Those of you who remember Paul Krugman's often harsh criticisms of Obama during the election campaign might be surprised to read Howard Kurtz's media column which puts him first among the disappointed former Obama cheerleaders. Krugman has certainly been critical of Obama's performance in office, but this is only news for Kurtz, not people familiar with Krugman's writings.

--Dean Baker

Somehow, this line passed without ridicule at the WSJ. Maybe Mr. Bernanke missed it, but his independent Fed gave us the largest financial and economic crisis since the Great Depression. Does anyone really think that things would have been worse if the Fed had been more accountable?

Last fall, Mr. Bernanke told Congress that the Fed's policies had led to a situation in which the economy would completely collapse if it did not immediately approve $700 billion in loans for the banks. It is hard to imagine greater instability than what the Fed brought about with its current level of independence from Congress.

--Dean Baker

In his column today, Robert Samuelson held out the hope that the prospect of large deficits might: "trigger a flight away from the dollar on stock, bond and foreign exchange markets." Of course a lower dollar is the only plausible mechanism for bringing the trade deficit down to a manageable level.

In fact, the large trade deficit requires the sort of economic imbalances that the country has experienced over the last decade. As an accounting identity, a large trade deficit implies low national saving. This means that either we must have very low private savings or very large negative public savings (i.e. budget deficits) or both low private savings and large budget deficits.

--Dean Baker

This is very fashionable to say in all the news coverage on Japan (a "worrying rise of the world's oldest population,"according to the Post), but it's not clear what it means. The concern is that Japan will not have a large enough workforce to support its dependent elderly population. There is no evidence of that problem at present, when the unemployment is a historically high (for Japan) unemployment rate of 5.7 percent.

As a more general issue, a relative decline in the size of the labor force would simply mean that the least productive jobs go unfilled. This could mean, for example, that jobs held by the pushers who shove people into Tokyo's overcrowded subways may go unfilled. There may be fewer people working as parking lot attendants, custodians in office buildings and convenience store clerks. As an offset, this densely populated country, with very high land prices, will become less densely populated and have lower land prices. It will also be much easier for Japan to reduce its greenhouse gas emissions and other pollutants. It is difficult to see where the crisis lies.

Of course one reason that Japan has such an old population is that its life expectancy is so long. At 82.1 years its life expectancy at birth is four years longer than that of the United States. It is also worth noting that, dispute a debt to GDP ratio of more than 180 percent, its annual interest burden is less than that of the United States.

--Dean Baker

The NYT had a front page piece telling readers that the government is profiting on last fall's bailout of the banks. The tally to date presented in this article is a bit misleading. The banks that borrowed money were in very different conditions. Some were hopelessly insolvent, while other were fundamentally sound. The ones that have repaid their loans and provided profits on warrants were in the former category. The NYT is tallying up the profits on these loans.

The government has not yet recorded any losses from the zombies, most notably Citigroup and Bank of America. It is important to note that in the case of these two banks, the government has kept them afloat, after issuing its initial loans through the TARP program, by guaranteeing hundreds of billions of dollars of bad assets. If these banks end up using a substantial portion of these guarantees, then the government will end up a big loser, if they and all other banks repay their TARP loans.

It is also worth noting the origins of bank profits in the current economic environment. The Fed has pressed the short-term interest rate to near zero. This allows banks to borrow directly from the government at a almost no cost and then make loans, including to the government, at interest rates of 3.5 percent (10-year Treasury bonds) and higher.

If we create a situation in which banks can borrow money from the government at a low rate and lend back to the government at a considerably higher rate, then we can be sure that banks will have the money needed to repay their loans. However, this is a dubious way to make profits on investments.

--Dean Baker

One often repeated comment in the health care debate is that doctors/hospitals can't get by on Medicare's compensation rates. They argue, as reported in the Post today, that if a large public plan offered Medicare-type reimbursement rates, they would be forced to just abandon public sector programs and work for rich people.

That should be a serious concern in the health care debate, if there were a lot of rich people who do not currently enjoy access to medical care. However, that does not seem likely. All the rich people I know are able to get all the health care they want.

What this means is that if doctors in large numbers were to abandon their current hospitals to serve the rich, most would find themselves unemployed. The rich are already being served. While some doctors may have the connections or skills to find employment providing boutique treatment to the rich, for the most part they would be displacing doctors who already serve the rich. These displaced doctors would then have no choice but to work for inadequate pay in hospitals serving the public health care plans.

(There is also the threat that doctors will leave medicine altogether for another profession, But since physicians are already the top paid profession, they can only go down from there. It is unlikely that many doctors want to become shoe salespeople.)

In short, the scare story pushed by the hospitals and doctors might be useful to advance their ends (high public compensation for their services) but they have no basis in reality. Responsible reporting should point this fact out to readers.

--Dean Baker

The Washington Post Outlook section had an interview with David Walker. It introduces the piece by telling readers: "This time last year, David Walker -- who quit his job as U.S. comptroller in March 2008 to sound the alarm about rising national debt -- was being called 'Chicken Little.' Now, not so much."

I would start typing "wrong, wrong, wrong," but my computer does not have enough "wrong"s. The explosion of the deficit in the last year did not come from the sources of which David Walker had warned. It came from the collapse of an $8 trillion housing bubble, which David Walker (and the Washington Post) almost completely ignored. The collapse of the bubble threw the economy into the worst downturn since the depression. It also forced the government to spend hundreds of billions of dollars bailing out failed financial institutions. Walker never talked about this threat in his anti-deficit tirades.

A nuclear war also would lead to enormous deficit problems. It would hugely increase medical care costs and destroy much of the country's productive capacity. By the Post's logic, if a country used nuclear weapons on the United States and thereby created an enormous deficit problem (in addition to killing millions of people), Walker's deficit warnings would have been vindicated.

In fact, Walker's deficit warnings would have been a distraction from the real problem; the risk that a country was about to use nuclear weapons on the United States. As it was, Walker's deficit warnings distracted the public (and certainly the media) from the real danger to the economy, an enormous housing bubble that was about to collapse.

--Dean Baker

One of the main causes of the severe downturn is the plunge in consumption that has resulted from the loss of more than $6 trillion in housing wealth. The NYT has a front page piece on this topic today.

It's worth noting that the rise in the saving rate is probably even larger than the official measure. Saving is measured as a residual -- disposable income, minus consumption. However, it is likely that the measure of disposable income was inflated by capital gains showing up as income in the peak bubble years of 2005 and 2006. This lead to a large negative statistical discrepancy in the national income and product accounts, with the income side measure of GDP being $253.4 billion larger than the output measure at its peak in the second quarter of 2006.

With the plunge in stock and housing prices, the relationship has reversed to the more normal situation with the output side measure being larger than the income side measure. The gap in this direction was $224.8 billion in the most recent quarter.

If we assume (as most economists do) that the output side measure is the more accurate measure of GDP, then the saving rate in 2006 would have been close to -2.0 percent of disposable income whereas it would now be close to 7.0 percent of disposable income.

--Dean Baker

The United States pays more than twice as much per person for health care as other wealthy countries, with no obvious benefits in terms of outcome. President Obama has proposed a series of reforms, including more emphasis on prevention, in order to bring our costs more in line with the rest of the world.

While this might seem a plausible route to those of us here on planet earth, the Washington Post tells us "no way." In a front page article it asserts that: "effective health reforms would take decades to produce savings." Hmm, if health care costs in the U.S. grow on their projected path, then we will be spending 3-4 times as much per person as people in other wealthy countries. The Post tells us that there is nothing we can do about that. It's great to have a newspaper that is so knowledgeable about the future.

It's not quite as knowledgeable about the past. It told readers that Obama may break "his no-tax vow, the same political transgression that cost Democrats control of Congress under former president Bill Clinton." Actually, President Clinton did not make a no-tax vow. He said that he would raise taxes on the wealthy, and he did.

It is also worth noting that all the budget experts interviewed in this piece (along with the Post itself) contributed to the creation of the country's debt problem, but refusing to note the enormous growth of the housing bubble. They dismissed efforts to call public attention to the bubble. The main reason for the explosion of the deficit is the slump created by the collapse of the bubble and the payment required to bail out bankrupt financial institutions. It is ironic that the Post would rely exclusively on experts whose analytic failings contributed hugely to the deficit problem about which they are complaining.

--Dean Baker

Reuters has a nice piece pointing out that Kenneth Feinberg, President Obama's pick to monitor compensation at bailed our firms, is himsefl no stranger to multimillion dollar paychecks.

--Dean Baker

David Cho has a generally good front page article in the Post today on the increased concentration in the banking industry as a result of the crisis. It would have benefited from some voices who are critical of the Obama administration's plans for regulating "too big to fail" institutions.

As the article correctly explains, too big too fail banks get subsidized by the government, since lenders know that their loans are effectively insured by the government. This allows these banks to borrow at a lower cost, giving them an enormous advantage over their competitors. The article quotes Treasury secretary Timothy Geithner's explanation of the Obama administration's plans to offset this advantage with increased capital requirements.

