Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

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A NYT article on President Obama's trade agenda repeatedly referred to "free-trade" agreements. This is a term that politicians who back these pacts use to garner public support, however, it is not accurate. The deals generally do little or nothing to reduce barriers to trade in highly paid professional services, like physician and lawyer services. They also increase protectionism in some areas, most notably by strengthening copyright and patent protections.

It is understandable that the proponents of these trade pacts would want to dub them "free-trade" pacts to make them more politically appealing. However, the media should not be using such inaccurate terminology.

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USA Today reported that many home sales are not going through because the appraisals are too low to support the mortgage. At one point it reports complaints from realtors that appraisers now often come from outside the area and make low appraisals because they don't know the housing market.

If appraisers are unfamiliar with an area then it would be expected that they would make inaccurate appraisals. This would mean that there might be mortgages that don't go through because an appraisal comes in too low, however some mortgages may end up being issued that should not be because the appraisals are too high. There is no obvious reason that the appraisals would be biased on the low side.

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David Brooks told readers that it is very important that we redistribute money from the old to young. He argues that this is due to the government debt built up as a result of the downturn. This debt will put pressure to reduce government spending, which he argues should come primarily at the expense of the elderly.

It is impressive that Brooks could only think of redistribution by generation after the United States has just gone through the most massive upward redistribution in the history of the world over the last three decades. Other observers might have thought of dealing with unmet needs by adopting measures that partially reverse this upward redistribution.

For example, the government could raise more than $1.8 trillion by taxing financial speculation. This revenue would come almost entirely at the expense of speculators and the financial industry. It could save a comparable amount of money by adopting alternatives to patent monopolies for supporting prescription drug research. And it could substantially reduce the interest burden of the current debt by having the Federal Reserve Board buy and hold a substantial amount of the debt. This would mean that the interest paid on this debt would be refunded to the government, leading to no net interest burden on the bonds held by the Fed.

However, Brooks never considers any measures that could reverse the upward redistribution of the past three decades. He is only interested in taking away Social Security and Medicare benefits and reducing the pay of public sector workers.

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The Washington Post told readers that "consumers are sitting on their pocketbooks," in reference to the 5.8 percent savings rate reported for January. In fact, this savings rate is well below the average for the 50s, 60s, 70s, and 80s. The wealth effect from the stock bubble in the 90s and the housing bubble in the 00s depressed saving rates in these decades.

 

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With the housing bubble now finishing its deflation we should expect the saving rate to rise back to its historical level. The alternative would imply that workers will have much less money for their retirement relative to their income in their working years.

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USA Today ran an article highlighting a difference in pay between government workers and private sector workers in Wisconsin and 40 other states. The methodology used in the article simply takes average compensation per worker without adjusting for their education, experience or other factors that typically affect pay. (Most people expect a cardiologist with 25 years of experience to earn more than a 20-year old counter person at McDonalds.)

The gap in compensation (pay and benefits) highlighted in the USA Today article could be eliminated if governments made a point of replacing work that is often contracted to outside businesses (e.g. cafeterias in government buildings, custodial work in government buildings and groundskeeping on government properties) with government employees. By increasing the ratio of less educated workers to more highly educated workers (e.g. teachers, nurses, and doctors) state governments can eliminate the sort of pay gap that concerns USA Today.

Analyses that do control for education, experience and other factors in ways that are standard within economics consistently find that public sector workers receive somewhat lower compensation than comparable workers in the private sector. This article does cite Jeffrey Keefe, an economist who has done such analyses, pointing out this fact, but it is unlikely that many readers will pick up this point.

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Morning Edition featured an interview with Mitch Daniels in which he was asked about whether he thought the Bush tax cuts were a good idea. Mr. Daniels, who was director of the Office of Management and Budget at the time, responded by saying that the tax cuts were widely credited (referring to the 2001 recession), "with the shallowness and the swiftness of recovery from that recession."

