The Washington Post showed yet again why it is known as "Fox on 15th Street." It ran a column today that blamed the United Auto Workers for the bankruptcy of Chrysler and GM. So what if Toyota has managed to profitably run a plant in California represented by the UAW for more than two decades? So what if wages of unionized autoworkers in profitable car companies in Europe and Japan are the same or higher than in the United States? So what if the proximate cause of the bankruptcy was incompetent economic management in Washington and an explosion of incompetence and greed on Wall Street?

At the Washington Post, the line is blame the unionized auto workers -- after all, they earn $57,000 a year. Except of course by the calculation in this column. Richard K. Bank, a man with no obvious qualification other than his dislike of unions told Post readers that the G.M., Ford, and Chrysler have labor costs of close to $110 an hour. The would come to $220,000 a year for a full-time worker. Of course, this has no basis in reality, but it helps advance the anti-union case, so it's good enough to get in the Washington Post.

--Dean Baker

Suppose that President Obama announced tomorrow that he was going to increase spending on the military by an amount equal to 10 percent of GDP ($1.5 trillion a year or $6 trillion over the course of his presidency). This would not affect USA Today's calculation of debt burdens at all. Suppose that he announced that he would eliminate the corporate income tax and institute a special zero tax bracket for incomes over $100,000. This would also increase annual deficits by about $1.5 trillion. This change also would not affect the deficit as highlighted by USA Today in a front page story.

USA Today's deficit does not take account at all of projections of future income tax revenue or projected spending in most government programs. It only considers commitments to a narrow set of retirement programs and Medicare and it only counts the projected payments of taxes designated for these programs by people already in these programs.

This gives a really huge number to scare people with, but it has virtually no meaning whatsoever. If you think this is the burden passed on to our kids, you would be mistaken. As soon as our kids start working, say a summer job for a high school kid, they become part of the problem. They are among the people to whom the debt is owed. In fact, the 16 year-old would be a huge contributor to the problem since the projected value of his or her Social Security and Medicare swamps the projected cost of these programs for people in their fifties and sixties.

The long and short is that USA Today wants to scare you into supporting big cuts in government social programs. It is easy to show using normal arithmetic that these programs are easily affordable if we fix health care. If we don't fix health care then the programs are not affordable, but we will also have wrecked our economy, so who cares about the programs.

Anyhow, serious people focus on fixing health care. USA Today and its horror show crew whine about big deficit numbers to scare people.

--Dean Baker

The Washington Post made yet another contribution to the nonsense about China literature. First we had the "alleged manipulation" of China's currency. This implies that there is some mystery surrounding China's currency policy. What is the mystery? China has a managed exchange rate that keeps its currency below market levels as official policy. What exactly are we looking for here. There is nothing in dispute.

Next we are told that Geithner can't really press China about this policy because they may stop buying our Treasury bonds, causing interest rates to rise. This should raise a huge cry of "huh?"

If China were to stop "manipulating" its currency, it would have to stop buying U.S. treasuries. These actions are one and the same thing. China keeps down the value of its currency by buying dollars. This is really simple -- supply and demand -- it keeps down the price of yuan by supplying more and increases the demand for dollars by buying up dollars.

If we want China to stop manipulating its currency, then we want it to stop buying U.S. government bonds, it's that simple. (The Fed can offset any reduction of Chinese purchases of Treasury bonds by buying more itself.)

--Dean Baker

When April new homes sales came in worse than expected most observers might have thought this was bad news about the state of the economy, but not the WSJ. The headline of the WSJ article told readers: "New-Home Sales Rise as Prices Tumble." The lead sentence began: "new-home sales climbed a second time in three months during April, an encouraging sign for the housing market," before noting that prices are still falling.

Okay, what was the upturn in April? Well, the annual selling rate of 352,000 was 1,000 above the downwardly revised level of 351,000 reported in March. This number was the third worst figure on record and was 34% below its year ago level.

The basic story was that January housing numbers were awful across the board, presumably in large part because of worse than usual weather. The more recent data looks good only compared with January. Otherwise it is about as bad as can get, but let's give the WSJ credit for this effort at economic cheerleading.

--Dean Baker

It told listeners on the headline news on Morning Edition that stock prices rose yesterday due to a fall in new unemployment claims, a surge in durable goods orders, and an increase in new home sales. If these reports were really the basis of investors' optimism, then we should all be very scared since it would mean investors are really clueless.

New unemployment claims were reported at 623,000 for last week. This is down by 13,000 from the 636,000 reported for the prior week, but it is down by only 8,000 from the number that had been reported before yesterday's upward revision. It is also a number consistent with a very rapid pace of job loss. New claims were running at the rate of less than 600,000 a week in November, December, and January, when the economy was losing more than 600,000 jobs a month. (Note, the weekly claims refer to the number of people who filed for unemployment insurance in that week. The monthly job loss refers to the net change in employment [new hires minus job losers] over the course of a month.)

As noted in an earlier post, there was no surge in durable goods orders. There had been a downward revision to the March data that was equal to or larger than the extent to which the April numbers exceeded expectation. New orders for capital goods, the investment component of this measure, fell sharply in April.

Finally, new homes sales reported for April were up by 1,000 from the level reported for March, but this 4,000 below the level previously reported for March. The April sales level is the second lowest on record.

In sum, none of these reports are especially good. In each case, they could have been worse, but none provide any evidence of growth, nor even much evidence that the rate of decline is slowing. Whatever modest improvement they show from the weak reports in prior weeks/months is well within the margin of error for these reports.

As a more general proposition. No one knows what was in the mind of the millions of investors whose actions moved the market yesterday. Media outlets should attribute the claim of what was in their minds to a specific source rather than pronouncing it as a matter of fact, as NPR did this morning.

--Dean Baker

That's because it is not true. USA Today headlined an article on reports on the latest weekly jobless claims and April durable goods orders: "Initial jobless claims drop; durable goods orders surge."

While the Commerce Department did report a 1.9 percent increase in April orders, it revised down the March data by 1.3 percentage points (as noted in the article) to show a 2.1 percent decrease for the month. This left the April orders number 0.6 percentage points above the originally reported March level, almost exactly the same as the consensus forecast.

The new orders index excluding the volatile transportation category rose by 0.8 percent in April, considerably less than the 2.1 percentage point downward revision to the March data, leaving the April number 1.3 percentage points below the level previously reported for March, somewhat worse than the consensus forecast.

New orders for non-defense capital goods, a measure of new investment, fell by 2.0 percent in April. Excluding transportation equipment the drop was 1.5 percent. These April numbers are, respectively 35.6 percent and 27.4 percent below their year ago levels.

--Dean Baker

The NYT is touting the layoffs in the U.S. auto industry as a virtue. (I'm waiting to see the same case about the banking sector.) It notes that auto industry employment in Europe is remaining steady at around 2.3 million, while it is falling to close to 700,000 in the U.S..

The article and accompanying chart imply that Europe is delaying an inevitable adjustment. The case is far from clear, in spite of the NYT's best effort to make the case. The chart shows that Europe produces about 18 million cars a year, while North America produces around 12 million. Those noting the asterisk will see that one-third of the cars in North America are produced in Canada or Mexico, meaning that only about 8 million cars are produced in the U.S.. This adjustment makes the gap in employment look less extreme.

Furthermore, the U.S. imports a large portion of the parts for the cars that are produced here. Much of the employment in the auto sector is in parts production. Without knowing the balance of trade in car parts, there is no easy way to know how Europe's auto employment relative to its output compares to the U.S..

--Dean Baker

There is a bizarre theory circulating in high Washington circles, expressed today by Sebastian Mallaby in the Post, that China is concerned that the huge dollar reserves it holds will lose value. The reason this is bizarre is that the dollar already plunged in value over the years 2002-2008 and China just kept buying more dollars.

The euro went from being worth just over 80 cents at the dollar peak in 2002 to over $1.60 at its trough early last year. Through this whole slide, China just kept buying up more dollars. Does anyone think that China's leaders did not notice the plunge in the value of the dollar? This is not exactly secret information.

