WSJ reporter told his blog readers that: "stimulus can’t take credit for slower GDP contraction." His argument is that most of the growth in spending at the federal level came from higher defense spending, which is not part of the stimulus.

This is true, but hugely misleading. The stimulus was directed primarily at state and local spending and also at increasing disposable income through tax cuts and benefit increases, thereby increasing consumption.

S&L spending added 0.3 percentage points to growth after subtracting 0.2 percentage points in the first quarter. Without the stimulus money from government, S&L governments almost certainly would have subtracted even more from growth in the current quarter.

The stimulus also put money directly in consumers' pockets. As a result of the tax cuts and benefits increases disposable income rose at a 4.6 percent rate, even though wages fell at more than a 5.0 percent rate. This boost undoubtedly kept consumption from falling more than it otherwise would have.

So, there is clear evidence of an impact of the stimulus, as long as you don't look where you shouldn't expect to find it.

--Dean Baker

The Post is acting like a newspaper this morning. Here's a front page story on the money that the Blue Dogs get from the health care industry.

--Dean Baker

The Post has a good front page article that reports on the frequent use of costly scanning equipment by doctors who get high reimbursements from insurers or Medicare. There is an obvious problem of incentives here. Once the doctor owns the scanner, he has an incentive to use it as much as possible in order to get high fees.

The standard economists remedy would be to take the money out. This could be easily done if we stopped financing research into medical devices with grants of patent monopolies. If, instead of imposing an artificial monopoly on the market, the government paid for research upfront (which could be done by the private sector) then imaging equipment would be cheap. Then doctors would have no incentive to play games and rip off insurers.

Unfortunately, most economists are too busy yelling about items like 5 percent tariffs on imported shoes to worry about medical equipment that sells for 100 times its production cost.

--Dean Baker

For years the media liked to tout the fact that Europe had a higher unemployment rate than the United States. This was routinely presented as evidence that Europe's more generous welfare states and strong labor movements were outmoded in a modern economy. This story lost credibility as the unemployment rates have converged over the last few years, and in recent months U.S. unemployment exceeded Europe's levels.

Now, the media are ridiculing Europe's efforts to reduce its unemployment rate. The NYT complains that companies are reducing hours rather than laying off workers, among other steps. In fact, this would be a really great way to deal with demand shortfalls. If hours were cut back every time demand fell off, then we could avoid subjecting millions of people (tens of millions in the current downturn) to forced unemployment or underemployment. In the U.S. economy, a 5 percent reduction in average work hours could save roughly 7 million jobs.

--Dean Baker

This time the problem child is South Korea, which the Post tells us will have the oldest population on the planet by 2050. They may not have enough people to work as valet parkers at restaurants or the mid-night shift at convenience stores. This sounds very scary. Just imagine, a low unemployment rate and high wage; what a disaster!

The decline in South Korea's saving rate, which is the main issue in the story, turns out to be much less of a story when you read through it. According to the article, one reason for the low saving rate is the large amount of money that Koreans spend on education in the form of private schools, tutors, and other expenditures to ensure that children do well in school.

In GDP accounts, education spending by households is counted as consumption. In reality, it is a form of investment. More educated workers are more productive workers. If the next generation of South Koreans all have the equivalent of medical degrees or PhDs, they will not have to worry about their lack of saving.

--Dean Baker

NPR interviewed PhRMA CEO and former congressman Billy Tauzin this morning. Mr. Tauzin told listeners that drugs are just 8 percent of the country's health care expenditures. According to the Centers for Medicare and Medicaid Research, prescription drugs account for almost 10 percent ($244.8 billion out of $2509.9 billion) of spending. It would have been appropriate to correct Mr. Tauzin when he understated expenditures by 20 percent.

--Dean Baker

When China bought dollars in the early part of this decade it lost large amounts of money compared with alternative investments, like euro denominated bonds. Were the Chinese upset about their large losses?

I don't know, but they certainly never publicly complained. Their dollar investments did prop up the dollar against the yuan, supporting China's huge export market in the United States, which in turn helped to sustain China's extraordinary growth over this period.

The Post now tells us that China: "along with many other investors, fear that massive U.S. spending, as well as the Fed's injection of hundreds of billions of dollars into the financial system, may cause inflation to flare, reducing the value of their U.S. investments."

How does the Post know what China fears? They may know what the Chinese government says, which they should report, but public statements by governments do not always reflect their actual views (news for the Washington Post).

We know from the Post's editorial page that the Post's editors want us to: "fear that massive U.S. spending, as well as the Fed's injection of hundreds of billions of dollars into the financial system, may cause inflation to flare," however serious newspapers are supposed to keep a separation between their editorial pages and the news pages.

It would be a big step forward at the Post if they would just stick to reporting the facts and stop making things up.

--Dean Baker

In its top of the hour news segment on Morning Edition Mora Liasson reported the results of a new poll showing dwindling support for President Obama's health care plan. Ms. Liasson noted pollster Stan Greenberg's assessment that people had heard about the program's "huge" $1 trillion price tag, but had not heard about the benefits of the program.

The program's huge price tag is equal to about 0.5 percent of projected GDP over the next decade. The Iraq war at its peak cost more than 1.0 percent of GDP. NPR and other news outlets rarely, if ever, referred to the "huge" cost of this war, which was twice the "huge" cost of President Obama's health care program. Perhaps the decision of supposedly neutral media sources to constantly warn that the costs of the program are "huge" has something to do with its dwindling public support.

--Dean Baker

The reporting on the U.S.-China relationship is approaching the absurd. The NYT tells readers that:

"Analysts said the United States seemed eager to play down areas of friction like China’s currency policy, in part because the Obama administration does not want to antagonize Beijing, its largest foreign creditor, when Washington is running a yawning deficit."

Okay, let's look at this more carefully. What is China's currency policy? Well, they want to keep their currency from rising, even though the country has an enormous current account surplus. How does China keep its currency from rising? It's very simple, they buy up huge amounts of dollar denominated assets.

Buying up dollar denominated assets means lending the United States money. This is the same thing. China "manipulates" its currency by buying up huge amounts of U.S. government bonds or short-term deposits.

In other words, we are supposed to be upset about China lending the U.S. money, but we won't complain about it too much, because we need them to lend us money. It's easy to understand how these people can miss an $8 trillion housing bubble.

--Dean Baker

Readers might be wondering that after hearing the pharmaceutical industry is pledging itself to $80 billion in savings on drug prices over the next decade. According to the Centers for Medicare and Medicare Services the country will spend more than $3.5 trillion on drugs over the next decade. This means that the drug industry's offer is equal to a bit more than 2 cents for every dollar of revenue. By contrast, if drugs sold in a competitive market, without patent monopolies, the savings would probably be more than $3 trillion.

--Dean Baker

The Washington Post told us in reference to the debate over the health care bill that: "most troubling in the short term is how few in the caucus of 256 House Democrats understand the emerging 1,000-page bill."

It doesn't tell us who this is "most troubling" to. Some of us might find it more troubling that the insurance industry, the pharmaceutical industry and other special interests give tens of millions of dollars in campaign contributions to the members of Congress who are deciding the structure of health care. We may also find it more troubling that the country will spend an extra $3 trillion on prescription drugs over the next decade because of the patent monopolies that the government gives to drug firms and no one in Congress will even discuss more efficient mechanisms for financing drug research. We might also find it troubling that Congress refuses to discuss reducing the protectionist barriers that allow U.S. doctors to earn twice as much as doctors in other wealthy countries.