It is questionable whether these restrictions will be efficient. The most obvious test of the effectiveness of such restrictions would be if banks voluntarily break up to avoid them. In principle, the restrictions should be sufficiently onerous that they would eliminate any benefit from a bank achieving "too big to fail" status. Therefore, at least some banks in this category should find it beneficial to break up into smaller banks to avoid the restrictions. If the Obama administrations proposals are put in place, we will have the opportunity to see if the restrictions pass this test.

--Dean Baker

That's the clear implication of his column on Obama's health care plan. He concludes by referring to other countries that have universal health care coverage: "they got hooked [on universal health care]; now they ration. So will we. "

Of course, in no cases are people prevented from buying health care with their own money. What Mr. Krauthammer means by "rationing" is that there are some medical procedures that will not be covered by the government's health care plan. In other words, the government doesn't pay for them. By this standard, the government is rationing Mercedes and any other item that people have to pay for with their own money.

This is not the usual definition of "rationing," but this is the Washington Post.

--Dean Baker

The NYT had a peculiar article today presenting some of the people who work in the insurance industry to its readers. As the article indicates, they don't seem like evil people, just normal workers trying to support themselves and their families.

It is not clear why anyone would have expected the workers who fill the industry's offices to be evil people. The argument made against the industry is that the structure of the industry causes it to profit by preventing people from getting coverage and that it adds an unnecessary layer of administration to the health care industry.

The first point is straightforward. Payments for health care come dollar for dollar out of the industry's profit. If an insurance company can avoid paying for its customers' care, then it increases its profits.

The industry is arguably unnecessary since it is not directly involved in providing care. Medicare pays the checks for care at far lower administrative cost than the private insurance industry.

Neither of these facts makes the individuals who work in the insurance industry evil people, just as oil and coal workers do not become evil people because burning fossil fuels cause global warming. Nor is a government employee an evil person because they may work in a pointless bureaucracy.

It is not clear why anyone would have thought that the individual workers in the insurance industry were evil, but if anyone did, the NYT did a valuable service by correcting this impression.

--Dean Baker

The NYT article on weekly unemployment insurance (UI) claims carried the surprising headline: "first-time U.S. jobless claims fall again." The reason the headline is surprising is that claims rose the prior week, from 561,000 to 576,000, a number that was revised up to 580,000 in the new report. So, claims did not fall again.

This article makes the point that new UI claims, which have averaged 566,000 over the last four weeks, are down sharply from the peaks hit in April. However, it is worth noting that these are still extraordinarily high levels of claims. In a healthy economy, we should expect to see weekly claims in the low 300s. Also, the current rate of claims can be consistent with a very rapid pace of job loss.

In November of 2008, when the economy lost 597,000 jobs, weekly UI claims averaged 520,000. In December, when the economy lost 681,000 jobs, UI claims averaged just over 550,000. It is obviously better to see UI claims averaging 566,000 than the 650,000 weekly average that we saw earlier this year, but in other times, weekly claims at this level would be really really bad news.

--Dean Baker

USA Today had a nice piece this morning reviewing an interesting habit of investment management firms, of contributing large amounts of money to elected state officials who have control over the investment of pension fund money. For those trivia fans out there, yes, well-known billionaire and Social Security foe Peter Peterson is on the list of big givers.

--Dean baker

The NYT had an article talking about the round of option adjustable rate mortgages (option ARMs) that will be resetting over the next few years. The headline of the article is: "adjustable mortgages loom as threat to housing recovery." This is not supported by the evidence presented in the article.

The article cites estimates produced by FirstAmerican Core Logic, that 600,000 option ARMs will reset over the next four years. This is a rate of 150,000 a year. Even if all these mortgages defaulted and went into foreclosure, it would increase the rate of foreclosures by about 6 percent. Realistically, it is unlikely that more than half of these mortgages will end up in foreclosure. While this is not trivial, it is not large enough to qualitatively change outcomes in the housing market.

--Dean Baker

Departing from normal journalistic practices, the Washington Post devoted its lead article to an editorial criticizing the Obama administration's budget policies. The headline of the piece, ostensibly an article on new projections from the Congressional Budget Office, is "Deficit Projected to Soar With New Programs."

In fact, the main cause of the increase in the deficit in the latest projections is not "new programs," the main cause of the increase is worse than expected unemployment and growth numbers. A more neutral account of the projections would have highlighted the fact that the Congressional Budget Office now expects the unemployment rate to average 10.2 percent in 2010. It previously had projected that unemployment would average just 9.0 percent, even without the benefit of a stimulus package. The article does not discuss this sharp deterioration in economic projections until deep into the jump page.

The article also wrongly includes the assertion that: "deficits of that magnitude [the projected deficits for the end of the projection period] would require dramatically more government borrowing from China and other creditors,..." It is the trade deficit that requires borrowing from China (more precisely, lending from China causes the trade deficit by raising the value of the dollar), not the budget deficit. The Post should stop making such xenophobic assertions.

The Post also notes that China has expressed concern that it may lose money on its dollar investments. Presumably it knows that it in fact will lose money on its dollar investments. The dollar is virtually certain to fall in the years ahead since is trade deficit is unsustainable. This means that the Chinese will be paid back in dollars that are worth considerably less than the dollars they lent. China may be willing to accept this loss to sustain their export market in the United States. The public expressions of "concern" are most likely for public relations purposes. (Governments don't generally express their real concerns in public forums.)

--Dean Baker

In an article on the new economic and budget projections released yesterday, the WSJ warned that China and other international investors "are growing bolder about questioning whether they will keep buying U.S. government debt at today's voracious levels." The Chinese government keeps down the value of its currency against the dollar (an action often described as "manipulation" by politicians and in news stories) by buying U.S. government debt. If it stopped buying U.S. debt, then its currency would rise against the dollar, reducing the U.S. trade deficit with China. This is exactly what both the Bush and Obama administration publicly claim to support, so it is difficult to understand why the public should be worried about getting what we claim to want.

The article also confuses the trade deficit and the budget deficit. Foreign capital is needed to finance the trade deficit. In the absence of an inflow of foreign capital, the dollar would fall, as noted above. This would make imports more expensive (just as a tariff would), and make our exports cheaper to foreigners. As a result, the trade deficit would fall.

Foreign capital is not needed to finance the budget deficit. In a context where the economy is below full employment, as is projected to be the case for the next five years, the Federal Reserve Board can finance the budget deficit by directly buying debt, as it has been doing. It would have been helpful if the article pointed out this fact, since there have been huge efforts by Obama administration critics to spread misinformation on this topic.

--Dean Baker

The consumer confidence index rose by a larger than expected 6.7 percentage points in August. This increase was hyped in an NYT article because of the importance of consumption in the economy.

It is worth noting that most of the rise in the index was attributable to a 10.1 percentage point increase in the expectations index. This index is much more volatile than the current conditions index and has little relationship to spending. Therefore it provides little information about the direction of consumption spending.

--Dean Baker

That could have been the headline of an article on the new economic and budget projections. After all, the article included a quote from John Boehner, the leader of of the House Republicans: “the Democrats’ out-of-control spending binge is burying our children and grandchildren under a mountain of unsustainable debt.”

If we look at the latest projections from the Congressional Budget Office (CBO), they show that the interest burden of the debt in 2019, the last year for their projections, will be $722 billion. That comes to 3.4 percent of projected GDP.

If our children will be buried under this burden, then their parents must have been comparable strangled by the debt burden created in the Reagan-Bush presidencies. The interest burden from the debt run up in these years peaked at 3.3 percent of GDP in 1991.

It would be helpful for readers to put these budget and deficit projections into some context. Unlike reporters, most readers do have other jobs. Therefore they may not have the time to look up the data that shows Mr. Boehner's complaint is just empty rhetoric.

--Dean Baker

Give the Washington Post credit, in its article on Ben Bernanke's reappointment as Fed chair, it did point out that Mr. Bernanke bears considerably blame for getting us into this economic crisis in the first place. While all the other reporting emphasized his efforts to prevent a financial collapse over the last year, only the Post noted that Bernanke consistently ignored the risks building up as a result of the growth of the housing bubble.

While Bernanke bears less responsibility than Greenspan, he was a Fed governor from 2002 to 2006, and then head of President Bush' Council of Economic Advisors, until he took over as Fed chairman in January of 2006. There were few people better positioned than Bernanke to head off the growth of the housing bubble.

None of the reporting mentioned the secrecy surrounding the Fed's lending policies. Bernanke has refused to make any information public about who has received loans under the various spending lending facilities created by the Fed over the last two years, or under what terms. This is the topic of a lawsuit by Bloomberg, which the Fed lost yesterday in district court. This secrecy has also been a big factor motivating most members of the House to sponsor a bill calling for a GAO audit of the Fed.

It would have been appropriate to mention this issue in a discussion of the case for Bernanke's reappointment.