Obviously, China's central bank was fully aware that the dollar was losing value but was willing to buy dollars anyhow in order to preserve its export market in the United States. That is the reason that it continues to buy dollars even though its leaders know that they will lose money on the deal. The economy can easily afford the loss, contrary to the bizarre calculations Mallaby uses in his column.

If it seems strange that elite Washington types can push economic views that are far removed from reality, remember, these people could not see an $8 trillion housing bubble.

--Dean Baker

The NYT reports on proposals to support the municipal bond market. At one point the article refers to a proposal by Representative Barney Frank, chairman of the House Financial Services Committee, to reinsure $50 billion of municipal bonds. The article then asserts about this other proposals: "All of the proposals are meant to help struggling state and local governments that are facing a cash-flow squeeze."

Actually, Mr. Frank's intention in this proposal is not clear. Guarantees for newly issued bonds will reduce the interest rates that state and local governments must pay. However, once these bonds are issued, state and local governments are not directly affected by the price of these bonds. Reinsuring bonds that have already been issued will increase the value of these bonds, thereby helping bondholders, but will provide no obvious benefit for struggling state and local governments that are facing a cash-flow squeeze.

--Dean Baker

The Post reports on an effort to revitalize the Hope for Homeowners program. It notes that second mortgage holders have often objected to loan modifications because these modifications generally wiped them out. By contrast, it suggests that there is a need to "balance" the interests of holders of first and second mortgages.

It would have been worth noting that holders of second mortgages are supposed to be wiped out. Under our sacred contract law, they are not supposed to get a penny unless the holder of the first mortgage is paid in full. Since first mortgage holders are losing much of the value of their mortgages, second mortgage holders should receive zero. That would be balance.

However, second mortgage holders, which are primarily banks (a.k.a. the folks that the taxpayers bailed out) are using their legal power to block modifications to extort money from the government, even though their mortgages would be worthless in the event of a foreclosure. This point should have been made clear in this article.

--Dean Baker

That's right folks, the Post has its second front page article in less than a week touting the end of the downturn. This one, which encourages readers to worry about the prospect of inflation gets just about everything wrong.

First, it is important to realize that the economy is continuing to contract rapidly, even if the pace of decline may have slowed from the 6 percent annual rate in the first quarter. The economy has lost an average of more than 600,000 jobs a month. The Labor Department will almost certainly report another loss of more 600,000 when the May data is reported a week from next Friday. While the article reports that "unemployment is expected to top 9 percent and stay above 7 percent for the next two years," economists who were not surprised by the recession expect the unemployment rate to top 10 percent and remain above 7 percent for 3 years.

More importantly, the article completely misrepresents the problem of inflation and wrongly attributes its inaccurate view to Federal Reserve Board chairman Ben Bernanke. The article describes Bernanke's view on inflation:

"By problem [inflation], he means rising prices that destroy the value of money -- an experience fresh in the public memory. During last summer's run-up in gas prices, real disposable income fell at an annualized rate of 8.5 percent from July to September, Commerce Department data show. "

Actually, the run-up in gas prices and the resulting loss in purchasing power had nothing to do with low interest rates and the Fed printing it too much money. It was attributable to excess world demand for oil driving up oil prices relative to other prices. Purchasing power of people in the United States would have fallen even if there had been zero inflation given the excess demand for oil, it just would have been brought about by falling wage income rather than rising oil prices.

Inflation does not reduce purchasing power. Pure inflation simply means that prices and wages are rising together. By itself, it does not reduce purchasing power in aggregate. (Where would the money go?) There is redistribution associated with inflation. For example, homeowners benefit as the value of their homes rise relative to their mortgage debt.

As a general rule, debtors benefit from inflation. Bondholders (the folks that got the bailouts supported so strongly by the Post) and other creditors are hurt by inflation.

It is also worth noting that a decline in the value of the dollar, which is necessary for bringing the trade deficit closer to balance, will lead to an increase in the rate of inflation as imports become more expensive. The Post, which routinely runs articles, editorials, and op-eds warning about the budget deficit almost never runs pieces discussing the trade deficit, which until recently had been much larger.

--Dean Baker

An otherwise useful article in the NYT on the surge in foreclosures in prime mortgages never mentions the collapse of the housing bubble. Of course, the crash of the bubble was central. If the problem was just unemployment, then many people would be able to draw on the equity in their home to get through a spell of unemployment, or alternatively they would sell their home and pocket some money, rather than losing it through foreclosure.

Job loss is obviously an important factor in many foreclosures, as this article points out, but the decline in house prices is at least as important.

--Dean Baker

This article reports on the jump in the number of people seeking early Social Security retirement benefits compared with last year. The subhead and first paragraphs of the article describe this as surprising given the large losses in stock and home equity suffered by older workers.

In fact, the surge is totally predictable given the state of the job market. Many older workers are being forced out of jobs and having difficulty finding new jobs, so it is totally reasonable that they would look to start collecting their Social Security benefits as a means to support themselves.

Collecting benefits does not mean that people have stopped working. Workers can earn up $14,160 a year and still collect full benefits. This would be equivalent to 20 hours a week of work at $14 an hour. Many older workers will receive wages considerably less than this. Furthermore, many workers may not disclose their full pay in order to avoid the earnings penalty. (50 cents of benefits is deducted for each $1.00 of earnings for workers receiving benefits who are under age 66, the normal retirement age.)

--Dean Baker

The Washington Post had a piece on the prospects for the housing market in the DC area that relied exclusively on "experts" who were unable to see the housing bubble. Most notably, the piece included a quote from Nicolas Retsinas, the head of Harvard University's Joint Center for Housing Studies, who encouraged moderate income families to buy homes even when the bubble was already seriously inflated. At the time he assured readers that, "when house prices deflate, they do so slowly."

It might be useful to find sources who are not known primarily for having been wrong about the housing market.

--Dean Baker

People who get upset over the appearance of Ben Stein's columns in the Sunday NYT simply fail to understand their purpose. They are not to be treated as serious analysis of the economy or economic issues.

Rather, Stein's columns are meant to be treated like a puzzle. Readers are supposed to find all the various inaccurate statements and outright errors that appear in each column. They are like the game where two pictures are juxtaposed and the reader is supposed to find the twelve subtle differences between the pictures.

Let's see how many of the errors we can find in today's piece, which is supposedly reflecting backward from 2089 on the collapse of the U.S. economy:

1) The piece begins by asserting that the United States was "starting from an extremely strong economic and fiscal position in the year 2000."

Actually, those of us who can remember back to 2000 will recall that the economy was driven by a $10 trillion stock bubble that began to burst in March of 2000. The loss of this bubble wealth sent consumption downward. It also pushed down investment, which at least in the tech sector was directly financed by the crazy stock valuations of this era.

Furthermore, the country had a badly over-valued dollar which was leading to a large and growing trade deficit. Every year the deficit was reaching new records as a share of GDP.

So the assertion that the country was starting from a strong economic position is completely untrue.

2) Stein asserts that there was a: "public shaming of the leaders of the banking sector in front of Congressional committees — a sort of Great Cultural Revolution in America." In fact, most of the bankers responsible for promoting the housing bubble continue to be incredibly wealthy. While many no doubt found their appearances before Congress to be unpleasant (perhaps a bit like a TV reality show), they undoubtedly view it as a very small price to pay in order to keep their tens and hundreds of millions of wealth.

Furthermore, since Congress went ahead and gave the banks hundreds of billions of taxpayer dollars before and after these appearances, they were extremely well-paid for their troubles. The victims of the Cultural Revolution in China would have been delighted to be given a similar option. In fact, they probably would have preferred this option even if they did not have to fear persecution in the Cultural Revolution.

3) Stein asserts that: "there was a spectacular constriction of credit, despite the flooding of the economy with dollars." Actually people are borrowing plenty of money to refinance their mortgages. There has been a plunge in demand for new loans, but that is what happens in a recession.

The constriction of credit has been on the demand side. Households that have lost more than $6 trillion housing wealth are less able to borrow since they have no equity. Also, businesses that have seen their markets collapse due to the falloff in consumption are less anxious to borrow to expand.

