The NYT has a good discussion of how the United States government has been out front in criticizing other governments for not allowing financial institutions to go bankrupt, but is now rushing to rescue Fannie Mae and Freddie Mac from failure.

One item the piece gets wrong is its discussion of the risk of bankruptcy by the U.S. government itself. This is essentially zero, since the U.S. debt is denominated in dollars. If the United States ever had difficulty paying off bonds held by foreign central banks, it could print as many dollars as necessary to make the payments.

The mass printing of dollars would of course be inflationary and would mean that foreign central banks would get paid off in dollars that are worth much less than the ones that they lent, but they have already been happy to take large losses on the money lent to the United States. For example, the dollar has fallen by almost 50 percent against the euro since 2002, yet foreign central banks are still willing to lend money to the U.S. government at interest rates that are well below the inflation rate in the United States.

The foreign central banks presumably are willing to absorb such large losses because they want to prop up the value of the dollar in order to maintain an export market for their goods. As long as foreign countries cannot figure out how to create domestic demand for their output (it actually is not very hard for those who have read Keynes), they may find it worthwhile to lose large amounts of money on their loans to the United States in order to maintain their export markets in the United States.

--Dean Baker

My earlier post commenting on the strange sight of supposedly hard-core free-market types banning naked shorts prompted reactions that focused on the "naked" rather than the "short." This misses the point.

Going naked in a short is a convenience. Typically, the short-seller has to have an account that can offset any possible losses on the transaction, even if she has not actually contracted to borrow the stock being shorted. A naked short is comparable to purchasing stock on the margin, with the dealer loaning the buyer much of the value of a stock purchase. Back in the stock bubble days, many of us urged Greenspan to raise margin requirements as a tool for reining in irrational exuberance.

Greenspan rightly pointed out that most buyers could and would arrange other financing. However, the value in raising margin requirements would have been to have a clear statement from the Fed that it viewed the market as over-valued. (I would have actually preferred numerous clear statements from the Fed, backed up by charts and tables that explained to every moron millionaire exactly why the stock market was hugely over-valued.)

In a similar vein, the restriction on naked shorts (for just 19 financial firms) is a statement by the SEC that it doesn't want to see the stock prices of these firms driven down further. Of course, the SEC's ability to assess the fundamental value of stocks is questionable, given that they have been caught by surprise at almost every point in this crisis.

Anyhow, in terms of the winners and losers from this government intervention, count any of the folks who were long in these companies as big winners. Their shares all rallied big-time in response to the SEC's intervention. This list presumably includes most of the top management who likely have shares or options that can now be cashed in at a considerably higher price. The big losers were the folks who had short commitments that may now have to be honored at a price that leads to substantial losses.

If the shares in these companies subsequently fall back to the levels that were at prior to the restrictions, then the SEC will have effectively redistributed a huge amount of money from the shorters (who correctly assessed the value of these companies) to shareholders who were clueless.

This handout from the SEC can be real money. For example, Vikram Pandit, the current CEO of Citigroup was reported by the Wall Street Journal to be holding more than 1 million shares of the company as of January 1, 2008. If he still holds over a million shares, then the 5 point rise in Citi's share price following the SEC's action effectively handed Mr. Pandit more than $5 million. That's about 1000 times as much as the average annual TANF check, and Mr. Pandit didn't even have to meet a work requirement. That's welfare as we know it now.

--Dean Baker

I hate to make a whipping boy out of Ben Bernanke, he came into an impossible situation, but this is someone who has minimized the problems of the housing market at every turn. Before he took his post as Fed chairman he told the Washington Post that there was no housing bubble. In March of last year he told Congress that the problems in the subprime mortgage market were "likely to be contained" and not spread to the larger economy.

After missing the last Bear Stearns, Bernanke told Congress that he doesn't anticipate another Bear Stearns. And now that we seem to be seeing something that looks a lot like Bear Stearns at Fannie Mae and Freddie Mac, Bernanke tells us not to worry.

USA Today should have provided some of this background when discussing Mr. Bernanke's expression of confidence in Fannie and Freddie.