--Dean Baker

That seems the unifying theme from his column today, since his arguments against high speed rail do not make a lot of sense. Samuelson tries to tell us that trains might be useful in Japan and Europe, but they won't work in the United States.

He tells readers that:

"Densities are much higher, and high densities favor rail with direct connections between heavily populated city centers and business districts. In Japan, density is 880 people per square mile; it's 653 in Britain, 611 in Germany and 259 in France. By contrast, plentiful land in the United States has led to suburbanized homes, offices and factories. Density is 86 people per square mile."

The density for the United States as a whole would be relevant if the plans were to build a train network going from Florida to Alaska, but that is not what is on the agenda. Instead, the issue is about deepening and improving the network in relatively densely populated parts of the country, like Ohio (277 people per square mile), New York (402), and New Jersey (1134). The population densities of much of the United States are very comparable to the regions in Europe through which high speed rails travel.

The distances for many trips is also comparable. The distance from Midwest cities to East Coast cities will typically be around 500-700 miles. Trips of this distance can be managed in 4 hours or less using technology that is 40 years old. Traveling downtown to downtown in this time is very competitive with air travel from suburban airports.

Samuelson also bizarrely compares long-distance train with the 140 million daily trips to work each day. He then compares President Obama's goal of replacing 1 million cars by train travel with the 240 million on the road. Of course most people do not travel between cities every day, so it's not clear what the point of the comparison is. And, most of the 240 million registered cars in the country are not driven to work every day.

Robert Samuelson doesn't like trains. He told us that this morning in his column. He didn't tell us anything else.

--Dean Baker

The NYT had a bizarre piece in which it reported on the FBI's arrest of a former Goldman Sachs employee because he allegedly stole software from Goldman Sachs which the article says a federal prosecutor claims: "could be used to 'unfairly manipulate' stock prices."

The article is peculiar because it focuses on the intellectual property issues between Goldman and a former employee who had worked on developing the software. It almost completely ignores the more basic issue that the federal government effectively claims that Goldman Sachs has software that can be used to manipulate stock prices. If the software can be used for illegal purposes, why is it more serious that a relatively low level employee has access to it than Goldman Sachs' top executives?

--Dean Baker

The NYT attributed an inaccurate assertion to the Treasury that: "debt as a percentage of G.D.P. is rising and nearing a postwar high."

Even counting the debt held by trust funds, the debt to GDP ratio is only around 70 percent of GDP. It was near 120 percent of GDP ($18 trillion in the current economy) immediately after World War II.

--Dean Baker

The NYT ran a "he said, she said" article on health care today in which it repeated several blatantly untrue statements by opponents of health care reform, alongside statements by proponents.

The most obvious falsehood was a comment, attributed to Senator John McCain that: "the language in some bills would have created boards to decide what procedures would be allowed for the terminally sick and dying. ... 'Doesn’t that open the door to the possibility of rationing?' he asked."

There is absolutely no language in any bill that would "decide what procedures would be allowed for the terminally sick and dying." There certainly are measures that would continue the current practice of limiting what procedures the government would pay for. However, it makes no more sense to call this rationing than saying that the government rations housing because it does not pay for everyone's home.

Senator McCain has been in Congress for more than three decades. Presumably he knows both the Medicare does not pay for every conceivable form of health care at present. He presumably also knows that absolutely nothing in any version of health care reform currently being considered would prevent anyone from getting any care that they are prepared to pay for.

Instead of the simply reporting Senator McCain's comment alongside other comments, the NYT should have pointed out that he is almost certainly deliberately lying in order to increase opposition to the health care bill. NYT reporters have the time and expertise to recognize this fact. Many of its readers may be too busy.

--Dean Baker

A Reuters article on the new budget projections that will be issued by the Congressional Budget Office (CBO) on Tuesday told readers that: "new deficit projections pose risks to Obama's agenda." The article reports that the projections will likely show an increase in the projected 10-year deficit of $2 trillion (about 1 percent of projected GDP).

The article does not indicate the source of the upward revision, but it is almost certainly be due to lower projected growth and higher projected unemployment. A weaker economy leads to a higher deficit because the government will collect less in taxes and pay out more in unemployment benefits and other transfer payments.

The normal response to a weak economy is to push stimulus of various forms. If the economy is now projected to be weaker than had previously thought than this would be a compelling argument for more deficit spending, not less.
While there are limits to the amount of debt that the United States can accrue, there is no evidence that the United States is anywhere near these limits. Investors are willing to hold 10-year Treasury bonds at just a 3.7 percent interest rate. This is lower than 5-6 percent interest rate they demanded in the late 90s when the government had a surplus and the political elite was talking about paying off the national debt in a decade.

It is unusual for a news organization to editorialize so explicitly in a news article, but in this case, the content of the editorial is wrong from an economic perspective. Of course, if all news reporting on the deficit contains similar editorializing then Reuters may prove right from a political perspective.

--Dean Baker

Congress included an $8,000 first-time home buyers tax credit in the stimulus package. This credit expires at the end of November. The Post discussed the prospects of its being renewed.

While the Post included the realtors inflated claims about the economic benefits of the credit, it left out two important points. First, the vast majority of homes purchased with the credit would have been bought anyhow, they were just moved forward. In other words, people who may have bought homes in 2010 or 2011 have decided to purchase their home this year as a result of the credit. The cases in which people who would not have otherwise bought a home opt to do so because of the credit will be the exception. Therefore, for the most part, the economic benefits from the credit in 2009 are coming at the expense of economic activity in 2010 and 2011.

The other point is that the credit is a redistribution from taxpayers at large to first time homebuyers. The size of the tax credit is equal to almost two years of TANF payments to a typical family and could pay for approximately 2.5 kid years of health care under the State Children's Health Insurance Program. This is a questionable redistributive policy to homebuyers who have higher incomes on average than renters. (Full disclosure: I benefited from this tax credit -- thank you very much, suckers!)

--Dean Baker

The White House's 10-year economic projections show that the economy will be in considerably worse shape than the previous set. As a result, the cumulative deficit over this period will be $2 trillion larger. One might think that the prospect of millions more workers being unemployed would be news in the Washington Post. Nope, they just just talked about the budget deficit.

The article also related the budget deficit to U.S. indebtedness to China and other Asian countries. The level of U.S. indebtedness to other countries is determined by the trade deficit, not the budget deficit. The trade deficit is primarily the result of an over-valued dollar. Neither the trade deficit, nor the value of the dollar, was mentioned in the article.

-- Dean Baker

That would be the world's central bankers who are convened at their annual meeting in Jackson Hole, Wyoming. Four years ago this same group had a Greenspan retrospective in which they debated whether Alan Greenspan was the greatest central banker of all time. It might have been worth noting the track record of this group -- the people most responsible for the current economic crisis -- when the NYT gives us their assessment of the world economy.

It might also have been worth noting the greatest claim to fame of Frederick Mishkin, a former Fed governor cited in the article. Mr. Mishkin wrote an analysis of Iceland's economy in 2006 assuring the world that it was thriving.

--Dean Baker

The NYT gives the incorrect impression that Medicare's designated funds will be used to pay for President Obama's health care reform. An article discussing the attitude of the elderly toward reform reports:

"Knowing that Medicare itself faces a financial crisis, many older Americans object to Congress’s tapping the program to help pay for coverage of the uninsured. They say they do not believe that all the Medicare savings will come from eliminating waste and inefficiency, as Mr. Obama says.

'Medicare is nearly broke,' said James P. Ivey, 66, of Deer Park, Wis. Mr. Ivey predicted its financial problems would grow as the ratio of beneficiaries to workers increased in coming years."

While Medicare's trust fund is projected to go into a deficit by 2017, there is no proposal that would take money from this trust fund to pay for health care reform. President Obama does propose to reduce overall Medicare spending as a way to offset the cost of extending coverage, but this will in no way worsen the finances of Medicare's trust fund. In fact, by slowing the growth of Medicare expenditures, it should improve the finances of Medicare's trust fund.

--Dean Baker

NPR did a segment on realtors' complaints that a new law governing appraisals is preventing them from completing sales. According to the report, many realtors are complaining that the law, which prevents realtors from directly contracting appraisers, are leading to less experienced appraisers being hired.

This can create one real problem, delays in appraisals, which can slow or block sales. However, the piece also implies that the new system is leading to lower appraised prices and thereby preventing mortgages from being issued.

This second point does not make sense. Inexperienced appraisers may give less accurate appraisals, but there is no reason to believe that they would produce biased appraisals. If the realtors are unhappy about the appraised prices, then it is simply because they are unhappy that market prices have declined or they were used to getting inflated appraisals from corrupt appraisers.

--Dean Baker

Marketplace radio had a segment this morning in which former labor secretary Robert Reich discussed with the host Fed Chairman Ben Bernanke's prospects for reappointment. Remarkably, neither the host nor Mr. Reich said a word about Mr. Bernanke's responsibility for the worst economic downturn since the Great Depression. Before taking over as Fed chair in January of 2006, Bernanke had served as head of President Bush's Council of Economic Advisors and as a member of the Fed's Board of Governors.