4) Stein asserts that the constriction of lending might be due to fear of further public shaming by bank executives. There is no evidence anywhere that any bank is not making loans because the CEOs are worried that they will subsequently be shamed by Congress.

5) Stein asserts that banks' reluctance to make loans because of a fear of public shaming will lead to a long recession. In fact, the major cause of recession is the loss of the bubble wealth that had fueled the consumption boom of the last decade.

6) Stein asserts that: "the confidence that American lenders had in the rule of law, probably one of the main pillars of the economy, was demolished by government actions that invalidated some lenders’ long-held legal rights in favor of ad hoc attempts to please various political constituencies."

This presumably refers to the auto industry bailouts in which speculators complained because the government did not give them as much money as they wanted. In fact, there is no issue of the rule of law here. The government decided to put money into G.M. and Chrysler in order to benefit the workers and the region. It has no obligation to also give additional money to bondholders.There is no reason to believe that the bondholders would have received more money on their bonds if the government had not intervened.

Those who care about the rule of law would not be upset by the government's actions in this case. Of course those who like to see money redistributed upward to wealthy speculators would be upset.

7 and 8) Stein claims that: "confidence was further eroded as the government embarked upon unprecedented “stimulus” moves costing trillions of dollars in the aggregate."

This one contains two errors. The size of the stimulus package was approximately $700 billion, once we remove the one-year fix to the Alternative Minimum Tax which is put in place every year. $700 billion is not "trillions."

The second error is the claim that confidence was eroded by the stimulus. Is there any business that canceled plans for new investment or adding workers because the government is repairing roads and helping state and local governments meet their budget shortfalls? That seems pretty unlikely.

9 and 10) Stein asserts that: "it is not clear upon what evidence the stimulus packages were based, because no one had ever been able to prove that taking money from taxpayers, and having the government spend it instead, would meaningfully enlarge the scale of economic activity."

Of course the theory of the stimulus is very clear to those who got through a first year intro econ class. The economy needs demand in a downturn. This can come from any source, but since consumers are unlikely to spend following the loss of trillions of dollars of stock and housing wealth and firms are unlikely to invest when demand is weak, the government is the only sector that can pick up the slack. This is a very clear theory that dates from Keynes.

Second, the government is not "taking money from taxpayers." The stimulus cuts taxes, it does not increase them. That is why it is leading to a larger deficit.

11) Stein asserts that: "the flood of liquidity into the economy had translated into unnerving inflation as sellers constantly anticipated higher prices, while labor demand remained soft as buyers resisted buying, especially durable goods."

Businesses don't raise prices when they see unchanged costs and weak demand. In econ 101 students are taught about supply and demand. If the basics of supply and demand are unchanged in a weak economy, any business that raises its prices because it thinks the Fed has printed too much money will soon find itself out of business. Stein can do stock pickers a great public service if he will identify any such business in future columns.

12) Stein asserts that: "environmental and other regulation made it impossible for executives to compete with the industry of countries that ignored such issues as the environment."

In fact, European countries already have stricter regulations in almost every area than any that are being considered by the Obama administration and the EU enjoys a trade surplus, so they obviously have no problems competing.

13) (Stein's bonus mistake, he only promised 12.) Stein concludes: "Foreign holders sold as quickly as they could. The dollar collapsed, and the yuan replaced it as a global reserve currency. The resulting hyperinflation in the United States and the accompanying collapse of the republic are by now known to every schoolchild..."

Actually, if China and other foreign countries stopped buying dollars their export market in the United States would collapse. Similarly, as the dollar fell, U.S. goods would suddenly become hyper-competitive in world markets, leading to a huge surge in exports. So, rather than leading to a collapse of the U.S. economy, a plunge in the dollar would lead to an explosion of manufacturing in the United States and would likely be the basis for a new era of prosperity.

Now, wasn't that fun? I can hardly wait for the next Ben Stein economic errors puzzle.

--Dean Baker

The Washington Post regularly displays its contempt, in both the news and editorial sections, for ordinary workers, as well as its fondness for the wealthy, especially bankers. It does so yet again by running a column today by a "global financial strategist" who tells readers that we need the wealthy to have more money so that they will spend it.

Of course anyone can spend money if they have the money. If we want more moderate income people to spend money, instead of trying to push up the stock market, the policy implicitly endorsed by this column, we could have a policy of pushing up the price of old cars and small houses. The Fed could have a special fund that could be used to make zero interest loans to buy cars that are more than 20 years old or houses that cost less than $200,000. This would make moderate income people wealthier and cause them to spend more money.

Alternatively, we could apply similar measures internationally. We could have the Fed buy up $4 trillion worth of currencies of countries with per capita income of less than $3,000 a year. This would put money in these people's pockets and cause them to buy more things including more goods produced in the United States.

In short, there is no reason why we should try to make the wealthy happy to get them to spend more money. Anyone is capable of spending more money if we give them the means to do so, not just the rich.

--Dean Baker

Max Baucus, the head of the Senate Finance Committee, has explicitly and publicly said that universal Medicare was never considered as a possible health care reform option. When the committee held hearings on reform, no one supporting universal Medicare was allowed to testify, even though this is the only health reform option that has any sort of grassroots support.

There are reasons why universal Medicare would be difficult to pass politically, but the Washington Post's description of Baucus's approach to reform:

"his approach has been to pull together stakeholders and hold them as long as possible; no idea is ruled out, no policy change dismissed,"

is simply not true. Since Baucus has not been willing to consider universal Medicare and it is incredibly bad reporting for the Post to tell readers, in a major front page story, that "no idea is been ruled out" when this is clearly not true.

--Dean Baker

Gregory Mankiw uses his NYT column today to give us an explicit "who could have known?" about the economy crisis. He tells readers that: "fluctuations in economic activity are largely unpredictable."

No, this crisis was completely predictable. The problem was that the leading lights in the economics profession completely missed the boat and are now using their platforms to tell the public that it wasn't their fault.

The basic story was and is the housing bubble. How could they miss an $8 trillion housing bubble? What were they smoking?

We have a hundred year long trend, from 1895 to 1995, when nationwide house prices just track the overall rate of inflation. Suddenly in the mid-90s, coinciding with the stock bubble, house prices begin to hugely outpace inflation.

The run up in prices cannot be explained by any obvious shifts in the fundamentals of supply and demand. Furthermore there is no remotely corresponding increase in real rents. And, the vacancy rate for housing rises to record levels.

If economists could not see this bubble, then they should look for another line of work. Sorry, this fluctuation was entirely predictable. The people whose job responsibilities including recognizing a dangerous bubble like this one just blew it completely. It speaks volumes about the nature of the U.S. economy that almost all of those people still have their jobs, unlike the tens of millions of other workers who lost their jobs or can only work part-time because of the incompetence of the economists.

--Dean Baker

That completely unsubtle point was missing from the NYT discussion of the risk of inflation. If there is 15 percent inflation over a five year period, then the real value of mortgages and other household debts fall by 15 percent. That is the most obvious and easiest way to relieve debt burdens.

--Dean Baker

The lead article in the Washington Post warns that Europe may lag the U.S. in recovery. The article correctly notes the weakness of the response of the European Central Bank to the crisis relative to the Fed's aggressive response. It also points out the limited fiscal stimulus from EU governments, with Ireland actually being forced to raise taxes and cut spending (kind of like California).

While many of the factors that the Post cites raise real questions about the likely strength of the EU economy, the paper also includes the bizarre assertion that "the pace of job losses has eased ."The Post must have some secret data source on the U.S. labor market since this is not what the government data show.

The four week average for initial unemployment claims is almost 630,000. While this is down slightly from a March peak of over 650,000, it is still well above the pace of new claims in the late fall and beginning of this year, months in which job losses averaged close to 680,000.

The April jobs data did show a somewhat slower rate of job loss than in the prior five months. However, the loss of 611,000 private sector jobs was larger than the average job loss initially reported for the prior five months. In short, there is not much evidence that the rate of job loss is easing thus far.

