The NYT told readers that "the collapsed housing market" was a major cause of the recession. That is sort of true, except that it was a bubble that burst.

This is an important point, because it doesn't make sense to try to re-inflate a housing bubble, just like it would be foolish policy to try to push the NASDAQ back to 5000. Reporters should try to talk to someone who understands the housing market when it reports on housing policy.

--Dean Baker

The NYT told readers that Obama must worry about maintaining the confidence of world financial markets because the United States has a trade deficit. This is not true as can be easily shown.

Suppose that foreign investors refuse to buy U.S. bonds. This would have two effects. First it would drive down bond prices (pushing up interest rates). Second it would drive down the value dollar.

Higher interest rates would be bad news right now, but we know how to counter this effect. The Fed just has to buy up long-term Treasury bonds. It can buy as many bonds as it needs to keep interest rates low. Would this cause inflation? That's not likely given the severity of the downturn. We have 7.2 percent unemployment and it's rising fast. That's not an environment that is conducive to inflation.

The second issue, the fall in the dollar, is something that must happen in any case. Clinton gave us an over-valued dollar, which Bush largely maintained. The result was a huge trade deficit. The only remedy for our trade deficit is a lower dollar. (Remember, we have ostensibly been pressuring the Chinese to raise the value of their currency [i.e. lower the dollar]).

If large budget deficits are the mechanism that finally gets the dollar down to a sustainable level then it will be just one more benefit from the stimulus program. Rather than being a problem, as the NYT tells readers, this is an important part of the solution for getting the U.S. economy back on a sustainable growth path.

--Dean Baker

The Washington Post must be shooting for the Pulitzer for incredibly bad reporting. How else can one explain an article on plans for bailing out the banks that never once conveys the basic fact to readers that many, if not most, of our banks are in fact bankrupt.

Instead the article uses euphemisms to conceal this fact. For example, it tells readers that the scope of the toxic asset "problem" has reached $2 trillion. What does this information tell readers. Do the people reading this article know that this sum vastly exceeds the capital of the banking system?

That seems unlikely. So most readers would not know that the Robert Rubins of the world are sitting on bankrupt banks. In other words, they would be shut down and put out of business if we let the market run its course.

Instead the Obama administration is looking to hand taxpayer dollars to the banks through a variety of complex mechanisms. The main reason for using complex mechanisms (rather than simply seizing bankrupt institutions) seems to be to conceal the fact that we are handing taxpayer dollars to bank shareholders and the wealthy executives who run them.

The Post is obviously eager to assist in this effort. At one point, it even is so polite to tell us that the administration doesn't want to limit executive compensation as part of getting welfare from taxpayers because "officials" are worried that such limits would discourage banks from participating.

Isn't it neat how the people who work in the Obama administration don't have names. Are they called "official 1," "official 2" etc.? Since "officials" are not always entirely truthful in what they tell reporters, it is important for readers to know who made such claims.

Who cares if some banks don't participate in getting handouts? Citibank, Bank of America, and many other major banks have no choice. They will go bankrupt without assistance. If some banks actually can get by without the government's assistance, why would we want to force it on them?

If their toxic assets have really frozen lending, although not actually jeopardized their solvency, then the shareholders would have a great lawsuit against any bank executive who refused to act in the interest of the shareholders in order to preserve their own high pay. Such instances would presumably be rare, but could nonetheless provide a great source of free entertainment to a nation suffering through a severe downturn.

In short, there is good reason to believe that the Obama administration is trying to slip hundreds of billions of dollars to bank shareholders and their top management. The Washington Post seems to be helping.

--Dean Baker

On average, Bill Gates and I have $20 billion. If anyone thinks this statement means I'm very rich, then you're smart enough to have a column in Time Magazine, but probably not smart enough to hold a real job.

Micheal Kinsley pushes this line in telling readers that "the average couple age 65-74 has accumulated a net worth (not counting entitlement promises as either assets or liabilities) of $691,000, according to the Federal Reserve in 2004." The problem is that this number is an average. It includes the enormous wealth of the Bill Gates types who fall in this age group.

If Kinsley was interested in telling readers about the standing of the typical person in this age group, he could have found it on the exact same page. The Fed reports that the median family in this age group had $190,100 in net worth (this includes home equity) in 2004. Of course, this was before the recent stock and housing market crash so the median would almost certainly be far lower today.

The other parts of the Kinsley story are equally dishonest. He gives the Peter Peterson foundation's number for the U.S. debt as $56 trillion. Most of this is the result of our broken health care system, as can be easily shown.

Peterson is using much of his multi-billion dollar fortune to launch a full-scale attack on Social Security and Medicare. It is likely that he will use this money to get many more columns like this one in the near future.

--Dean Baker

President Obama said that the bonuses paid to top Wall Street executives at the banks receiving TARP money are "shameful." Unfortunately there is little that he can do about these bonuses. However, if President Obama wants to take a stand against outrageous compensation in failed financial companies receiving government money, he has an opportunity right here in Washington.

Fannie Mae recently reconstituted its board of directors, announcing that its directors would get $160,000 each, with the chairman getting $290,000. Those sound like pretty good paychecks for jobs that are very part-time, almost certainly involving less than a few hundred hours a year.

Furthermore, it is questionable whether these directors are an especially talented group. Three of them are holdovers from the board that watched Fannie slip into bankruptcy.

Since Fannie Mae is now under conservatorship, President Obama has considerable ability to affect the pay of its directors. Reporters may want to ask him whether he will take the opportunity to restrain compensation in a situation where he actually has the authority to do so, rather than just complaining about compensation in a situation where he has no authority.

--Dean Baker

The NYT reports it will be difficult to recover bonuses that Wall Street banks paid to their top executives.

The article concludes by telling readers:

"Despite the current outcry in Washington, some compensation experts said Congress missed a chance to impose strict limits on 2008 bonuses last fall, when the government embarked on its rescue plan.

'The time to say ‘no bonuses’ has come and gone,' said Brian Foley, an executive compensation consultant in White Plains. 'The horse is out of the barn and over the horizon.'"

It is worth noting that many of the opponents of the TARP as it passed made exactly this point at the time. The leadership in Congress and the White House chose to ignore this concern raised by TARP opponents. The failure to restrict executive compensation on Wall Street through the TARP was a deliberate decision by the Congressional leadership. It was not some sort of oversight, as this discussion implies.

--Dean Baker

The Post's front page news article on the House's approval of the stimulus package described its cost as "staggering." Usually such characterizations are reserved for the editorial pages. Perhaps the Post should find reporters with more steady footing.

Carrying through with this liberal use of adjectives, the article refers to the TARP as "massive." It also describes the TARP as an "effort to free up the credit markets." This is a questionable characterization. To date, the TARP has helped to keep many banks out of bankruptcy. Arguably, this is the main purpose of the fund, since Congress has thus far rejected proposals that would focused the money more on freeing up credit as opposed to paying dividends and executive salaries.

--Dean Baker

The NYT reports on the bonuses paid out by the Wall Street banks, all of whom are now operating with government subsidies. The fact that taxpayer dollars to make some of the richest people in the country (Wall Street bank executives) even richer, is a very important piece of information for the public to know, as the Obama administration crafts a plan that will give even more tax dollars to banks.

--Dean Baker

The NYT presented a somewhat confused discussion of the stimulus bill passed by the House today. For example, it told readers that: "the bill would also create a $79 billion state fiscal stabilization fund, disbursing half the money in late 2009 and half in late 2010. The Congressional Budget Office has estimated that little of that money would be spent this year."

Hmmm, should we be worried that little of this stabilization fund will be spent in fiscal 2009 (before October 1)? Right now state and local governments are preparing massive cutbacks in services and payrolls based on huge projected budget deficits. The day this bill is signed into law, these governments know that they will have access to this $79 billion fund. This means that they do not have to start cutting back services and lay off workers. They may not literally tap the funds immediately, but the impact on their spending and employment should be almost immediate.

Later the article discusses the prospect that some of the infrastructure will not be well-spent, commenting: "then there is the risk that the projects themselves have little or no long-term economic value and simply drive up the budget deficit." There is a risk that any government spending, or tax cuts, will have little long-term economic and therefore "simply drive up the budget deficit." (The tax cut in this bill that allows businesses to write-off losses against taxes paid up to six years ago, might fit this category.) There is no obvious reason that infrastructure spending should raise this concern more than any other item in this bill.