After Alan Greenspan, there was probably no one better positioned to stem the growth of the housing bubble than Bernanke. Yet, he did nothing to combat the bubble, arguing that everything was just fine. This negligence was directly responsible for the crisis and the resulting downturn.

It is incredible that Bernanke's failure to combat the bubble does not even come up in discussions of his reappointment. This would be like a school bus driver coming up for a contract renewal with no one mentioning the fact that he had drunkenly taken his bus into oncoming traffic, killing all his passengers. Outside of the top echelons of power, workers are usually held more accountable for their job performance.

--Dean Baker

The Washington Post has long opposed allowing people to buy into a public insurance plan that would depress insurance industry profits. It has made this clear in both its editorial pages and its news coverage of the health care debate. Its alignment with the insurance industry on this issue -- in opposition to a proven method for reducing costs and lowering budget deficits -- has been widely known for some time.

Therefore it is amusing to see an editorial expressing surprise that President Obama's administration had not read its earlier editorials. The Post referred back to an article it published yesterday in which President Obama's advisers expressed surprise at the anger of progressives over plans to drop the public option. (The Post departed from normal journalistic standards in allowing Obama administration officials to attack political opponents under a veil of anonymity.) The editorial comments that the administration's surprise "seems hard to believe. We wrote back in April that the left's 'fixation on a public plan is bizarre and counterproductive.'"

When a newspaper becomes a reliable mouthpiece for special interests, it should not be surprising that its editorials are not closely monitored. It therefore would not be surprising if the White House staff had not carefully considered the Post's April warnings on a public plan.

--Dean Baker

The NYT reports that Fed Chairman Ben Bernanke seems to be cruising to reappointment in spite of having missed the largest financial bubble in the history of the world, giving us the worst downturn since the Great Depression. The article notes that there are also critics of the way that he has handled the bailout effort, but does not provide details.These details would be helpful to readers.

First, he misled Congress last fall to help gain quick approval of the TARP. He told Congress that the commercial paper market was shutting down, so that non-financial corporations could not raise the money needed to pay their bills and meet their payrolls. In fact, the Fed had the ability to prevent a shutdown of the commercial paper market by directly buying commercial paper. Bernanke announced plans to establish a special lending facility to buy commercial paper the weekend after Congress approved the TARP.

Bernanke has also chose to keep all of the Fed's lending secret. While anyone can go to the Treasury's website and find out which banks received money from the TARP and under what terms, Bernanke has refused to make information on Fed's lending available even to members of the relevant congressional oversight committees.

Finally, Bernanke has allowed the distinction between commercial and investment banking to be obliterated. After Goldman Sachs became a bank holding company, Bernanke has allowed it to continue to operate as an investment bank. This means that it has effectively gambled with the FDIC's insurance fund money. Even proponents of the repeal of Glass Steagall insisted that they would never allow this sort of mixture of government insured deposits and speculative investment banking.

For these reasons, even some people who don't think that Bernanke's responsibility for the greatest economic disaster in 70 years disqualifies him for reappointment do not want to see him get another term as Fed chair.

--Dean Baker

That would be the people who hate the idea that the government will use the power of the state to force people to buy insurance from Aetna, United Health, or some either company run by a golden diaper CEO. If there are mandates without a public option, then this is exactly what would happen. Many freedom loving people find this idea quite offensive which is one reason why many progressives feel strongly about the public option. Somehow the Post could not find anyone to represent this view.

On the other hand it did give an extraordinary amount of space to people in the Obama administration who wanted to trash their progressive critics while hiding under a shield of anonymity. That's very bad reporting.

A real newspaper would report this by saying that "several members of the Obama administration made harsh comments about progressive critics, but refused to go on record with their statements."

--Dean Baker

BTP always gives more leeway to columnists, after all, good newspapers will present strong opinions from a wide range of perspectives. But where the hell does Kathleen Parker get off telling readers in reference to President Obama's health care plan that Americans: "aren't quite ready to surrender self-determination?"

What self-determination will Americans lose with the health care plan? They will get an option to buy into a public health insurance plan. That is one more option. In other words, Americans will have their current level of self-determination in reference to health care, and will also have the option to buy into a public plan. That is more choice, not less.

Ms. Parker's comment is simply a non-sequitur; sort of like if someone wrote, they were opposed to ending the estate tax or extending the Bush tax cuts for the wealthy because Americans aren't quite ready to surrender self-determination. We haven't seen those lines in the Post yet for some reason.

It's also worth noting in the context of Ms. Parker's piece that the current health care system is very far from a free market system. We pay $250 billion a year for drugs that would sell in a free market for about $25 billion a year because the government gives drug companies patent monopolies. Patent monopolies are also the reason that expensive diagnostic tests are expensive.

In addition, our doctors get paid about twice as much as doctors in West Europe and Canada, even though most of the rest of us get paid less than our counterparts, because the United States has protectionist barriers that limit the number of qualified foreign doctors who can practice medicine in the United States.

In other words, Ms. Parker may have missed it, but the current health care system has about as much to do with a free market as the Soviet Union. Maybe the Post can find some better informed columnists before it folds.

--Dean Baker

Warren Buffet is a very shrew investor. His oped in the New York Times today warning of the evils of inflation was likely one of his best. Mr. Buffet tells readers that we must quickly get the budget deficit down or risk becoming a "banana-republic economy."

To help make his case on inflation, Buffet quotes Keynes, the great guru of all depression fighters everywhere: "governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens." The problem with this quote, as Keynes well-knew and often talked about, is that not all citizens stand to lose wealth from inflation.

Most citizens in fact stand to gain wealth from inflation. Most citizens are debtors, primarily as a result of a home mortgage, but also due to student loans or other forms of debt. These citizens will stand to gain from moderate rates of inflation. For example, if the inflation rate is 3 percent annually over the next five years, then someone who owns a $300k home can expect the price to rise by roughly 15 percent to $345k (this ignores compounding, which would make the increase somewhat higher). If the person has a mortgage of $270k, then their equity will have more than doubled from $30k to $75k, even before counting any payoff of principle.

By contrast, if the economy has zero inflation over the next five years, then this home will still be worth $300k in five years, giving this homeowner no additional equity. In fact, there is probably no better way to rebuild household wealth and restore balance to the economy than to sustain moderate rates of inflation (3%-4% annually), just as the country did through most of the post-World War II period of rapid growth. By rebuilding wealth, consumers would be able to consume more and businesses would be able to invest more.

It's fine that Mr. Buffet differs with this view, but it might have been worth noting that he is someone who does stand to lose "an important part" of his wealth through inflation. Mr. Buffet is heavily invested in the financial sector, owning large amounts of insurance companies and major banks, such as Goldman Sachs and Wells Fargo. The financial sector will be hurt by inflation because the mortgages and other loans that it has issued will be worth less money.

In other words, Mr. Buffet has a direct personal interest in preventing inflation, just as the CEO of a health insurance company has a direct personal interest in preventing a robust public insurance option. Most people would recognize the latter, unfortunately they may not recognize the former.

Remember, Warren Buffet is a very shrewd investor.

--Dean Baker

This one is outsourced to Tim Duy via Mark Thoma.

--Dean Baker

The Washington Post, which could not see an $8 trillion housing bubble, still can't understand the simple arithmetic. It had an article today on the impact that high unemployment is having on foreclosures and just mentions plunging prices in passing.

Yes, unemployment makes things work, but in normal time, a short spell of unemployment will not cause most people to lose their home. We can see this by a quick use of an obscure methodology known as "arithmetic." Let's say that someone bought a home four years ago for $300k and had a down payment of $30k or 10 percent. If we had a moderate 2.5 percent inflation rate, then this home would now be worth about $330k. With a 30-year fixed rate mortgage, this homeowner would have paid about $15k in principal over 4 years, which means that this homeowner would now have $75k in equity.

Suppose that this person loses their job. If the monthly mortgage and tax payment comes to around $2,400, then it would take a bit less than $30k to cover the house payments through a 12-month spell of unemployment. In ordinary times, there should be little problem borrowing $30k against the $75k in equity in the home. Therefore, there would be no reason for a person to be losing their home.

Maybe they should try teaching arithmetic at the Post. It would help its reporting immensely.

--Dean Baker

Nothing can escape the Post's team of super-sleuth investigative reporters. President Obama has been going around the country telling people that he wants to create a public health insurance plan that they will have the option to buy into. And then he tells them that if they like their current plan, they can keep it.

To most people, this statement presumably means that under President Obama's proposal, people will not be forced to buy into the public plan. Of course this statement is true. The plan as proposed by President Obama would not force anyone to buy into the public plan.

However, the Post's super-sleuth reporters took matters a step further. As it reports in a major page 2 article today, the President's plan can change the dynamics of the insurance market. Some employers who currently offer coverage may decide not to, if they know their workers have the option to buy into a public plan. Or, they could change the plan they have. In either case, it would mean that people would not have the option to stay with the plan they have today.

