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 NYT told readers that the White House is opposed to an amendment to the financial reform bill by Senator Bernie Sanders that calls for an audit of the Federal Reserve Board because they: " view it as an encroachment on the central bank’s traditional independence." While this may be the real reason that the White House opposes the bill, there may also be other motives. For example, it is possible that the Fed disbursed funds from its emergency facilities in ways that would be embarrassing if more widely known.

The NYT only knows that the White House says. It does not know its true motives. It should have simply told readers that the White House "claims" that it views an audit as interfering with the Fed's independence.

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Casey Mulligan is on the loose again. The notorious University of Chicago economist is arguing that there was no housing bubble in the NYT Economix section. The centerpiece of his argument is that inflation-adjusted house prices have not returned to their pre-bubble level. This means that the price rise must be driven by the fundamentals of the housing market rather than an irrational bubble.

It's hard to know where to begin on this one. I guess the first point would be that he is using the wrong series to find anything about the bubble. He is using the new house price series from the Census Bureau. This series controls for neither quality nor location. If the price of all homes doubled, but the price of new homes built further from city centers remained the same, this index would show no increase in prices. This is why almost everyone in this debate uses one of the repeat sales indices, such as the FHFA House Price Index or the Case Shiller national housing index.

Of course the good part of the story is that Mulligan's case would hold even more strongly with these indices (they are further above their pre-bubble level), but it is important that we at least look at the right picture. The NY Fed put out a paper back in 2004 claiming that there was no bubble, the only problem was that people like me were using the wrong price index.

But, let's get back to the issue at hand. House prices have certainly not deflated to their pre-bubble level. They are about 15-20 percent higher in real terms. Why is this the case?

I would point out three factors that may have escaped Professor Mulligan's attention. First, until last Friday the government had an $8,000 first time homebuyers tax credit. This is a bit less than 5 percent of the median house price. Even at the University of Chicago an $8,000 tax credit would be expected to have an upward effect on house prices.

The second factor is that we have had extraordinarily low mortgage interest rates. The weakness of the economy and the Fed's policy of buying $1.25 trillion in mortgage-backed securities pushed the 30-year mortgage rate below 5.0 percent. Interest rates are at their lowest levels since the early 50s. Again, even at the University of Chicago, low interest rates would be expected to have a positive effect on house prices. We might see a different picture if interest rates creep up to near 6.0 percent over the next year, as they are widely expected to do.

The third factor unusual affecting house prices in the last year was the expanded role of the Federal Housing Authority (FHA). The FHA guaranteed almost 30 percent of purchase mortgages in 2009. Many of these homebuyers would not have been able to get a mortgage without the government's support. Again, even at the University of Chicago they probably think that government guarantees for mortgages will have a positive effect on house prices. It is worth noting that the FHA is rapidly cutting back its role because it lost lots of money and is now below its minimum capital requirement.

Finally, real house prices are falling -- currently at a rate of between 0.5-1.0 percent a month. Economists generally do not expect to see instantaneous price adjustments, so it should not be surprising if it takes another year or two for house prices to get to a stable level, once the bubble has fully deflated. (Over-correction is a real risk.)

So, if anyone thought that the housing bubble would immediately deflate and bring prices back to their fundamental level -- in spite of massive efforts by the government to prop up prices -- then Professor Mulligan has the evidence to show that they were wrong. But for everyone else, this piece is probably not very enlightening.

 

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And they said it was impossible. The Post followed the NYT in calling for an independent agent to pick which credit rating agency will rate a company's issues. This is the obvious and simple way to fix the basic conflict of interest involved when the company pays the rater. If the company has no control over who gets hired, then the rating agency has no incentive to lie in its assessment.

Congress was running around in circles genuflecting over various non-solutions to this problem. However, in the last couple of weeks there seems to have been an outbreak of commonsense, no doubt fueled by a Krugman column pushing the idea. I also have been pushing this one for a while, although my megaphone is not as big.

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That is a question that the Post should have asked in an article that reported on the Obama administration's plan to set aside $5 billion to help cover the cost of employer provided health care benefits for retirees who are not yet 65 and eligible for Medicare. The article tells readers that there are 2 million retirees under age 65 who are currently receiving benefits from their employer.