--Dean Baker

The NYT told readers that the Republicans objected to spending that they "ridiculed as having nothing to do with economic stimulus." It then listed the expansion of federal Medicaid coverage of family planning services as one example.

Actually, this program involves spending money, therefore it is stimulus. This money will employ people in the provision of family planning services, just as highway spending employs people in the constructing or repairing highways.

It's sort of like baseball being a type of sport. Some people may not like baseball, but that doesn't change the fact that it is a sport.

If the Republicans were to insist that baseball is not a sport then it would be reasonable to assume that they do not know what the word "sport" means. Similarly, if the Republicans do not understand that any spending that directly goes into the economy is stimulus, then it implies that they don't know what "stimulus" means.

If one of the major political parties doesn't even know what stimulus means then the media should be exposing their ignorance to the public. Presumably voters would like to know if their representatives in Congress don't understand very basic economic concepts.

[Addendum: I'm glad to see that this quick economic lesson seems to have gotten the adrenalin flowing among my friends on the right. Let me suggest that you read it a few more times until you understand it.]

--Dean Baker

The Associated Press apparently thinks so. It could not find anyone who thought the idea of buying junk assets from banks was fundamentally a bad idea because it would almost certainly mean further taxpayer subsidies of banks.

All the experts cited in the article accepted that the basic idea was a good one. It's probably also worth noting that the experts cited in the article somehow were not capable of seeing the $8 trillion housing bubble, the collapse of which has led to the worst economic crisis since the Great Depression.

--Dean Baker

Welcome to economics 101 for business reporters. Reuters told us today that: "NBC has sold all but two ad spots for its Super Bowl broadcast, despite the pressures of economic recession."

Okay, what does this mean? Is NBC doing well with its ad sales because 4 days before the big game they have managed to offload all but two spots, "despite pressures of economic recession?"

Suppose NBC had to sell half its spots for $10 a minute, would that still be good for the networks profits? This one requires just a little commonsense. NBC will be showing the Superbowl on Sunday and it has already set aside a certain amount of time for commercial breaks. It will eventually sell all these spots, because the marginal cost to NBC of running an ad at this point is close to zero.

The real issue is the price that they are able to sell the ads for. The Reuters piece provides no information on the prices paid for the ads, therefore readers can have no idea as to whether NBC has been successful with its Superbowl ad sales.

--Dean Baker

The Post tells readers that a problem with a bank rescue plan that injects capital in exchange for an ownership stake, and effectively wipes out the stake of current shareholders is that "the government could also precipitate a sell-off across the banking system as investors flee, fearing they could be next."

The reason that the government would be injecting capital is that the bank is effectively bankrupt. Shareholders should know if there are banks are effectively bankrupt. If they are, then they essentially have an asset that has no value. (in principle shares of stock only have value if a company's assets exceed its liabilities. If it is bankrupt, then its liabilities exceed its assets.)

It would be a good thing if shareholders paid attention to the financial condition of the stocks they own. (Isn't this what fund managers get paid 7-figure salaries to do?) If it takes government action to get shareholders to look seriously at the bank stocks they hold, then this would be a plus of intervention, not a "danger."

--Dean Baker

For those with nothing better to do than read people talking about my book, TAPPED has it all.

--Dean Baker

Okay, can anyone imagine that the chief economist of the National Association of Realtor's might have an agenda? Not the NYT. It presented Lawrence Yun's assessment of the housing market and his view of the need for special government handouts.

Mr. Yun complained that, "The economy just simply cannot recover as long as home prices continue to decline." Is that the story?

Well suppose the NYT had talked to someone who was able to notice an $8 trillion housing bubble. Such a person might have told the NYT that in some markets, the bubble has deflated and it would be desirable to see prices stabilize. However, in other markets, prices must still fall much further before the bubble is fully deflated. In these markets, it would be extremely stupid for the government to waste taxpayers' dollars trying to stabilize prices.

But, hey, why would NYT readers want to get the assessment of someone who recognized the housing bubble and doesn't have a monetary stake in pushing real estate?

--Dean Baker

The NYT takes President Roosevelt to task for not being willing to fully embrace Keynesian economics and therefore failing to restore the economy to full employment with his New Deal programs. The complaint is fair, but Roosevelt did better than the article leads readers to believe.

The standard measures of the unemployment rate counting people employed under government programs like the Works Progress Administration as being unemployed. If these people are instead counted as being employed (in keeping with current methodology) then the unemployment rate fell below 10 percent in 1937, before Roosevelt became concerned about budget deficits and cut spending and raised taxes. This is still far from full employment, but it is less than half the 23 percent rate that Roosevelt faced when he took office.

--Dean Baker

The Republicans were anxious to tout the Congressional Budget Office's (CBO) preliminary analysis of a portion of the stimulus package, claiming that it showed the plan would have little impact over the next two years. The media were anxious to follow their lead, describing this preliminary and partial analysis as a "CBO Report" on the stimulus.

Now we actually have a CBO report on the stimulus. It projects that $374 billion of the $606 billion of spending appropriated in the bill (61.7 percent) will actually get out the door by the end of 2010. (This number assumes that spending in the 4th quarter of 2010 occurs at the same pace as it did during fiscal year 2010.)

It will be interesting to see if the Republicans are as anxious to use these CBO numbers as they were of the numbers in the preliminary report. It will also be interesting to see if all the media outlets who highlighted the preliminary analysis give the same prominence to CBO's actual report.

--Dean Baker

The Washington Post (a.k.a. Fox on 15th Street) is still referring to a CBO report that purportedly shows that most of the stimulus will not be spent in the first two years. The big problem is that the report does not exist.

--Dean Baker

The NYT is worried (in a news analysis) that if the government took over bankrupt banks that it wouldn't be able to attract good people at government salaries: "and how would the government attract the best talent if it demanded that they take minimal pay."

I guess they didn't notice that the "best talent" is the reason that the banks are bankrupt and the economy is crumbling. At this point, the economy can't afford the best talent, even if they would work for free.

--Dean Baker

I was going to let this one pass, but the newspaper that told us the economy was just fine back in September felt the need to spew nonsense into the debate on stimulus.

The basic story on stimulus is simple -- you want to spend money. Someone better say that slowly for the Post's editors because they can't seem to understand the concept.

The Post is unhappy because the bill gives $4 billion for equipping and paying police. The Post tells us that this spending "might be a good idea, but writing checks to individual households for the same amount would do more to stimulate the economy." it then adds, "ditto for $16 billion in Pell Grants for college students, $2.1 billion for Head Start and $50 million for the National Endowment for the Arts."

Is that so? Does the Post have any evidence to support this assertion? The standard estimates of multipliers on government spending (even spending that the Post doesn't like) is 1.5. Multipliers for tax cuts usually start at 0.9 and go down, depending on the type of tax cut being considered. Perhaps the Post got its assessments of multipliers from Donald Luskin, the author of its column saying that the economy was just fine.

The Post then complains that: "for sheer irrationality, it would be hard to top the $4.19 billion the bill would give to the Neighborhood Stabilization Program, on top of $4 billion authorized last year. This program gives local governments money to buy and rehabilitate homes that have been foreclosed on -- thus giving lenders an incentive to foreclose on more houses."

Okay, get out the arithmetic here. We are going to give cities $4.19 billion to buy foreclosed homes. How will this give banks incentives to foreclose? Well, this money could raise the price of foreclosed homes. How much impact can $4.19 billion have ? The total value of residential housing in the United States is around $20 trillion. Try to find the impact of $4.19 billion, an amount equal to 0.02 percent of the housing stock. If the Post is worried about driving driving up the price of foreclosed homes, the Fed's efforts to cut mortgage interest rates would almost certainly be far more important.

--Dean Baker

Alan Blinder lists six policy errors that worsened the impact of the collapse of the housing bubble in his NYT column today. Missing from his list is the housing bubble itself.

We seem to live in some bizarro economic world where even now no one can bring themselves to talk directly about the housing bubble. This comes up in a wide range of contexts.

For example, in discussions of plans to stabilize house prices, for some reason no one ever bothers to distinguish between the bubble and the non-bubble markets. Is there a public interest in keeping house prices from spiraling downward indefinitely? I would say yes. Is there a public interest in trying to house prices over-valued at bubble-inflated levels? I would argue strongly against that one. Remarkably, apart from me almost no one even notes that this can be an issue.