[Addendum: I should have pointed out that the reference to Bernanke offering assurances on Fannie and Freddie was in the headline (since changed), not the article itself.]

--Dean Baker

That is what reporters should be asking the Securities and Exchange Commission (SEC) and the Bush administration as they impose restrictions on naked short-selling, the practice of betting that a stock's price will fall. Whatever happened to free market fundamentalism? Why shouldn't individuals be allowed to bet that a stock's price will fall if they believe it is over-valued? And aren't these the same folks that were completely opposed to any restrictions on speculation in oil and other commodities?

This is more than just a gotcha. Short-selling can play a very important role in the market. If informed investors recognize that a stock is over-valued they perform a valuable service by selling it short and pushing down its stock price. This can both deprive the company of capital and be a signal to other actors in the market that the company might not be as healthy as is generally believed.

The economy would have benefited enormously if large numbers of traders had shorted Fannie and Freddie 4 years ago when they were buying up hundreds of billions of mortgages issued to buyers who bought homes at bubble-inflated prices. This would have stopped the bubble years ago. Similarly, we could have prevented the financial chaos at Merrill Lynch, Citigroup, Bear Stearns and the rest, if traders had recognized their financial shenanigans and aggressively shorted their stock. In the same vein, heavy shorting by informed investors could have prevented the boom and bust of the tech bubble.

The decision to intervene against short-selling is completely inconsistent with the belief in the wisdom of the markets. Of course short-sellers can be wrong and depress stock prices more than is justified by fundamentals, but so what? The government doesn't intervene when it thinks investors have exaggerated the true value of a stock. The public has no more reason to fear under-valued stock prices than over-valued stock prices. This one-sided intervention by SEC is hard to justify on any grounds. Reporters should be asking about it.

--Dean Baker

Toward the end of an informative editorial discussing the subsidies for the private insurers operating within the Medicare program, and the Republican support for these subsides, the NYT told readers: "the only explanation is Republicans’ ideological compulsion to provide a private option."

Hmmm, the only explanation for the fact that Republicans keep voting to hand billions of dollars to insurance companies is an ideological commitment? Let me suggest an alternative possibility. Members of Congress run for election at regular intervals. They need campaign contributions and political support to win elections. Insurance companies are major campaign contributors and political actors. Their support or opposition can have a big effect on the outcome of elections.

Perhaps some Republicans in Congress support subsides for the insurers, regardless of their political ideology (if they have one) because they want money and political backing from the insurance industry. Could that be possible?

This does matter because debates on ideology often get abstract and confusing. The matter that is clearly at issue in this particular debate is whether the government will pay private insurers more money for Medicare beneficiaries (13 percent on average) than it costs to keep them in the public plan. There is no real dispute about this fact. How this relates to anyone ideology (or why anyone should care) is more difficult to determine.

--Dean Baker

In his monthly column at the NYT Greg Mankiw gave readers his economist's wish list. While I'd agree with several items, I also have some big differences. For example, why wouldn't economists want to tax speculation in oil and commodities just like speculation on lottery tickets and casino gambling? A modest financial transactions tax on futures, options, stocks, bonds, etc. would have almost no impact on normal transactions, while making life a bit more risky for speculators. And, it could easily raise $150 billion a year. I don't know why an honest economist would support leveling the playing fields for different types of gambling.

But where I really take issue is with Mankiw's discussion of the economist's position on trade and high skill immigration. Mankiw implies that we have an open door policy for high-skilled immigrants and even goes so far as to claim that "economists very clearly practice what they preach. Many of the best economists at top American universities were born abroad."

Mankiw knows better here. There are many prominent economists in the United States who were born abroad, but the fact that hard-working talented economists can have the opportunity to work in the United States does not mean that foreign economists do not face barriers. In effect, foreign born economists are allowed to compete on quality. The very best foreign economists are allowed to work as economists in the United States. However, the law prohibits them from competing on price.

If we had genuine free trade in economists' services we could not doubt fill our universities with economists who are as good as our typical U.S. born economist, but willing to work for half the wage, since this would still be far more than they would earn in their home countries. (I remember a World Bank economist saying that all the best economists he knew were born in India. If we had genuine free trade in economists, all the mediocre economists he knew also would have been born in India.) If the United States had such open door policies for all highly-paid professionals (while maintaining quality standards), we could substantially reduce the price of health care, college education, and numerous other services and products.