--Dean Baker

I'm sure that Ben Bernanke is working as hard as he can to try to pull the economy out of the recession. However praiseworthy this effort is, it is important to remember that we are largely in this mess because of the earlier failings of Bernanke and his colleagues on the Federal Reserve Board.

If they had acted in 2002, 2003, or even 2005 to stem the growth of the housing bubble, instead of publicly insisting that no bubble existed and applauding the strength in the housing market, the downturn would not have been anywhere near this severe. Tens of millions of victims of Mr. Bernanke's mistake have lost their life's savings and/or their jobs. It would be appropriate for reporters to keep these facts in mind when reporting on Mr. Bernanke's job performance.

--Dean Baker

In discussing plans for worldwide reductions of greenhouse gas emissions, the WSJ notes the insistence by China and India that the U.S. and Europe should be responsible for bearing the bulk of the cost because: "Europe and the U.S. generated the bulk of the carbon gas already in the atmosphere, they argue." Actually, this is not just something that
China and India argue, it is true. The U.S. and Europe have been responsible for the bulk of the buildup of greenhouse gases in the atmosphere.

--Dean Baker

Okay, maybe that is not even worth mentioning for those familiar with Fox on 15th Street, but this article really is over the top. It discusses the loss of wealth in General Motors bonds by presumably middle income retirees.

This is exactly the piece that the bond speculators wanted in the paper, which is why they brought these people to Washington. Of course middle income retirees hold only a small portion of GM debt. The vast majority is held by institutional investors, speculators, or wealthy individuals. Much of this debt was bought at fraction of its original price as the bankruptcy of GM became likely, a point noted in the article.

In both its editorial and news pages the Post has expressed contempt for the autoworkers and its sympathy for the banks. This article is consistent with that pattern.

--Dean Baker

This article notes Treasury Secretary Timothy Geithner's assertion in congressional testimony that the Treasury can recycle TARP money as banks pay it back. It would have been worth noting that the law authorizing the TARP explicitly prohibited the recycling of TARP money that was used to buy assets from banks.

[Richard Meagher, in a comment below, refers to a blognote by David Zaring, arguing that the law does authorize Treasury to re-lend money returned from TARP, despite explicit wording saying that this money is returned to general revenue. Zaring's view rests on the wording that limits the program from having more than $700 billion outstanding "at any one time." Zaring claims that this wording would have no meaning unless the purpose was to allow TARP money to be recycled.

Actually, there is a very simple alternative explanation. Paulson and others floated the idea of various public-private partnership schemes (like the PPIP currently being pushed by Secretary Geithner). These schemes could have required the Treasury to put out money in advance of bringing in other investors. In such cases, the wording would be a restriction that prohibited the total outlay from exceeding $700 billion at any one time, but that money could be relent when the partners had been brought on board.

This could mean, for example, that if the government initially hit its $700 billion cap by putting out $200 billion for troubled assets, but then brought in private partners for half this amount, it could then re-lend the $100 billion. This would not mean that the TARP was a revolving loan fund, just that the timing of investment decisions could temporarily drain funds, that could then be replenished.

Is this a plausible interpretation of the wording? Well, I would say it is more plausible than Zaring's interpretation that the wording requiring that proceeds from the sale of troubled assets be returned to general revenue simply meant that Treasury could not use money to start a national health care program.]

--Dean Baker

The NYT is struggling with facts that are very simple to explain. China knows it will take a beating on its dollar holdings -- its leaders are not stupider than everyone else in the world. They saw the plunge in the dollar over the years from 2002 to 2008, yet they continued to buy dollars. They know it will fall again in the future.

The reason they buy dollars is sustain the market for their exports in the United States. Buying dollars keeps down the value of their currency against the dollar, which makes Chinese imports cheap for people in the United States. This is a key part of China's economic strategy of growing through exports.

The United States absolutely does not need China to buy dollars to support its trade deficit. If China stopped buying dollars then the dollar would fall and the trade deficit will fall with it. There is no co-dependence as this article suggests. China's dollar purchases create the trade deficit.

The article also completely misinterprets China's decision to shift from long-term debt to short-term debt. The article asserts that this decision was made because China worries that the dollar may fall and it may have to get out of dollar assets quickly.

Actually the market for long-term treasury debt is quite liquid. If China wanted to sell 10-year or even 30-year treasury bonds and get out of dollars, it could do it in seconds, any day of the week. The reason for shifting from long-term to shorter term debt is the concern that interest rates will rise, leading to capital losses. China is willing to lose money by holding dollars even as it dollars fall relative to other currencies, but it has no reason to lose more money by holding long-term debt when it can instead hold shorter-term debt.

--Dean Baker

The Washington Post had a front page article touting the improvement in the financial sector based on the trillions of dollars of low cost loans that the government made available to it through various channels. The article notes the 34 percent run up in the stock market from its low earlier this year, and then presents a quote from an economist saying that the markets are forward looking and are anticipating economic improvement.

It is worth noting that the markets were not forward looking in anticipating the downturn. The plunge in the market came only after the economy had entered the recession and in fact most of the downturn did not come until after the rate of economic decline began to accelerate last fall. So, if the market is now accurately projecting the future course of the economy, that would be a sharp departure from its recent behavior.

The article also quotes Treasury Secretary Timothy Geithner saying: "A huge part of getting out of this crisis is about confidence." It is not clear that Geithner, who completely missed the onset of the crisis, is correct in saying this.

The falloff in demand has been due to huge overbuilding of residential housing and the loss of around $15 trillion in household wealth. The main reason that consumers are not spending is the same reason that homeless people don't spend, they don't have any money. It is not clear that attitudes have much to do with it. It would have been helpful if the Post had presented the view of an economist who had not been completely surprised by the collapse of the housing bubble and its consequences.

--Dean baker

I have appreciated many of the comments that former Federal Reserve Board chairman Paul Volcker has made in recent months about the banking system, but I still am not prepared to rewrite history. What does this sentence in a Washington Post article mean?

"He [Volcker] led the fight to rejuvenate the U.S. economy after the high inflation of the 1970s."

Let's put the facts on the table. The U.S. economy had high inflation in the late 70s primarily because the OPEC price increases. (The fall in the dollar, due to a trade deficit, and measurement issues in the consumer price index also contributed to inflation.) However, the economy was actually growing at a relatively healthy pace until Volcker sent interest rates through the roof in an effort to wring inflation out of the economy. Volcker's interest rate hikes gave us a worst recession since World War II (until now), pushing the unemployment rate above 10 percent.

Was this recession necessary? My view is that inflation could have been brought into check at a much lower cost (ask one of the people who lost their job during these years what they think of Volcker), but that doesn't matter. The point is that the policy that he is most often given credit for was wringing inflation out of the U.S. economy. It is a bit of historical jujitsu to describe this as leading the fight to rejuvenate the economy.

[Addendum: For those with bad memories, year over year growth in 1977, 1978, and 1979 was 4.6 percent, 5.6 percent, and 3.2 percent, respectively. These are not growth rates that are generally described as stagnation. In addition, the investment share of GDP hit a post-war record in these years, so firms were not shy about investing.]

--Dean Baker

The NYT discusses the extent to which the United States will be pursuing industrial policy in its efforts to reinvigorate the Big Three. The article implies that industrial policy is somehow alien to the United States. In fact, the United States has long had implicit industrial policy.

In the early part of the 20th century the United States had some of the highest tariffs in the world with the explicit goal of developing domestic industry. In the post-World War II era, the government adopted a variety of policies with the explicit purpose of promoting the pattern of suburban growth that fueled the economy for the last 60 years. This included a variety of subsidies for home ownership and the construction of the highways. (Low-interest mortgages to veterans are an often overlooked subsidy. Until the end of the draft in the 70s, nearly all men served in the military and therefore qualified for veterans mortgages.)

In short, industrial policy would not be new to the U.S. economy, even if an explicit discussion of it might be.

--Dean Baker

The NYT reports that many banks are making plans to return the money they borrowed through the TARP as quickly as possible. While the article points out that the banks are upset about the TARP conditions, it does not explicitly point out that they may still turn to other forms of government aid that do not come with conditions.