Blinder's list of six items is a good one, but none of these would have mattered anywhere near as much if we had a Fed chair who actively warned against the bubble. If Greenspan had devoted his personal efforts and the Fed's research capacities towards explaining to the financial industry and the general public that there was a housing bubble it is difficult to believe that the warnings would not have had an impact.

This view is widely ignored by economists -- almost all of whom were unable to see the bubble. Track records do not count for much in economics.

--Dean Baker

The Republicans have become fond of saying that President Obama's stimulus package will cost $275,000 for every job created. The media have been typically derelict in simply reporting this number without making any assessment to evaluate it -- as though readers in their spare time are supposed to determine whether it is accurate or not.

Okay, let's do the reporters' work for them. First, where do the Republicans get this number? They divide the the $825 billion cost of the stimulus by 3 million jobs that President Obama had originally pledged.

Their arithmetic is right but both numbers are wrong. First, the projections from the Obama team is that their package will create 4 million jobs, not 3 million. Furthermore, it is important to note that this over 2 years, not one year.

The cost is also wrong, or at least misleading. If we assume that the stimulus will work as planned, then it will boost GDP by approximately 1.5 times the amount of spending or $620 billion a year. If GDP rises by this amount, then it will translate into roughly $155 billion a year in higher taxes/lower spending than if we didn't do the stimulus. This is money that should be subtracted from the cost to the taxpayers.

So, if net out the increased revenue from the growth generated by the stimulus we end up with a 2-year cost of $515 billion which will generate roughly 8 million job-years. That comes to about $65k per job year, less than one-fourth of the Republicans' number.

--Dean Baker

Virtually everyone (even the "experts" cited in Washington Post articles) acknowledges that the banks are facing large losses and will need much more money from the government. The trillions of dollars that have been lent thus far through the TARP and the Fed amount to a subsidy from the taxpayers to the shareholders of the banks and their highly paid executives. Since most people think that there is a limit to how much taxpayers should have to subsidize these people, there have been serious debates in policy circles about just nationalizing the banks.

However, this policy option did not make the list in an article in the Washington Post discussing the issue. The only options discussed in the article involved given even more taxpayer dollars to the banks.

The article also seriously represents the mechanics of plans to "help" homeowners facing foreclosure. The article notes the views of "some of the nation's top economists" that a the rescue efforts being discussed could cost $250 billion. It then quotes Senator Kent Conrad as saying that the $350 billion remaining in the TARP fund is not enough to both help homeowners and rescue the banks.

The Post should have pointed out the absurdity of Mr. Conrad's statement to readers. The money to "help" homeowners in these programs in fact is money that goes to the banks. It involves paying above market prices for mortgages held by banks in exchange for allowing homeowners to remain in homes in which they will have little or no equity. The more money that is spent helping homeowners in this way, the better will be the condition of the banks. This money is part of a rescue of the banks, not a subtraction from it. (It is probably also worth noting in this context, that while Senator Conrad has been anxious to give taxpayer dollars to banks, he is one of the Democrats most eager to cut Social Security benefits.)

The article also expresses surprise at what should have long been obvious to any serious economist analyst, telling readers that: "home prices are plummeting and are projected by some financial analysts to lose a third of their peak value before the market recovers."

This should not be news. There was an enormous housing bubble, with inflation-adjusted house prices exceeding their trend levels by more than 70 percent. Of course bubbles burst. This means that we should expect inflation-adjusted house prices to decline by more than a third of their value from peak levels. And contrary to the bizarre assertion in the Post article, they will not recover any more than the NASDAQ recovered to its 2000 peak levels.

--Dean Baker

The Washington Post, which relied on David Lereah, the chief economist of the National Association of Realtors and the author of Why the Housing Boom Will Not Bust and How You Can Profit from It, as its main source on the housing market during the bubble, has still not recognized the housing bubble, even as its collapse is throwing the economy into the worst downturn since the Great Depression.

An article on growing loan losses at the Federal Housing Administration (FHA), which will soon push it below its minimal reserve requirements, never noted its continuing practice of insuring mortgages on homes that are purchased at bubble-inflated prices. This will cause the FHA to continue to lose money in the foreseeable future as the default rate on these loans will be much higher than normal. The FHA would be able to avoid such losses if it issued mortgages based on appraisals of rental values (which were not affected by the bubble), however it has opted not to do so.

The Post should try to talk to some experts who are familiar with the dynamics of the housing market for its articles on the topic.

--Dean Baker

The Washington Post, which relied on David Lereah, the chief economist of the National Association of Realtors and the author of Why the Housing Boom Will Not Bust and How You Can Profit from It, as its main source on the housing market during the bubble, has still not recognized the housing bubble, even as its collapse is throwing the economy into the worst downturn since the Great Depression.

An article on losses at Freddie Mac, which are causing it to need more bailout money, never noted its continuing practice of insuring mortgages on homes that are purchased at bubble-inflated prices. This will cause Freddie to continue to lose money in the foreseeable future as the default rate on these loans will be much higher than normal. Freddie would be able to avoid such losses if it issued mortgages based on appraisals of rental values (which were not affected by the bubble), however it has opted not to do so.

The Post should try to talk to some experts who are familiar with the dynamics of the housing market for its articles on the topic.

--Dean Baker

It turns out that the media reports of spending rates from the Congressional stimulus package were taken from a preliminary CBO analysis of a bill that has since been altered. While opponents of the stimulus package have touted these estimates to claim that the stimulus will have little effect in the next two years, CBO produced nothing that can support this claim.

CBO will produce an analysis next week that will examine the bill in its current form. It is also important to keep in mind that the preliminary analysis (and probably the analysis that will be produced next week) relied on standard rules of thumb for spendout rates rather than the spendout rates for the specific projects in the stimulus package.

There can be a big difference. For example, as a rule of thumb, the spending for highways in the first year after an appropriation may be just a small percentage of the total cost of the highway, with spending in the second year being on a little bit higher. It takes time to plan a highway and to bid out contracts.

However, if there are maintenance projects where planned maintenance has been deferred, then it is likely that spending can proceed far more quickly. Furthermore, contractors will typically have to find time to fit a government project in their queue of other work. Given the severity of the current downturn, especially in the construction sector, there are likely to be plenty of contractors who are ready to move almost immediately after a contract is signed. For these reasons, CBO's rules of thumb on spendout rates may substantially understate the amount of spending that will be carried through in the next two years.

Hopefully the CBO report will be clear on its methodology in its report so that there will be less confusion on this issue.

--Dean Baker

Maintaining its Fox News like attack on pension programs, the Washington Post had a front page article about Japan's efforts to keep immigrant workers. It goes on to warn about how it will need many more immigrants in the future because of its declining population.

Actually, because of something that economists call "productivity growth," Japan can count on continuing improvements in its standard of living even without immigration. In fact, since it is a densely populated country, it is possible that its standard of living will actually increase more rapidly in the absence of immigration.

--Dean Baker

Washington Post reporters should have the time and expertise to evaluate the assertions on economic issues made by politicians. This is important, because readers almost certainly do not.

The Post was seriously negligent in reporting Senator Arlen Spector's complaint about the inclusion of an expansion of Pell Grants in the stimulus. According to the Post, Spector is opposed to the inclusion of expanded grants in the stimulus, "because it would do little to spur short-term economic growth."

The grants, which help to pay for college for people with low and moderate income families, actually would provide stimulus in roughly the same way as tax cuts to these families would. They provide them with more disposable income, which is likely to lead them to spend more. The Post should have told readers that Mr. Spector's assertion was wrong.

The article also notes the opposition of Republicans and the banking industry to a measure that would allow bankruptcy judges to rewrite the terms of mortgages in a bankruptcy proceeding. The articles tells readers that they oppose the measure because, "it might cause mortgage interest rates to rise."

This is the stated reason given by Republicans and the banking industry for their opposition, but it may not be the true reason. It is also possible that they oppose the measure because it would likely reduce the profit of the banking industry. It is virtually certain that lower bank profits would result if the measure is approved. It is far from obvious that higher mortgage interests rise, since the measure is likely to only apply to past mortgages not new ones. It is also not clear that Republicans and the banking industry would necessarily care much if mortgage rates did rise, especially since the plausible size of any increase would be in the neighborhood of 0.1 percentage point.

--Dean Baker

Floyd Norris has a good column on the topic.

--Dean Baker

During his Senate testimony Tim Geithner said he supported a strong dollar. He also complained that China was "manipulating" its currency by keeping its value down against the dollar. (China has a public exchange rate target, so its not clear how this can be called "manipulation." It is a fixed exchange rate.)