Thus far our trade policy has been a policy of one-sided protectionism in which barriers that protect non-college educated workers from competition with workers in the developing world are torn down, while the barriers that protect the most highly educated workers are largely left in place. Economists should be honest enough to acknowledge the protection from which we benefit.

--Dean Baker

The NYT rightly criticizes Senator McCain for putting out a target of balancing the budget in 2013 while proposing nothing but tax cuts. It then presents the list of items that will be needed to set the economy right.

The one obviously crucial item that is missing from this list is a lower dollar. The United States is running a current account deficit that is equal to 5 percent of GDP. This logically implies means that the public and private sector must together be dissaving (i.e. borrowing) by an amount equal to 5 percent of GDP. While this can be reasonable for a rapidly growing country like China or India, it is not a sustainable position for a rich country with a slow growing labor force like the United States. The only plausible mechanism for adjustment for the current account deficit is a lower value of the dollar.

It is understandable that politicians would be reluctant to call for a weak dollar. But a newspaper that purports to be responding to the real needs of the country should have the courage to discuss the issue more seriously.

--Dean Baker

When discussing the likelihood that Fannie Mae and Freddie Mac would go under, the NYT dismissed the importance of the plunge in their stock prices and told readers that "the insurance premiums that are paid by the buyers of the debt securities issued by the companies declined significantly on Friday, a sign that the markets do not believe the companies are on the brink of failure." It then reinforced this assertion with a quote to this effect from the noted expert on financial markets, New York Senator Charles Schumer.

The NYT is wrong on this point. Treasury Secretary Henry Paulson has made it clear that the government will bail out Fannie and Freddie's creditors in the event that the companies go under. This means that the premium on the debt is not a good measure that the markets attach to the probability that the companies will collapse, since they expect the federal government to repay the debt if the companies can't.

The price of credit default swaps is an especially bad measure in such cases. The deal that the Fed arranged to have Bear Stearns taken over by J.P. Morgan did not constitute a technical default and trigger any payments. If investors anticipated a similar outcome with the collapse of Fannie and Freddie, there would be no reason for them to buy credit default swaps to insure their loans.

--Dean Baker

E.J. Dionne has a column today arguing that the ideology of the free-market has failed. The column actually shows how deeply the ideology had taken hold and how deeply it is still held even by those who think they oppose it.

For example, at one point the column asserts: "free trade produces well-distributed economic growth, and any dissent from this orthodoxy is 'protectionism.'" What? Where on earth did Dionne get this idea and what does it have to with U.S. trade policy?

Trade theory (as in the standard neo-classical theory that gets taught in graduate programs) holds that trade will produce winners and losers. In principle, the winners should gain more than the losers lose, but that is not the same as "well-distributed economic growth."

Furthermore, trade policy has not pursued "free" trade. If the Washington Post brought in a group of highly qualified people from India, who were prepared to work as reporters and columnists for half the pay of the current crew, its managers would risk fines and imprisonment (unless they lied about their motives). Trade policy has been about subjecting less-educated workers to competition with low-paid workers in the developing world. More highly educated workers, like Mr. Dionne, are still largely protected.

Similarly, the ability of CEOs to get huge paychecks, even when they run their companies into the ground, has nothing to do with the free market. It is due to rules of corporate governance that allow top management to pillage the companies for their own ends.

The government sets the rules of corporate governance, that is due to the fact that corporations are legal entities -- they are creations of government. The rules in principle are supposed to protect shareholders from abuse by insiders, but they clearly no longer serve that purpose.

But this is not a failure of a free market. The current situation is not the free market.The current situation is one in which the government has rules that allow insiders to rip off shareholders. (Think of all the Wall Street firms where top executives pocketing tens or hundreds of millions of dollars based on what turned out to be non-existent profits.)