Of course, under the current system there is no guarantee that workers have the option to keep their current plan. Employers are dropping coverage all the time. Others switch plans; there is a whole industry of insurance brokers who support themselves by getting companies to switch plans. In addition, the insurers themselves can change their plans, so that good plans may become less attractive through time. In all of these cases, even under the current system people cannot be guaranteed the option to stay with their current plan.

In short, President Obama made an absolutely true and meaningful statement in claiming that people would be able to keep their current plan, if they like it. His proposal would not force them to buy the public plan. However, if anyone thought that President Obama was pledging to freeze time and ensure that their health care plan would always stay the same, then the Post has performed a valuable service in correcting this misleading impression.

--Dean Baker

Richard Thaler has a column in the NYT that may leave many readers scratching their heads. He argues that a public option is a good idea, as long as the reimbursement rates for providers are not set too low, because then it would drive out private competitors. This is a bit hard to understand.

Presumably, his concern is that if we just had a single government insurer that it would become bureaucratic and provide bad service. But no one in the Obama camp is talking about outlawing private insurance, so if we did have a huge government plan that became bureaucratic and inept, why wouldn't smart enterprising individuals set up private insurers to compete with it? If the system is bad, then wouldn't the free market allow for competitors to take away market share?

This is the standard argument that economists make all the time in the context of concentration in various sectors of the economy and there is certainly considerable truth to it. (Remember when GM had the dominant position in the U.S. auto industry?) It seems impossible to make any sense of the idea that we will see a government insurance plan dominate the market and that it will be bad. A public plan may come to dominate the market, but presumably this would mean that it is providing better service for the money than private competitors, actual or potential. Isn't that what free market types would believe?

--Dean Baker

No, I'm not talking about the people who show up at the townhalls yelling about "death panels." I'm talking about folks who are a step down on the evolutionary ladder the people who run the Washington Post.

They were out in full force today spreading misinformation in every direction. In both the lead editorial and a David Broder column we got stern lectures about how the government will soon have to get its fiscal house in order now that the worst of the recession is over.

Remarkably, neither piece mentioned the fact that nearly all economic forecasts project the unemployment rate to be near 10 percent through 2010 and to only fall back to normal levels in 2014. In other words, we are talking about more than 7 million people being needlessly unemployed next year, many of whom will have exhausted their benefits. There will be another 5-6 million people underemployed -- people who want full-time work, but can only get part-time employment. And both the Post's editors and David Broder think that the main goal of policy should be to reduce the budget deficit, an act that will lower demand in the economy, slow growth, and make the unemployment rate even higher.

The lack of concern for the unemployment of others is especially pernicious because the Post and other media outlets did so much to contribute to the disaster that got us here. It was easy for any competent economic analyst to recognize the housing bubble and its dangers as early as 2002. But the Post, like most of the media, almost completely ignored an unprecedented run-up in U.S. house prices. Instead, it just repeated the "everything is fine" line from Alan Greenspan and the rest of its clique of supposedly knowledgeable policymakers. Its main and often only source on the housing market prices was David Lereah, the chief economist with the National Association of Realtors and the author of the 2006 bestseller, Why the Real Estate Boom Will Not Bust and How You Can Profit From It.

To push their line, the Post and Broder use inventions that are almost as fantastic as Sarah Palin's "death panels." At one point, when David Broder referred to the stimulus spending he said that "all of it [is] borrowed from overseas creditors." The editorial warned us that foreigners might stop warned us that foreigners might stop wanting to hold dollars.

It's not clear what Broder thinks his source is. Our foreign borrowing in 2009 is not $1.8 trillion, much of lending did come from domestic sources, including the Fed. But the more fundamental point is that the key determinant of foreign borrowing is the trade deficit, not the budget deficit. Hence, we were borrowing an amount from foreigners that was close to 4.0 percent of GDP in 2000 ($600 billion in today's economy) when the government had a huge budget surplus. Anyone concerned about borrowing from foreigners should be talking about the trade deficit, not the budget deficit, which gets us back to the ominous warning from the editorial that: "it's alarmist to underestimate foreigners' willingness to keep holding dollars; it's foolish to count on it forever."

Okay, class what happens when China, Japan, and other foreign central banks stop buying U.S. dollars? That's right, those of you who have heard about supply and demand (advanced economic concepts) know that the dollar will fall in value. This is exactly what both the Bush and Obama administration supposedly want, at least in reference to China's currency. We have made official complaints that China has been "manipulating" its currency, which means raising the value of the dollar against its currency by buying up huge amounts of dollars. So, the Post is warning us that China may do exactly what we have been asking them to do, and stop buying up dollars and letting the dollar fall relative to the yuan.

This would have the effect of making Chinese and other country's imports more expensive for consumers in the United States. Therefore we would buy more domestically produced goods. There would be more jobs in U.S. manufacturing. The lower valued dollar would also make U.S. exports cheaper for people living in other countries. Therefore we would sell more exports. This would also increase the number of manufacturing jobs in the U.S..

Oh yes, there would be somewhat more inflation. We can get a rough estimate of the amount of additional inflation through applying another concept unknown at the Post: arithmetic. Imports account for about 16 percent of GDP. Suppose that the dollar falls by an average of 25 percent against the currencies of our trading partners. Presumably it will fall by much more against China's currency and considerably less against the euro and the currencies of some other major trading partners.

If the decline in currency values is translated one to one into higher prices (almost certainly a gross over-estimate of the impact), this would result in an increase in the inflation rate of 4.0 percentage points. If the decline in the dollar and rise in import prices took place over 3 years, then it would imply a boost to inflation of 1.3 percentage points a year. This is a serious impact but hardly unmanageable. More importantly, it is also unavoidable for precisely the reason mentioned in the Post's editorial: we cannot count on foreigners to buy up dollars forever.

In a policy move strongly endorsed by the Post's irresponsible and short-sighted editorial board, the Clinton administration actively promoted a high dollar. This led to the large and unsustainable trade deficit the country has experienced over the last decade. The only way to get the deficit down is to bring the dollar down. The high dollar was a policy that brought some short-term benefits in the form of cheap imports and lower inflation, but comes with an inevitable long-term price. Maybe one day the Post's editors will understand this fact.

--Dean Baker

Most news accounts that reported on the Fed's release of data on industrial production highlighted the overall increase of 0.5 percent. However, a big factor holding down the gain in July was a 2.4 percent reported decline in the output of utilities. Month to month changes in utility output are determined primarily by the weather, not the state of the economy. If we instead just focus on manufacturing, we see that there was a strong 1.0 percent gain in output in July.

That's the good news. The bad news is that almost the entire gain was attributable to a 20.1 percent rise in output in the auto sector. The increase in output excluding autos was just 0.1 percent. In other words, car production is being driven by increased sales associated with the cash for clunker program. Otherwise, manufacturing is still pretty much dead in the water.

--Dean Baker

USA Today tells us that the stock market dropped because investors are worried that consumers have bad attitudes and therefore will not sustain consumption. Consumers may have bad attitudes, but the real reason that they are not spending money is that same reason that homeless people don't spend money: they don't have it.

The collapse of the housing bubble has destroyed more than $6 trillion in housing wealth. The plunge in the stock market has eliminated another $6 trillion. The predicted result of the loss of this much wealth would be a fall in annual consumption of more than $500 billion a year (@3.5 percent of GDP).

In short, it would be very surprising if consumption had not fallen sharply. USA Today should find some economists who can explain this fact to readers so that investors can stop worrying and come to grips with reality.

--Dean Baker

Okay, that's more than a bit strong, but on the other hand, AP referred to Social Security as "a giant federal Ponzi scheme," so if we're going to do name-calling, Beat the Press is closer to mark here than AP.

It goes on to tell readers:

"That's pretty much the current system. Social Security takes contributions from today's workers and uses them to pay the old-age benefits that were promised to retirees. But there are serious concerns how long that can last."

"There are serious concerns"..... scary, ominous, concerns lurk.

Of course, once we get beyond science fiction and horror films, concerns don't lurk in the world, they reside in specific people. Names would be nice. There are people cited in the article, but none of them say anything implying that a largely pay as you go Social Security system could not continue indefinitely, because of course it can.

Social Security is absolutely not a Ponzi scheme as anyone who has ever looked at either the Trustees report, the Congressional Budget Office's (CBO) analysis, or taken third grade arithmetic knows. As this article notes, the Trustees project that the program will be fully funded through 2037 (the next 28 years) with no changes whatsoever. CBO projects that it will be fully funded through 2043 (the next 34 years) with no changes whatsoever.

The program is projected to face shortfalls after these dates, but it would still be able to pay the overwhelming majority of scheduled benefits even if no changes were ever made. (Just like a Ponzi scheme, right?) The reason that it can pay all benefits now and nearly all benefits forever, is that the tax rate is set at level that the taxes collected from current workers can support the benefits paid to current retirees. The problem in the longer-term is that we will be living longer in future decades, therefore the ratio of retirees to workers will rise, eventually pushing the program into deficit.