The complaint against China implies that Geithner wants a lower-valued dollar which is directly opposite to wanting a strong dollar. As a practical matter, this is about as embarrassing a contradiction on a key policy issue as a Treasury secretary designate can possibly make, but the contradiction completely escaped the notice of the NYT.

The article also asserts that: "Mr. Paulson initiated a round of strategic talks with the Chinese and, on his watch, the Chinese allowed the yuan to depreciate nearly 20 percent." Actually, the Chinese allowed the yuan to appreciate by nearly 20 percent.

--Dean Baker

Reporters cover proposals for allowing bankruptcy judges to alter mortgage terms as part of their job. That means that they are paid to know roughly how much impact this change could have on lenders and therefore the future costs of mortgages. On the other hand, readers don't typically have time to determine the cost themselves.

This is why the Washington Post was incredibly negligent to just tell readers that, "most lenders oppose the measure [bankruptcy reform], saying it would raise the cost of making home loans because of the possibility lenders could lose control over the loans in a bankruptcy." Readers have no way to assess whether there is any merit to this assertion, a full-time reporter at a major national newspaper does.

For those who care, if 1 percent of mortgages end up in bankruptcy (a very high percentage) and the judges actions as a result of this measure result in banks getting an average of ten percent less than would otherwise be the case 9a very large cut), then this would raise their costs by 0.1 percentage point. This amount would presumably be passed on to borrowers in mortgage interest rates that would average 0.1 percentage point higher.

This increase would be smaller if the change only applied to existing mortgages (and not future mortgages) as is currently being proposed by Congress.

--Dean Baker

The British Pound, like the U.S. dollar, had been seriously over-valued in recent years. That is why it had been running a large trade deficit.

This relationship is pretty straightforward. A higher value of the currency makes imports cheaper and exports more expensive to those living in other countries.

In most contexts reporters are able to understand the relationship between higher prices and demand, but for some reason in the context of trade, they discuss the topic as though there is no relationship. Hence in an article on the falling British pound, the NYT tells readers that Britain's prosperity over the last decade "camouflaged a steadily weakening manufacturing base."

Of course, the prosperity did not just "camouflage" a weakening manufacturing base, to a large extent, the prosperity was directly related to the weakening manufacturing base (except for the laid-off manufacturing workers).

The over-valued pound allowed the British to buy imported goods at lower prices than their own industry could produce them. However, this led to a large current account deficit which could not be sustained indefinitely.

In this respect, an over-valued currency is very similar to tax cut leading to large budget deficits. In the short-term it can allow for higher living standards, but in the longer-term it is necessary for the currency to fall to bring the current account deficit down to a sustainable level, just as taxes must eventually be raised or spending must be cut, to bring budget deficits down to sustainable levels.

In this context, the decline in the pound, like the future decline in the dollar, is not an unfortunate occurance, but rather an essential part of an economic adjustment.

--Dean Baker

In his column this week David Leonhardt compares the severity of the downturn in 1981-82 with the current downturn. One of the factors that he argues made the 1981-82 downturn more severe is that house inflation-adjusted prices were 30 percent lower in 1981-82.

I'm missing something. Why on earth would anyone care that house prices are low. This means that new home buyers can get homes at more affordable prices. Last I heard, we wanted affordable housing, not unaffordable housing. (Leonhardt recently bought a home, which may tell us something here.)

The other point worth keeping in mind is that the Current Population Survey (CPS), our main measure of unemployment, is likely missing much current unemployment. The CPS presently failures to cover roughly 12 percent of the adult non-institutionalized population. The people who it does not cover disproportionately belong to demographic groups who are likely to be unemployed, such as young African America men. In an analysis comparing employment rates from the decennial Census, which has near complete coverage, with the CPS, John Schmitt calculated that the CPS may overstate employment rates by approximately 1.7 percentage points. This could mean that it understates the unemployment rate at present by approximately 1.0 percentage point.

Addendum: Apologies to David Leonhardt. He clearly was referring to sales being lower in 1981-82 than in the current downturn, not prices.

--Dean Baker

The Washington Post told readers that the Congressional Budget Office projected that most of the spending on the discretionary projects included in President Obama's stimulus package "would come too late to lift the nation out of recession."

Actually, projections showing that spending will not occur until after October 1, 2010 (the cutoff referred to in the article) will still provide a much needed boost to the economy according to CBO. In its baseline scenario the unemployment rate is still projected to be close to 9 percent by the end of 2010. This would mean that any boost to the economy from a stimulus package could still have a useful impact in lowering unemployment.

--Dean Baker

A front page article in the Washington Post told readers that the analysts it relies upon as sources had not expected the large losses being reported by banks for the 4th quarter. It is hard to understand how professional economic and financial analysts could still be surprised by the size of bank losses.

The basic story is straightforward. Housing has lost close to $6 trillion in value over the last two and a half years. This is leading to massive losses not only on mortgage debt and derivative instruments, but also on car loans, student loans credit card debt and other forms of consumer credit, since more than ten million homeowners no longer have any equity that can serve as backdrop to pay these loans in bad times.

The Post might try to rely more on experts who are not repeatedly surprised by events that they should have expected.

--Dean Baker

The Wall Street Journal told readers that former Treasury secretary and Citigroup honcho Robert Rubin is playing a central role in designing President Obama's economic policy. It would have been appropriate to note that with the possible exception of Alan Greenspan, Mr. Rubin is the person most responsible for the policies that lead to the current crisis.

Mr. Rubin was a staunch advocate the policy of one-sided financial deregulation under which the government ignored prudential regulation while continuing to allow major banks to benefit from the government's "too big to fail" insurance policy. Mr Rubin also actively promoted an over-valued dollar which led to the enormous trade deficit of recent years. In addition, he had a "bubbles are fine" approach that allowed huge asset bubbles to grow unchecked.

The WSJ does note that Mr. Rubin personally profited from these policies in his role as a top Citigroup executive, but it does not point out the extent to which he was directly responsible for the policies that have produced the worst economic downturn since the Great Depression. If Mr. Rubin is in fact playing a large role in determining the economic policies of the Obama administration, this should be serious cause for public concern.

--Dean Baker

I see Paul Krugman has taken me to task for questioning the importance of the credit crunch. Just to be clear, I wouldn't say that there is no issue of credit availability, but I just don't think that it is hugely different than what we typically see in a downturn and that we would be seeing pretty much the same awful economic picture even if our banks were fully solvent. You don't lose $6 trillion in housing wealth and $8 trillion of stock wealth and not expect to see a real impact on the economy.

Krugman's main argument is based on the spread between corporate bond yields and treasury yields. But, these always rise during a downturn. In fact, the current spread between Aaa bonds and treasuries of 2.0 percentage points, is the same or lower than year round average for 2001. The 5 percentage point spread on Baa bonds is higher than the 3.8 percentage point peak spread reached in October of 2002, but given the relative severity of the two downturns, the gap doesn't seem hugely out of line with the relative risk associated with this debt.

It would be nice to see lower yields on corporate debt, and cleaning up the financial system should help to bring this about (Krugman's is absolutely right in his column this morning calling for takeovers of the banks whose bad assets we buy), but fiscal policy will have to do the heavy lifting to get us out of this downturn.

[Addendum: As a sidebar on media reporting on the credit crunch, there has been no article that I've seen that has noted the decision of Federal Reserve Board chairman Ben Bernanke to directly lend money to non-financial institutions by buying commercial paper after Congress approved the bailout. The Fed always had this ability.

The best argument for the urgency of the TARP was that the economy was shutting down because companies could not get the credit needed to meet their payrolls and meet other bills. Mr. Bernanke had the authority to ensure that such a shutdown did not happen by buying commercial paper. He is hard to understand his decision to wait until after the Congressional vote except as part of an effort to promote an atmosphere of crisis. Manipulating Congressional votes is not part of the Fed chair's job description.]

--Dean Baker

The NYT has an article promoting the credit crunch story whereby credit worthy businesses are supposedly unable to get credit. Readers would be well-advised to skip the article and just look at the accompanying chart. The chart tells readers that the interest rate on the debt of investment grade corporate debt was pretty much the same in the fourth quarter as it was earlier in the year, and in fact only a small amount higher than it had been in the three preceding years. In other words, investment grade companies are paying pretty much the same interest rate as they always have and probably expected in their planning.