There is a long list of policies that were designed to redistribute income upward that have been pushed in the last few decades as "free market" policies. These policies did not serve the bulk of the population precisely because this was not their design. The fact that income flowed upward over this period was not an accidental outcome of the market, it was the purpose of the policies. It's unfortunate that Mr. Dionne still fails to recognize this fact. (Of course knowledgeable people know all about this because they have read The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer.)

--Dean Baker

That is what Janet Yellen, the president of the San Francisco Federal Reserve Bank, reportedly said yesterday. Of course, those were not her exact words. She warned of the dangers of inflation and then said, "we cannot and will not allow a wage-price spiral to develop."

USA Today readers may have applauded the commitment to preventing a wage-price spiral without understanding that it means that the Fed will throw people out of work to put downward pressure on wages. That is the Fed's mechanism for preventing a wage-price spiral.

It might be good policy to use higher unemployment to fight inflation, but readers should at least understand the trade-offs involved.

--Dean Baker

The NYT reports that the Bush administration is making plans for a rescue operation to keep Fannie Mae and Freddie Mac operating in the event they effectively become insolvent. While this piece is focused on the possible outlines of the rescue plan, it would be appropriate to analyze the failure of regulators and analysts to see the warning signs in years past. Hopefully this will be the topic of future articles.

[On a trivia quest, the first written comment on the topic that I could find is from the end of September, 2002:

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

--Dean Baker

NPR had a generally informative segment on the tax proposals of Senators McCain and Obama this morning. However, after telling listeners who wins and who loses under each set of proposals, they felt the need to conclude by telling us what the "big ideas" are behind each candidate's proposal.

We were told that the big idea behind the McCain proposal was "growth." By contrast, the big idea behind the Obama proposal was "fairness," which could also be described as "redistribution."

Now, this is where a good news story became a fairy tale. NPR's correspondents do not know what the "big idea" is behind a candidate's proposal, both because they are not mind readers and because there may not be a "big idea."

Let's say this 30 million times until we get it right. The people running for political office are politicians, they are not political philosophers. They put out proposals that they think will get them elected. That is how politics works.

So, it would be nice if reporters could refrain from telling us what they cannot possibly know -- they do not know what ideas, if any, stand behind proposals.

On the other hand, they could usefully inform their audience about the track record on the various proposals. In this respect, under President Clinton, when tax rates comparable to those proposed by Senator Obama were in place, the private sector added 2.6 million jobs a year. By contrast, under President Bush, when tax rates comparable to those supported by Senator McCain were in place, the private sector added 400,000 jobs a year.

While there were certainly many factors other than tax policy that caused the economy to grow rapidly under Clinton and slowly under Bush, it requires some serious torturing of the data to describe the Bush-McCain agenda as being about growth in a way that the Clinton-Obama agenda is not.

--Dean Baker

The NYT does a nice job laying out the key issues involved in McCain's health care plan.

--Dean Baker

For folks not familiar with Social Security, it is the country's biggest social program. It costs over $600 billion a year (20 percent of the federal budget) and has 50 million beneficiaries.

At a forum on Monday, after wrongly claiming that Social Security won't be there when young workers retire, McCain went on to say:

"Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that's a disgrace. It's an absolute disgrace, and it's got to be fixed." [Transcript available from Congressional Quarterly]

Of course present-day retirees have always been paid their benefits from the taxes paid by current workers. That has been true from Social Security's inception.

Some folks might have thought Senator McCain's description of Social Security as a "disgrace" was worth a mention somewhere in the media, but the NYT, Washington Post, WSJ, and USA Today don't seem to have noticed. It's not like he said "bitter."

--Dean Baker

NPR concluded a mostly good discussion of the oil market with the statement that "you never know when you're in a bubble." This is partially true in that we can never be certain of whether a particular run-up in prices is due to fundamentals or speculation, but of course we can never be entirely certain of anything.

There are real fundamentals in any market and a good understanding of these fundamentals will allow one to determine whether or not a particular market is subject to a bubble. It was possible to recognize the stock bubble and housing bubble long before they burst. The economists and analysts who did not recognize these bubbles failed in their jobs in a really huge way. If they held jobs in which workers were held accountable for their performance, they would have been fired.

