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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The Washington Post editorial board is upset that members of Congress tried to prompt Federal Reserve Board Chairman Ben Bernanke to weigh in on the merits of Republican proposals for large budget cuts. While they are right to be upset about such childish behavior, the Post missed the main reason.

After Alan Greenspan, Ben Bernanke is the person most responsible for the economic collapse the country is now recovering from. He was one of Fed governors from 2002 to 2005, before having a brief stint as President Bush's chief economic advisor. He then returned as Fed chairman in January 2006. During this period, he stood by and did nothing as the housing bubble grew to ever more dangerous levels and in fact publicly insisted that it was no big problem. It would be hard to imagine a more disastrous mistake.

Given Mr. Bernanke's track record he is very lucky to have a job (and indeed a well-paying one) at a time when so many workers do not. It is hard to see why the opinion on economic policy of someone who didn't see any problem with an $8 trillion housing bubble would be especially valuable.

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The headline of the NYT article on the February jobs report told readers about the "big jump" in private sector jobs reported for the month. While the 222,000 increase in private sector jobs was indeed good compared to the anemic growth that we have been seeing, it is a bit misleading to describe this as "big." In the four years from January 1996 to January 2000 the economy generated an average of almost 240,000 jobs a month.

In past recoveries from serious downturns the economy generated jobs at a far more rapid rate. In the year following the end of the 1981-82 recession the economy created private sector jobs at the rate of more than 280,000 a month, in a labor market that was almost 40 percent smaller than the current market. In the year from November 1976 to November 1977 the economy created more than 290,000 private sector jobs per month in a labor market that was just a bit more than half as large as today's.

It is also important to remember, as noted in the article, that the February number was in part a bounceback from a weather-weakened January number. Firms that put off hiring because of weather conditions in January ended up doing their hiring in February. The average growth in private sector jobs for the last two months was just 145,000.

Given the ongoing decline in public sector employment due to state budget crunches (@15,000-20,000 per month), this is only a bit more rapid than the 90,000 growth rate needed to keep pace with the growth of the labor force. At this rate, the economy will not return to normal levels of unemployment until well into the next decade.

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It would be nice if the answers that economists gave us on economic issues did not change when the political environment changed. Unfortunately, we don't live in such a world. This can be seen very clearly in the current debate over the assumption on rates of return that public pensions should make for the assets they hold in stock.

Most economists today seem to be lining up on the side that pensions should only assume that stock will provide the same rate of return as Treasury bonds. Even though the expected nominal return on stocks might be 10 percent, these economists argue that because of the risk associated with stock returns public pension funds should only assume the rate of return on risk free Treasury bonds, roughly 4.5 percent.

The counter-argument is that state pension funds can essentially be indifferent to the risk of market timing. If the market is depressed for a few years, the state pension fund would still have adequate assets to pay all benefits. There would only be a problem if the market remained permanently depressed, which is not plausible if the widely accepted projections for long-term economic growth prove accurate.

This lower rate of return makes a huge difference in the size of pension liabilities. This change in accounting, coming at a time when state budgets are hard-pressed due to the recession, would create substantial pressure to reduce pension benefits and possibly eliminate defined benefit pension plans altogether.

It is interesting to note that the economists' concern with pension fund accounting just happens to coincide with a major push by the right-wing to attack public sector workers and especially public sector pensions. State pensions have been assuming 10 percent nominal returns on their pension's stock holdings for decades. This fact never seemed to trouble economists previously.

Interestingly, many economists had argued the exact opposite position in the context of Social Security privatization. Andrew Biggs, one of the economists who has been very prominent in the debate for lowering the return assumptions on public plans, explicitly argued for assuming a high rate of return for the stock held in privatized Social Security accounts. Other proponents of privatization took the same perspective, which was the main benefit of their proposal.

Even advocates of preserving the current Social Security system wanted to assume a higher rate of return for money held in stock, albeit for stock held in the Social Security trust fund. Two of the country's leading experts on Social Security, Henry Aaron and Robert Reischauer, both explicitly called for putting part of the Social Security trust fund in the stock market to take advantage of the higher rates of return offered by stock. President Clinton made the same proposal.

It is worth noting that these plans for putting Social Security money in the stock market were made near the peak of the stock bubble, when price to earnings ratios were approaching 30. In this context, they were making absurd assumptions about the prospect for future returns, as some people pointed out at the time. By contrast, now that the market has plummeted from its bubble peaks and price to earnings ratios are close to their long-term average, it is plausible that the market will provide its historic rate of return.

If economists were consistent, they would apply the same methodology for assessing stock returns in the context of Social Security privatization in the late 90s as they apply to public pension funds in the current crisis. This does not appear to be the case.