The chart also shows volumes of debt issuance. There was a falloff in issuance of investment grade debt in the third quarter (after a big surge in the second quarter), but the fourth quarter levels are pretty much in line with prior years.

There has been a serious falloff in the issuance of high yield debt as well as surge in the interest rates payable on this debt. That is what happens in recessions. The survival of companies whose survival was always questionable becomes far more questionable in a severe downturn. These companies are in reality far higher risks, so it is understandable that banks would be reluctant to lend to them even if the banks had plenty of capital.

The credit system is undoubtedly facing considerable stress because so many banks are effectively bankrupt, but the economy is not in a downturn because banks aren't lending. It is in a downturn because we have just lost $6 trillion in housing wealth and $8 trillion in stock wealth. The expected effects of this loss of wealth is the huge falloff in consumption that is driving the downturn. The condition of the banks is very much a secondary issue.

--Dean Baker

An Associated Press news story referred to "soaring" and "skyrocketing" cost of Social Security. This are unusual adjectives to include in a news story and they are also not particularly accurate. Measured as a share of GDP, Social Security is projected to increase by approximately 2 percentage points over the next twenty years. This is approximately the same as the increase in military spending in the Bush years.

Furthermore, this increase can be fully met by the designated Social Security tax. This article should have mentioned this fact. The Social Security tax and the bonds held by the trust fund will be sufficient to pay all scheduled benefits through the year 2049 according to the most recent projections from the Congressional Budget Office.

--Dean Baker

The Washington Post made reducing the pay of autoworkers by $4.00 an hour a central theme of its coverage (both news and editorial) of the auto industry bailout. For this reason it is especially noteworthy that its discussion of new plans for bailing out banks has no mention whatsoever of executive compensation at the banks.

In good years, the highest paid bank executives could make more money in an hour than a UAW autoworker earns in a year. For this reason, readers may find restrictions on the compensation of bank executives to be an important part of what could be another trillion dollar bailout package for Wall Street. The omission of any discussion of executive compensation is quite striking.

--Dean Baker

The otherwise astute Robert Shiller seems to think so. In an NYT column he notes the poor state of financial literacy among the public and argues that this could be improved by having the government subsidize financial counseling.

This one seems questionable to me. I argued with many financial advisers who told people that the stock market was the best place to put their money in the 90s stock bubble and who urged people to buy homes in bubble-inflated markets in this decade. I would hate to see taxpayer dollars being used to push this bad advice on innocent people -- maybe if we could make the advisers personally liable for really bad advice.....

Robert Shiller is famous for having warned of both the stock and housing bubbles almost as early I did. He should know better.

--Dean Baker

I enjoy reading about the hardships of Citigroup and Bank of America as much as anyone, but when the real wages of ordinary workers are soaring, it should merit at least some small bit of attention from the media. Since nominal wages have continued to increase in recent months, even as prices have plummeted, the real wage of workers lucky enough to keep their jobs has soared.

Over the last three months, the average hourly wage for production and non-supervisory workers has risen at an incredible 23.4 percent annual rate. This is an important story. If the stimulus can sustain demand so higher unemployment does not weaken the labor market too much and force down nominal wages, then we will have seen a substantial downward redistribution of income as result of this crash.

Of course, the other key factor in the distribution of income will be the efforts of the financial sector to grab taxpayer dollars through the TARP and other mechanisms. The government may act as it has in the past to offset the effect of market forces and push income upwards.

--Dean Baker

The Washington Post, which was famous for relying on David Lereah, the chief economist of the National Association of Realtors (NAR), as its main expert on housing (also the author of Why the Housing Boom Will Not Bust and How You Can Profit from It), is still missing the housing bubble.

An article that discusses aspects of the bubble and how it has hit a family in California refers to the "mortgage mess." Of course the mortgage mess is secondary. The problem stems from the fact that prices became hugely inflated and have now crashed. If house prices had followed a normal pattern of rising in step with inflation, the problems presented by the bad mortgages issued during this period would be relatively minor.

The failure to understand the housing market also leads the article to exaggerate the importance of the scheduled reset of option ARM mortgages in the next few years. The median period of home ownership in the United States is less than 7 years. (It was 5 at the peak of the bubble.) A high percentage of the homes bought with option ARMs will be sold or abandoned long before the reset date. Therefore the impact of these resets are likely to be relatively limited in the larger housing picture.

It would have been helpful if the Post had been able to talk to an economist who had not missed the $8 trillion housing bubble for this story. It would have been better informed. (The Post now relies on Lawrence Yun, Mr. Lereah's replacement as the chief economist at the NAR, as its main expert on the housing market.)

--Dean Baker

The Wall Street Journal ran a piece touting Democratic Congressman Jim Cooper's concerns about the deficit. Mr Cooper likes to scare people about the size of the deficit by expressing the projected deficit over the next 70 years in trillions of dollars. This makes the deficit sound very scary but conveys no information to readers, since they have no idea what a $50 trillion deficit over the next 60 years means. (It comes to about 6 percent of projected GDP.) If the intention is to convey information rather to advance Mr. Cooper's agenda of scaring people, then there is no excuse from not expressing the deficits as a share of GDP.

It is also important to note that the overwhelming majority of this deficit stems from projections showing that U.S. health care costs will get ever further out of line with health care costs in other wealthy countries. If per person health care costs in the United States were comparable to those in other wealthy countries (all of whom have longer life expectancies than the United States) then there would be no long-term deficit problem.

If the power of the insurance and pharmaceutical industries and other interest groups make the reform of the U.S. health care system politically impossible, then we could achieve enormous savings by simply allowing Medicare beneficiaries to buy into the health care systems of countries with more efficient systems than us. Apparently, Mr. Cooper and is not interested in exposing the U.S. health care system to international competition.

--Dean Baker

NPR interviewed WSJ economics editor David Wessel this morning about the 2nd round of the TARP and the 2nd round bailout of Bank of America. Wessel told listeners that the problems of the banks are greater than was conceived back in September when the TARP legislation was first proposed.

Actually, the problems are only bigger than was conceived by people who did not understand the situation. It would be helpful to listeners if NPR did not rely exclusively on such people as experts in its reports.

--Dean Baker

The Washington Post regularly editorializes for cuts in Social Security benefits. It also routinely makes untrue statements in its news article about the state of the program that have the effect of undermining confidence in it. It did so yet again today with a front page story that told readers, "beginning in 2011, Social Security will take in less revenue than it pays out and will be forced to dip into reserves to pay benefits."

This is wrong, the program is projected by the Trustees to take in more money in tax revenue than it pays in benefits until 2017. The Congressional Budget Office puts this date at 2020.

Of course being "forced to dip into reserves" is not a problem for the program. The reason that the program built up a huge stock of reserves (more than $2 trillion) was to defray the cost of the baby boomers retirement. We over-taxed workers for the last quarter century precisely so that we would have reserves to tap when the baby boomers retired.

--Dean Baker

That one has me baffled. I can understand wanting to give money to poor families, but is it really an advantage to design a bailout in a way that taxes school teachers and firefighters to give money to shareholders of Citigroup and Bank of America? Well the NYT tells readers that it is.

--Dean Baker

The Wall Street Journal has apparently abandoned any separation between its news and editorial section. In a news article, the paper referred to "the frightening long-term problems America was going to face anyway to pay for Social Security and Medicare in coming decades."

While the claim that Social Security and Medicare are unaffordable are consistent with the WSJ's editorial position, it is not consistent with the evidence. The Congressional Budget Office reports that Social Security will be fully solvent for the next 40 years with no changes whatsoever. Even after the program is first projected to run a shortfall in 2049 it will always be able to pay a higher benefit than current retirees receive.

Medicare is projected to face greater budget problems, but only because projections assume that the U.S. health care system becomes ever more uncompetitive. If U.S. health care costs were comparable to those in countries where people enjoy longer life expectancies, the projections show that the government would enjoy enormous surpluses.

While the article's assertions about SS and Medicare are not accurate, they are consistent with the WSJ editorial position, which calls for cuts in these programs and also supports protectionist measures to sustain the high profits/incomes of insurance companies, drug companies and highly paid medical specialists in the United States.

--Dean Baker

The Washington Post's lead article notes that bank losses are turning out to be even worse than the experts whom they rely upon had expected and therefore they will be needing the second half of the $700 billion provided under the TARP, and possibly even more money. The article then asserts:

"The problems are intensifying the pressure on the incoming Obama administration to allocate more of the $700 billion rescue program to financial firms even as Democratic leaders have urged more help for distressed homeowners, small businesses and municipalities."