--Dean Baker

Actually, the article was fine, the problem was the headline "Candidates Diverge on How to Save Social Security." Do the candidates diverge on their plans to "save" the Defense Department, the Justice Department, the Energy Department?

The Post doesn't run front page headlines like this because they would not make any sense. Neither does this headline about a program that the Congressional Budget Office (CBO) projects to be fully solvent until 2046 with no changes whatsoever. CBO projects that even after the date when the program can no longer pay full benefits it would always be able to pay larger real benefits than what current retirees receive.

The Post's editors don't like Social Security and would like to see the program cut and/or privatized. They should try to keep their editorializing out of front page headlines.

--Dean Baker

http://www.nytimes.com/2008/07/08/business/08fannie.html?hp

Fannie and Freddie Shares Plunge

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By REUTERS
Published: July 8, 2008

Shares of Fannie Mae and Freddie Mac, the largest providers of funding for United States home mortgages, plunged Monday on concern the companies need to raise more capital amid larger-than-expected losses.

The corporate “federal agency” debt obligations and mortgage-backed securities guaranteed by the companies also plummeted relative to government debt as investors thinned positions, analysts said.

Freddie Mac stock tumbled more than 21 percent in early afternoon trading to $11.42, while Fannie Mae shares dropped 20 percent to $15.01.

Concern that Freddie Mac could see greater losses from mortgage insurance was fueled on Monday after the research firm CreditSights said the mortgage insurer Radian could face more downgrades, forcing it to wind down its existing business. That increases risks for Freddie Mac, which had $63 billion of loans or pools of loans backed by Radian as of March 31.

The exposure to the mortgage insurer weakens the position of the government-sponsored enterprises that have been called on by Congress to do more to stabilize the housing market that analysts don’t expect will worsen into 2009.

“Fannie Mae and Freddie Mac are ground zero for mortgages,” said Steve Persky, chief executive at Dalton Investments in Los Angeles. “They’re the largest leveraged owners of mortgages out there, and that’s not a good position to be in right now.”

Greater-than-expected losses and share declines at Freddie Mac would make it more difficult for the McLean, Va.-based company to raise capital it needs to continue its business of buying and guaranteeing a huge chunk of American mortgages, said James McGlynn, a portfolio manager at Summit Investment Partners in Southlake, Tex.

A pending accounting change could also force Freddie Mac and Fannie Mae to boost capital by an additional $29 billion and $46 billion, respectively, according to Lehman Brothers.

A Freddie Mac spokeswoman on Monday said the company does not intend to raise capital until it announces second-quarter earnings, and declined to comment on the ability to raise capital as shares fall. The timing disappointed analysts since the company announced in May it would raise $5.5 billion.

India and China are obstructing an agreement on global warming because they refuse to agree to be bound by a treaty that requires their countries to emit less one-quarter as much greenhouse gas per person as people in the United States. That is President Bush's contention.

NPR was polite enough not to point out that President Bush thinks that people in India and China (and other developing countries) should be required to never come close to emission levels in the U.S.. Governments in these countries will not agree to such restrictions without substantial compensation from the wealthier countries who emit much more. It is impossible to have a serious discussion of global warming without noting this disparity in per capita emissions.

(Btw, no one has yet explained why President Bush thinks that people in developing countries should forever be held to lower per capita emission levels than people in the U.S. Is it race-based or is it due to the fact that he thinks that people in the U.S. have earned the right to pollute more based on the fact that they have polluted more? Serious reporters would ask such questions.)

--Dean Baker

The Washington Post has consistently ranked among the nation's most shrill voices when it comes to warning us about the coming catastrophe associated with the retirement of the baby boom generation. It routinely editorializes that this will break the budget, requiring massive tax increases or huge cuts in spending in areas not related to retirement programs. In addition, dissenting voices are virtually excluded from its oped pages, even as David Broder, Robert Samuelson, George Will and the rest echo the party line with regularity.

For this reason, it is worth noting a rare piece of commonsense that somehow appeared in the Outlook section this week. Russell Beland, a deputy assistant secretary of the Navy for manpower analysis and assessment was given the opportunity to point out that the Post's rants have no basis in reality. Beland doesn't get everything exactly right, but he is on the right track, which distinguishes him from 99.64 percent of Post columns on this topic.