Specifically, the banks still have access to special Fed lending windows that allow them to borrow money at below market rates. They can issue bonds insured by the FDIC (this is mentioned) and they have been beneficiaries of taxpayer dollars used to pay off AIG debts. It is not clear whether more money will be funneled, without conditions, from taxpayers to the banks through AIG.

In addition, the Treasury Department's Public Private Investment Program would subsidize the purchase of bad assets from the banks allowing them to command an above market price. This program also would not impose conditions on the participating banks.

--Dean Baker

Apparently not at USA Today. The paper features a major article assessing the prospects for a big stock rally without ever assessing price to earnings ratios. This would be like trying to determine the market value for an apartment building without considering the rent it commands.

--Dean Baker

That is the only plausible conclusion of the complaint in his column that: "Obama hasn't done anything to reduce the expense of retiring baby boomers." Presumably, if he realized that the baby boomers had just lost around $10 trillion in housing and stock wealth due to the incredible economic mismanagement of President Obama's predecessors in the White House, he would not be pressing to even further cut the wealth of the baby boom cohorts.

Samuelson apparently has also not been following the debate on health care reform. Peter Orszag, President Obama's budget director, is proposing a number of steps which could bring U.S. health care costs more in line with those of other wealthy countries. These countries on average pay less than half as much per person for health care as the United States, yet enjoy comparable health care outcomes.

If health care costs can be contained, which is one of the main points of the proposed reform (apparently Mr. Samuelson missed this fact), then the future budget deficits will be far less serious than suggested in this column.

--Dean Baker

I suppose its good to print a wide range of views but this one arguing for increased protectionism to increase newspaper profits is comparable to arguing that people should be arrested for driving a foreign car. If the car industry enjoyed the sort of protection advocated in this column, they would all be earning $200k a year.

[In response to a couple of posts below, it is easy to develop non-protectionist ways to support journalism and other creative work, but the Post will not present such views in its pages. These alternatives are likely to threaten its profits and its existence.]

--Dean Baker

Regular BTP readers know that I give the media much of the blame for the economic collapse, although I give my fellow economists even more. After all, knowing the economy is all they do for a living and they were completely clueless in missing an $8 trillion housing bubble. As they say back in Chicago (my home town): how stupid can you get?

Anyhow, in its latest issue, the Columbia Journalism Review has a piece by Dean Starkman that takes the media for task for missing the crisis. While the piece makes many good points, I would argue that it is still too generous. The investigative reporting into the dealings of the Wall Street banks advocated by the piece would have been desirable, but it was unnecessary. All we needed was reporters who knew arithmetic.

The basic point is that we saw a 70 percent run up in inflation-adjusted house prices nationwide, after 100 years in which house prices had just tracked inflation. There was no remotely plausible explanation for this sharp divergence from a 100 year long trend in the largest market in the country. Furthermore, it was not matched by an remotely comparable increase in rents, which continued to largely track inflation.

The implication was that we had a housing bubble that had generated $8 trillion in housing wealth (an average of $110,000 per homeowner). This was guaranteed to end badly even if every bank had kept good books, there were no complex derivative instruments, and no deceptive subprime mortgages. The U.S. economy was being driven by this bubble and it was sure to crash when the bubble burst.

Of course the bubble would not have grown to such an extraordinary size had it not been for the banks bad practices and outright fraud, but the latter required at least some investigative work. The core problem was an $8 trillion housing bubble that was standing there in the full light of day. The fact that so many business and economic reporters somehow could not see this is even more damning than their failure to highlight the corruption of the Wall Street boys. After all, if you can't see an $8 trillion housing bubble, what can you see?

--Dean Baker

The folks who couldn't see an $8 trillion housing bubble are now busy spreading another absurd untruth, that the United States needs China to buy its Treasury bonds to keep down interest rates. This is completely untrue and in fact runs against the stated goal of both the Bush and Obama administration of a higher-valued Chinese currency.

This should all be very straightforward. When China "manipulates" its currency (there isn't much secret here, the government openly manages its exchange rate) it buys up U.S. dollars. That is the way currency markets work. China's huge trade surplus would otherwise cause the value of its currency to rise against the dollar. However, China has an explicit policy of preventing this rise by using its foreign exchange earnings to buy dollar denominated assets. One of the dollar denominated assets it buys is Treasury bills.

If China stopped buying dollar assets (including Treasury bills), then the dollar would fall against China's currency. This would make Chinese imports more expensive to people in the United States (just like a tariff) and we would buy less of them. It would also make U.S. exports cheaper for people in China, causing them to buy more of our exports. This improvement in the trade deficit would help to stimulate the U.S. economy, which is one reason that many people have advocated reducing the value of the U.S. currency relative to the yuan.

China could continue to buy U.S. currency (thereby keeping down the value of its own currency) and just buy short-term deposits, rather than Treasury bills. This would cause long-term rates in the United States to rise other things equal. However, there is no reason to assume that other things would be equal.

The Federal Reserve Board could step in to buy more long-term bonds to offset the lower demand for China. It is no more inflationary for the Fed to buy enough bonds to keep the 10-year Treasury rate at a low level (say 3.0 percent) than it is for China to buy enough 10-year Treasury bonds to keep the interest rate at 3.0 percent. It is simply not true that we need China to buy our Treasury bonds.

Finally, China is not buying these bonds as an investment. It absolutely will lose money on these bonds.The dollar will fall and interest rates will rise. This makes U.S. Treasury bonds a really bad investment for the Chinese compared to say, buying short-term euro assets or almost anything else in the world. They are obviously buying U.S. Treasury bonds for the purpose of sustaining their export market in the United States. This is not an accidental outcome of their actions.

[I see that Paul Krugman has made the same point.]

--Dean Baker

The Post has repeatedly expressed its contempt for ordinary workers in both its news and editorial sections. It does say again today in its discussion of "buy America" provisions of the stimulus package.

The article notes that these provisions have shut out some Canadian firms from portions of the stimulus. While the article asserts that these provisions have created friction with Canada, as a practical matter the stimulus has almost certainly increased jobs in Canada, even with the buy America provisions. This is due to the fact that the buy America provisions apply to only a small portion of the stimulus. Furthermore, insofar as the stimulus increases demand in the economy more generally, it will also increase demand for imports from Canada.

Any bill that gets through Congress requires political compromise. If the options were to exclude any buy America provisions, and therefore not get a stimulus bill through Congress, or to get the stimulus bill through with buy America provisions, then Canadians will undoubtedly see more demand for their products in the latter case. The Post badly misrepresents the issue by not pointing this fact out.

It is also striking that the Post has never once mentioned the buy America provision in the Treasury's Public Private Investment Partnership plan. This provision has an absolute prohibition on the participation of any investor not headquartered in the United States. This omission is consistent with the Post's editorial policy which has consistently supported large taxpayer subsidies for the banks.

--Dean Baker

Economists have killed lots of electrons trying to muster evidence that employment protection laws (laws limiting employers' ability to fire workers without cause) increase the unemployment rate. They have largely failed. Some countries with strong employment protection rules do have high unemployment rates. However some countries, like Austria and the Netherlands have strong employment protection laws and very low unemployment rates.

So, when the NYT tells us that analysts want Spain's government to make it easier to fire workers as a way to spur economic growth and employment, it is giving us the position of business within Spain, not the consensus within the economics profession on the issue.

--Dean Baker

David Brooks is pushing the line that President Obama is a hopeless big spender desperately seeking to cover his excesses with vague promises of health care savings in the distant future.

Most of his story is flat out wrong. First, the vast majority of the increase in the projected deficit for 2009 came from a weaker than projected economy increased bailout costs for the boys at Fannie, Freddie, AIG and elsewhere. This was not the result of big-spending liberals. It was the result of incompetent rich bankers.

The larger point, that savings on health care costs are only vague hopes, ignores what we already know. Every other rich country in the world manages to provide comparable health care to its population at a cost that averages less than half as much as in the United States. (In fact, if Brooks and the rest of the elite were not such ardent protectionists, we could solve much of our health care cost problem with freer trade in the sector.)