In fact, the recession was not short and mild. It led to what was at the time the longest period without job growth since the Great Depression. NPR should have pointed out Mr. Daniels' mistake.

[This is corrected from an earlier version, that confused Daniels' wording to wrongly imply that he said most people did not notice the recession. He had actually said that they did not see the recession coming.]

 

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Source: Bureau of Labor Statistics.

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Joe Nocera used his column this weekend to comment on the fact that none of the Wall Street honchos who got rich pushing bad loans are being prosecuted. Nocera notes that Angelo Mozila, the former CEO of Countrywide, the huge subprime lender, still thinks that he did a great thing by getting moderate income people into homes. He concludes that this would have made it difficult to prosecute Mozila since "delusion is an iron-clad defense."

The issue of Mr. Mozila's beliefs about the good he was doing is beside the point in terms of bringing successful prosecution. The immediate issue is that Countrywide was issuing and selling large numbers of fraudulent mortgages. The fraud in these mortgages involved mortgage agents deliberately putting down false financial information about the borrowers (at their own initiative, not the borrower's) to allow them to qualify for loans for which they would not otherwise be eligible. These loans were then resold in the secondary market. This was a widespread practice at Countrywide and other subprime lenders.

A prosecutor would typically proceed by getting clear documentation about a large number of fraudulent mortgages being issued from a particular office. This would include depositions from the mortgage agents themselves as to whether they knew that they were putting down false information. Presumably some would answer "yes," especially if they were being offered a deal in exchange for cooperating. They would then be questioned as to whether their bosses knew that they were issuing fraudulent mortgages.

With enough low level people saying that issuing fraudulent mortgages was in fact a company policy, the prosecutor would then go after an office manager. The plan would be to threaten several office managers with long prison sentences for fraud, unless they talked about Countrywide's overall policy.

There are two possible stories. One is that the higher-ups somehow did not know what many outside observers knew about their own company (i.e. they were issuing fraudulent mortgages on a large scale) or that Mozila and other top executives were not idiots and in fact knew exactly what was taking place at their company. By threatening those lower down in the corporate hierarchy with long jail sentences, a prosecutor would be more likely to be in a position to put Mr. Mozila behind bars. This would be true whether or not he thought his fraud was ultimately a good thing because it promoted home ownership.

There would be a similar chain in connection with people like Richard Fuld, the CEO of Lehman and other top executives. The point would be to establish that these companies were securitizing fraudulent loans on a large scale. The people putting together the mortgage backed securities were either unbelievably negligent, by not knowing anything about the mortgages they were buying, or criminals who resold mortgages they knew to be fraudulent. Whether they thought this was a good thing is besides the point.

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Not in the Washington Post they don't. The paper ran a lengthy fluff piece that did not present a single critical comment about Mr. Lew.

One item that the Post could have mentioned is that Lew and his colleagues in the Clinton administration, who it notes are all back in top positions in the Obama administration, ignored the growth of the stock bubble and stood by as the over-valued dollar led to an enormous trade deficit. The collapse of the bubble in 2000-2002 gave the country what was at the time the longest period without job growth since the Great Depression. The economy only recovered from that slump as a result of the growth generated by the housing bubble. 

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The Washington Post had a front page article on the downward revision to 4th quarter GDP reported by the Commerce Department yesterday. The article cited higher oil prices and state and local budget cuts as the two major threats to growth in the immediate future.

Remarkably, the article did not mention falling house prices. Since their peak last summer when the first time buyers tax credit expired, house prices have fallen by more than 4.0 percent. They are currently falling at the rate of 1.0 percent a month. This would imply a drop of more than 15 percent by the end of 2011, which would correspond to a loss $2.4 trillion in housing wealth. A loss of wealth of this magnitude would reduce annual consumption by $120-$140 billion.

This loss of consumption due to a drop in housing prices would be a considerably larger blow to the economy than either the budget cuts and tax increases attributable to the state budget shortfalls or a rise in the price of oil that is twice as large as what we have seen to date. It is amazing that the Post is oblivious to the situation in the housing market even after the collapse of the bubble threw the economy into the worst downturn in 70 years.  