It is interesting to know what the Post finds most troubling about the health care debate, but that piece of information belongs on the editorial page, not a front page news story.

--Dean Baker

At a time when even Fed Chairman Ben Bernanke predicts that unemployment will cross 10 percent (he has consistently underestimated the severity of the downturn) does it make sense for him to be warning the public that: "you get much better results," when the Fed operates without congressional oversight?

The Fed's failed monetary policy brought on the worst downturn since the Great Depression. It would be reasonable for the media to be pointing out the irony in Bernanke's warning. This is a bit like the old GM warning of bad results if its management was not left alone.

--Dean Baker

Morning Edition had another segment misinforming listeners about China's relation with the United States. After first telling listeners that China deliberately keeps down the value of its currency in order to maintain its export market in the United States, NPR said that re-valuing the yuan was unlikely to be a top priority in negotiations, since the United States will be more concerned about having China continue to finance its deficit.

Actually, financing the U.S. deficit is exactly the mechanism that China uses to keep down the value of their currency. China buys dollar denominated assets, like U.S. government bonds. This keeps up the value of the dollar relative to the yuan. In other words, if we want China to finance our deficit, then we don't want them to revalue the yuan.

It would have helpful to point out what would happen if China did not continue to buy up large amounts of bonds. This would cause interest rates to rise, unless the Fed stepped in by buying bonds. The Fed can be every bit as effective as in keeping down interest rates in buying bonds as China. And, there need be little concern about inflation in a situation of near double-digit unemployment, although China's decision to stop propping up the dollar against the yuan will lead to some inflation, as the price on imports from China rises.

It is worth noting that Nicholas Lardy, the expert from the Peterson Institute who was the main source for this story, is widely known for predicting since the late 90s that China's economy would be decimated by the collapse of its banking system.

--Dean Baker

That is what readers of David Ignatius' column on the "rehab economy" probably assume. After all, he seemed to get just about everything wrong.

Ignatius tells readers that the go go economy of the last three decades appears to be at an end and we are now entering a period of slow growth, which he compares to the fifties and sixties. Okay, this is close to loon tune. The three decades following World World II were the period of most rapid growth in the history of the country. Productivity growth, economists' standard measure of an economy's dynamism, was almost 3 percent a year during this period. It fell to 1.5 percent in the mid-seventies and stayed there until the mid-nineties.

There was a productivity upturn in the 90s, but adjusted for items like a growing depreciation share in output and some index number issues, productivity growth as it relates to living standards was still a full percentage point lower than Ignatius's slow growth period.

Even Ignatius's story about bad stock returns in this period doesn't hold water. Real stock prices grew at close to a 7 percent annual rate from 1949-1969 (real stock prices fell almost 20 percent in 1970). This gain coupled with a dividend yield that averaged 3,2 percent, provided an average real annual return in the stock market of more than 10 percent.

Of course the facts don't fit very well with Ignatius' story that we suffered slow growth in that era because people didn't have enough incentives to take risks and innovate during this era. That is probably why they were edited out.

Dean Baker

It seems not. The paper had two major front page stories discussing health care costs and the issue never once came up. This is rather striking since they are an obvious source of both high prices and bad medicine. We are projected to spend more than $250 billion a year on prescription drugs this year. If drugs were sold in a free market without patent monopolies, the cost would be around $25 billion. We would need a different mechanism for supporting research and development, but it is easy to devise a more efficient mechanism.

It is especially striking that the article on treating heart disease didn't discuss patents, since it makes several references to expensive drugs and medical devices. The waste due to patent monopolies is not just attributable to the excess cost. The monopoly rents also provide incentives to push drugs and devices on patients in cases where they may not be the best treatment. This is very basic economics that should have appeared in an article like this.

--Dean Baker

That of course is fine, but it is a bit painful that the NYT gives him a column to lecture the rest of us on how things would have been different in 2005 if the Fed had been given the title of "systemic risk regulator."

Blinder says:

"Suppose such a regulator had been in place in 2005. Because the market for residential mortgages and the mountain of securities built on them constituted the largest financial market in the world, that regulator probably would have kept a watchful eye on it. If so, it would have seen what the banking agencies apparently missed: lots of dodgy mortgages being granted by nonbank lenders with no federal supervision.

If the regulator saw those mortgages, it might then have looked into the securities being built on them. That investigation might have turned up the questionable triple-A ratings being showered on these securities, and it certainly should have uncovered the huge risk concentrations both on and off of banks’ balance sheets. And, unless it was totally incompetent, the regulator would have been alarmed to learn that a single company, American International Group, stood behind an inordinate share of all the credit-default swaps — essentially insurance policies against default — that had been issued.

This counterfactual suggests that history might have been quite different — and much better."

See, if Blinder had been in the country, he would have known that people were trying to call Greenspan's attention to the housing bubble and the bad mortgages that were helping to propel it. Greenspan dismissed these warnings as ignorant and misguided. He assured us that everything was fine in the housing market.

Suppose that Alan Greenspan wore a hat that said, "systemic risk regulator." Does anyone think he then would have said: "oh my god, there is a huge housing bubble. When it collapses it will throw the economy into a huge recession and sink half of the country's financial system!" ?

Actually, if anyone thinks that formally wearing the hat of systemic risk regulator would have changed Greenspan's response to the housing bubble, they weren't just out of the country, they were off the planet. Let's try to get serious here.

--Dean Baker

That's what the NYT told readers. Of course the economy was in recession for the last one and a half years of their college career and it was still recovering from the last recession in the first year. With employment rates low and wages stagnant, it was not a very good four years by most measures.

--Dean Baker

It seems to assume that we all understand that this is bad. It sounds good to me. It means less crowding and less pollution. I guess they haven't heard of global warming at the NYT.

--Dean Baker

Actually, the Post's editorial writers probably did not know that this is what they argued in their editorial trashing the bill, but it is what they said. The Post warned readers that the bill: "would destroy financial markets' faith in the Fed and, by extension, the value of the U.S. dollar."

Of course the only way to bring the trade deficit down to a sustainable level is to reduce the value of the dollar. The over-valued dollar was arguably the major cause of the imbalances that led to the current crisis. It directly led to the environment in which an $8 trillion housing bubble could grow. If an audit of the Fed by the Government Accountability Office (the main provision of the Fed Transparency bill) is all that is needed to correct the trade imbalance, then this is a very strong argument for the bill.

Remarkably, the Post apparently still has not noticed the $8 trillion housing bubble and the current recession. If it had, it would realize that this is one of the main motivations for the bill. The Fed was unbelievably irresponsible/incompetent in allowing the growth of such a dangerous bubble.

The country now has almost 25 million people who are unemployed or underemployed as a result of the Fed's disastrous policies. Millions of people are losing their homes and tens of millions are losing their life savings. The country is likely to lose more than $6 trillion in output ($20,000 per person) due to the Fed's inept job performance. In this context, warning the public of dire consequences from passing this bill is more than a little silly.

--Dean Baker

In its top of hour news segment today, Morning Edition joined the media chorus telling us that the minimum wage hike could increase unemployment and prolong the recession. (Here's USA Today's entry.)

There is no doubt that employers of low-wage earners are unhappy about paying higher wages, just as they are unhappy about the rise of health insurance premiums every year. (For employers who provide coverage, the latter will be a much greater expense.) However, there is little reason to believe that it will result in substantial job loss.