Actually, there is no contradiction between helping banks and the way in which members of Congress have proposed using TARP money to help homeowners. The generally accepting mechanism involves having the government pay above market prices for existing mortgages. New mortgages are then issued, with a government guarantee, at a price close to the current market value of the home.

The "help" for the homeowners in this scenario is the excess price that the government pays the bank for the mortgage. If Congress insists on money being spent in this manner, it will mean more money for banks, not less.

--Dean Baker

The Washington Post has repeatedly editorialized that auto workers at the Big Three companies should be forced to take pay cuts because they earn $57,000 a year, which is more than workers get at the foreign-owned plants in the United States. Consistent with this editorial position, the paper has an article today about efforts to lower the compensation packages of union workers.

The Post has virtually ignored the much larger gap between executive compensation at the Big Three and at the transplants. While top executives at Japanese manufacturers like Toyota only earn around $2 million a year, executives at the Big Three can earn 10 times this amount.This would seem to be a reasonable focus for those concerned about making the U.S. industry competitive.

--Dean Baker

It isn't according to the New York Times. An article discussing Timothy Geithner's prospects for being approved as Treasury Secretary, notes that Larry Summers, President-elect Obama's National Economic Adviser, would have drawbacks as a pick for Treasury secretary:

"He had clear Clinton connections when the “change” campaign was trying to limit those ties. Mr. Summers also was known to have a sometimes difficult personality, and his troubled tenure as president of Harvard University had left some women’s and minority groups bitter and posed potential confirmation problems."

Summers was associated with the high dollar policy that led to the large trade deficit, the policy of ignoring asset bubbles as not being an issue of concern, and the policy of one-sided financial deregulation under which banks were allowed to do pretty much whatever they wanted under the security blanket of the government's too big to fail doctrine.

Presumably, Summers track record was also a drawback in Obama's eyes --- sort of like a batting average under 100 would be a drawback for a leadoff hitter -- but this article suggests that it was not an issue. Either this article is hugely misrepresenting Obama's decision-making process or it is missing an enormous story about how Obama didn't bother to consider past performance in the selection of top economic advisers.

--Dean Baker

The Washington Post noted the rise in the household saving rate this year in response to the loss of trillions of dollar of housing and stock wealth. In fact the increase in saving is somewhat larger than indicated in the standard data cited in the article.

Saving is measured as a residual, the difference between disposable income and consumption. Disposable income is derived from a measure of total income, which includes wages, interest, profits and other forms of income. In principle, income for the economy as a whole should be equal to output. In reality, the two are never equal, with output usually being larger than income. (People may understate income because they cheat on their taxes.)

The difference between the output measure and income is the statistical discrepancy. This discrepancy became negative in 2006 and 2007 (meaning that reported income was greater than output), but then became positive again in the 3rd quarter of this year.

If the output data is more accurate than the income data, then we overstated income growth and therefore overstated saving from 2006 through the first quarter of this year. If we construct a saving rate based on an output side measure (adding the statistical discrepancy to income), the rise in the saving has been even larger than the official data show.

Using this alternative measure, the savings rate has risen from less than -1.0 percent in 2007 to more than 3.0 percent in the second and third quarters of this year. (Data on the statistical discrepancy is not available yet for the 4th quarter.)

--Dean Baker

NPR reported on Representative Barney Frank's effort to ensure that a substantial portion of the money from the second $350 billion in the TARP go toward helping homeowners. The proposals that purport to save homeowners would in fact hand large amounts of money to banks. They involve paying banks far above market prices for underwater mortgages. The benefit to homeowners is that they would be allowed to stay in their homes, possibly with zero equity. (Some proposals also give the homeowner a small equity cushion.)

NPR and other news outlets should be reporting who gets the money under these proposals. In many cases, banks may be paid tens of thousands of dollars to leave a homeowner in a home in which they have no equity. At a time when Congress is debating extending the State Children's Health Insurance Program at a cost of $3,000 per kid, it is not clear how many kids' health care they or the public would be willing to sacrifice to pay a bank to leave someone in a home in which they have no equity.

--Dean Baker

The NYT report on Treasury Secretary nominee Timothy Geithner's failure to pay his payroll taxes tells readers that, "a 2007 I.R.S. notice reported that up to half of such employees [workers at the IMF and foreign embassies] incorrectly file their tax returns." Apparently, the I.M.F. does little or nothing to inform their workers about their tax liabilities under U.S. law. (Assuming Mr. Geithner's account is accurate.)

The I.M.F. has a rather poor record in managing the international monetary system as demonstrated by the poor growth records of most developing countries over the last three decades and the persistent flow of capital from poor countries to rich countries. However, it should not be too hard for this organization to figure out the tax liabilities for its employees at its headquarters in the United States.

The NYT and other news outlets should do follow up articles asking IMF officials whether they did not know or did not care that a large percentage of their employees were breaking U.S. law. Workers in less prestigious positions, like school teachers or truck drivers would be fired for this sort incompetence or corruption.

--Dean Baker

The Washington Post tells us that Representative Barney Frank, the head of the House Financial Services Committee, wants at least $40 billion of an any additional TARP funds to "help distressed homeowners." This is how Mr. Frank describes his agenda, but the proposes that he has supported would send checks to banks, not homeowners.

Mr. Frank has endorsed the idea of paying banks considerably more than the market value for bad mortgages in order to allow homeowners to stay in homes in which they will have zero equity. If a bank gets $20k, 30k, or even more, and the homeowner ends up with nothing except a new mortgage that is equal to value of her home, it is difficult to see how this outcome is aiding the homeowner.

It is easy to design measures that would help homeowners without giving taxpayer dollars to banks. For example, the government could temporarily change the rules on foreclosure to require that homeowners facing foreclosure be given the opportunity to rent their home at the market rent for a substantial period of time. Mr. Frank has shown zero interest in such measures.

--Dean Baker

The mis-identification of Social Security's financial state appears in a front page article today. According to the latest projections from the Congressional Budget Office, the program can pay all benefits through the year 2049 with no changes whatsoever. Even after that date, it would always be able to pay beneficiaries a far higher benefit than what current retirees receive.

The article later describes President Bush's effort to privatize Social Security as an effort to "tweak" the system. Under President Bush's proposal, a worker who earned roughly $100,000 a year during her working lifetime (adjusted for inflation and income growth), and retired in 2040, would see a reduction in benefits of almost 30 percent against current law. The fall in benefits would increase over time until even the highest paid workers would receive only slightly more in benefits than workers who had modest wages throughout their working years. It is misleading to describe such large-scale cuts as a "tweak" to the system.

The article also includes an assertion that President Bush proposed a health care plan that "many independent experts thought could make care more affordable for poor and middle-income families." It does not identify any experts who held this view. The plan, which would break up employer pools and encourage people to get insurance as individuals, would lower the cost for healthy individuals (who have little need for health care), but would raise the cost of insurance for those with serious health problems.

This article relies exclusively on economists who missed the housing bubble and were surprised by the current crisis. It would be helpful if the Post could find a broader range of economists for its sources.

--Dean Baker

Standard trade models do not care what items are placed on the axes. The models show that restrictions on car imports raise prices and lead to economic distortions. They also show that restrictions on imports of clothes and shoes raise prices and lead to economic distortions. In addition, the models show that restrictions on importing physicians' services or lawyers' services (or journalists' services) also raise prices and lead to economic distortions.

The WSJ is once again using its news section to try to alarm readers about restrictions on trade in manufactured goods, even though it has almost never discusses the costs and distortions associated with restrictions on trade in professional services. It also never discusses the cost associated with patent and copyright protection, which have been increased as part of recent "free trade" agreements.

There are much greater economic costs associated with the forms of protectionism that the WSJ ignores than the ones that it wants its readers to be alarmed over.

--Dean Baker

Greg Ip is generally a very good reporter, but he gets the story of the U.S. debt badly wrong. (He is now the U.S. economics editor at the Economist, but was formerly a reporter for the WSJ.)

First, he uses the price of credit default swaps (CDS) as a measure of investors' expectations of the likelihood of a default on U.S. government debt. It is not clear that investors' expectations mean much (remember, these are people dumb enough to have been willing to pay $50 for a share of Citigroup stock little more than a year ago), but the price of CDS on U.S. debt is a very bad measure of the expectation of default.