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It seems as though the Washington Post's editorial board is losing sleep over inflation. Its lead editorial notes the recent rise in commodity prices and then warns that:

"Core inflation does indeed remain well within the Fed's safety range, but it has nevertheless begun trending upward, and one leading forecaster, Deutsche Bank Economic Research, says it could hit 2.1 percent, the upper limit of the Fed's usual target range, by the end of 2011. That could force the Fed to raise interest rates, slowing growth before unemployment has returned to pre-recession levels, in order to preserve its inflation-fighting credibility."

Actually, 2.1 percent inflation is not "the upper limit of the Fed's usual target range." The Fed never explicitly set a target range and there are a range of views among the Fed's open market committee (the body that sets interest rates) as to how high inflation can go before it poses any problem to the economy. For example, back in 1999 Chairman Ben Bernanke argued that in comparable circumstances Japan's central bank should deliberately target a higher rate of inflation in the range of 3-4 percent to lower real interest rates.

As a practical matter, the inflation rate has rarely been below 2.1 percent. As can be seen, there was only one year in the decades of both the 80s and the 90s when the inflation rate was below the level that the Post wants the Fed to have as the top end of its target range.

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Source: Bureau of Labor Statistics.

 

There is no obvious reason that the Fed should feel "forced" to raise interest rates if the core inflation rate happens to edge above 2.0 percent to preserve its credibility. Such an increase in interest rates would mean throwing more people out of work.

There are already tens of millions of people who have lost their jobs and/or their homes because of the Fed's mismanagement of the economy. There is no reason that the Fed should deliberately put more people out of work just because the Post editors and their friends have irrational fears about inflation.

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The NYT had a front page article warning that the rise in oil prices could slow economic growth. The article hugely overstates the potential impact of the price rises that we have seen to date as indicated by an estimate that appears in the article.

At one point it tells readers that:

"Mr. Lafakas [an economist at Moody's Analytics] estimates that oil prices are on track to average $90 a barrel in 2011, from $80 in 2010, an increase that would offset nearly a quarter of the $120 billion payroll tax cut that Congress had intended to stimulate the economy this year."

It is worth remembering that the payroll tax cut was only a portion of the stimulus package that included the extension of the Bush tax cuts, the extension of emergency unemployment benefits, and 100 percent expensing for business investment. It is unlikely that anyone would have paid too much attention if the tax cut had been 2.5 or 1.5 percent instead of 2.0 percent. In other words, the impact on economic growth of this rise in oil prices is not likely to be very noticeable.

At one point the article also includes the comment:

"After a few false starts, housing prices have slid further."

Actually, the decline in house prices following the "false starts" was entirely predictable. The first-time buyer tax credits that Congress put in place supported the market by pulling purchases forward. It was inevitable that demand and prices would fall after these credits expired.

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David Brooks thinks that Mitch Daniels would be a great president, or at least this is what he said in his column today. Brooks' case centers on the outstanding job that Daniels has done as governor of Indiana. Brooks is especially impressed with the extent to which Daniels has improved the state's fiscal situation.

While that may be interesting to some, most people are probably most concerned about jobs. (Remember the recession?) If we compare job growth in Indiana with job growth (or more accurately loss) with its mostly Democratically governed neighbors, it doesn't look especially good.

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Source: Bureau of Labor Statistics.

 

Indiana lost 6.5 percent of its jobs between December of 2004 (the month before Daniels took office) and December of 2010. This beats Michigan's 13.0 percent and Ohio's 7.7 percent, but is worse than Illinois' loss of 5.2 percent of its jobs. It's also worse than the loss of 3.3 percent of jobs in Wisconsin and 0.2 percent of jobs in Iowa.

I suppose that Daniels campaign slogan can be "better than Michigan."