I hope no one gets fired at the Post because of this piece.

--Dean Baker

The NYT seems to have zero understanding of the economics of prescription drugs. An interesting and lengthy article on a new generation of very high-priced cancer drugs (often costing more than $100,000 a year) never once mentions the fact that the drugs are expensive solely because the government grants the manufacturer a patent monopoly that protects them from market competition.

By giving them a monopoly on what could be a life-saving drug, the government is enabling these companies to charge exorbitant prices. It also gives them an enormous incentive to mislead doctors and patients about the effectiveness of their drugs.

It would have been appropriate to discuss the economic distortions and perverse incentives that are created by the patent system in this context, as well as alternative mechanisms for financing prescription drug research. The article is written as though no one has ever suggested an alternative mechanism to patent supported research, even though two bills providing for an alternative mechanism have already been introduced before Congress.

--Dean Baker

There are not enough well-qualified journalists willing to work for $8 an hour. We know this because there are very few (if any) experienced journalists working for this wage. The New York Times and other newspapers deal with this shortage by paying journalists considerably more than $8 an hour.

By contrast, the NYT tells us that many employers want to relax laws penalizing them for hiring undocumented workers because "they grappled, even in an economic downturn, with shortages of low-wage labor."

In a market economy, the response to shortages is higher prices, or in this case higher wages. While it is understandable that employers do not want to pay higher wages, just like most of us do not want to pay higher gas prices, that is the way a market works. If they cannot afford to pay higher wages, then in a market economy, they go out of business, just as tens of millions of inefficient businesses have gone out of business as the economy has grown over the last century.

It would be helpful if the NYT would apply some basic economics to its discussion of this economic issue.

--Dean Baker

That is the question that a serious reporter would have asked WTO Chief Pascal Lamy after he complained that subsidized exports from the United States and other wealthy countries are raising food prices. That is not the way markets usually work and that is not what most trade models show.

The standard story is that subsides cause items to be sold at below market prices. Take away the subsidy and prices rise. Does Lamy not know this or is he just a politician making an argument to advance a policy he favors?

--Dean Baker

[Here's an example of the NYT complaining about subsidies lowering prices in the developing world.]

Someone needs to tell that to the NYT. The NYT has an article on the current problems in the United Kingdom's economy in which it fails the connect the current problems with the housing bubble that laid its basis. At one point the article refers to the "the remarkable run of prosperity over the previous decade," saying that it "seems to have hit a wall."

Well, it was not remarkable, it was irresponsible. The UK government and central bank decided to pursue a policy to promote short-term prosperity by allowing a housing bubble to grow out of control. The bubble is almost certainly much worse in the UK than in the U.S.. According to the article, the price of the median home peaked at almost $370,000. This would be more than 60 percent higher than the price peak in the United States.

It is inevitable that bubbles burst and when they do, they leave governments and central banks with really bad options. The article notes that the Central Bank of England is now torn between trying to fight inflation or fight recession. This was a totally predictable outcome of the crash that the bank should have anticipated.

At one point the article includes the bizarre phrase "unions are agitating for higher wages, even as inflation rose at a 3.3 percent annual rate in May, above the 3 percent upper limit of the Bank of England’s comfort zone (emphasis added)." Unions are presumably pushing for higher wages because inflation is high, that is how workers maintain their living standards.

The article also tells readers that:

"The British government has little leeway to spend its way out of any slump. The public purse is constrained by two rules — the so-called 'golden rule,' in which the government borrows only to invest and not to finance current spending, and the sustainable investment rule, in which public sector debt is to be held stable at 'a stable and prudent level.'”

Most governments don't adopt such rules because they are irresponsible -- they can prevent governments from responding effectively to crises such as this one. The article should have presented the view of an analyst who could have made this point. This situation is comparable to a government that was running its economy into the ground because it had a rule that it would always spend 5 percent of GDP on defense and never raise taxes. Obviously a government can elect to adhere to such rules, but it would be appropriate to present the view of almost any serious economist that such behavior is irresponsible from the standpoint of maintaining a stable economy.