The bet on a CDS is not just that the bond will have a default event, but also that the issuer will be around to make good on the CDS. In other words, if J.P. Morgan sold a CDS on U.S. debt, the buyer is not only placing a bet that U.S. government debt will be subject to a default event, but also that J.P. Morgan will be around to pay off the CDS. Since it is very likely that J.P. Morgan (or any other issuer) will also be defunct if the government goes bankrupt, the value of these CDSs is not really giving a measure of the expected risk of default.

In fact, CDSs can provide payments to holders in the case of a default event, which could include the government temporarily exceeding its debt limit. This is a far more likely event than a default on U.S. government bonds, and it is almost certainly the main factor underlying the value of CDS on U.S. government bonds.

The other more important point that Ip gets wrong is his assertion at the beginning of the article that the United States had pursued "responsible macroeconomic policies." This is blatantly wrong. It was astoundingly irresponsible to allow the growth of a $10 trillion stock bubble followed by an $8 trillion housing bubble. These policies directly led to the extraordinarily steep downturn the country is currently experiencing. It would be difficult to envision macroeconomic policies that could be more irresponsible than the one we pursued over the last dozen years.

The irresponsibility of U.S. macro policy also has direct relevance to the issue that Ip raises about the sustainability of the debt burden. The high dollar policy initiated by Robert Rubin caused the government to run large current account deficits. These deficits are unsustainable over the long-run and will put downward pressure on the price of the dollar since the United States is putting more dollars into world markets than is needed to buy our goods and services.

This will eventually lead the dollar to fall to a level that is consistent with more balanced trade. This decline in the dollar would occur even if the government were running a budget surplus, it is the result of our trade position, not our budget situation. However, a declining dollar could make foreign and domestic investors less willing to hold dollar denominated debt, since they can get better returns holding debt denominated in other currencies.

This reluctance to hold dollar denominated debt will cause interest rates in the United States to rise. The Fed can seek to counteract this rise in interest rates, but the cost will be allowing somewhat higher inflation (most likely in the 3-6 percent range, not hyper-inflation).

This scenario is not hugely different than the scenario described by Ip, except that the culprit in the story is the over-valued dollar (really bad macroeconomic policy) which never makes an appearance in Ip's column. It is important that economists and reporters acknowledge the origins of our problems so that we can learn enough to avoid repeating the same mistakes.

--Dean Baker

The Washington Post, which is widely known as the paper that printed a column in mid-September saying the economy was just fine, has a column today telling readers that there is nothing we can do about health care costs. Remarkably, this lengthy column never once notes the fact that the United States pays more than twice as much per person for health care than the average of the other wealthy countries, all of whom enjoy longer life expectancies.

This is a hard to overlook piece of evidence suggesting that the United States could do a great deal to lower its health care costs. Among other things, we have a hugely wasteful insurance system (noted in the column), pay close to twice as much for prescription drugs as people in other wealthy countries, and pay our medical specialists close to twice as much as they earn in other wealthy countries.

Overpaying for drug and doctors not only directly wastes money by causing us to pay more for the same services. The huge rents created by these over-payments leads drug companies and specialists to find ways to promote excessive use of their products and services. The rest is really bad an really expensive medicine.

Unfortunately, the villains in this story have enormous political power (because of their huge rents), which makes it very difficult to change the system, but that is not an excuse for the Post not to point out the underlying factors that drive up health care costs.

If we cannot change the U.S. health care system, one alternative is to allow people to buy into the health care system of other countries. However, the Post is far too protectionist to even allow the possibility of freer trade in health care to be discussed in its pages.

--Dean Baker

The $1.2 trillion (8.3 percent of GDP) deficit projected by the Congressional Budget Office (CBO) has received considerable attention form the media. However it is important to note that approximately $400 billion of this deficit represents money to make up losses of the financial system through the bailouts of Fannie Mae and Freddie Mac and the TARP.

While this money adds to the debt, it does not directly stimulate the economy. It simply ensures that private obligations (e.g. bank deposits) can be honored. There would be a loss of wealth if these obligations were not honored, but the government's guarantees do not directly lead to new demand.

It is also inaccurate to imply that that the debt was incurred in 2009. If we assume that the government always would have bailed out Fannie and Freddie and the major banks, then the debt was actually incurred when Fannie, Freddie, and the major banks made their bad loans. While we are first recognizing this debt in 2009, the debt was actually incurred during the peak years of the housing bubble, from 2004-2006.

--Dean Baker

A Washington Post article on divisions within the Service Employees International Union told reader that the Employee Free Choice Act, "would make it possible to form a union by collecting cards from a majority of workers, rather than through a secret-ballot election."

Actually it is already possible for workers to organize through card check, if the employer agrees to accept a card check certification. The main change that would result from the Employee Free Choice Act is that workers would be able to decide whether to organize through card check or an election supervised by the National Labor Relations Board (NLRB). Card check recognition would be an option for workers, but they could also petition to have NLRB conduct an election.

--Dean Baker

The NYT is doing some serious fear-mongering when it tells readers that Social Security is a program that along with Medicare "threaten to grow so large as to be unsustainable in the long run."

Because are children and grand-children are projected to live longer lives than us, the costs of Social Security are projected to outrun its revenue in 40 years, but the projected shortfalls are relatively modest. They can be easily addressed by sorts of changes to the program (tax increases and or spending cuts) that we had in the decades of the 50s, 60s, 70s, and 80s. There is no realistic sense in which Social Security can be termed unsustainable unless we take the view that unlike in prior decades, the program can never be changed.

--Dean Baker

The headline of an NYT article tells readers that "Obama Promises Bid to Overhaul Retiree Spending." The first sentence warns that "overhauling Social Security and Medicare would be 'a central part' of his administration’s efforts to contain federal spending, signaling for the first time that he would wade into the thorny politics of entitlement programs."
This certainly makes it appear as though President-elect Obama intends to use the Wall Street generated crisis as a pretext for cutting Social Security.

However, it is not clear that the headline and lead sentence accurately represents Obama's comments. At a press conference, he responded to a question about the deficit saying:

"We will -- we are working currently on our budget plans. We are beginning
consultations with members of Congress around how we expect to approach the
deficit. We expect that discussion around entitlements will be a part, a
central part, of those plans. And I would expect that by February, in line
with the announcement of at least a rough budget outline, that we will have
more to say about how we're going to approach entitlement spending, how
we're going to approach eliminating waste in government, one of Nancy's
tasks.

So we will have some very specific outlines in terms of how it's going to be
done."

This statement does not indicate any intention to cut Social Security. It does indicate a desire to address entitlement spending, which includes both Social Security and Medicare. Medicare costs are in turn being driven by the explosive growth in health care costs in the United States. President Obama's health care reform plan should contain health care costs and in that way restrict entitlement spending.

President-elect Obama could correctly say that he intends to address entitlement spending by fixing the U.S. health care system. This would be a quite different policy than cutting Social Security. If the NYT article is based solely on this comment from the press conference, then it has seriously misrepresented Obama's statement. If this is the case, then it owes its readers a prompt correction.

(President-elect Obama may also wish to explicitly correct such an important misrepresentation of his comments.)

--Dean Baker

Apparently not, since an NYT article on the budget quoted two people from the Concord Coalition and no one else. It would be helpful to readers if the NYT did not rely exclusively on people who believe that reducing budget deficits is the most important economic priority in its reporting.

Had it turned to a broader group of experts, the NYT could have told readers that the only reason that there is a major budget problem projected for the long-term is that U.S. health care costs are out of control. If we can successfully contain costs through health care reform, then the long-term budget problem promoted by the Concord Coalition crew will not exist.

--Dean Baker

Another day, it's another front page article in the Washington Post about the budget deficit. The Post has apparently not not heard about the economic downturn that has the rest of the country concerned.

The article includes a comment about "the looming challenge of skyrocketing Medicare and Social Security spending. " Of course Social Security spending is not projected to skyrocket. It is projected to increase gradually, and its costs are fully covered by its own tax stream until 2048, according to the Congressional Budget Office's latest projections.

The cause of skyrocketing Medicare care costs are the sharp projected rise in health care costs, but the Post doesn't want to talk about health care reform.

--Dean Baker

A Washington Post editorial yesterday commented on an issue brief from the Congressional Budget Office which, "shows just how precipitous the recent decline in manufacturing work has been: 22 percent since the 2001 recession."

