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 bureaucracy, cost no taxpayer money, and could begin protecting homeowners the day it was passed, has been completely ignored by the NYT in favor of its Rube Goldberg house price support scheme.

btw, the delay in the passage of this bill is likely to prove a huge gift to many of the homeowners who will eventually enter the bailout program. In most of the bubble markets house prices are falling very rapidly. Every month that the program is delayed means a much lower guaranteed price for the new loan, which is the basis for the homeowner's mortgage payment and eventual equity in the home.

For example, in the case of Los Angeles, prices in the bottom tier of the market are falling at the rate of 4 percent a month. With houses at this end of the market selling for an average of $400,000, a one-month delay in entering the program would net a homeowner entering the program $16,000. Now that is what we call asset building.

--Dean Baker

We regularly see efforts to push favored public policies by trotting out really big numbers that are supposed to scare people. For example, there is a whole contingent running around Washington who talk about the country's $75 trillion long-term deficit as a way to push cuts to Social Security. The real story is that the bulk of the projected shortfall (about 6 percent of future income) is attributable to projections of exploding health care costs and has nothing to do with Social Security.

Washington Post gives us another example of would be scary numbers when he tries to warn off regulation of oil prices by referring back to the price controls of the Nixon presidency. Mallaby tells readers that "administering the controls on energy alone took an estimated 5 million man-hours per year."

Are you scared. Let's see, most workers put in 2000 hours a year, so this means that it took 2,500 people to administer energy prices under Nixon. I had never given this one too much thought, but I probably would have guessed something considerably higher. After all, energy accounted for well over 5 percent of GDP and was the most problematic sector of the economy in terms of pushing prices higher. So, containing prices in energy required 2,500 people -- the same number who might occupy a small town in Iraq --that one doesn't scare me. I would not argue for oil price controls (I agree with many of Mallaby's points), but I would caution against being scared away by seemingly big numbers.

Undoubtedly, most of the increase in oil prices is real. Is some of it due to speculation? It seems almost impossible for me to believe it isn't. There are sharp movements in oil and other commodities. These sharp movements are not just responses to changes in underlying supply demand. Inevitably speculation exaggerates these moves.

In response to the question of where is the oil being stored. First, with a product with highly inelastic demand, we don't need very much oil to be pulled off the market to affect the price. But the obvious place that the oil would be stored is in the ground. Do we know exactly how much oil would be pumped at $140 a barrel, if producers anticipated it would rise no higher? Obviously the rate of current production will depend on future price expectations of price. That doesn't make for a grand conspiracy of speculators, but it does mean that the expectation of higher prices in the future can lead to higher prices in the present.

This doesn't mean we should have price controls or ban speculation. My policy recommendations would be to tax the speculation. We tax casino gambling, why not tax gambling in financial assets? We could easily raise over $150 billion a year on a comprehensive set of financial transactions taxes. We could even use the money to pay for a cut middle class income taxes.

For oil, how about a windfall profit tax? We can use the money to pay for tax cuts for energy conserving home improvement. Will that reduce the amount of investment in new drilling for oil? Probably, but we can almost certainly do more to influence the energy market in the future through conservation.

--Dean Baker

I have nothing against Europeans (some of my best friends .....), but I have never worried that the world will run out of them. This sets me apart from the NYT magazine which devoted a lengthy piece to this "problem."

Some of the discussion is reasonable. Several countries in Europe, like France and the Scandinavian countries, have adopted work and child care arrangements that make it easier to raise kids in two worker families. Other countries, like Italy and Spain, lag badly in this regard. Certainly it makes sense to have policies that allow workers the option to raise children without extreme hardship.

But, let's say we adopt these policies and populations still decline. Why should we fear being able to go to beach and not fighting for a place to put a blanket? Will the world collapse if we go to work and there are no traffic jams? And, should we be upset that it will be easier to reduce greenhouse gas emissions if there are fewer of us emitting?

The article seems to rely on some loon tune economics to make the prospect of declining populations seem like a serious problem. For example, it warns about rising rates of retirees to workers. Guess what, we have had rising rates of retirees to workers for the last century. Why on earth would anyone think that this is some sort of crisis? (The article actually tells us how much Germany and Britain's populations would have to increase to keep the ratio of retirees to workers constant. I suppose that is interesting trivia, but why on earth would anyone care?)

The implication that we will have no workers to care for our elderly, or alternatively that future generations of workers would face some crushing tax burden can be seen to be ridiculous with the most basic economic analysis. As one commentator quoted in the piece notes, there is a large amount of unemployed and underemployed labor in Europe. This could be put to work in the event that there was a labor shortage.

