exactly right. If we pay a quick trip to the IMF website, we find that Mexico's real GDP in 1987 was 1,030 billion pesos. The IMF projects 2007 GDP as 1,895 billion pesos (inflation adjusted), an increase of 84.0 percent [corrected 12-6]. That is considerably short of quadrupling.

How on earth does the Post get that Mexico's GDP quadrupled when it actually only grew by 67.6 percent? Well, they may have taken the growth in nominal GDP. If we don't adjust for inflation then we can conclude that Mexico's GDP quadrupled over the last twenty years. Of course, no reasonable person would ever assess growth without first adjusting for inflation since it has no meaning. If we don't adjust for inflation, Zimbabwe's economy, wracked by hyperinflation of several thousand percent annually, is the fastest growing economy on the planet. If the Post editorial writers use a consistent measure, we can expect to see warm praise for Zimbabwe's extraordinary growth on the editorial pages in the near future.

The Post also notes the fact that the poverty rate fell by 10 percentage points in the second half of the nineties. Yes, but it soared in the first half of the nineties due to the 1994 peso crisis. This is not a good story.

The most basic measure of economic performance, per capita GDP, was dismal in the post-NAFTA period, growing just a 1.5 percent a year, a slower pace than the growth rate in the U.S.. Developing countries should have more rapid growth than rich countries, as Mexico did in the period before 1980. Successful developing countries, like South Korea and Taiwan have managed to sustain per capita GDP growth of near 6 percent for decades. Of course China has been growing even more rapidly for the last two decades. NAFTA clearly has not made Mexico a success story.

In fairness to the Post editorial board, there has been a concerted effort to mislead the public on the success of NAFTA by those who know better. For example, the World Bank published a bogus study on 2005 that purported to show that Mexico's growth rate increased because of NAFTA (see CEPR's analysis here). But, gullibility is an excuse, not a virtue.

The Post is correct in saying the harm to U.S. workers attributed to NAFTA is probably overstated, since its effect simply was not every large. However it is reasonable to believe that NAFTA, along with the larger pattern of trade of which it is a part, has contributed to the growth in wage inequality. The Post asserts that this inequality is primarily attributable to technology, not trade. That argument is getting ever harder to make, since the pattern of growth of inequality bears no obvious relationship to the advance of technology. (Inequality increased most in the 80s, a period of limited technological advance. During the boom years in the late 90s, there was little change in measures of wage inequality.) This is why so many economists, including former adherents of technology story (e.g. Paul Krugman and Frank Levy) now emphasize institutional explanations for the growth in wage inequality.

NAFTA was about putting non-college educated workers in direct competition with their low-paid counterparts in Mexico, while maintaining the protection for the most highly paid professions (investment bankers, doctors, lawyers, editorial page writers). This redistributes income upward. The effect of NAFTA itself was limited since it was a small part of a much larger trade agenda, but its opponents are not foolish to identify it as a cause of pain.

--Dean Baker

The Washington Post claims to analyze the quality and accuracy of campaign ads for its readers. BTP gives the Post a failing grade for its analysis of a Rudy Giuliani campaign ad. The ad shows Giuliani saying that "I know that reducing taxes produces more revenues. Democrats don't know that."

The Post's analysis of the ad asserts that Giuliani's claim is "a matter of fierce dispute among economists." That is not true. There are few if any economists who claim that cutting taxes will increase revenue. In fact, Douglas Holtz-Eakin, who was one of President Bush's top economic advisors, had the Congressional Budget Office analyze the evidence for tax cuts increasing revenue. Examining a broad range of models, Holtz-Eakin concluded that the growth effects of tax cuts could offset between 1 and 22 percent of the lost revenue over the first five years and as much as 32 percent over the second five years.

In short, Holtz-Eakin found that with the most favorable possible assumptions, growth could only offset less than one-third of the lost revenue from tax cuts, and even this gain was only obtainable for a short period of time. Economists don't hotly dispute whether it is possible to increase revenue by cutting taxes, only people who are trying to deceive the public claim that it is possible to increase revenue by cutting taxes.

--Dean Baker

Okay, I know that they don't really need my help, but why not take advantage of a rare opportunity to be on their side. Ben Stein somehow got his hands on a paper by Jan Hatzius, an economist at Goldman Sachs. According to Stein, the paper outlines a scenario for a financial market meltdown stemming from a collapse in the housing market. Stein reports that Hatzius projected a 15 percent decline in house prices.

Stein then goes on to essentially dismiss the report based on the fact that house prices have never declined by 15 percent since the great depression. Furthermore, he assures readers that the Federal Reserve Board will ensure that the banks will always have enough money to keep the economy rolling. Since he has decided that Hatzius's scenario is implausible, Stein then concludes that Hatzius is pushing scare stories to promote Goldman Sachs trading strategy which has involved extensive shorts of collateralized mortgage obligations (CMOs). He then calls for Goldman Sachs to be investigated.

Stein may have missed it, but in the years from 1995 to 2006 the United States had the largest run-up in house prices in its history. This is why it is very reasonable for Hatzius to draw up scenarios assuming a 15 percent decline in house prices. The run-up makes the crash possible and even likely. That's the way markets work. The stock market had the largest decline since the great depression in 2000-2002 because it had reached the highest price to earnings ratios since 1929.

While the Fed can take many steps to offset the impact of a housing crash, it is not the all-purpose rescue vehicle that Stein seems to think. It is supposed to make loans to solvent institutions, it is not supposed to give money to insolvent ones. If a huge spate of bad loans pushes many banks to the brink of insolvency, the Fed will not be able to just hand them cash to make them financially viable

The evidence that bailouts of a collapsing financial structure is not always easy can be found on a little Asian island nation near China called "Japan." Japan endured more than a decade of stagnation following the collapse of its stock and housing bubble in 1990. Clearly its central bank and government could have pursued better policies that would have hastened the recovery, but the fact that the recovery took so long should demonstrate that it is not easy to recover from the collapse of a bubble. I would hope and expect that the Fed would do a better job than Japan's central bank in responding to the fallout from the housing crash, but it is not ridiculous to imagine it will still be a very difficult process.

In short, Stein gives no reason whatsoever to doubt that Hatzius wrote a serious analysis of the current state of the U.S. economy. Of course Goldman Sachs should still be investigated.

--Dean Baker