The impact of a rise in the minimum wage on employment is one of the most heavily researched topics in economics. Virtually all of this research shows that it will have little or no impact on employment. It would have been useful if the news reports had mentioned this research instead of treating this topic as a he said/she said, implying that those who claim that it will lead to large rises in unemployment are on an equal footing with those who emphasize the benefits to low wage earners. Reporters should have the time and expertise to find the evidence on this issue, readers do not.

--Dean Baker

Way back on Monday, NYT columnist David Brooks was complaining that the tax surcharge on the wealthy proposed in the House health care bill would raise the marginal tax rates for high-end families above 50 percent in states with high income taxes. He warned that wealthy families in California and New York would be paying a higher marginal tax rate than in France.

Well, today he seems to be suggesting the same sorts of high tax rates, except for much more middle income people. Brooks proposes phasing out Medicare benefits based on income, in other words imposing a tax in the form of benefit reduction as people's income rises.

There can be various schedules for such phase outs, but given the value of the benefit and the desire to get some actual money, you would almost certainly need a phase out rate in the area of 10 cents in reduced benefits for every dollar of additional income.

The problem is that we already have a benefit phase out along these lines for Social Security. As a result, senior couples with an income of $60,000 (Brooks' definition of "rich") already face a marginal effective federal tax rate of 35 percent (25 percent marginal tax rate, plus 10 percent Social Security benefit loss rate). Add in 5 percent for state income taxes and we're up to a 40 percent tax rate. If we then throw in Mr. Brooks phase out of Medicare benefits and we're hitting 50 percent.

Higher income people would be looking at effective marginal tax rates under the Brooks proposal of close to 60 percent even with the top Bush marginal tax rates. If we let the Bush rates expire, so that the wealthy are paying a 39.6 percent marginal federal rate, then Brooks wants them to pay close to a 70 percent marginal tax rate. Now that's a high tax rate.

--Dean Baker

Apparently word has not gotten out to the WSJ. An article discussing job loss and the prospect of a jobless recovery never noted the issue.

In fact, those of us with access to the secret data compiled by the Bureau of Labor Statistics (i.e. Internet users), know that average weekly hours have fallen by 2.4 percent since the beginning of the downturn. This is the equivalent of another 3.3 million jobs lost. This decline has been especially pronounced in manufacturing where hours worked have declined by an average of 4.1 percent.

This decline is important, because when employers first start to see additional demand in an upturn, they will more likely increase the hours worked by the existing workforce than add new workers. This is another reason why we may expect to see the economy grow for quite a while before it adds a significant number of jobs.

--Dean Baker

The NYT told readers that PhRMA, the pharmaceutical industry's trade group, had built: "a compelling public policy argument on behalf of prescription drugs: they account for only 10 percent of the nation’s health care spending. They help people avoid hospitalization and other more costly medical treatments and their profits pay for research and innovation that result in newer, better drugs."

Hmmm, how did they determine the case was "compelling." One study touted by PhRMA that purported to show the great health and economic benefits from prescription drugs also showed that there is no link between education and productivity and that life expectancy falls as income grows. (An update of the study finds no link between smoking and life expectancy.) These absurd results are obviously the result of garbage regressions that were designed to show positive effects for new drugs.

Such shoddy research would usually be laughed away by serious researchers, by PhRMA was able to use its money to get this study taken seriously by Congress and even got an oped based on this research printed in the Washington Post.

In fact, PhRMA has not made a compelling case, it has just used its money and power to buy legitimacy among key arbiters of public opinion.

Btw, it is probably worth noting that the "only" 10 percent of the nation's health care spending touted by the NYT is projected to come to approximately $3.5 trillion over the next decade or more than $10,000 for every person in the country. The NYT usually does not use the adjective "only" in describing such sums.

--Dean Baker

The NYT discussed the debate over providing extensive periods of data exclusivity to biotech drugs in order to prevent generic competition. As the article notes, prescriptions of biotech often sell for tens of thousands of dollars per year.

While the article discusses the debate over the best length for periods of exclusivity, it does not ever discuss alternatives to patent financing for pharmaceutical research. As the price of drugs diverge further from their marginal cost of production, the inefficiency of the patent system gets much larger. (The inefficiency increases in proportion to the square of the gap between the patent protected price of the drug and the free market price.) Therefore it would be reasonable to discuss alternatives, such as direct public funding or the prize system advocated by Nobel Laurette Joe Stiglitz, in the context of very expensive drugs.

--Dean Baker

This minor point might have been worth noting in a piece discussing the Fed's efforts to prevent more congressional oversight. The Fed's decision to let the housing bubble grow unchecked was the cause of the current economic disaster, leading to a cumulative loss in output that is likely to exceed $5 trillion ($17,000 per person).

Most people would get immediately fired from their jobs if they made a mistake that was remotely near this serious. It would be difficult to imagine how the Fed could have done worse at its job, yet because of the almost complete lack of accountability, no one there has lost their job or even missed a promotion because of its failure. Good reporting would point this out.

--Dean Baker

That is presumably the implication of his complaint that the Democrats paid for the stimulus package "with borrowed money."

This is not the only peculiar item in his column. He also claims that only 11 percent of the stimulus will be spent in the first seven months of the program. CBO puts the figure at 20 percent, which doesn't seem bad for a program that is just getting started and should be spent out over time in any case.

Then, in full Republican talking point mode, Brooks tells us:

"The House [health care] bill adds $239 billion to the federal deficit during the first 10 years, according to the Congressional Budget Office. It would pummel small businesses with an 8 percent payroll penalty. It would jack America’s top tax rate above those in Italy and France. Top earners in New York and California would be giving more than 55 percent of earnings to one government entity or another."

Let's see if we can rewrite this slightly:

The House bill adds an amount equivalent to 10 percent of the spending on the Iraq and Afghan wars to the federal deficit during the first 10 years, according to the Congressional Budget Office. Some small businesses will end up converting as much as 8 percent of their wage bill into health care insurance for their workers. The richest 1 percent will see an increase in their marginal tax rate, but it will still be lower than in most European countries. And the effective marginal tax rate for the wealthy will still be far lower than the marginal tax rate and reduction in benefits that most moderate income families face.

Are you scared?

--Dean Baker

Robert Samuelson told readers that: "the CBO estimated that nearly 30 percent of the economic effects would occur after 2010." Actually, this refers to fiscal year 2010, which ends on September 30, 2010. If we assume that spending in the fourth quarter of 2010 continues at the same rate as during the fiscal year, then only about 15 percent of the impact of the stimulus would be felt after 2010.

--Dean Baker

Suppose we decided that we wanted to discourage the consumption of alcohol so that we taxed all alcohol products manufactured in the United States. Then, realizing that people will simply switch to buying untaxed alcohol produced overseas, we start taxing alcohol that is imported from countries that don't put their own tax on the manufacture of alcohol products. Are we putting sanctions on countries that don't tax their own production of alcohol?

According to the NYT we are. The NYT told readers that a House bill to restrict greenhouse gas emissions "would impose sanctions on countries that did not accept binding emissions cuts." That is a very peculiar way to describe the nature of the carbon import taxes in this bill.

--Dean Baker

Truly incredible story. This is what newspapers are supposed to do.