But we don't even have to go to other countries. There are actually huge cost differences within the United States that are not reflected in differences in outcomes. If we could more widely adopt the practices of low cost states/regions, then savings of 20-30 percent are quite plausible.

In short, President Obama's health saving targets are very realistic, although he will have to fight some very powerful industry and doctor lobbies to have them realized.

--Dean Baker

Fox on 15th Street (aka "The Washington Post") misrepresented a number of issues in its discussion of the Chrysler/GM bankruptcies. It is very upset that union auto workers might get the retirement health benefits that they worked for decades ago, while speculators may not see much return from their speculation.

The Post argued that the bondholders are supposed to have a preferred position in the event of bankruptcy compared to workers' claim for retirement health benefits.This is true under bankruptcy law.

However, the factor that has apparently escaped the Post's attention is that the government is giving money to Chrysler and General Motors. Bankruptcy law does not require the federal government to hand Chrysler and General Motors a penny. It is doing so as a matter of public policy.

There are two policy goals that the government hopes to advance with its intervention. First, to try to keep jobs in these firms and their suppliers at a time when the economy is shedding jobs at an incredibly rapid rate. Second to protect the retirement health benefits of workers.

The Post openly shows contempt for ordinary workers (as opposed to bankers), but President Obama was elected in large part because he promised to use the government's power to advance their interests. One of these interests is protecting the retirement health care benefits for which they worked -- just as the government protects the pensions for which they worked.

For these reasons, the government is giving money to Chrysler and GM. If it opted not to try to help these companies then it is likely that the whining speculators claims would be worth even less. In other words, even though the speculators are getting their debts paid at a lower rate than the debt owed to the autoworkers, they are still likely getting more money than they would without the government's generosity.

There are two other important points left out of the Post's rant. First, these speculators bought the Chrysler and GM debt at 30 cents on the dollar. It had already been marked down by the market with the understanding that debt holders would incur large losses. The speculators bet that they could be tough guys and press President Obama for more money. The tough guys are now whining because it looks like they lost that bet.

The other point concerns the bond insurance that the Post mentions. This bond insurance, which will pay 100 cents on the dollar, may have been issued by bankrupt institutions like AIG. If this is the case, the government is effectively paying creditors to hold out by honoring commitments that it is has no legal obligation to honor and certainly no obvious policy reason to honor. If the tough guys bought bond insurance from a bankrupt company, then they made a bad decision. The government should allow them to enjoy the fruits of their investment and not give AIG the money to pay off insurance written on the bonds of Chrysler or GM.

--Dean Baker

There are many bad things that can be said about economists, but sometimes they don't even know which way is up, as seems to be the case on the oped page of the NYT today. The NYT has two columns, including one by the usually astute Nouriel Roubini, bemoaning the fact that the dollar is likely to fall in value and lose its status as the world's preeminent reserve currency.

Okay, let's start with the which way is up question. The official position of the Bush administration, the Obama administration, and the leadership of both parties in Congress is that the United States is unhappy with China's "manipulation" of its currency. The alleged manipulation is actually China's explicit policy of keeping a managed exchange rate, under which the value of China's currency is kept well below its market value relative to the dollar.

Which way is up? Let's get this straight -- everyone is mad at China because they are keeping the value of their currency low against the dollar. A low value of the yuan means a high value of the dollar. So, the official position of the U.S. political leadership in this story is the high dollar is bad.

The reason why the high dollar is bad should be obvious. The high dollar is what gives us our trade deficit. The often-blamed budget deficit has nothing to do with the time of day when it comes to the trade deficit. People buy imported goods rather than domestically produced goods because the high dollar makes the imported goods cheaper. Let's say that again, the high dollar, makes foreign goods cheaper and therefore is the cause of the trade deficit: end of the story.

Okay, now we have two columns in the NYT warning us that the dollar is going to fall because the Chinese and others will no longer turn to it as the international reserve currency. So, these columns are telling us that China is effectively going to stop "manipulating" its currency and thereby allow it to rise relative to the dollar. This will mean that U.S. manufactured goods will be far better able to compete against Chinese goods, as well as the goods of other countries whose currency rises against the dollar.

If China's currency rises by 30 percent against the dollar, then this will provide the same benefit to U.S. manufacturers as imposing a 30 percent tariff on Chinese imports. In addition, the drop in the value of the dollar will also provide a boost to exports equivalent to a subsidy of 30 percent on all exports.

Tell us again why we are scared of the dollar losing its status as the world's leading reserve currency. Isn't the decline in the value of the dollar exactly what we want?

Roubini also commits the cardinal sin of implying that the U.S.draws any special benefit because most commodities are priced in dollars. Wrong!!!!. If the dollar falls against the euro and other currencies, then the market price of oil and other commodities increases in dollar terms. We are not able to get oil at a lower real price just because it's traded in dollars. Roubini knows better.

--Dean Baker

I

Yes, that sound you hear is once again the wail of surprised economists who thought that retail sales for April would be flat or even slightly positive. Why were the economists surprised?

They forgot that when they looked at chain store sales there was upward bias compared with last year because many of the chains' competitors are no longer in business. This one was very easy to see for economists who understand the economy.

Anyone have any green shoots of recovery?

--Dean Baker

The Post is pursuing the "what did they know and when did they know it" line about the AIG bonuses. This is misleading readers because it implies that top officials in the Obama administration (e.g. Treasury Secretary Timothy Geithner) were surprised by the bonuses.

Secretary Geithner oversaw the takeover of AIG by the Fed. It has been widely reported, that as president of the New York Fed, Geithner maintained close ties to the top executives of major banks. Geithner was certainly familiar with how these executives were paid and that it was standard practice for large bonuses to be issued.

Geithner never claimed that he ordered AIG to stop making bonus payments. Since he knew that it was the practice of firms like AIG to make large bonus payments, and he never told them to stop making these payments, then he effectively know that they would make large bonus payments.

The real story here is very simple. Geithner knew about the bonus payments at AIG from the day the government took it over. He just never cared. This sort of article by the Post is confusing a very simple situation, implying that there was some possibility that Geithner and other top officials did not know about the AIG bonuses.

--Dean Baker

We all know that other wealthy countries pay less than half as much per person for health care yet enjoy better health outcomes. Why is there such complete refusal from the media to ever discuss the enormous potential for gains from trade from allowing people in the United States to take advantage of more efficient health care systems elsewhere in the world.

Unfortunately, the New York Times, like most news outlets leaves its coverage to hard core protectionists who would never consider the idea of subjecting the U.S. health care system to international competition.

The protectionism in health care is unfortunate because the economic costs of this protectionism dwarf the cost of protection, actual or proposed, in other sectors of the economy. It would be appropriate to have an article that discussed protectionism in the health care sector in the context of the Smoot-Hawley tariff and other protectionist measures in the Great Depression.

--Dean Baker

Tens of millions of Americans will no doubt be delighted to find out that they are wealthy. Okay, at least the Washington Post considers themselves wealthy.

The Washington Post told readers that members of Congress are looking to cut benefits for "wealthy Americans." While it doesn't provide an exact cutoff for this definition, in order to save more money than it would cost to implement this cut, it would be necessary to get quite far down the income distribution, certainly in the neighborhood of $60,000 a year.

The definition of "wealthy" that the Post uses in the context of Social Security is striking, since it went to great lengths to tell readers that people earning $500,000 a year were not wealthy in the context of President Obama tax increases.

Such inconsistencies pervade the arguments of those wanting to cut Social Security benefits. For example, Peter Peterson, who has devoted much of the last two decades to cutting Social Security, has personally pocketed tens of millions of dollars through the fund managers' tax subsidy.

Those who care about logic would note that the lost of more than $10 trillion dollars of wealth in the housing crash and stock market plunge would be an argument against cutting Social Security benefits for retirees and near retirees. Remarkably, this enormous loss of wealth is not mentioned once in the Post article.

--Dean Baker

The fact that the United States spends more than twice as much per person on health care than Germany, France and other countries with comparable health outcomes should suggest that there are enormous potential gains from opening up trade in the health care sector. However, the Obama administration has apparently never considered the possibilities for gains from trade in this sector and the NYT has agreed not to call attention to their protectionist position.