Once underutilized labor was fully employed, we would expect to see workers go from less needed jobs to more highly valued jobs. That means fewer people working in restaurants, as house cleaners in hotels and homes, and working the midnight shift at convenience stores. I still don't see the crisis.

Note that as the labor shortage develops, wages get bid up. So our impoverished young people will be earning really high wages. They also will pay much less for housing. In the U.S., rent averages 30 percent of expenditures. It can often be 40-50 percent in highly populated areas. In our declining population scenario, rents will fall since there will be an excess supply of housing.

So, our impoverished young people will be getting high wages because of the labor shortage and paying low rent because of the glut of housing. Yes, but their taxes will rise. Excuse me, but this sort of argument is tripe and it has no place in a serious newspaper. Standard projections for the growth rate of wages show that the rise in before tax wages should easily outpace the impact of any tax increases necessitated by a higher ratio of retirees to workers. There is no plausible story in which demographic pressures will cause future generations of workers to have lower standards of living than we do today.

(The article even puzzles over the question as to whether we can have economic growth with a declining population. The correct answer is, "why would anyone care?" Suppose the population is falling by 2.0 percent annually and the GDP is falling 1.0 percent a year. This translates in per capita GDP growth of 1.0 percent a year. What is the problem with that?)

It would be useful if the NYT would have an editor with some knowledge of economics review a piece like this before turning over 10 pages in the Sunday Magazine.

--Dean Baker

The news articles noting that the stock market is flirting with bear market levels reminded me of previous comments that I made on the investment advice that I saw on my local Fox affiliate back in January and also in November. The investment advisers told people to hold their stock and just let the market ride out the downturn.

Of course, anyone who had sold back then could buy into the market today and be almost 20 percent richer. Did we know that the market would fall at the time? Well, we can never know the timing of the market for certain. Even if we had a perfect chart of what the economy will do over some future period of time, we can't know that some moron with access to hundreds of billions of dollar will not buy hugely overpriced stock and keep its price from falling, but we can have some basis for our assessments of the market.

Last fall there was good reason to believe that the market would drop from what have since turned out to be peak levels, because the vast majority of economists were still insisting that housing meltdown was not a big deal. Those of us who recognized the seriousness of the loss of close to $5 trillion in housing bubble wealth (and rising) thought it likely that these losses would be a serious hit to the economy and corporate profits, and presumably also to the stock market.

It would have been appropriate for Fox , as well as other media outlets wishing to present investment advice, to seek out divergent views. Those who listened to the Fox experts have just lost much of their retirement savings.

--Dean Baker

The NYT had a very good article this morning on the overuse of CT scanners, a new devise for examining the condition of the heart. The article points out that the scans are of little or no use for the vast majority of patients who receive them. They also are somewhat risky, because they expose patients to large doses of radiation.

Nonetheless many doctors administer them to patients. This may be because they think that they are actually helpful or because they receive large fees for the scans.

It would have been useful if the article had examined more carefully how the way in which the United States finances research into drugs and medical devices creates this incentive structure.

The waste of resources on medical technology (either devices or drugs) occurs at the point where they are developed. At that point, all the scientific expertise and capital involved in either a medical device like a CT scan or a new drug has already been expended. The cost of actually using the scan (or a new drug) is very modest -- a bit of electricity and perhaps 20 minutes of a skilled technician's time.

However, because of patent monopolies, these devices (and drugs) can command huge fees. These fees provide enormous incentives to use these devices in cases where they may be of little use or even harmful.

On the other hand, if the cost of the research was paid up front (e.g. through public provided funds), then medical devices and drugs would be available at their marginal cost. In this event, a CT scan might cost less than $100. Most drugs were sell for less than $10 a prescription. There would be no incentive for manufacturers to misrepresent the benefits of these treatments.

A piece of this length should have spent some time explaining how the incentive structure of the drug/device development process leads to the sort of problems it highlights.

--Dean Baker

It takes a newspaper with a great deal of self-confidence to turn over a regular Sunday column on business issues to someone who has no idea whatsoever what they are talking about. I have no idea how or why Ben Stein has a column in the NYT business section, but you have to admire the NYT's editors for their willingness to put up with the regular embarrassment.

This time he really went all out. First he minimizes the problem of higher oil prices by telling us that "as of this spring, gasoline and oil and heating oil together amounted to about 2.5 percent of total personal consumption expenditures in this great country."

I am not positive where this one came from (he says the Economic Report of the President -- I suspect I know how he got confused), but if we look to the most recent consumer price index report (Table 1), we can find that motor fuel is 5.5 percent of consumption expenditures. Household energy would add another 4.2 percent to total consumption expenditures, if we want to take a broader measure of the impact.