--Dean Baker

No doubt many of you have been concerned about Goldman Sachs getting a bad rap. People have been getting down on them just because they made $3.4 billion in profits last quarter, betting with the taxpayers' money, and that they intend to hand out this bounty in bonuses to their executives. Fortunately, the Washington Post is there to come to Goldman's aid with a column by Mark Gimien telling us not to punish success.

Gimien's basic line is that we should be glad that Goldman made lots of money; would we rather be bailing them out? Here he has a point. After all, Goldman had borrowed $10 billion from Treasury through TARP (recently repaid), $28 billion in FDIC insured bonds, and untold billions from the Fed's special lending facilities. If its bets had not paid off, then the taxpayers would potentially be out some really big bucks.

Of course Goldmans' profits do come from somewhere. Insofar as they come from trading, Goldman's gains will largely still come from the rest of us, albeit through a a different pocket than their subsidized loans. There is nothing inherently pernicious about this behavior -- it's just like gambling in Los Vegas. We don't bad gambling, we just tax it.

Of course speculation can occasionally serve a productive purpose. Informed speculators share their knowledge with the markets and society. If we had more informed speculators 4-5 years ago, they could have bet against the stock and bonds of Citigroup, Fannie, Freddie and the rest. Perhaps by driving the price of these stocks down enough it might have called attention to the housing bubble. But, those trading on real information will be able to cover the cost of a modest transactions tax. We need not worry if some of those trading on gossip and hunches get driven away by higher transactions costs.

Let's take the case of oil. Suppose that Goldman was smart enough or lucky enough to catch oil on the way up. This means that Goldman bought oil at a lower price and sold it to an end user (or another speculator) at a higher price. Due to Goldman's good fortune, an oil producer received less money than otherwise would have been the case or a consumer ended up paying more. In the former case, the oil industry will have less money to invest in new production. (Okay, no one really believes that.) In the latter case, consumers will end up paying higher prices than they might have otherwise.

In other words, Goldman's profits were in part the higher prices we paid at the pump. Note that this story assumes no manipulation, just good wholesome speculation.

Suppose that the speculation was driven by irrational exuberance about oil prices that Goldman rose up and then jumped ship. In that case, we got hosed, as perhaps did a few speculators who got left holding the bag when oil prices turned. (Think back to last summer when speculators bought oil at $150 a barrel.)

In these stories, Goldman did nothing wrong -- they just bet with our money and won. Their gain helped to raise our gas prices. There is nothing illegal in this picture, it is just a simple story of rent-seeking where Goldman won.

--Dean Baker

In an article about strange happenings in Alaska, the NYT notes the sharp fluctuations in oil prices over the last year, after telling readers: "for years, the price of oil has been relatively stable." That sure has not been the case in the lower 48. Oil prices fell to under $15 a barrel back in 1998. They then hovered in the low-mid twenties range at the start of the decade before nearly doubling to more than $40 a barrel following the Iraq War. Prices then continued to rise to $70 a barrel by 2007 before going into the stratosphere in 2008, when they crashed along with the economy. If there is any stability in this picture, it is hard to find.

--Dean Baker

Readers might be asking that question when the NYT told them that CBO's analysis implied that the House's health care bill would raise the deficit by that amount. It is equal to about 0.13 percent of projected GDP over this period.

By comparison, the Iraq War at its peak cost more than 1.0 percent of GDP. Put in per capita terms, it is a bit less than $80 a year. This would have been useful context for this article.

--Dean Baker

No, I am not kidding. The Washington Post (Fox on 15th Street) applauded the big profits at Goldman, which will mean bonuses in the tens of millions of dollars for top performers. Goldman is able to make these payouts because it won with the bets that it made with taxpayers' money. We all know what would have happened if Goldman lost on these bets.
(If you answered something like bankruptcy and unemployed managers, you obviously know nothing about modern economics.)

--Dean Baker

Okay, this is some self-promotion, but it is also about pushing a serious plan to help millions of people that are losing their home due to foreclosure. Rather than having expensive and complicated mortgage modifications, Congress could just temporarily change the law on foreclosure so that homeowners will have the option to remain in their home as renters paying the market rent. This would both provide security of tenure for homeowners -- they could stay in their home if they wanted -- and it would also provide a powerful incentive for lenders to modify mortgages, since foreclosure would be a much less attractive option.

The Post reports on the discussion of this proposal at a Senate hearing. It notes that not many homeowners took advantage of the offer by Freddie Mac to stay in homes as renters following foreclosure. It is important to point out that Freddie Mac only offered the option to remain as renters on month to month leases. This provided no security to former homeowners. The right to rent proposal would guarantee the right to remain as a tenant for a substantial period of time (e.g. 5-10 years). This is likely to be considerably more valuable to former homeowners.

--Dean Baker

Doug Elmendorf, the head of the Congressional Budget Office, told the Senate Budget Committee yesterday that nothing in its proposed health care bill will substantially reduce the rate of growth of health care growth. This assessment is clearly not helpful to the Obama administration's efforts to get a bill through Congress, but how bad is it?

Well, the Post told readers that it was "devastating." This characterization appeared in the first sentence of a front page news story, not in a column or editorial.

It is worth noting that the Congressional Budget Office's assessments have often proven to be highly inaccurate. It completely failed to anticipate the collapse of the housing bubble and the resulting economic crisis. Back in 2001, their budget projections over-estimated capital gains revenue for the next decade by $450 billion because they assumed the stock bubble would persist indefinitely.

More recently, CBO hugely over-projected the number of homeowners who would take advantage of the Hope for Homeowners mortgage modification program passed by Congress last summer. CBO projected that 400,000 homeowners would take advantage of the program through 2011. As of April of this year, there had been less than 1,000 applications and just 51 closings.

--Dean Baker

Yes, Fox on 15th Street strikes again. The Washington Post reported on a letter signed by more than 250 economists that warned against efforts to make the Fed more accountable to Congress. Remarkably, it has never seen fit to note the main item that would lead to more accountability: a bill sponsored by representatives Ron Paul and Alan Grayson, which would require the Government Accountability Office to audit the Fed. This measure, which is supported by both the most progressive and most conservative members of the House, has the support of more than 250 members of the House.

--Dean Baker

The Fed reported its new economic forecasts along with the minutes of its June meetings yesterday. What is striking is how far off its earlier forecasts have proved to be. The bottom end of the central range for its unemployment forecasts is above the top end of this range for the forecasts made just two months earlier. That range in turn was completely outside the central range from the January forecasts.

The economy is obviously sinking much more rapidly than the Fed had anticipated. It would be worth calling attention to this fact. Clearly the Fed does not have a clear grasp of the nature of this downturn. This deserves attention from the media, especially in the context of the Fed's efforts to resist greater accountability to Congress.

The Post did a service by including a chart showing the large gap between the earlier and more recent projections. This gap warranted some discussion in the article.

--Dean Baker

In its top of the hour news segment on Morning Edition NPR reported on the House health care bill, which would raise taxes on people who earn more than $250,000 a year. It then told listeners that President Obama had promised not to do this.

That is not true. President Obama's pledge was to not raise taxes on people earning less than $250,000 a year.

--Dean Baker

USA Today headlined a piece on new numbers on manufacturing: "reports on factory sector suggest economy is improving." Since the Fed had just reported that manufacturing output had fallen another 0.6 percent in June, the basis for the good news touted in the headline was not obvious.