But, this is not exactly a horror story. As the country gets richer, it may decide to put a larger share of its wealth into supporting retirement. That is something that it has done repeatedly in the past (something that AP reporters who write on Social Security should know). It may also decide to raise the retirement age at some point, this is also something that has been done in the past.

Social Security has faced many shortfalls in prior decades because the rise in the ratio of retirees to workers is not new, it has been happening almost continuously since the program's inception (the baby boom cohort is a small blip, temporarily reducing the ratio during its peak working years). If our AP reporter had been around in 1965 he or she would have been writing much more alarming stories, since the situation for Social Security three decades into the future would have looked far worse then. If anyone had taken such fears seriously, we never would have created Medicare, Medicaid, or Head Start. As it was, we did create these programs and we also patched the holes in SS, so it is still doing just fine more than 40 years later.

This article also includes an inaccurate assertion by Brookings Economist Bill Gale, that "the world is sick of our debt." This can easily be shown to be false by looking at market interest rates. Investors are willing to hold 10-year Treasury bonds at a 3.75 percent interest rate. This is a far lower interest rate than they demanded at any point in the prior 50 years, except at the peak of the crisis last fall. If investors were actually sick of our debt, they would be demanding very high rates of interest to hold it.

--Dean Baker

The Post yet again complained that Social Security was one of the "primary drivers" of the country's financial problems, even as it included a graph in the very same article that showed otherwise. It also never mentioned the fact that the designated SS tax is projected by the Congressional Budget Office to leave the program fully funded until 2043.

It will be a great day when the Post starts restricting its editorial to its opinion pages.

--Dean Baker

The headline for a front page article reads: "False 'Death Panel' Rumor Has Some Familiar Roots." The article then goes on to explain first, why the death panel story is nonsense and then how a longstanding conservative network developed and promoted the "death panel" story.

This is how a real newspaper should treat this nonsense. The only news here is that ostensibly serious people are saying utter nonsense. Reporters should investigate why they are repeating blatantly untrue statements. It is not objective reporting to treat the "death panel" line as a serious pole in the health care debate. It isn't.

--Dean Baker

All the economists who I know have names. Apparently the NYT knows economists without names. How else can we explain a statement like:

"Germany, Europe’s largest economy, will still probably see its gross domestic product contract by about 6 percent for the full year, economists say."

or later in the same piece:

"Already, the euro area’s unemployment rate stands at 9.4 percent, its highest level in 10 years, and the anemic growth of the coming quarters will not be enough to arrest the slide. That, in turn, could drag down consumer confidence or even generate a political backlash in Europe, economists said."

The theme of the article is that Europe's economy will suffer much more than that of the U.S. in part because it has not been as aggressive in pushing stimulus. While this may be true, a big factor in Europe's slump has been a plunge in exports. With demand in the United States for cars and other manufactured goods picking up, Europe's economy will get a substantial boost from exports in the 3rd and 4th quarters of this year.

Some economists may view this boost as being sufficient to prevent a long and deep slump. For this reason, it would have been helpful to assign names to the economists who were being cited instead of implying that their views are universally held by economists.

--Dean Baker

In its lead front page article, the Washington Post described the protest outside the town hall meeting in New Hampshire where President Obama spoke yesterday: "people screamed into bullhorns to protest a bigger government role in health care." It continues: "a young girl held up a sign that said: 'Obama Lies, Grandma Dies.'"

Currently the vast majority of the elderly get their health care through Medicare, the government run program. If this protester was concerned that Obama's policies would cause her grandmother to die, then presumably she fears that President Obama would reduce the quality of care provided by Medicare and that some procedures that are currently covered by the program will not be covered under President Obama's plan. This means that she is protesting a smaller role for government in health care, not a bigger one as the Post asserted.

The Post badly misinformed its readers in this important article on the health care debate.

--Dean Baker

In general this is a good rule. The data are highly erratic and subject to very large revisions.

I once bet a friend that there was no statistically significant relationship between the final data and the numbers originally reported. He won, just barely, because we agreed to accept a 10 percent significance level. Of course, if we had the comprehensive GDP revisions available at the time time, I think that I would have won.

Anyhow, this NYT article is especially off base for presenting comments about the strong productivity performance reported for the second quarter. Productivity growth is especially erratic around downturns.

In the first quarter of 81 it grew at a 6.6 percent rate (just before the onset of the 1981 recession). In
the second quarter of 91, it grew at a 6.1 percent rate (just after the recession officially ended). In the second quarter of 01 productivity grew at a 7.4 percent rate and the 4th quarter at a 5.8 percent rate.

The reason the numbers are erratic is that the recorded rate of productivity growth has everything to do with the timing of layoffs. If businesses wait a quarter or two and keep workers on the payroll who aren't doing anything, then productivity looks bad over those quarters. When they do get laid off, productivity suddenly looks great.

The moral of this story is there is no longer term takeaway about yesterday's data on productivity growth.

--Dean Baker

Not according to the WSJ. It tells us that economists are near unanimous in thinking that Federal Reserve Board Chairman Ben Bernanke should be reappointed.

After telling us that the economists who it polled were nearly unanimous in believing that Bernanke should be reappointed as Fed chair, the article concludes:

"Though the economists were overwhelmingly supportive of Mr. Bernanke, they don't think his tenure was without mistakes. A slow initial response to the credit squeeze and the decision to let Lehman Brothers fail were cited as the biggest errors."

The article never once mentions Bernanke's error in allowing the housing bubble to grow to a size where its collapse would inevitably produce a disastrous downturn. Bernanke completely ignored the bubble first as a Fed governor from 2002 to 2005, then as head of President Bush's Council of Economic Advisors until he took over as Fed chair in January of 2006, and in his tenure as Fed chair until the collapse of the bubble brought on the downturn.

It would be difficult to imagine a more catastrophic mistake by an economic policymaker than missing such an enormous economic behavior. There are few people in any job who have ever committed such an enormous error. Yet, the WSJ never even mentions it. (Obviously another example of the soft bigotry of low expectations for economic policymakers.)

It would be interesting to see the results of a poll on Bernanke's reappointment of economists who did recognize the housing bubble and the danger it posed to the economy.

--Dean Baker

Suppose that the Washington Post thought that it would be a really good idea to open a new branch of the University of Illinois in the Chicago suburbs. Suppose that the state didn't go along. Would it be good reporting to have news article after news article that discussed the economic impact of this decision?

Given that the impact of this decision on the national economy is trivial, readers would probably be outraged if the Post used its limited news space for such a relatively unimportant issue. They should be similarly outraged that the Post has run yet another news story whining about the "Buy American" provisions in the stimulus package.

The theme of this story is that Canadian provincial and local governments are unhappy about the Buy American provisions -- just as the suburban Chicago governments would be unhappy about the decision not to build another branch of the University of Illinois. The Washington Post is really really good at ignoring unhappy governmental units in both the United States and Canada. It does it all the time.

However, these unhappy governments happen to agree with the Post editorial policy, which is to rigidly oppose any form of protectionism that might benefit ordinary workers, as opposed to professionals, drug companies, or the entertainment industry.

The simple reality is that the portion of the stimulus subject to the Buy American provisions was a drop in a much larger bucket. Because the stimulus has boosted the U.S. economy, leading it to buy more of everything, including more imports from Canada, the unhappy Canadian towns are almost certainly better off with a stimulus package with a Buy American provision, then they would be with no stimulus package. It seems unlikely that if the complaints of these Canadian governmental units did not coincide with the Post's editorial position that they would be given any space whatsoever in the newspaper, much less the topic of repeated news stories.

--Dean Baker

We all know the sad story about the Canadian cancer victim who would have died if she had to depend on Canada's health care system. Morning Edition did the simple thing that news organizations are supposed to do, they investigated whether cancer victims are really left to die in Canada.

Well it ain't so. Give the folks at NPR credit for this one.

--Dean Baker

The WSJ told readers to expect a strong job recovery. The point is that firms have laid off many workers and therefore will need to start hiring as soon as demand picks up.

There's a problem in this story. Hours per worker have been cut by more than 2 percent in this downturn. This reduction in hours is equivalent to almost 3 million jobs worth of labor time. Firms will typically increase the hours of the existing workforce before hiring new workers. There was a modest increase in hours reported for July, but this was largely a statistical fluke driven by the layoff patterns in the auto industry. It remains to be seen if there is a sustained uptick in hours, which will almost certainly precede large-scale hiring.

The article also includes the bizarre assertion that we should expect 8 percent GDP growth based on the severity of the downturn. This is unlikely because the sectors that have fueled rapid growth coming out of past downturns, housing and autos, are unlikely to provide the same lift in this downturn.

--Dean Baker

Not according to USA Today. It told readers that: "the key reason is that lawmakers are fearful that tough pay curbs might get in the way of the financial services industry helping foster an economic recovery."