--Dean Baker

Reuters did not think it was worth commenting when the Jose Manuel Barroso, the European Commission President, both complained about the weak dollar and defended the rise in the interest rates by the European Central Bank. This is kind of bizarre.

Higher interest rates presumably were intended to fight inflation by slowing growth in the European economies, thereby throwing workers out of work and decreasing their bargaining power. One of the main ways in which higher interest rates slow growth is by raising the value of the euro against the dollar and other currencies. This makes U.S. goods cheaper in Europe, causing Europeans to buy more imports rather than domestically produced goods (this also lowers prices, another way to reduce inflationary pressure). The lower dollar also causes raises the price of European exports, causing people in the United States to buy less European exports.

Presumably Mr. Barroso understands such basic economics, but his position seems to be contradictory. This would be comparable to a political leader calling for tax cuts but then complaining about the loss of tax revenue. It would be appropriate to point out such an extraordinary inconsistency to readers.

--Dean Baker

The Labor Department's establishment survey includes an imputation for jobs created in new firms that are not included in its sampling universe. This imputation tends to miss turning points, understating job growth when the economy picks up speed and overstating job growth when the economy sinks into a recession.

Last year it overstated job growth by 284,000 for the year from March 2006 to March 2007, an average of 24,000 a month. It is likely that this imputation is still overstating job growth. The imputation for April, May, and June was 80,000 more in 2008 than in 2007. Since the economy is almost certainly creating jobs at a slower rate this year than last, it is likely that these numbers will be revised downward in the benchmark revisions. The preliminary data for the benchmark revision will be released with the September unemployment report.

Of course, you can always get the real scoop on the jobs numbers with the CEPR Jobs Byte.

--Dean Baker

It is remarkably how an outfit that imagines itself so deeply committed to free trade is so incredibly oblivious to protectionism when it has the effect of redistributing income upward. The court order telling Google to hand over the Internet viewing records of tens of millions of people might be a good time to discuss the economics of copyright.

The point is that we incur enormous inefficiencies in the form of monopoly pricing and extraordinary enforcement costs, and now this invasion of individual privacy, all in order to get a relatively small amount of money into the hands of creative workers. We can think of much better ways to finance creative work. It would be difficult to imagine a worse system -- will the NYT ever talk about the issue?

--Dean Baker

We know this because it told readers today that, "the credit crisis also has stuck around much longer than expected." This is not true.

Economists who understand the economy knew that the credit crisis was far from over back in March, when many ill-informed analysts proclaimed the end of the crisis. It was easy to see that the crisis was not over because the fundamental problem was the collapse of the housing bubble which was and is leading to record foreclosure rates on mortgages. With hundreds of billions of dollars of losses on mortgages, it was inevitable that there would be serious problems for those holding mortgages and mortgage backed securities and their derivatives.

Furthermore, the glut of housing guaranteed loses for builders and defaults on construction loans. With the overbuilding also in the commercial sector, there will be another source of bad loans. In addition, since housing equity was a general fallback for consumers on other loans, such as student loans, credit card debt, and car loans, the loss of equity guaranteed higher default rates on these loans as well. This situation is of course worsened by the job loss that began in December.

This is why serious economists knew that the credit crisis was not over in March.

--Dean Baker

The NYT reports that Brazil anticipates average growth in the range of 3 percent to 4 percent over the decade from 2010-2020, but that a shortage of skilled workers may make this target unobtainable.

While it will obviously be worse for Brazil if it doesn't hit this target than if it does, but it is hardly a very ambitious target for a developing country. According to the CIA Factbook, Brazil has a per capita GDP of $9,700, less than one fourth as high as the United States. Typically, we would expect that developing countries will be closing the gap in income with developing countries, however the 2.5 percent per capita GDP growth rate implied by this target would be only slighter faster than the growth rate anticipated in the United States and other wealthy countries. This would imply very little convergence even if Brazil can achieve its target. By comparison, Argentina's per capita GDP is more than one-third higher and has been growing at close to an 8 percent annual rate over the last five years.