It turns out that the New York Fed's Empire State General Business Conditions Survey rose to minus 0.55 in July from minus 9.41 in June. Of course a reading of minus 0.55 is better than a reading of minus 9.41, but this reading is still negative. The index reports the number of businesses who say that conditions are improving minus the number who say that conditions are deteriorating.

The negative reading for July means that more businesses still see the economy as getting worse than see it as getting better, even if they see it as deteriorating at a slower rate. That's a step in the right direction, but things are still heading down.

--Dean Baker

USA Today gives readers the tragic story of Robert Westover, a homeowner who is desperately hoping to be able to sell his ocean view vacation home for a profit of just $265,000 (approximately $175,000 after adjusting for inflation). This intended profit is equal to more than five times the median worker's annual pay and more than 30 times the average annual TANF payment to a family.

Fortunately, there is hope for people like Mr. Westover. The National Association of Realtors is pushing to have the government provide subsidies for purchasing such high end homes by guaranteeing even very large mortgage loans. (The current limit is between $417,000 and $730,000, depending on the area.) If the guarantee lowers the interest burden by 1.5 percentage point, then the government would effectively be handing $15,000 a year to someone who takes out a $1 million mortgage.

--Dean Baker

The $3.44 billion in profits that Goldman Sachs reported for the 2nd quarter indicates that their bets with taxpayer dollars paid off. In addition to the $10 billion that Goldman borrowed through the TARP, it also borrowed $28 billion that was guaranteed by the FDIC. In addition, it likely borrowed substantial amounts of taxpayer dollars from the Fed's special lending facilities, although the Fed will not disclose how much Goldman borrowed. And, Goldman was given more than 12 billion taxpayer dollars through AIG.

Apparently, Goldman used its borrowed money to take risky bets. It seems that the bets paid off well. If they hadn't, then taxpayers could have lost a large amount of money.

--Dean Baker

USA Today listed several items that gave readers a basis for assessing the size of the $1 trillion health care bill being debated in the House. It would have been useful to compare the cost to projected GDP over the decade.

GDP is projected to be approximately $190 trillion over the next decade. This means that the cost will be approximately 0.5 percent of projected GDP. By contrast, the combined cost of the Iraq and Afghan wars have been close to 1.0 percent of GDP. This means that the health care bill will cost approximately half as much as the Iraq War.

--Dean Baker

The Washington Post is very unhappy with Japan's government, which it complains (in a "news" story) "has all but ignored an impending demographic calamity." The calamity is a rising ratio of retirees to working age people.

The "calamity" in this story should be an intense labor shortage. That is not consistent with the relatively high (for Japan) unemployment rate that the country has experienced in recent years. Furthermore, it is not clear that a labor shortage is a "calamity" for the bulk of the country. Typically, a labor shortage would lead to a bidding up of wages. The least productive jobs, for example, the late shifts in convenience stores or parking valets, would go unfilled.

The Post however assures us that Japan faces a calamity because of "a growing clamor from business groups that predict ruinous decline because of a lack of workers. " Post reporters have apparently not be told about corporate lobbyists who sometimes exaggerate to advance their employers' interests.

--Dean Baker

Doesn't the NYT have copyeditors anymore? Why are they referring to the WTO as a "free trade" group in an article on China's efforts to promote its domestic green power industry.

It can accurately be referred to as a "trade group" or more accurately as a "commerce group," but no agency that actively promotes the protection of copyrights and patents can accurately be described as a "free trade" group.

So, why doesn't the NYT save a word and increase the accuracy of its reporting?

--Dean Baker

In the top of hour news segment on Morning Edition, NPR told its listeners that Goldman Sachs has repaid the taxpayer money it received. This is important because it is about to report that it earned approximately $1.8 billion in the 2nd quarter. It will also be giving large bonuses to its executives.

While Goldman did repay the money it received under the TARP, it did not repay the $13 billion (approximately equal to 3 million annual family TANF payments) that it received from the government through AIG. Nor has it repaid the $28 billion in government subsidized loans that it obtained by borrowing with an FDIC guarantee. In addition, it may still be using the Fed's special lending facilities to borrow money short-term at below market rates. (The Fed doesn't reveal who borrows its taxpayer dollars.)

The difference between the TARP money that Goldman did repay and the other funds, which it did not, is that the government imposed conditions on the TARP, such as restrictions on executive compensation. The other aid comes without conditions.

--Dean Baker

The WSJ tells readers that: "Some lawmakers fear mandated clearing and higher capital charges could hurt small businesses that won't be able to afford customized hedging anymore."

Yeah, right. This is what the politicians say. The secret that the WSJ apparently has not learned is that some (yeah, right, "some") politicians are not always truthful. They sometimes make arguments that do not reflect their real motives.

For example, if they want to protect the big profit margins that Goldman Sachs, Morgan Stanley and the rest enjoy on customized derivatives, they might say that restrictions on these derivatives will raise the price so much that Joe's Diner will no longer be able to use them to hedge the price of hamburger meat.

Even though they could not care less about Joe's Diner hedging the price of hamburger meat, it makes a much better story line that saying: "I'm worried that the loss of the customized derivative market will hurt the profits of Goldman Sachs and Morgan Stanley, who happen to be big contributors to my campaign." And hey, if you can get the WSJ to buy it, why not tell them about the risks to Joe's Diner?

--Dean Baker

The Washington Post had a front page article pushing some vague and unspecified plan by the Obama administration to aid small businesses by using TARP money to guarantee loans. The article implies that economists debate the amount of employment by small businesses:

"Some economists estimate that small businesses, defined as firms with fewer than 500 workers, employ most of the country's workforce."

Actually, economists don't speculate much on this topic, since there is very good data on employment by firm size available from the Bureau of Labor Statistics.

There had been some debate in the 90s about whether small businesses were responsible for a disproportionate share of job creation. While this is true, small businesses are also responsible for a disproportionate share of job loss. Most small businesses only survive a few years. As a result, small businesses on net, create new jobs at roughly the same rate as larger businesses.

It is worth noting that there are already many substantial subsidies available to small businesses. For example, the Small Business Administration has a variety of programs that allow small businesses to get loans at below market rates. These subsidies can be very large relative to other government benefits.

For example, if a small business owner gets a $500,000 loan at an interest rate that is 2 percentage points below the market rate, this is an effective subsidy of $10,000 a year. That is close to twice the average TANF grant that a mother with two children would receive.

--Dean Baker

This is really great. There is an ongoing issue about whether global warming deniers should be treated seriously by the media given, that they have about as much scientific support for their position as the flat earth crew. However, the NYT goes them one better in finding a global warming ignorer.

Apparently, Ben Stein has never heard about global warming. How else can someone interpret this paragraph:

"I don’t believe we need to do something radical about energy, but even assuming that we do, why do it right now? Do we need to take one of the few sectors that is working like clockwork through the recession — oil refining — and wring its neck by making it pay for pollution “cap and trade” credits? Why attack a healthy industry when so many other sectors are ill? What is all of this anger at Big Oil, which has not done anything blameworthy, all about? Why endlessly beat up the companies that keep the country going?"

He then goes on to complain about the Obama administration's efforts to change the laws on foreclosures. This would be a good idea, except the Obama administration is not working to change the laws on foreclosure.

Stein is opposed to this plan because he is worried that it will further discourage mortgage lending. The problem with that part of Stein's story is that there is no problem of mortgage lending at present. Mortgage rates are near historic lows and the Mortgage Bankers Association applications index indicates that few people are having trouble getting mortgages.