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Actually, I meant to say "the housing bubble," but in top policy circles it might be easier to get a discussion going on sex. The NYT's lead editorial defends the Obama administration's housing programs based on the fact that house prices are falling again. This is really confused thinking.

First, we should expect house prices to fall. Nationwide house prices have to fall by about 15 percent to return to their long-term trend level. No one has produced any remotely plausible explanation as to why we should expect house prices to diverge from a 100-year long trend, so this decline is consistent with the market returning to normal.

Why, as a matter of policy, would we want to try to prop up housing prices, even assuming that we could? Should the federal government be running an unaffordable housing program? 

House prices had been supported through the second half of 2009 and the first half of 2010 by the first-time buyers tax credit. This pulled purchases forward and now house prices are back on the path to correcting. Given the still near record housing vacancy rates, there is no reason to expect this decline to stop soon regardless of what we do on foreclosures. 

If we could talk about the housing bubble, there is an argument that the government could take steps to support house prices in markets where the bubble appears to have deflated. In former bubble markets like Las Vegas and Phoenix, it might make sense for the government to target loan money and other support in order to prevent prices from falling too far below the trend level. However, this would require distinguishing between markets where the bubble is still deflating from the ones where it has deflated. The price to rent ratio gives us an obvious to tool to make that assessment, but no one seems to want to have that discussion.

Returning to the question at hand, the Republicans are absolutely right, the Obama administration foreclosure programs have been a disaster. There are both policy and political obstacles that make effective programs a virtual impossibility.

On the policy side, the key problem is that the Obama administration never wanted to force the banks to do anything. This invites efforts at cherry picking. They want to have the government subsidize them to make modifications that it might have been in their interest to make in any case. This means the program is giving money to banks, not homeowners.

There is also the problem that servicers are not in the mortgage modification business. Servicers collect monthly payments, they assess fines and send out threatening letters when the payments are late. They move forward with foreclosures when the payments are repeatedly late. They don't have experience working with owners to do modifications.

Asking servicers to do modifications is like asking the police to be social workers. It might be nice if a beat cop could pull aside a troubled kid and give him some counseling, come by and check on his school work, and help him with his family problems, but that is not what cops do. It is the same story with servicers and putting a few thousand dollars on the table will not change this fact.

On the political side, it looks absolutely horrible for the government to be paying the mortgage of people who have fallen behind. Every person who has fallen behind on their mortgage has a neighbor who is working overtime or taken a second job, scrimped on basic expenses, and taken other extraordinary measures to keep current on their mortgage. Of course the Obama administration policy is not actually giving large amounts of money to defaulting homeowners, but the right has been effective in building this perception.

It is also worth noting that we would have a disaster if the government actually did offer large amounts of money to defaulting homeowners. This would give everyone incentive to default on underwater mortgages and have the government and/or lenders pick up the tab. While many of the people helped this way may be very deserving, many of the biggest gainers would be relatively well off people who bought expensive houses at bubble-inflated prices or opted to take large amounts of money out of their home when the bubble sent the price through the roof.

Some of the losers in this story would be the banks that pushed and packaged fraudulent loans. However the bulk of losses would be incurred by public and private pension funds, who bought mortgage backed securities (MBS) in good faith, and individuals who hold MBS in their retirement funds. 

There are policies that the Obama administration could pursue that provide benefits to troubled homeowners at no cost to taxpayers and with none of the policy and political risks noted here. For example, it could push to allow cramdown in bankruptcy. This means that judges could re-write mortgage contracts when a homeowner declare bankruptcy. It could also push for right to rent laws. This would allow homeowners to stay in their home as renters paying the market rents for a substantial period of time (e.g. 5 years) following foreclosure.

Both of these policies would increase the bargaining power of homeowners relative to lenders, leaving them in a better situation to keep their home and, in the case of right to rent, put them in a much better housing situation in the event that they can't keep their home. Neither policy requires any new government bureaucracy or creates any serious moral hazard problems.

Both cramdown and right to rent would require action by Congress, which may prove impossible, but at least the Obama administration would be pushing for sound policy. As it stands, the Obama administration programs are largely worthless. If the President wants to put on his fiscal austerity hat and cut out government waste, he's got some good targets here.

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The NYT implied that the Obama administration, which includes not a single economist who recognized the danger of the housing bubble, still does not understand the bubble. According to the NYT:

"the Obama administration, as well as the F.D.I.C., sees any broad settlement with the servicers [over improper foreclosure actions] as an opportunity to do more than just fix the foreclosure process. They want to stabilize the housing market, where prices are continuing to decline, and try to help bolster the economic recovery."