--Dean Baker

I count 7 "free trades" in this one. In all cases, the word "free" provides no information. In fact, as BTP readers know, it is a distortion. Maybe the paper needed to fill space. Perhaps in the absence of free trade in journalistic services, its protected reporters are paid by the word.

--Dean Baker

That's the question millions are asking (okay, maybe just me). But I heard at least four "free trades" in a discussion of the Colombia "free trade" agreement.

Of course the agreement is called a "free trade" agreement, but that is just part of the sales pitch, just like when President Reagan tried to name the MX missile the "peacekeeper" in the hope of making it more appealing to the public.

As BTP readers know, this is not a free trade deal. First, it does not free all trade. It will do little or nothing to make it easier for doctors, lawyers, and other highly educated professionals in Colombia to sell their services in the United States. It also increases some protectionist barriers in the form of copyright and patent protection.

Reporters always complain about having to convey large amounts of information in a limited space. So, if they could just refrain from saying the word "free" in the context of trade discussions, they would be have more space and be more accurately conveying information to their audience.

--Dean Baker

The Washington Post still does not have a clue about the housing bubble. It continues to focus on the resetting of adjustable rate mortgages as the basis of the foreclosure crisis.

This is wrong. The basis of the foreclosure crisis is that people purchased over-valued homes at bubble-inflated prices. On average, nominal house prices are down almost 20 percent from their bubble peaks. In many areas they are down by 30 percent. In other words, people owe $300,000 on homes that are now worth $200,000.

If house prices had not declined, then the resets would not be an issue. Homeowners could get new mortgages. Furthermore, if the mortgage payments did pose a problem, they would be able to borrow against their equity or simply sell their home and put money in their pocket.

The housing bubble and its subsequent collapse is not a secret. The Post reporters who cover housing should know about it.

--Dean Baker

Let's say it another 200 billion times, the fact that oil is priced in dollars makes no difference whatsoever in terms of the price that people in the U.S. or anywhere else pay for oil. When the dollar falls, the price of oil goes up in dollars, the price of oil does not change measured in euros yen, or pizza.

Steven Beard, a financial analyst, got this completely wrong in a segment on Market Place radio this morning. He noted that the European Central Bank was likely to raise interest rates this week. He then told listeners that they would do this because they were concerned about inflation.

Going back and forth with the host, they noted that one of the main sources of inflation is higher oil prices. They then told listeners that if the dollar falls, then the price of oil rises.

Implication: those dumb European bankers will make their inflation problem worse by raising interest rates because they will have to pay more for oil.

Reality: if the dollar falls by 10 percent against the euro (an exaggeration), then the price of oil measured in dollars will rise by roughly 10 percent. Since Europeans will be getting 10 percent more dollars for each euro, the price they pay for oil will not be changed.

--Dean Baker

I suppose the NYT editorial writers don't read their editorials, or if they do, they have a hard time remembering them. How else can we explain the fact that such ardent opponents of farm price support programs are ardent supporters of a house price support program.

The arguments about how a farm price support program are wasteful and counterproductive can also be applied to a house price support program, except the numbers are a couple of orders of magnitude larger in the case of a house price support program. Most agricultural commodities have worldwide markets in the low hundreds of billions, the U.S. housing market is valued at close to $20 trillion (and falling fast).

The plunge in house prices at present is due to the fact that we had an enormous housing bubble, which has gotten some attention in the NYT. The bubble has led to an enormous oversupply of housing, which has shown up as record vacancy rates in both ownership and rental units. This oversupply will continue to put downward pressure on house prices until they get more in line with their long-term trend levels, unless of course the NYT has plans to pull housing off the market and outlaw new construction. (Btw, why do we want high house prices -- is the NYT an advocate of unaffordable housing?)

The reality is that the housing bill in Congress will not stop the price decline, it will just allow the banks to dump some of their bad loans on the government. The time to have prevented the calamity that we are now facing was four, five, or six years ago, before then housing bubble grew to such dangerous levels. But the NYT editorial board could not be bothered by such trivia back then.

The best thing that can be done for those losing their homes right now is to temporarily change the rules on foreclosure to allow moderate income homeowners the option to stay in their homes as renters, as proposed by Representative Raul Grijalva of Phoenix. This plan, which would require no bureau