So, once again, Ben Stein distinguishes himself by how many things he can get really seriously wrong in a relatively short column.

--Dean Baker

A well-off young doctor will have to wait another year to buy a home -- did you ever hear anything so tragic? The NYT ran a misleading piece on the mortgage market, wrongly extrapolating from the experience of a relatively well-off young doctor.

According to the NYT, the doctor makes a six-figure salary, but because she just started earning an income of this level, banks won't issue a mortgage. They want to see two years of tax returns.

The NYT then tells readers that this doctor's experience are: "but far from unique, brokers and agents say." Actually, they are not far from unique. The number of people who just started earning six figure salaries, who previously earned little, is trivial.

Furthermore, we have a very good measure of the extent to which potential homebuyers are having trouble getting mortgages. Every week, the Mortgage Bankers Association puts out an applications index. It has been at very low levels all year. If creditworthy people were having trouble getting mortgages, then this index would be very high, since applicants might have to put in two or three applications for every one that is approved.

In short, this article's assertion that there is a tight mortgage market has no foundation in reality. We have very good data indicating that the vast majority of mortgage applicants face no serious problems getting loans.

--Dean Baker

That wouldn't be a problem except that they feel so much need to expound on it. Today, they tell readers that: "those calling for an additional stimulus package must explain why this is not enough."

Wow, haven't they heard? I guess it's hard to get news in the middle of Washington.

Anyhow, it works like this. (Warning, this part uses arithmetic.) The collapse of the housing bubble led to a reduction in annual rates of construction of about $450 billion. The bubble in the non-residential sector is also in the process of collapsing, cutting annual demand by approximately $200 billion. The loss of $8 trillion in housing bubble wealth, coupled with a loss of roughly the same amount of stock wealth, is leading to a reduction in annual consumption of approximately $700 billion.

The total loss in demand is around $1,350 billion. The annual stimulus in the bill approved in February was around $300 billion. $300 billion in stimulus is not nearly enough to fill a $1,350 billion shortfall in demand.

We'll see if the Post editorial writers can follow that one.

There is one other issue that they get painfully wrong in this piece. The Post warns us that we could be borrowing too much because: "there is only so much capital to go around." Actually, this is not true right now. When you have a severe world-wide downturn, as we do now, there is no shortage of capital. If the Fed, or anyone else, just prints up tons and tons of money, it will simply generate demand for labor and resources that would otherwise be idle.

At some future point when the economy is closer to its capacity, there may be issues of capital shortages, but there is none today. It is tragic that tens of millions of people around the world are sitting unemployed because of such poor thinking by those in positions of responsibility. It's too bad they can't change places.

--Dean Baker

David Brooks uses his column today to complain that Congress is not prepared to impose the cost control measures that will be needed to make health care in the United States affordable. He is right to raise the issue, but he does not present the options accurately.

The basic story of the U.S. health care system is that prices are inflated by enormous rents everywhere. Our doctors get paid twice as much as doctors in Canada, Germany, and elsewhere. (I know, they will all work as shoe salespeople and custodians, if we cut their pay.) We pay twice as much for prescription drugs as everyone else. And we throw 15 percent of our health care expenditures in the garbage, paying insurance companies to deny people care.

There are two ways to contain costs. The most obvious is to cut the rents. Use international competition to bring doctors' salaries down to earth. Get rid of government patent monopolies and develop a more efficient mechanism to finance the development of prescription drugs and medical equipment. And, allow people to buy into an efficient public Medicare-type insurance plan.

But, Brooks backs down from such substantive changes. These reforms would hurt powerful interest groups. Instead, he wants to see Congress cut costs through the alternative route of giving people less health care.

Brooks is disappointed with Congress. Readers should be disappointed with Brooks.

--Dean Baker

That's what the NYT says about a bill to require the Government Accountability Office to audit the Federal Reserve Board. Of course, since the Republicans are the minority party in the House, they don't have 250 members.

This mistake is important, because the bill is not just supported by people who view an increase in the Fed's powers: "as an expansion of big government by unelected officials." In fact, the bill is backed by many progressive Democrats who view the Fed as being too close to Wall Street financial interests.

--Dean Baker

That could have been the headline of the USA Today article on the start of Treasury Department's Public Private Investment Plan to buy up bad assets from banks. Under the plan, the government will take most of the downside risk if the investment goes bad, with private investors getting half the profit if the investment turns out well. This arrangement would be expected to raise the price of assets above the market price.

The article wrongly asserts that: "The government hopes that the public-private partnership funds can establish a price for the securities, sparking sales." The price generated from sales in which the government provides a subsidy would not be a market price. The Treasury presumably knows this. It will be a subsidized price. Presumably it is the Treasury's intention to subsidize the banks by purchasing their bad assets at an inflated price.

It is also important to note that only investment firms based in the U.S. are allowed to take part in this program. While the media usually get hysterical over any hint of protectionism when it involves manufacturing workers, they have opted to almost completely ignore this blatant protectionism for the financial sector. While it is probably true that our financial industry is less able to compete internationally than our manufacturing workers, that is not an excuse for ignoring the protectionism benefiting this sector.

--Dean Baker

There is considerable confusion over what impact we should expect from the stimulus and when. Much has been made of the fact that only a relatively small portion of the stimulus (@15 percent) has yet gone out the door. This is not a bad record in terms of spendout, but it also should not be excuse for waiting.

In terms of spendout, it takes time to spend money even for the most shovel ready projects. If we are repairing a bridge, even if everything moves quickly, the project itself might take several years. The government will not make the full payment for repairs in the first month.

On the tax side, the government has put in place a schedule of lower tax rates so that we are all paying lower tax rates. That will continue through 2010. So, we have already had 3 months of lower tax rates, with 18 more yet to come, that's about 15 percent of the total period. So, we've done reasonably well in getting the money out the door.

But, we should already be seeing most of the impact that we will see. The logic is simple. The tax cut put another $45 in our paychecks in April, in May, and in June. We will continue to see this extra $45 a month for the next year and a half, but that will not be a further boost. In other words, insofar as we will spend more each month because of this extra $45, we presumably are already seeing this effect. There will be no further uptick in consumption based on this money.

So, we have probably already experienced most of the boost that we will get from the stimulus. The economy would have been in worse shape without it. Consumption is higher than it would have otherwise been and state and local governments have been able to keep many programs funded that otherwise would have been cut. People have jobs (most obviously in state and local governments) who would have been unemployed in the absence of the stimulus.

However, the stimulus clearly was inadequate to get the economy back towards full employment. With the unemployment rate almost certain to cross 10 percent this summer, it should be clear that we badly need more stimulus.

--Dean Baker

The Washington Post ran a sob story for banks, noting how they are losing money on the commercial real estate loans they issued in the last few years. It is sad, but bankers are supposed to have a clue about their business.

There was enormous overbuilding in almost every category of commercial real estate including retail, office space, and hotels. Banks would be right to refuse new loans in these areas even if they were flush with money. It would have been useful if the Post had included the views of someone familiar with the commercial real estate market.

--Dean Baker

For some reason, the media seem to think that any statement to advance the current trade agenda is justified, no matter how utterly absurd it might be. How else to explain the fact that trade representative Ron Kirk is not being laughed out of office after saying: "we now have a visible manifestation of what happens when the world stops trading. It's not a pretty picture."