It's not clear how USA Today was able to make this determination. In the event that members of Congress actually were trying to benefit their Wall Street contributors it is unlikely that they would give the contributions as a reason for their action. As a practical matter, it it highly unlikely that anything Congress did by way of restricting compensation at the banks would have a significant impact on the recovery. Presumably members of Congress know this, so concern for the economy is not a plausible explanation for the failure to restrict executive compensation.

--Dean Baker

As every Washington Post reader knows, the United States and much of the industrialized world faces a dire future because of stagnant or declining populations. As a result in 20 or 30 years we will have an enormous labor shortage in which there is no one to change the bedpans of all us soon to be retired old-timers.

The Post routinely repeats this view, not only on its editorial pages, but also in endless news articles on how Italy, Japan, and even China face this dire demographic meltdown. It almost never allows a contrary view into its pages, once of the reasons it came to be known as "Fox on 15th Street."

However, today the Post printed a front page Outlook piece that did not argue against the demographic nightmare story, it completely ignored it. Gregory Clark, an economics professor at the University of California at Davis told Post readers that: "the economic problems of the future will not be about growth but about something more nettlesome: the ineluctable increase in the number of people with no marketable skills."

Okay, let's go through this in a way that even a Post editor can understand. An "ineluctable increase in the number of people with no marketable skills," implies a growing supply of people without skills that are demanded in the market. In other words, this means a surplus of labor. A surplus of labor is the exact opposite of a shortage. We can not both have a huge surplus of labor and a huge shortage of labor at the same time. If Clark is remotely close to being right, then the Post constant whining about a demographic nightmare is nonsense.

Now, Clark does postulate that the problem is that we will have people with no marketable skills. There are a few people without marketable skills who cannot be trained with marketable skills. And, of course the reason that people with "marketable skills" are doing relatively will in the economy is that they enjoy the benefits of protectionism, unlike those with less education.

In Mr. Clark's case, his employer does not have the option to replace him with a professor from Mexico, India, or China who is equally qualified but willing to work for a much lower wage. The University of California must first swear that it tried to hire a U.S. citizen or greencard holder at the prevailing wage, and only after failing in this effort, it then sought to hire a foreigner. And, even then it must claim to pay the foreign professor the prevailing wage. A similar situation helps to prop up the pay of doctors, lawyers, and other highly educated professionals, in addition to licensing requirements that are designed to restrict entry to the fields.

In short, Mr. Clark is exactly right that the Post's is spewing nonsense in its demographic meltdown spiel, but he is wrong in worrying about an excess supply of people with few skills. The relative supply and demand for people with less education will be determined by politics, not the natural workings of technology or the market.

--Dean Baker

In keeping with its strict editorial policy of only letting others tell readers what "populists" think, the Post front page article on setting executive compensation at banks receiving bailout money never presented the views of an actual populist.

Therefore readers got to see the comment of Robert Profusek, a lawyer at Jones Day who is identified as having advised major banks on compensation matters: "I wish I could hum the theme song for 'Mission: Impossible' because I think his job is mission impossible, .... On the one hand, there's this populist outrage that is fanned every other day by somebody in Washington. . . . But he can't just go in there with a hatchet and cut everything because the good people will leave. That's not in our best interest."

Later the article quotes Linda Rappaport, head of the executive compensation practice at the firm Shearman & Sterling: "You've got to allow these companies to make the money for the shareholders ... And to make the money for the shareholders, they have to have the talent. And to have the talent, they have to be able to pay them competitively."

If the Post had solicited the views of a populist, or an economist, they might have told readers that much of what the banks earn comes directly at the expense of consumers and businesses. For example, suppose that Goldman Sachs' large trading profits last quarter came in part from oil trades. This would mean that it managed to buy oil or oil derivatives on the way up, preventing oil companies from getting as much profit as they otherwise would have received. This is money that they could have used in developing new energy sources, as the oil companies so often tell us. Alternatively, if the run-up was purely speculative, Goldman's successful traders caused consumers to pay more money for gas and home heating oil than otherwise would have been the case. There would be a similar story if Goldman made its money on the way down, with the trader pulling way money that would have otherwise gone to consumers or producers.

The public has no obvious interest in subsidizing traders to speculate in financial markets. If the speculators win, then the loans that Goldman and the others receive will be repaid, but this repayment will only be a portion of the higher prices paid by consumers and lower profits earned by producers as a result of Goldman's speculation.

Moving beyond the world of speculation, it is not clear that the marginal contribution of the individual bank executives involved in the more mundane tasks of running a bank can run into the millions or tens of millions of dollars a year. In other words, it seems unlikely that if most of these individuals were replaced by the person next in line that the bank's profits would suffer in any big way. In this sense, these high salaries are just a drain on the bank, its shareholders, and the taxpayers. But, you won't see this argument presented in the Post.

--Dean Baker

Gretchen Morgenson has another outstanding piece examining former Goldman CEO Henry Paulson's extensive contacts with Goldman when he was Treasury secretary.

--Dean Baker

Logic is often missing in debates over economic policy. The NYT tells us that Canadian manufacturers are being hurt by the "buy America" provisions in the stimulus package.

Okay, so let's help them. We'll get rid of the Buy America provisions, but we'll also get rid of the stimulus. Now, they will all go out and celebrate, right? They no longer will have to worry about protectionist policies throwing us into another Great Depression. They will just have to get by with fewer orders.

This may be news to the NYT, but political interest groups often have an impact on the structure of legislation. For example, the reason that we pay twice as much as everyone else in the world for prescription drugs is that the drug industry is powerful enough to get stronger patent monopolies in the United States than elsewhere. In the case of the stimulus package, unions and some domestic manufacturers insisted on buy America provisions as a condition of their support. The bill would not have passed without it.

The stimulus has boosted demand in the U.S. including the demand for imports from Canada. Therefore, Canadian manufacturers were actually helped, not hurt, by the stimulus, even if they may have been helped more if it did not include buy America provisions.

--Dean Baker

The WSJ noted the 0.1 increase in the length of the average workweek last month and highlighted the 0.3 increase in hours worked in manufacturing. In doing so, they missed much of what happened in July.

Typically, the auto industry shuts down many of its factories in July to retool for the new model year. This leads to a large drop in hours and employment. Since the data are seasonally adjusted, the Bureau of Labor Statistics corrects for the normal July layoffs so it doesn't appear that the auto industry is going into a slump every July.

This year, there were few, if any, layoffs associated with retooling, since many factories had already been shut. Nonetheless, the seasonal adjustment pushed up reported hours and employment in July for the auto sector. As a result, the seasonally adjusted workweek in the auto sector increased by 1.6 hours in July and added approximately 0.1 hours to the overall average for manufacturing.

While there probably was some real boost to manufacturing hours in July, the picture is certainly less robust than implied by the WSJ article. For example, overtime hours in non-durable manufacturing actually fell by 0.1 hours last month.

--Dean Baker

David Leonhardt wants to congratulate the gang that led us into the worse economic downturn in more than 70 years because it will not be as bad as the Great Depression. Yes, the downturn could be worse, but let's be serious.

This crash was 100 percent preventable to anyone watching the economy and capable of doing 3rd grade arithmetic. The housing bubble was easy to see and it should have been obvious that its collapse would devastate the economy.

The "good" story is that we will have tens of millions of people unemployed or underemployed for years because of this gang's incompetence. Millions of people will lose their homes. The country will needlessly lose more than $6 trillion ($40,000 per family) of output.

This is a complete disaster. Any custodian, dishwasher or shoe salesperson who showed the same degree of incompetence on their job would be fired instantly. There is no reason that the country should engage in this soft bigotry of low expectations when it comes to economic policy. This crew blew it just about as badly as anyone conceivably could. Saying that you didn't give us another great depression is not exactly a winning re-election slogan.

--Dean Baker

The NYT told readers this morning that: "Home building and home prices, which had fallen for almost three years, appear to have almost no place to go but up." This one is very seriously wrong.

It is probably true that home building has no where to go but up. Construction had fallen to just one third of its bubble peak rate. It may not zoom upward, but the rate of building is unlikely to fall further in the next six months or year.

Prices are an altogether different matter. The basic story here is that real house prices are still 10-15 percent above their long-run trend level. Since the country still have a record housing vacancy rate, it is hard to see how this gets corrected with prices rising. Furthermore, virtually every economist in the country expects unemployment to rise and stay high over the next year. Also, mortgage interest rates will trend upward.

If this is a recipe for rising house prices, then I'm missing something.

-- Dean Baker

The NYT discussed whether Goldman Sachs is really the poster child of the new welfare state. Unfortunately, it framed the story largely as a he said (Goldman is getting rich on taxpayers' money)/ she said (no, they earn their money) rather than presenting the key facts.

High on the list of neglected facts is the $28 billion that Goldman borrowed with a guarantee from the FDIC. The article makes reference to this loan, but doesn't tell readers the amount. If the government guarantee lowered the interest rate by 2 percentage points, then the government is effectively handing Goldman shareholders and top management $560 million dollars. This is approximately equal to the money need to pay for health care for 180,000 kid years under the SCHIP program. Goldman also is borrowing an amount that the Fed will not disclose through its special lending facilities.