What is most striking about this editorial is that it gives the impression that the Post's editors were unaware of the sharp decline in manufacturing jobs over the last decade. This is not secret information, it is data can be found on the Bureau of Labor Statistics website in a matter of seconds.

The Post is disturbed by the fact that: "The study will provide some ammunition for those inclined to blame free trade for American industry's plight," since it points out that an increase in imports was an important factor in the job loss. Actually, few people are likely to blame "free trade," they are far more likely to blame the current pattern of selective protectionism that largely shields more highly educated workers from foreign competition while explicitly forcing manufacturing workers to compete with the lowest paid workers in the world.

Standards "free trade" models show that the U.S. economy would experience large gains if it were as easy for a kid growing up in India to work as a doctor or lawyer or Washington Post editorial writer, as a kid growing up in the New York suburbs. Trade policy has done little to reduce the barriers that protect professionals from this sort of competition.

--Dean Baker

It looks like President-elect Obama is picking up President Clinton's promise to end welfare as we know it. Back in those pre-welfare reform days, welfare checks went to poor families. Welfare as we know it now seems to involve giving taxpayer dollars to Citigroup and other banks.

The media seem to have largely overlooked the Citigroup tax credit in their discussion of the latest items in President Obama's stimulus proposal. According to the Washington Post, the proposal will allow companies to write off current losses against taxes paid over the last 4-5 years, not just 2 years, as in current law.

There are relatively few companies that could benefit from this tax break since most companies will not have losses so large that they would need more than two years of tax payments to balance them against. But, really big losers, like Robert Rubin's Citigroup, and other badly failing financial institutions, are losing much more money in 2008 and 2009 than they earned in 2006 and 2007.

Did the political connections of Robert Rubin and others in the financial industry have anything to do with the decision of Obama's economic team to be so generous to them? I don't have an answer to that question, but the media should be asking it.

--Dean Baker

Folks who haven't yet gotten enough of my writing may want to look at a piece on regulation that I did for the latest Boston Review. There are also good pieces there from Robert Pollin and Jeff Madrick.

--Dean Baker

The last time I went to the beach it was very crowded. The Washington Post wants us to be concerned that it might be less crowded in 20 or 30 years. The problem is falling birth rates and declining populations.

That's right the same people who told us a few months ago that the economy was just fine are now telling us that we should be worried about a planet with fewer people consuming less resources. Yes, this is yet another piece in the Post's jihad against Social Security and Medicare.

A smaller population should make us richer, other things equal, since there will be less demand for beach space and other natural resources. The declining rate of workers to retirees can easily be met by productivity growth (a concept with which Post writers seem unfamiliar) and by losing a few jobs on the midnight shift at 7-11s.

The column warns us that China may grow old before its grows rich. At its recent growth rates, output per worker in China will be almost 6 times higher in twenty years as it is today. Suppose its ratio of retirees to workers doubles over this period. Then means that supporting retirees at current living standards would impose a burden on workers that is one-third as large (relative to their income) as the burden imposed at present. That should make everyone really scared.

--Dean Baker

The Washington Post's obsession with the deficit thoroughly contaminates and confuses its economic and budget reporting. The obsession showed its ugly head yet again in a front page news story.

The article notes that President-elect Obama's health care plan is likely to carry an upfront price tag of $65 billion a year, even though it is projected to save money in the long-run. The article reports that Obama had originally planned to pay for this cost by raising taxes on the wealthy in 2009, but he now is planning to put off the tax increase until 2011 because of the recession.

The article then tells readers "That could sour some deficit hawks on the idea. 'It's going to be very problematic to me unless they can tell me how it's going to be paid for,' said Sen. Ben Nelson (Neb.), a leading centrist Democrat."

Okay, perhaps Mr. Nelson hasn't noticed, but we are in a severe recession. As a result, the overwhelming majority of economists want to see the government stimulate the economy by running large deficits. That means that we want spending that is not paid for.

Of course in 2011, when hopefully the economy will be back on track, we will be collecting the taxes that Obama had wanted to cover the cost of his health care plan. In that sense the plan will be paid for in the period in which we want it to be paid for.

It is possible that Mr. Nelson doesn't understand basic economics and how stimulus works, which should have been pointed out in the article, since he is clearly an important figure among centrist Democrats. However, the Post article makes it appear as though Mr. Nelson's objections make sense. This is not true. If someone supports a large stimulus, then the fact the first years of a health care reform plan are not paid for, should be a non-issue.

--Dean Baker

Following its practice of merging editorial content with news, the Washington Post had yet another lead article warning about the budget deficit and national debt. While there are some efforts at balance in the piece, it still misrepresents the nature of the deficits in these years. It also carries on the Post's longstanding practice of misleading readers about the relationship between the deficit and the dollar.

The article is misleading in that it does not point out that a substantial portion of the deficit (e.g. the $700 trillion TARP) is being used to by assets. This money is not spending that just goes out the door, like money spent on the war in Iraq or on health care. The government will likely lose money on the TARP (my bet at least), but it will get most of this money back when it sells the assets (shares of preferred bank stock) that it has acquired through the program.

The discussion of the dollar fails to note that the main factor that will determine the value of the dollar in the long-run is the trade deficit, which bears no direct connection to the budget deficit. The dollar will fall (actually it has already been falling against many currencies over the last month) because the United States has a large trade deficit. The decline in the dollar will in turn eventually reduce the trade deficit, which will reduce the outflow of dollars each year.

Readers should understand that the dollar will fall regardless of whether or not we run large budget deficits. A sharp decline in the dollar is the only plausible way to bring the trade deficit to a manageable level. The fall in the dollar is therefore a necessary correction mechanism, it will not be the result of a profligate fiscal policy.

--Dean Baker

The lead article in the New Year's Day edition of the Washington Post bemoaned the loss of $6.9 trillion in value in U.S. stock market last year. While those who own large amounts of stock have reason to shed tears, this may end being good news for the rest of us.

The loss of stock wealth means that stockholders have less claim to value of the country's output. The U.S. economy can produce just as much in 2009 as it did in 2008 (in fact somewhat more, because of labor force and productivity growth). If stockholders can demand less because of the reduced value of their stock, then this leaves more for the rest of us.

The most visible evidence of how the loss of stockholder wealth can benefit the rest of us was the sharp decline in consumer prices over the last three months. As a result, real wages rose at almost a 15 percent annual rate in the three months from September through November.

Of course, insofar as the demand generated by stockholders (and homeowners, who have also seen their wealth plummet) is not replaced by other sources, then workers are losing jobs. Eventually weakness in the labor market will put more downward pressure on real wages. However, if the loss of demand from stockholders is effectively replaced by demand from the government or foreign sector, then the vast majority of the country will be made better off by this plunge in stock prices.

The Post should have reporters who understand this fact.

--Dean Baker

Addendum: Since the question has been asked repeatedly, I will try to quickly explain how the fall in stock prices can make non-stockholders wealthier. There are two components to the wealth that people have in stock.

One component is the flow of income in dividends, which is turned based loosely on the growth of corporate profits. If, for the moment we make the unrealistic assumption that the growth in profits is unaffected by the crash (there will be feedback effects as we are seeing -- the plunge in demand that resulted from the stock and housing crash is also leading to declines in profits), then this future flow of dividend income will not be affected.

The second component of wealth is that value of the stock itself. How much can I get for selling my 100 shares of Verizon today. This second component is obviously directly affected by the fall in stock prices. Stockholders will consume based in part on the value of their stock wealth. The logic is that they try to more or less balance their consumption over their lifetime. If they have more wealth, then they can consume more over their lifetime.

To take a simple example, imagine a person is 75 and can expect to live another 10 years, and had $200,000 in stock. Then we might expect this person to spend roughly 10 percent of her wealth or $20,000 a year. Now suppose the market has crashed and her stock is only worth $100,000. Then we would expect her spend just $10,000 a year.

This is what is happening as a result of the stock crash. Stockholders have less wealth and therefore are spending less money on cars, vacations and everything else. The reduction in demand places downward pressure on the price of these goods, making them cheaper for everyone. Those folks who did not have a lot of stock gain in this story, assuming that they hold onto their jobs.

China just took actions that will raise the price that tens of millions of people around the world pay for software. This will reduce their income and depress demand for other products. The WSJ reported on the Chinese government's crackdown on a factory producing unauthorized copies of software, but neglected to mention the impact on consumers and the economy.

--Dean Baker