Yes, the current picture is not pretty. The economy is in its worst downturn in 70 years because the promoters of the current trade agenda have mismanaged the economy for the last two decades. One result of the downturn is that world trade has plummeted. That one should be pretty evident even to a supporter of this trade agenda. In other words, the causation went from economic collapse to reduced trade, not the other way around.

Where's the ridicule?

--Dean Baker

I suppose I should expect to get trashed in the WAPO after calling them Fox on 15th all the time. Still, economist Mark Zandi's comment that: "the economy has been measurably worse than anyone expected," should not go unchallenged. It may have been worse than he expected, or the economists with whom he talked regularly expected, but some of us (including Nobelists Paul Krugman and Joe Stiglitz) were not at all surprised by the severity of the downturn.

The problem is not that economists are always surprised by the economy. The problem is that the media tend to rely almost exclusively on those who are.

--Dean Baker

David Leonhardt rightly complains that President Obama's health care plan does nothing to change the incentives for doctors to prescribe expensive forms of care, even when there is no evidence that this care will lead to better outcomes. However, Leonhardt fails to take the extra step and ask why this care is expensive.

In most cases, the care is more expensive because it involves expensive medical equipment and drugs, with a healthy dash of high doctors' fees as well. The reason that medical equipment and drugs are expensive is that they have government granted patent monopolies. In the absence of such monopolies medical equipment and drugs would be cheap in nearly all cases. The huge patent rents that these monopolies allow medical supply companies and drug companies to earn also give them incentive to mislead doctors and the public about the benefits of their products.

The patent monopolies are justified as being necessary to support the development of new equipment and drugs, however there are more efficient alternatives. However, that would require bigger thinking than NYT columnists are yet prepared to undertake.

[The WAPO has the same problem.

--Dean Baker

It is painful to read news article that relies on economists who could not see an $8 trillion housing bubble telling us how awful it will be if we don't get our deficit down. They don't have a coherent story, which reporters should be pointing out.

This NYT article includes statements from economists who missed the $8 trillion bubble warning us of dire consequences if China and India get concerned about our deficits and stop buying U.S. bonds.

Okay, let's try some arithmetic and basic economics. Suppose China and India stop buying dollar denominated assets (bonds and short-term money deposits) altogether. Then the dollar falls against their currencies and interest rates rise. Since both the Bush and Obama administrations have been pushing for China to raise the value of its currency against the dollar, why would we suddenly be upset if they finally do exactly what we have been asking?

The other part of the story is that because they stop buying U.S. government bonds, long-term interest rates would rise. This is not good, but the Fed could offset the increase by buying long-term bonds itself. Will that lead to inflation? We should hope so. Modest inflation (3-4 percent a year) would be an extremely effective way to reduce the indebtedness of households. The economists who missed the $8 trillion housing bubble certainly have no better suggestions for boosting the economy. Of course the fall in the dollar would also boost exports, which could provide a substantial lift to the economy.

So, what exactly are we supposed to be worried about in this story? We have lots of economists who missed the biggest threat to the world economy in 70 years telling us that if we don't listen to their whining all hell break loose. This would be funny if people didn't take it seriously.

--Dean Baker

In the middle of an article discussing how quickly France is spending out its stimulus money, the NYT tells readers that: "indeed, without major changes in government policies, France faces costs that will probably be crippling in the long run."

It is not clear that any country can ever go decades without major changes in government policy. Accordng to most official projections, it is certainly true that if the United States does not use government policy to reform its health care system it will face costs that will be crippling in the long run.

--Dean Baker

USA Today had a piece discussing lower rates of minority enrollment in 401(k) plans. It also notes that minorities are also less likely to put their money in stock and instead prefer safe bond and money market funds. The article suggests giving them more financial education.

In fact, the financial educators were utterly clueless over the last decade. They were too uneducated to recognize the stock bubble or the housing bubble. Their advice to hold most of a portfolio in stock would have led to large losses for minorities compared with their strategy of holding relatively safe assets.

Unless the financial educators are smarter in the future than they were in the past, it is not clear that we should want them to talk to minority investors or anyone else.

--Dean Baker

The economists who missed the housing bubble seem to be having a hard time understanding the timing of the stimulus. While the vast majority of the money has not yet been spent, the economy has already felt the bulk of its impact.

The reason is simply, more than 60 percent of the stimulus takes the form of lower tax rates and higher benefit levels for programs like unemployment insurance. The lower tax rates and higher benefit levels already went effect at the start of the spring. This means that people already have higher take-home pay or government benefit checks. The stimulus will not increase further in future months, which means that there is no reason to expect spending to increase further.

More than a quarter of the remaining stimulus is devoted to state and local government stabilization funds. This spending will limit the cutbacks at the state and local level, but will not lead to additional growth. The remaining funds are projected to be spent out at an $80 billion annual rate over the course of 2010.

Even if we assume that we are starting from zero spending at the moment, this is boost of just over 0.5 percent of GDP. By contrast, the collapse of housing construction trimmed $450 billion or 3.0 percentage points of GDP from annual demand. The decline in consumption due to the loss of bubble wealth is in the range of $600 billion to $800 billion a year.

In other words, the remaining stimulus is an order of magnitude too small to give much of a boost to the economy. Economists who know arithmetic would be aware of this fact.

--Dean Baker

Yeah, what else is new. If the United States is the victim of a nuclear attack, it will have a very bad deficit problem and a big program like Social Security will be an especially large burden. That is the nature of Fred Hiatt's deficit whining in the Washington Post today.

Actually, Hiatt isn't even clear on what he is talking about, telling readers that: "it is Obama's long-term budget that would more than double the projected deficit over the next 10 years, to $9 trillion." Yes, he meant "debt," not "deficit," but hey, you get the point.

As everyone should know by now, if we fix our health care system, then we will have no serious deficit problem. In fact, if the Washington Post and other elite types were not such protectionists, we would take advantage of the more efficient health care systems in other countries to radically reduce our costs to international levels. But, the Post's editors have friends and relatives who are doctors and insurance company executives, which is not the case with auto workers, whose wages they are anxious to drive down through trade.

--Dean Baker

Robert Samuelson asks a reasonable question in his column today: "what do economists do for a living?" More specifically, how did almost all economists fail to see the coming of the worst downturn since the Great Depression?

However, Samuelson reaches the wrong conclusion in saying that the slump originated in finance. The highlights and headlines, like the collapse of Bear Stearns, Lehman, AIG, Fannie and Freddie are certainly in finance. These events get the most attention and headlines, kind of like the explosions from bombs or artillery in war. But, the cause of the war was not the bombs and artillery.

The story in this picture was an $8 trillion housing bubble. This hugely distorted the real economy by causing housing construction to expand as a share of GDP by 50 percent above its normal level. The bubble wealth also generated an enormous wave of consumption that pushed the saving rate into negative territory. It was inevitable that this story would end badly, because there is no easy way to replace the loss of $450 billion in annual demand generated from construction and $600-$800 billion of housing bubble wealth driven consumption.

It is far too generous to economists to imply that they had to know the details of finance, a specialized area within the profession, to understand the bubble. A knowledge of the basics of intro econ would have been sufficient.

--Dean Baker

The Washington Post told readers that: "other Democrats worry about the unintended consequences of requiring employers to offer health coverage, such as an inclination to hire fewer low-income workers." It seems unlikely that these critics of health care reform actually have this concern, since large scale layoffs due to a mandate is implausible.