--Dean Baker

USA Today threw some really foul-smelling garbage at President Obama's stimulus plan in a front page article today. The article implies that President Obama's team had just made up its claims that the stimulus would create 3.5 million jobs.

For example, it includes the assertion by Representative Paul Broun that: "Very probably, these numbers are just picked out of the clear blue sky and are not authenticated or authenticatable." While the article does present a reply from Christina Romer, President Obama's chief economist, the article leaves the reader with the impression that this is a question that is up for debate.

It isn't. President Obama's economic team produced a careful paper that explained exactly how they derived their job creation estimates. While it is possible to take issue with any of the assumptions that were used in this paper, they are all well within the mainstream of economics. It is simply not true to claim that the job creation figure was "picked out of the sky."

The article also implies that there is something disingenuous about referred to jobs "created or saved." It quotes University of Chicago economics professor Steven Davis describing this as "a very clever device for providing future political cover." In fact, it is the only honest way to discuss the stimulus. Obviously the economy is losing jobs at a very rapid pace. The stimulus is being put in place with this as a backdrop. There is no guarantee that even a very effective stimulus will cause the economy to create jobs if it is shedding jobs at a very rapid pace in the absence of stimulus.

By analogy, suppose a car is headed toward a brick wall at 120 miles an hour. If the driver slams on the brakes, but the car still hits the wall at a speed of 15 miles an hour, then obviously the brakes had an enormous impact in slowing the car and reducing the impact of the crash. However, in Professor Davis' world the conclusion would be that the brakes did not work.

--Dean Baker

In the worst downturn since the Great Depression, losing just 539,000 jobs in a month may seem like good news, but there is less cause for optimism than most reporters recognized.

First, most reports did note the one-time event of 62,000 people being hired for the 2010 Census. The Census will be employing part-time workers for much of the next year, but this hiring will not be repeated (or at least not at this rate) in future months. So, the net of Census job loss was 601,000. This is still an improvement over the 680,000 average job loss for the prior five months.

However, this comparison ignores the fact that we are comparing revised data from the prior five months with unrevised data for April. The revisions for the last five months have all been negative in a big way, adding an average of 86,000 to reported job loss. We don't know whether the revisions will be that large again in April, or even that they will be negative, but a word of caution is certainly in order.

Second, It is worth noting that the number of jobs imputed for new firms not included in the Labor Department's survey continues to outpace the number for 2008. There were 226,000 jobs imputed for new firms in April of 2009 compared with just 176,000 for April of 2008. Given the health of the economy in 2009 compared with 2008, this seems unlikely.

Third, wage growth appears to have collapsed with the average hourly wage reportedly increasing by less than 0.1 percent in the April data. This is consistent with a sharp slowing of the rate of wage growth reported in the Employment Cost Index for the first quarter.

This is very disturbing. Wage growth had been holding up earlier in the downturn, which meant that workers (at least those who still had jobs) were seeing increased purchasing power and were therefore able to sustain their consumption. It now seems that weakness in the labor market has brought wage growth to a halt. This is likely to further reduce consumption and demand more generally.

In short, while we can always say that this report could have been worse, there was not much to celebrate here.

--Dean Baker

I hate to repeat myself every month, but if reporters repeat the mistake, then I have to repeat the correction. The year over year comparisons of chain store sales have an upward bias this year compared to more normal years. The reason is very simple, the chains are still there, while many of their competitors are not.

In more normal times, there would be some number of new non-chain stores that would open, as well as some number that close. However, in the last year, very few new stores have opened, while many have gone out of business. This means that the surviving chain stores have a larger share of total retail sales in April of 2009 than in April of 2008. Therefore, the WSJ should not be overly impressed by the modest uptick in year over year sales reported for the month.

--Dean Baker

Most news outlets seem anxious to join the Treasury's PR campaign in pronouncing the banks essentially healthy based on the stress test results. There is of course enormous uncertainty around the course of the economy over the next few years, and the results of these stress tests may well prove to be an accurate assessment of the banks' health, but there are some reasons for believing that the stress tests are likely to prove too lenient.

1) Fraud in mortgage issuance -- we know that many of the loans issued in this period involved fraud, more often on the lenders' side than the borrowers. In these cases, for example where the mortgage application grossly overstates the buyers income or the appraisal hugely overstates the market price of the house, default rates will be far higher than would be expected even in bad economic times. Also, recovery rates will be far lower if the original appraisal price was inflated.

2) Unemployment -- in their negative scenario, the stress tests assumed a year-round average unemployment rate of 8.9 percent for the 2009 and 10.3 percent for 2010. The economy is on track to have a much higher unemployment rate, as it is likely to hit 9.0 percent in April. My best guess for a year-round average would be 9.4 percent for 2009 and probably around 10.5 percent for 2010. (These numbers assume no second stimulus, but of course Congress will not sit back and just let the unemployment rate go through the roof.)

3) House prices -- the negative scenario assumes that house prices, as measured by the Case-Shiller 10-City index fall 22.0 percent in 2009. Prices in this index have been falling at a 24 percent annual rate in recent months. Given the massive inventory of unsold homes, It is reasonable to expect that this rate of price decline could continue at least through 2009.

What difference would harsher assumptions make? The projected loss rate on first mortgages increases by 45 percent between the baseline scenario and the negative scenarios in the stress tests. The baseline scenario assumes an 8.4 percent unemployment rate for 2009 and 8.8 percent for 2010 (some serious stimulus here), compared to the 8.9 and 10.3 rates in the negative scenario. The rate of house price decline in the baseline scenario was 14 percent in 2009 and 4 percent in 2010, compared to 22 percent and 7 percent in the negative scenario.

So, if my somewhat more negative numbers prove accurate let's assume that it increases losses by about 20 percent. That comes to an additional $120 billion in losses. That would mean that instead of having to raise $75 billion, these banks would have to raise $195 billion. That's a qualitatively different picture.

So, are the stress tests worthless? They did provide a much clearer picture of the position of individual banks than we had previously. It is worth noting that this is a 180 degree shift from the original course pursued by Treasury Secretary Henry Paulson last fall. Paulson tried to conceal the situation of individual banks, putting a cloud over all of them. Treasury also should be credited for disclosing many of the specifics of the stress tests so it is possible to do a quick (or more in depth) analysis of its assumptions and explore the implications of alternative assumptions.

Still, it is hard not to conclude that these stress tests and certainly the PR campaign around them, were intended to paint as positive a picture as possible of the banks' financial condition. If this picture proves to be wrong, then it means that we will have unnecessarily delayed the clean-up of the financial system. It will also be bad political news for the administration (Geithner and Summers will presumably be joining the ranks of the unemployed).

Of course, the big second stimulus package that Congress will pass this summer, will save both the banks and the administration.

--Dean Baker

Because it's not true. One of the best and most often repeated lines of the opponents of the Employee Free Choice Act is that it will deny workers the right to vote decide on a union with a secret ballot election. That is wrong, wrong and wrong.

First of all, workers do not currently enjoy that right. Maybe that should be repeated a few times in case there are any very slow reporters reading: Workers do not currently have the right to a secret ballot election to decide whether or not to be in a union Workers do not currently have the right to a secret ballot election to decide whether or not to be in a union.

Under current law, an employer has the option to recognize a union based on a majority of workers decision to sign cards requesting recognition. That's right folks, under current law, employers can decide to recognize a union without a secret ballot election.

The big change under the Employee Free Choice Act is that the decision as to whether or not to have a secret ballot election or to organize through majority sign-up would rest with workers not employers. Of course if workers wanted to have a secret ballot election they could petition the National Labor Relations Board to get a secret ballot election.

So, anyone who claims that they oppose the Employee Free Choice Act because they support workers' right to a secret ballot, they are not telling the truth. The media should be pointing this out.

--Dean Baker

The Washington Post has an incredibly insightful oped column noting that the spendthrift baby boomers will have almost nothing saved for retirement. This is true as serious economists have tried to point out.