Next Mr. Stein tells readers that after peaking in 1973 "real wages both hourly and weekly for all nongovernment workers, on average, have fallen by about 5 percent, very roughly." Okay, this one is not quite right for two reasons. First, Stein has used the wrong deflator. There have been changes in the Consumer Price Index over the last 35 years, and a proper measure takes these into account. When this is done, real wages in this series have been roughly flat over this period.

The other problem with Stein's statement is that this index does not include "all nongovernmental workers." It includes production and non-supervisory workers, about 80 percent of the labor force. For the most part, this series excludes the "lawyers, doctors, investment bankers, accountants, dentists" that he refers to later. (Imagine the situation of a typical worker if a series that did include these workers had actually fallen by 5 percent in real terms over the last 35 years.)

But these mistakes are just the prelude for the big one:

"The federal government can do little to make the price of oil fall in the short run, except, perhaps, for one basic thing: balance the budget. The world price of oil is denominated in dollars. The dollar is weak for many reasons, but a big one is the immense budget deficits run by our government. If President Bush and Senators John McCain and Barack Obama were to stand together in front of a camera and solemnly swear that they would balance the budget in four years, even if it required tax increases on people earning millions, the dollar would rise against the euro, and oil would fall in dollars."

Okay, this one is wrong on almost every angle. First the fact that oil is priced in dollars matters not one iota. We have to pay dollars to buy it. If oil was priced in potato chips, then it would take us more dollars to buy the potato chips that we needed to purchase oil. When the dollar falls in price, it takes us more dollars to buy oil, just as when the Mexican peso falls in price it takes people in Mexico more pesos to buy their oil.

Next, what happens when we balance the budget. Well, in econ 101 land, we learn that there is less borrowing, which causes interest rates to fall. When interest rates fall in the United States, then fewer foreigners want to hold dollar denominated assets. (Why?, because they would be getting a lower rate of interest.) With foreigners buying fewer dollar denominated assets, the dollar falls in value.

If Mr. Stein were a bit older he might remember the stories of the "twin deficit." The idea was that large budget deficits led to high interest rates, which raised the value of the dollar, thereby causing our trade deficit to rise.

The basic story of the 80s fits this picture very well. The Reagan deficits led to higher interest rates, which caused the dollar to rise and the trade deficit to soar. Toward the middle of the decade, the deficits came down somewhat and interest rates fell. The dollar fell also, and the trade deficit eventually came down to sustainable levels. The whole story is more complicated, but few economists would dispute the essence of this picture.

In short, if the next president wants to raise the value of the dollar, the last thing that he would want to do is to balance the budget. Balancing the budget will not raise the value of the dollar and reduce the price of oil. As Ben Stein said in a slightly different context "that will not happen."

--Dean Baker

The article in today's paper on the continuing collapse of the housing market never mentions the bubble. It is impossible to make any sense of the flood of foreclosures and the price declines without noting the bubble. In some metropolitan areas, like Atlanta, Cleveland, and Detroit, there is no bubble and no reason that prices need to continue to fall. On the other hand, in markets like Los Angeles, Miami, and San Diego, and Washington, the bubble is still in the process of deflating.

Housing policy can help to shore up prices in the depressed markets like Cleveland and Detroit. It is not plausible to imagine that housing policy can sustain prices in the bubble-inflated markets. Not is it obvious that it would be desirable to sustain these bubble-inflated prices since it would mean that new people moving into the area or forming their own households would find homeownership unaffordable.

It would have been useful if the article had made the distinction between these markets.

--Dean Baker

Why does the Post insist on attributing motives to members of Congress in their actions? The Post today asserted that the housing bill before Congress is "intended to halt the steepest slide in home prices in a generation."

Wow! So the bill is intended to prop up a housing bubble? That's really interesting. I don't know of a single economist who believes that it will have this effect. Given the record level of oversupply in a $20 trillion market, it hard to believe that anyone actually thinks that a bill that CBO prices at $1.7 billion will do the job. We spend far more to prop up prices in farm commodities with markets that may not even reach $100 billion a year. Have the boys and girls in Congress been drinking too much happy water?

Some people have argued that this measure will help homeowners facing foreclosure keep their homes. Clearly it will do this in some cases, although the benefit of this can be disputed when much of the money is likely to go to markets where the bubble is still in the process of deflating.

There is an alternative explanation of motives that is at least as plausible as the one the Post presents here. Members of Congress may want to help the politically powerful financial industry. The Post recently had an article suggesting this alternative motive for this housing bill, "Vital Part of Housing Bill is Brainchild of Banks".

--Dean Baker

The NYT noted the fact that Dow briefly hit a level that was 20 percent below its previous peak on Friday, meeting the definition of a bear market. There is no reason for most people to really care about this milestone, both because the Dow is not a representative index and the vast majority of people own little or no stock. (And we would want to look at inflation adjusted numbers in any case.)