The cost of health care comes out wages. While it may take a period of time, employers will adjust wages downward (most likely by raising them in step with inflation) to offset the cost of a health care mandate. It is also would have been worth noting that the mandate will almost certainly not apply to firms that employ fewer than 25 workers.

--Dean Baker

Interest rates on U.S. Treasury bonds are among the most widely circulated pieces of information in the world, running alongside information on the current time. However, AP's reporters apparently do not have access to this information.

How else can someone explain the assertion in an AP article that: "the Treasury is finding it harder to find new lenders"? The interest rate is the direct measure of the ease with which the Treasury can find new lenders. With interest rates on 10-year Treasury bonds well under 4.0 percent, the Treasury is obviously finding it very easy to get new lenders. By contrast, the interest rate on 10-year bonds was typically in the 6.0 percent range when the budget was balanced at the start of the decade, suggesting that the Treasury was having much difficulty finding new lenders back then.

Part of the problem may stem from the fact that the reporter writing the piece was apparently staggered by the numbers involved, having described the country's $11.4 trillion nation debt as "staggering." It would probably be better if AP assigned reporters who could more easily deal with large numbers and write them in ways that put them in context for readers.

Such a reporter would not have written that: "Over the past several decades, it [the debt] has climbed sharply — except for a respite from 1998 to 2000, when there were annual budget surpluses, reflecting in large part what turned out to be an overheated economy."

In fact, the ratio of debt to GDP -- the only measure that serious people would ever look at -- fell through most of the 90s. Even though the country ran deficits in most years, GDP grew more rapidly. In fact, the debt to GDP ratio fell sharply from 120 percent at the end of World War II to less than 30 percent in 1980, even though the government ran deficits in nearly every year. The reason was that the economy grew far more rapidly than the debt.

It is also not at all clear how the reporter determined that the economy was overheated in 1998 to 2000. It had healthy growth, but no inflation or other evidence of being overheated.

It is also worth noting that extraordinary debt to GDP ratio after World War II did not lead to an "economic crisis," as warned by the headline of the article. This high debt to GDP ratio was followed by the three most prosperous decades in the country's history. The article does not explain why it believes the lower debt to GDP ratios we presently face will produce a crisis.

Finally, the article refers to the $56 trillion debt figure highlighted by the Peter G. Peterson Foundation, an institute financed by a billionaire investment banker. Most of this projected debt assumes that U.S. health care costs continue to explode and that the country maintains protectionist policies that prevent its citizens from benefiting from lower cost health care in other countries.

The assumed level of health care costs in this scenario will wreck the economy even if the government had no debt. In other words, this is like saying that if the U.S. is the victim of nuclear attack that it will have a very serious budget problem. That may be true, but serious people would focus on preventing the nuclear attack. In this case, that means fixing the broken health care system.

Peter Peterson has consistently used the projections of exploding health care costs to advance his agenda of cutting Social Security and Medicare.

--Dean Baker

It is worse than you thought.

--Dean Baker

The pricing of oil in dollars creates an incredible amount of confusion among people who should know better. For example, USA Today tells us that: "how long the weak dollar can support energy prices, if demand is still weak, remains to be seen."

This one deserves a big "huh?" If the dollar falls in value against other currencies, then other things equal, oil should rise in price measured in dollars. That would be necessary to keep it from falling in price measured in euros, yen, and everything else. If the dollar is falling in value against other currencies, then the dollar price of oil must rise just to keep it constant measured against other currencies. So even with some weakening of demand for oil, we should expect the dollar price to rise, if the dollar continues to fall.

It is also worth noting that oil is not necessarily sold for dollars. If the Saudi government signs a contract to sell oil to a European, Japanese, or Brazilian firm, it can agree to accept any currency it chooses. Generally this trade is done in dollars, but there is no rule that requires the trade take place in dollars and often it does not.

--Dean Baker

The argument that China is worried that it will lose money on its dollar holding because of a fall in the value of the dollar implies that the Chinese are morons. There can be no doubt that the dollar will fall and that the Chinese will lose money on their dollar holdings. The only thing that keeps the dollar from falling now is the decision by the Chinese government to buys hundreds of billions of dollars a year. Of course China can keep the dollar from ever falling as long as it is prepared to buy ever more dollars, just as it could have kept shares of Pets.com at $100 if it continually bought more shares. (By the way, the dollar will fall because of our trade deficit, not the budget deficit. If we had the same trade deficit and the budget was in surplus by $1 trillion a year, the dollar would still fall.)

The only plausible story for China's buying of vast amounts of dollars is to support its export market to the United States. It could do much better investing its surplus in euros, yen, or almost any other currency in the world or just about any commodity. China knows it will take a bath, arguing otherwise is saying that the Chinese leadership is stupid. That view may be taken seriously by David Brooks, but it need not trouble serious people.

--Dean Baker

There were few people in the media still trying to spin the "green shoots of recovery" story following the release of the June employment report yesterday, but most news reports managed to overlook one of the most important items in the data.

The downturn has led employees to cut back both jobs and reduce hours for those who still have jobs. In June the economy reportedly lost 467,000 jobs in June. This number was considered a surprising jump from the 322,000 rate of job loss in May (it should not have been a surprise, given that weekly unemployment insurance filings averaged well over 600,000). Nonetheless, the June pace of job loss was still well below the 670,000 per month average from October to April.

However, the Labor Department's index of hours worked fell by 0.8 in June, the same as the average for the October to April period. While hours are poorly measured, and this drop could be partially reversed in future months, the June data implied that employers are still cutting back work hours at the same pace as they did in the period of the economy's sharpest decline.

It is important to follow trends in both hours and employment. Obviously workers would rather see their hours cut than lose their jobs, but if workers are getting paid for fewer hours each week, then they will be seeing smaller paychecks, and therefore cutting back their consumption.

The recent data may indicate that the economy is not declining at the same rate as it did at the start of the year, but there can be little doubt that it is still heading downward at a pace that at other times would be quite scary.

--Dean Baker

Latvia was one of the great bubble countries of the world, until last year, borrowing vast sums (denominated in euros) from west European banks. The country is now seeing its economy contract at close to a 20 percent annual rate. The European Union is offering to help (how else can those loans to the banks be repaid?), but is demanding that Latvia move quickly to reduce its deficit.

The NYT reported that the EU relaxed the conditions on its loans, allowing Latvia to reach a deficit target of 3.0 percent of GDP in 2012 rather than 2011. The NYT notes a controversy over whether this pace of deficit reduction is still too fast. It would have been helpful to point out that Latvia's debt to GDP ratio was just 17 percent at the end of 2008. This would suggest that it could easily support considerably higher debt levels.

Given that Latvia's economy is likely to still be far from full employment in 2012, and that it can anticipate relatively rapid growth over the longer-term as it catches up to west European living standards, the 3.0 percent deficit target for 2012 could still be overly restrictive.

--Dean Baker

The NYT noted that one factor depressing Morgan Stanley's profit last quarter was its improved credit standing, which increased the market value of its debt. The NYT implied that this was a peculiar accounting rule.

The rule may be peculiar, but it goes both wars. In prior quarters, Morgan Stanley increased its profits (or lowered its losses) by writing down the market vale of its debt as its credit quality deteriorated.

--Dean Baker

I just wanted to see if my computer could type those words. His assessment of the Waxman-Markey bill looks right on the money to me. It's worth reading.

--Dean Baker