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According to the Washington Post it does. The Post reported on the modest rise in existing home sales in January reported by the National Association of Realtors. The increase in sales was accompanied by a sharp plunge in prices with the median sale price now 13.1 percent below the recent high set in June.

As the article suggests, it appears that many investors were buying up foreclosed properties at low prices. This is a necessary part of the return to normal in the housing market, but it is a bit misleading to describe this story as reflecting an improved economy.

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He told listeners this morning that the government deficit problem is a health care problem. It's too bad that people in Washington can't hear this. Add a comment

An NYT article discussing the impact of higher oil prices on the economy told readers that:

"As a general rule of thumb, every $10 increase in the price of a barrel of oil reduces the growth of the gross domestic product by half a percentage point within two years."

There is no source cited for this rule of thumb, which implies an extraordinarily large impact of oil prices on GDP. For example, the fall of oil prices from an average of $91 a barrel in 2008 to $53 a barrel in 2009 should have added almost two percentage points to GDP growth in the last two years.

The article later gives a more conventional rule of thumb, that each 1 cent increase in gas prices takes $1 billion out of consumers' pockets. These two rules of thumb appear inconsistent. A $10 increase in the price of a barrel of oil would imply an increase in gas prices of about 25 cents. This would reduce the money available for other consumption by about $25 billion a year. If the impact is doubled to account for other uses of oil (e.g. home heating, electricity, etc.) this would reduce the money available for spending by $50 billion, approximately 0.3 percent off GDP.

Of course the reduction in spending will not be 100 percent of the higher price of oil, many consumers will dip into their savings, just as they would in response to a temporary tax increase. In addition, some of the gain from higher oil prices goes to U.S. producers of oil, either as domestic production or importers with higher profits. While higher earnings for producers will have less impact on increasing spending than higher oil prices will have on reducing spending, the impact will not be zero.

On net, it is unlikely that the actual impact of a $10 increase in the price of a barrel of oil would be even half as large as the rule of thumb described in this article. A substantial rise in the price of oil would still have a substantial impact on the economy, but not nearly as much as this article claims.

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The Washington Post (a.ka. "Fox on 15th Street") long ago gave up any pretense of objectivity in its budget coverage. Today it ran a news article which can best be described as a tirade against budget deficits and debt, since it contained no real news. The article relies exclusively on deficit hawks as sources. It presents no one who could put current deficits/debt in context.

Had it gotten a broader range of opinions readers would have known that the claim that growth slows when a country's debt to GDP crosses 90 percent is dubious, since most of the countries in this group are like Japan, in the sense that their debt to GDP ratio rose because they were growing slowly. Japan's government actually had a very small debt before its stock and housing bubbles burst in 1990.

A wider range of sources would have pointed out that it is the combination of public and private sector debt together that pose a burden on an economy. Right now the U.S. is seeing its private sector debt diminish. They might have also pointed out that the Federal Reserve Board can and does hold large amounts of government debt, so that it poses no interest burden for taxpayers.

And, they would have also pointed out that productivity growth ultimately determines a country's standard of living in the long-run. Current and projected future levels of productivity are far higher than the deficit hawks ever dreamed possible in the mid-90s, so what are they whining about?

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That's what readers of a front page Washington Post article are undoubtedly asking after reading the first sentence:

"Is Rep. Harold Rogers the right man to break Congress's addiction to spending?"

There is nothing in the article that explains an "addiction to spending." It does describe efforts by members of Congress to get projects for their districts for which they can take credit, but it does not provide any evidence that this has been a major problem for either the federal budget or the economy. Virtually all budget experts agree that narrowly defined pork barrel spending, of the sort described in this article, is a small share of the total spending. Many projects are actually useful -- members of Congress just want to circumvent the normal appropriation process so that they can take credit for it.

It would have been more reasonable to begin a piece with a phrase like "fear of deficits" as the disease that Congress needs to overcome, since tens of millions of people are now unemployed or underemployed because Congress has a seemingly irrational fear of running larger budget deficits.