Movements in the stock market bear only a loose relationship to the overall health of the economy and in fact can go in the opposite direction for substantial periods of time. This is easily demonstrated by the bear market that ran from 1965 to 1982. While the NYT tells us that periods of bear markets "coincided with geopolitical or economic turbulence — wars, the Depression, stagflation," the first 8 years of this bear market were actually the most prosperous period in the country's history.

From 1965 to 1973 the unemployment rate averaged 4.5 percent, GDP growth averaged 3.9 percent annually, and the real average hourly wage grew at a 1.7 percent annual rate. In fact, real wages for a typical worker grew more during the first 8 years of this bear market than in the subsequent 35 years.

The economy clearly faces very serious problems in the years ahead due to the collapse of the housing bubble, the correction from an over-valued dollar, and the adjustment to higher oil prices. It is likely that these developments will also have a negative impact on the stock market, but the market itself is a very poor measure of the state of the economy. The NYT and the rest of the media would better serve the public if they focused on actual measures of the health of the economy.

--Dean Baker

That's the word from the Washington Post. The Post reported that the Fed is seeking to structure its rules in a way that facilitates investment from hedge and equity funds. The only comment on the merits of this proposal comes from Randal Quarles, a managing director of the Carlyle Group, a private equity fund.

Mr. Quarles is quoted as saying that, "Banks have a tremendous need for capital right now and it's in everyone's interest for the Fed to help facilitate the flow of capital into the industry, including from private equity."

Observers who were not surprised by the collapse of the housing bubble and the crisis in the banking system (and who don't have a direct material stake in the Fed's policy) might have told Post readers that many of the current problems in the credit market stem from a failure to maintain transparent arms length relationships. For example, the bond-rating agencies were paid by the companies whose bonds they rated. Similarly, Citigroup created numerous Structured Investment Vehicles (SIVs), corporate entities whose legal status was unclear. These SIVs contained tens of billions of dollars in assets and liabilities.

Since we are seeing the fallout of a large set of dubious, if not illegal, practices in the financial sector, it might be a very bad time to adopt regulations that will make it easier for secretive private equity and hedge funds to play a larger role in the sector. It may well be better to let failed institutions collapse and then to start over with clean books, after their incompetent and/or corrupt management has been removed.

--Dean Baker

The NYT had a brief assessment of Bill Gates career in building up Microsoft as he prepared to leave his position with the company. The article mentions the anti-competitive practices that caused it to lose an antitrust suit in connection with its Internet browser. However, it did not discuss the earlier practices that helped give Microsoft near monopoly status in the operating system market.

In the late 80s, Microsoft signed contracts with several major computer manufacturers under which they got a discount price, but agreed to pay Microsoft for every computer they shipped, whether or not it included the Microsoft operating system. This meant that the marginal cost of including the Microsoft system was essentially zero, since the manufacturer had already paid for the system, even if she decided not to use it. The result was discourage the use of any other operating system. This could have prevented an erosion of market share that could have resulted if other software companies sought out niche markets.

Microsoft was investigated for these contracts by the Justice Department and in 1993 signed a consent decree in which it agreed to not write any more of these contracts (after Microsoft had already captured 90 percent of the operating system market).

It would have been worth mentioning this background in this piece. Gates benefited enormously from the willingness of the government to ignore violations of anti-trust law during his rein at Microsoft. If he had tried the same business practices at other times, he might be going to prison rather retirement.

--Dean Baker

That's good to know, some folks might have thought the loss of $5 trillion in housing wealth, more than $60,000 per homeowner, was a big deal. Standard models indicate that this will lead to a large falloff in consumption spending (@$200 billion to $300 billion in annual spending). This falloff coupled with continued weakness in the housing market, declining non-residential construction, weak investment, and cutbacks in the state and local spending, might be expected to lead to a serious downturn. Of course record loan write-offs might also be expected to weaken the economy.

But the Post told readers that "the economy is in only a modest downturn, with economic growth still slightly positive and fewer jobs being shed than in recent recessions." So, why worry?

--Dean Baker

Of course this is true. The fund managers currently only have to pay a 15 percent tax rate on much of their pay. By contrast, without the tax break, most of them will pay a 35 percent tax rate.

Nonetheless, the Post's way of characterizing the removal of a tax break for some of the richest people in the country is rather unusual. I suppose this is case of the glass being half empty or half full.

People who are upset about a special tax break for extremely rich fund managers focus on the fact that the tax break allows them to pay a tax rate that is 60 percent lower than what the law would require in the absence of special treatment. On the other hand, people who are sympathetic to the extreme