The problem with the column is that the reason the baby boomers didn't save is because they believed the claims about the bubble economy from the experts cited in the Washington Post and elsewhere. The Post used to have James "Dow 36,000" Glassman as a regular columnist. Its most cited expert on real estate prices was David "Why the Real Estate Boom Will not Bust" Lereah, who worked as the chief economist for the National Association of Realtors for his day jobs. Of course similar views were put forward by people like Alan Greenspan and Ben Bernanke.

The views of those of us who tried to warn of both the stock and housing bubbles were (and are) almost completely excluded from the Post's pages. They were far more likely to hear the Post's endless tirades, in both the news and editorial pages, about how Social Security was going to bankrupt the country.

There is a well-documented wealth effect whereby people consume based on their stock and housing wealth. The excessive consumption of the baby boom cohort was a predictable result of the stock and housing bubbles. This spending would have been entirely rational if this bubble wealth was real as the Post and the rest of the media told the boomers. If the boomers can be blamed in this story it is for listening to the media and the experts that whose views they convey.

--Dean Baker

USA Today has joined the rest of the media in helping to paint a bright picture for the health of the banks. (Can we stop the Fed and FDIC subsidies now?) It goes along with a bit if slight of hand in telling readers about how Citigroup was so easily able to deal with much of its capital shortfall:

"Citi made a deal in February in which the government would be able to convert up to $25 billion of its preferred shares into common stock, for a 36% stake."

The problem in this story is that at the time of the conversion, Citi had a market capitalization of about $20 billion. This means that the government effectively spent $25 billion to get a 36 percent stake in Citi that could have been purchased on the market for just $7 billion. When banks can arrange deals like this with the government, it is not surprising that their books look good. Most businesses would be doing quite well if they could get the government to pay them more than three times the market value of their stock.

--Dean Baker

The housing bubble was fed in part by incredibly bad economic reporting. Reporters should have been reporting on little else since the bubble was so obviously far more important than anything else taking place in the business/economic arena in the years 2002-2207. However, as we know, the vast majority of reporters slavishly followed the lead of Alan Greenspan and other top economists and said that things are just great.

They seem to still be following this practice. To counter this "let's spread the good news" cheerleading, let's talk about some really bad news that got almost no attention in the media.

last week, the Bureau of Labor Statistics released its employment cost index for the first quarter. The index showed that employment cost (wages and benefits) growth had slowed to just a 1.2 percent annual rate in the first quarter. In the private sector the rate was just 0.8 percent. This is below the current rate of inflation. It also is a sharp slowdown from the prior quarter, which raises the possibility that wage growth will slow even further in the current quarter.

If wages slow further, then purchasing power will fall further, thereby slowing the recovery. This is a piece of really bad news that swamps by an order of magnitude the items presented as good news in this and other news articles. (Wage and benefit income accounts for about 60 percent of national income.) If reporters would focus more on reporting the news rather than repeating what the Fed chairman says the public would be much better informed.

--Dean Baker

The Wall Street Journal reports on the decision of a bank in Texas to tear down 16 partially completed houses that came into its possession following a foreclosure. The bank calculated that it was cheaper to just tear down the buildings then to try to resell them.

It would have been helpful if the article explained the obvious implications for the hundreds of billions of dollars of "troubled assets" that banks hope to sell with taxpayer subsidies. Many of these assets are in fact worth the low price at which the market now values them (@ 30 cents on the dollar). The media have helped maintain the fiction that these assets are in fact worth considerably more even though there is no evidence to support this position.

--Dean Baker

Come on folks, when you do year over year comparisons of air travel you have to remember things like holidays. Easter was in March last year, and April this year. This should mean that, other things equal, a year over year comparison of air travel for March will look bad and a year over year comparison for April will look good. So, why is USA Today surprised by the uptick in April travel?

--Dean Baker

That should probably be viewed as rhetorical question, but it might have been worth mentioning the track record of the unnamed official giving the NYT assurances that the banks are in good shape. We are being treated to a bizarre situation where the government is giving trillions of dollars of subsidized loans to the banks at the same time that it is assuring us that the banks are in good shape.

This raises the obvious question, if the banks are in such good shape, why not take away the training wheels and let them fend for themselves in the market? It is remarkable that this question is never raised in this article.

--Dean Baker

At 3.17 percent, the interest rate on 10-year Treasury bonds is now at about half the level that the Clintonites were celebrating back in the early 90s. The NYT sees this as evidence that "worries rise on the size of U.S. debt."

What on earth is the NYT talking about? The focus of the article is a modest increase in the interest rate on 10-year Treasury levels from the extraordinarily low levels they had hit in late 2008. The main reason for the sharp decline in Treasury yields was panic in financial markets that made investors fearful of holding anything other than government debt issued by the United States and other super-safe borrowers.

The modest rise in yields to still very low levels was a predictable and desirable outcome of a stabilizing financial market. The Congressional Budget Office projected that the 10-year Treasury rate would rise to an average of 3.4 percent in 2010 and 4.0 percent in 2011.

There is a currently a powerful contingent of people trying to spread fear about the government debt in order to advance their agenda of cutting Social Security and Medicare, most prominently investment banker Peter Peterson and the Washington Post. It is therefore especially important that the NYT report on the budget accurately in order to avoid feeding these fears.

This article also misrepresents some other aspects of the government's financial situation. For example, it asserts that because most of the rest of the world is in recession there is less money to lend to the United States: "Most of the world is in recession, and other nations have rising borrowing needs as well."

In fact, the opposite is the case. It would be harder for the United States to borrow if the rest of the world were growing rapidly and there were many competing demands for capital in both the public and private sectors.

--Dean Baker

Everyone makes mistakes, but the odds are that anyone who couldn't see an $8 trillion housing bubble is not a really good person to rely upon for predictions on the economy. Joe Nocera gives a quick survey of some radically conflicting forecasts in his column today.

It's worth noting that all the optimists completely the missed the bubble and the impact that it's collapse would have on the economy. At least some of the pessimists, most notably Nouriel Roubini, recognized that the conditions for a serious crisis were being created years ago.

--Dean Baker

Bill Moyers had an outstanding piece tonight on the efforts of a group in Boston, City Life/Vida Urbana, to directly obstruct bank efforts at foreclosure. It is likely that there will be many more direct action efforts of this sort if Congress does not do anything to protect families facing foreclosure.

--Dean Baker

1) Tax breaks pay for themselves.
2) Tax breaks, especially in recessions, can stimulate growth.

Okay, those are two very different statements. Virtually all economists would disagree with statement 1. There is a huge amount of research on this topic by economists who range the political spectrum. In the context of an economy near full employment, tax breaks can at best trigger enough growth to replace 30 percent of percent of the lost revenue and most estimates are considerably less.

On the other hand, virtually all economists would agree with statement 2. In the short-term, tax breaks will stimulate growth, especially when the economy is below full employment, as it is now.

President Bush and many Republican leaders have been found of asserting statement 1, even though almost no serious economists would support this position. On the other hand, President Obama and his advisers have been arguing a version of statement 2, although in reference to spending rather than tax cuts.

For some reason, the NYT wants to accuse President Obama of arguing a version of statement 1. This is entirely an invention of the NYT. Neither President Obama nor any of his top advisers have claimed that his spending will pay for itself in the form of higher tax revenue. While they have argued that it will boost growth, which will help to cover the cost of the spending, the assertion that the spending will pay for itself comes from the NYT, not the Obama administration.

It is unfortunate that trees had to die for this story.

--Dean Baker

The NYT discussed President Obama's feud with several hedge funds who refused to agree to the same write-down terms as other major bond holders. While the article points out that the hedge funds had purchased the debt for around 30 cents on the dollar, it would have also been useful to point out why the debt was selling for 30 cents on the dollar.

Other investors assessed both Chrysler's economic situation and the politics around the bailout and concluded that they were unlikely to get more than 30 cents on the dollar. The hedge funds that refused to accept the deal offered by the Obama administration were speculating that they could pressure the Obama administration into giving them a better deal. That is why they were prepared to pay more for this debt than other investors.

--Dean Baker