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The hoary phrase "right to work" has been appearing frequently in news reporting on the efforts by many Republican governors to weaken the power of public sector workers. This phrase, while very useful for opponents of unions, fundamentally misrepresents what is at issue.

There are absolutely no circumstances in which someone is denied the "right to work" in the absence of the laws that go under this name. These laws are actually about restricting the freedom of contract. Under U.S. labor law, unions are required to represent all the workers in a bargaining unit that they represent, regardless of whether or not they belong to the union.

This means that workers who opt not to join a union still benefit from the union's representation. This is true both in the sense that non-members get the same contract that union members receive (the contract can't specify one wage scale for union members and another for non-members) and also the union is required to defend the rights guaranteed to non-members on the contract. For example, if a non-member is fired or in any other way sanctioned, the union is required under the law to defend their rights as described in the contract.

In other words, U.S. labor law requires that the union incur costs to represent workers in a bargaining unit whether or not they choose to join the union. Not surprisingly, unions like to sign contracts that require workers to pay for this representation. This is a condition of employment just like employers impose conditions of employment (you don't like the pay, go work somewhere else).

So called "right to work" laws prohibit unions and employers from signing contracts that require workers to pay for their union representation. In this sense they could more accurately be termed "right to freeload," since they guarantee that workers will have the opportunity to benefit from union representation without paying for it.

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On the Washington Post opinion pages you can make up anything you like as long as you are using it in an argument against working people. Therefore we get columnist Michael Gerson telling readers that:

"public employee unions have the unique power to help pick pliant negotiating partners - by using compulsory dues to elect friendly politicians."

Nope, that is not true in this country. Unions are prohibited from using dues to pay for campaign contributions. (If Mr. Gerson knows of any violations of the law, I'm sure that there are many ambitious prosecutors who would be happy to hear his evidence.) Unions do make contributions to political campaigns, but these are from voluntary contributions that workers make to their union's PAC. They are not from their union dues.

As Barry Goldwater once said, "making things up in the service of the wealthy is no vice," or something like that.

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You would not read that line in the New York Times. There are two reasons. The first is that it is not true (at least as far I know). The second is that the NYT would be quickly sued by Microsoft if it said something like this with no support.

However the NYT can say this about governments, which do not have the same ability to use libel suits to correct inaccurate statements. Therefore the NYT felt no qualms about beginning an article on Japan's stock market with the line:

"Japan’s government finances are on the verge of collapse."

Of course investors who are putting billions of dollars on the line do not agree with this unsupported assertion. The interest rate on 10-year bonds issued by the Japanese government is less than 1.3 percent. Investors usually demand a higher return from a company or government that they believe is on the verge of collapse.

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Let's all have a hearty round of laughter at David Brooks' expense. He doesn't know that employer side payments for benefits like pensions and health care come out of workers' wages. In his column today, he tells his readers that public employees in Wisconsin should have to pay for these benefits just like private sector. Apparently he doesn't know that they already do.

Go into any economics department and tell the faculty that you think employers should have to pay more for workers' Social Security benefits. The ridicule with which that suggestion would be greeted should be heaped on Mr. Brooks for failing to understand basic economics. And of course, we actually have data that show that the higher benefits received by public sector workers in Wisconsin are more than fully offset by lower pay.

Of course the bigger mistake in Brooks' column is the assertion that we are looking at a decade of austerity. This may prove true, but this is a policy choice. We had unbelievably incompetent economic policy in the last decade. The Fed and the Bush administration allowed (arguably encouraged) the growth of an $8 trillion housing bubble. It was fully predictable that it would collapse and lead to a serious recession.

Unfortunately, economic policy continues to be guided by people who were too incompetent to recognize this bubble and the danger it posed. The route out of this downturn is simple: the government needs to spend money to create demand. This is the economy's problem at the moment, not a scarcity of resources. However, the incompetents control the debate and are now promising us a decade of austerity rather than taking the simple steps that would be needed to get back to full employment.

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