At the time that Glass Steagall was repealed in 1999, there was a commitment to maintain a separation between investment banking and commercial banking, so that investment banks could not gamble with government insured deposits. The Federal Reserve Board and other regulators have allowed Goldman to completely ignore this separation as they quite openly speculate with money lent to them by the government.

--Dean Baker

At least by one measure it did. The government added $300 to the checks of Social Security beneficiaries in May. This was a big contributor to the $165 billion jump in the annual rate of government transfer payments between April and May. This rate in turn fell by $130 billion between May and June.

This should have been a big item in the discussion of the data on personal income and spending released by the Commerce Department in June. This payment likely boosted consumption expenditures in May and June and will probably continue to have some impact through the summer. However, by fall the impact of this component of the stimulus will have largely faded.

While the impact of other components of the stimulus, most notably the infrastructure spending, will increase through the summer and fall, the impact of other components, like the Social Security payments, have already peaked. Those expecting a large further boost from the stimulus will be disappointed.

--Dean Baker

It can happen. This one is on a family struggling with the recession.

--Dean Baker

The NYT, like most of the rest of the media, reported that construction spending rose 0.3 percent in June. (Btw, I hate to nitpick, but the NYT article said that spending "increased by a seasonally adjusted annual rate of 0.3 percent in June." Actually the seasonally adjusted annual rate increased by 0.3 percent in June. If the June rate of increase was annualized, it would be approximately 3.6 percent [1.003^ 12].)

Anyhow, focusing on the overall increase concealed three distinct stories in the data. First, the increase was driven by a 1.0 percent rise in public spending. Private spending actually fell by 0.1 percent in June.

However, within private spending there was an unusual turnaround with residential construction 0.5 percent increase, while non-residential construction fell by 0.5 percent. The rise in residential construction is more evidence that the sector has finally bottomed out, although prices will continue to fall for another 6 months to a year.

The drop in non-residential construction is likely to continue. There has been massive overbuilding in most sectors. At the moment, a surge in construction in the oil sector (presumably ethanol refining facilities) is offsetting large declines elsewhere. This will not continue for long.

--Dean Baker

NPR did a segment this morning asking whether the U.S. economy would likely develop to be more like Europe's. At one point it presents the comment of the employee of a German software company, that he wished Germany's economy was "more dynamic."

While the media frequently repeat lines like this, it is not clear what they mean. The productivity experience of Europe and the United States over the last quarter century has been comparable. If small business is viewed as the key measure of dynamism than the United States lags badly.

A much larger share of the workforce is employed in small businesses in most European countries than in the United States. This could reflect the fact that many potential small entrepreneurs in the United States don't want to take the risk of going without health insurance.

--Dean Baker

The sharp decline in the saving rate over the last 15 years was not some mysterious change in consumer attitudes, it was a predictable response to the temporary wealth generated by the stock and housing bubble. Consumption is strongly influenced by wealth, as people will spend based on stock and housing wealth. The decision of millions of people to spend more money in the last 15 years was a totally rational response to the large capital gains they had on their stock or houses.

If someone gains $200,000 in equity in their home, there is no reason that they should not take a portion of this money to pay for a vacation, a new car, or some other discretionary expenditure. The issue going forward is not consumer attitudes, the issue is simply that people have lost around $6 trillion in housing wealth due to the collapse of the housing bubble and a comparable amount due to the stock market plunge.

--Dean Baker

After all, it would lead to sharply lower tax revenues and payments for disability would soar. CBO would have to add trillions of dollars to future deficit projections. Certainly this would be a fiscal crisis if ever there was one.

If it applied the same standards to nuclear war as it did in its lead article today, such a war would be described as a fiscal crisis. The article begins by describing a day during Obama's transition in December of 2008. The article tells readers: "Obama was welcoming and upbeat, although later that day he would learn during a meeting with his economic advisers that the fiscal crisis was even worse than they had believed."

Umm, what? The economy was losing 700,000 jobs a month. GDP was plummeting at a 6 percent annual rate. The entire financial system was teetering on collapse. What fiscal crisis are they talking about? The economy was on the edge of a collapse. If Obama had anyone on his staff who was wasting their time worrying about the deficit at the time, then the country is in really serious trouble.

--Dean Baker

Usually newspapers are big defenders of free speech, but not the Washington Post. It gave Ian Shapira, one of its reporters, nearly 2000 words to complain that a website had ripped off his story. The problem was not that the website had plagiarized the piece. Shapira acknowledged that his story was credited and even linked to by the website, which was a major source of readers for the original article.

However, Shapira is upset that the website may have made money off his work, because it sell ads based on viewership. In this case, the website piece based on Shapira's article drew 9,500 views. By way of response, Shapira wants "news organizations" to have the right to sue others that use their work without permission and profit from it.

This is a fascinating proposal coming from a "news organization." Let's think this one through for a moment. First, Shapira does not even know that he was harmed by the website piece. It is entirely possible that more people viewed his piece on the Post's site as a result of the version appearing on the website. So, if Shapira had his way, fewer people might have seen his piece. That may be a good thing, but how does he benefit from this?

There is a simple point that anyone who knows economics (taboo at the Post) would make. If people opt to read the piece on another website rather than the Post, then there must be some reason. Obviously they prefer something about this alternative venue. Perhaps the layout is better, the mix of articles is better, or maybe the person who wrote the spinoff piece for the website is a better writer.

If the protectionist measure advocated in this piece succeeded in shutting down the competition, then there would be a clear loss to readers. This loss would likely dwarf the loss to consumers that the Post routinely whines about so loudly when anyone suggests a tariff on imports or any other barrier to trade. After all, those forms of protection rarely add more than 10-15 percent to the price of a product. In this case, the Post's proposal may make the product unavailable altogether. Yet again, we see that protectionism is just fine with "free traders." The only issue is who is being protected.

Finally, let's consider what the enforcement of the Post's measure looks like. First who is a "news organization?" Is this a title that one registers for with the government? Does the Post get the title but not its website competitors? I suppose those big bucks dinners with lobbyists and policymakers really are worth something.

As a practical matter, it would be an incredible affront to the first amendment if the Post and other major newspapers and established news outlets were given any special ability to sue under such an act, compared to websites or for that matter think tanks. (If someone takes the major findings of a CEPR paper and uses it for a newspaper article, should we able to sue, even if we are credited [often we're not]?)

In reality, this proposal is a recipe for a vast legal morass that would result in the bullying of small websites by "news organizations" that could afford to hire high-powered lawyers. It is a protectionist measure that both carries high economic costs and is an obstacle to the exercise of free speech.

There is one legitimate point in this piece: the current newspaper model is not viable. But rather than trying to save the horse and buggy industry by outlawing the automobile, how about trying to adapt. There are alternative ways to support news writing and other creative work that take advantage of the possibilities offered by the web, rather than trying to stifle them.

Unfortunately the Post is not interested in alternatives to their business model (I've tried). The problem is that we have a creative class that is just not very creative. So instead we get the comical sight of a newspaper arguing against free speech.

--Dean Baker

The Post's front page article on the second quarter GDP numbers tells readers:

"There are some big ifs attached to that forecast, however, with the biggest being the fragile American consumer. For a sustained recovery to kick in, expanding production by businesses will need to result in a more steady job market and greater consumer confidence, even optimists acknowledge."

This is completely wrong. Consumers are spending at a normal or even high rate at present. The reason that they are spending less than before is that they don't have the money. They have lost close to $6 trillion in housing wealth. This bubble wealth had been spurring consumption and the economy prior to the collapse. Now that it is gone, people are going to spend less.

The problem is not bad attitudes. Most people are spending less for the same reason that homeless people don't consume a lot, they don't have the money. In fact, the saving rate was just 5.2 percent in the second quarter, well below its historical average, indicating that people were still consuming at high rates relative to their income.

In fact, for the economy to have a sustained recovery, it will have to correct its trade imbalance (which has temporarily improved with the downturn). This will require a sharp drop in the value of the dollar, something that the Post's editors want badly to prevent.

--Dean Baker

Suppose back in the days of the Soviet Union a young man in Moscow was fined $600,000 for selling blue jeans on the black market. Would the news media just report the sentence and discuss whether or not the convict was repentant? Possibly, but my guess is that the article would comment on how the Soviet Union was failing in getting consumer products to its population. It might include some economic analysis mentioning the enormous losses that the economy suffers by banning simple trade. It might even treat our black market blue jean dealer as a hero.

Anyhow, why is there no discussion of economic issues when a student gets a $675,000 fine for transferring copyrighted music over the Internet? The copyright system imposes enormous waste on the economy, including the enforcement costs associated with prosecutions like this one. We know of other ways in which creative and artistic work can be financed. Is there some reason that the copyright protected media never discusses them?

--Dean Baker