Actually nationwide house prices are still 10-15 percent above their trend levels. The housing vacancy rate, while down somewhat from its peak, is still far higher than any pre-bubble level. In other words, the Obama administration should fully anticipate that house prices will continue to fall. There is no obvious reason to want to prevent house prices from returning to more affordable levels.

Unfortunately the piece does not point out the absurdity of the position attributed to the Obama administration. Nor does it identify any of the officials holding this view so that they can be subjected to the ridicule they deserve.

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The Post referred to disputes among policymakers on how best to structure regulation of the financial sector told readers that:

"there are also deep philosophical and political differences as to what the government should do to prevent future crises."

The people who are making the decisions about regulating the financial sector are politicians. They get and keep their jobs by appealing to powerful interest groups who can finance election campaigns. Few, if any, of these people are known for their contributions to political philosophy. There is no obvious reason to believe that philosophy is a major factor in determining their approach to this issue and the Post certainly does not give us one.

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Suppose former FEMA director Michael Brown gave a lecture on how to best rebuild New Orleans following Katrina. Presumably the media covering the speech would point out that Brown's ineptitude in responding to the storm was one reason that the city's population was so devastated by it.

For this reason, it is surprising that Post never noted the same irony in reporting on Federal Reserve Board Chairman Ben Bernanke's advice to states dealing with budget shortfalls. The reason that nearly all the states are facing severe budget problems is that the economy is in the middle of the worst downturn since the Great Depression.

This downturn is the direct result of the Fed's failure to take steps to curb the growth of the housing bubble before it reached the point where its collapse would devastate the economy. Bernanke was at the center of this failure, having been one of 7 Fed governors from 2002 to 2005 and then coming back as Fed chairman in January of 2006.

Bernanke has never downplayed the extent of this disaster himself, telling Congress in the fall of 2008 that the economy was on the brink of a complete collapse. While the claim that the economy was at risk of a second Great Depression is not true (we know how a reflate an economy, so there never was any risk of a decade of double-digit unemployment), Bernanke has helped to promote it.


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That's what the NYT told readers this morning. The NYT said that:

"Republicans worry that the Fed is overstimulating the economy."

For those not familiar with the word "overstimulate," it means that the Fed is causing the economy to grow too rapidly and create too many jobs. This is an interesting position to hold at a time when the economy is experiencing 9.0 percent unemployment. It probably would have been better to just report what the Republicans said rather than directly attribute such an extreme view to them.

The article also quoted Alabama Senator Richard Shelby saying that: "Once price stability has been lost, it’s difficult and very costly to regain," adding that Shelby then invoked the 80s. It would have been useful to point out to readers that the recession brought on by Paul Volcker in 1981 to tame inflation was far milder than the one we are now experiencing.

The unemployment rate rose by 3.6 percentage points from its low in the summer of 1981 to its peak in December of 1982. This compares with a trough to peak increase of 5.7 percentage points in this downturn. Three years after the start of the 1981 recession the unemployment rate was back to its pre-recession level. By contrast, three years after the start of the current recession the unemployment rate stands 4.5 percentage points above its pre-recession level.

In other words, Senator Shelby is warning that if we take stronger steps to reduce the unemployment rate we risk a higher rate of inflation. And, the cost of bringing down this inflation may be less than the costs in unemployment that we are currently experiencing.

This article also presents Federal Reserve Board chairman Ben Bernanke's assessment on a range of issues. It would have been worth reminding readers that Mr. Bernanke did not see the $8 trillion housing bubble, the collapse of which brought on the worst downturn since the Great Depression.

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In following its practice that there is no division between news and editorial perspective when it comes to budget reporting, The Post (a.k.a. Fox on 15th Street) told readers in a front page news article that:

"Obama, who has overseen an expansion in spending, does not have the fiscal credibility that helped give President Bill Clinton the winning political hand in 1995 and 1996."

One might think that whether or not President Obama has "fiscal credibility" is an assessment that readers should make for themselves. According to the Congressional Budget Office and a wide range of private forecasters, the increase in spending that has taken place on President Obama's watch has boosted growth and prevented the unemployment rate from rising further.

It is bizarre to imply that because he acted to prevent a steeper recession President Obama lacks fiscal credibility. By the Post's logic, President Roosevelt could have established fiscal credibility by cutting the defense budget in half in 1943 in the middle of World War II. While most people might have viewed letting our military lose to the Axis powers in order to balance the budget as close to crazy, the Post no doubt would have applauded such an act of fiscal responsibility. At least it would if it applied the paper's current logic. 

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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.





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.]



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.

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.

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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