Since this $5 billion is the total amount available for the three years from 2011 until 2014, it means that there will be just under $1.7 billion available per year, or less than $900 per retiree per year. Health care costs for people in this age group average well over $10,000 a year, which means that this money will cover on average less than 9 percent of costs.

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The NYT somehow thinks that when President Obama insists that he is going to “keep our boot on the throat of BP” that he is going against free market principles. This is 180 degrees at odds with reality. BP caused damage to hundreds of thousands of people, possibly millions, living in the gulf states. Under free market principles, they are supposed to compensate people for the damage that they have caused by their irresponsible conduct.

However, the "socialists" in Congress passed legislation that limited BP's damages to $75 million. This means that they ignored market principles and had the government step in and seize property from individuals and hand it to BP.

It would be good if the NYT and the rest of the media got the issues straight here. No one is arguing about a free market. We are arguing about whether a huge oil company can wreck people's lives with impunity. Conservatives are claiming that they can, but this reflects their belief that the government exists to redistribute wealth income upward, not out of any commitment to the free market.

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It is painful to see the ongoing coverage of the bank bailouts and the extent to which the government is being reimbursed. It is true that the banks have repaid the vast majority of the money that was lent. However, this is almost irrelevant to anything.

At the time the government made money available to the banks through TARP and even more so through the Fed, liquidity carried an enormous premium. The major banks charged each other 5 percent interest on 90 day loans because they did not have confidence in their ability to survive.

In this environment, the government stepped in and providing banks with huge amounts of money (we don't know exactly who got how much because the Fed refuses to tell us what it did with our money), at a cost far below what they would have been forced to pay in private markets. The banks could lend this money at enormous premiums or use it to just buy government bonds and pocket the difference in interest rates. As a result, most banks have been able to get back on their feet.

As a bookkeeping matter we can say that the government "profited" from these deals in the sense that it got interest on its loans. (It also received warrants from banks that it sold at a profit.) However, as a practical matter, these profits no more benefit the government's accounts than if the Federal Reserve Board just printed the same amount of money and handed it to the Treasury by purchasing government bonds. Unfortunately, few reporters covering the economy and the bailout understand this point, so they end up writing pieces that imply the country was somehow benefited by the fact that the banks repaid their loans with interest.

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The Washington Post devoted a major article to telling readers that banking industry lobbyists, most of whom are unnamed, are not happy with the financial reform bills being debated in Congress. At one point it tells readers they describe aspects of the legislation as "Draconian," "Crazy," and "Insanely unproductive," although it provides no information as to which lobbyists describe which components with these terms.

One unnamed lobbyist told readers that: "I think the worry is the stuff coming out of left field, the whack-job amendments,... It's limited only to the imagination of the senators." Again, it would have been helpful to have examples of what is considered a whack job amendment and by whom. It's good to know that at least some industry lobbyists are at unhappy with at least some parts of these bills, but without some specific content, this article really is not giving readers much information.

 

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The NYT reports on the difficulties that Spain is facing in the wake of the collapse of its housing bubble. Its unemployment rate has crossed 20 percent and is likely to head higher. Its budget deficit exceeds 8 percent of GDP and its credit rating has recently been downgraded by Standard & Poor's.

It would have been worth noting that the credit rating agencies and the speculators who now believe that Spain is facing severe financial stress thought that Spain's economy was in solid shape as its housing bubble was growing ever more out of line with fundamentals. It is also would have been worth mentioning that Spain was running budget surpluses prior to the collapse of its housing bubble. At the time, it was often held up as a success story by the people now criticizing its institutional structure.

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This piece of information should have been included in a Washington Post article on the European-IMF bailout plan for Greece. At one point the article quotes from a German newspaper editorial: "most Germans struggle to understand why they should be paying for the Greeks, who are broke because they squandered their money." It would have been helpful to point out to readers that this money is allowing Greece to continue to make payments to foreign creditors, a list which includes German banks. In other words, the money going from Germany to Greece is in part money going from German taxpayers to German banks. This fact should have been noted in the article.
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Time Magazine's Adam Sorenson tells readers that: "Medicare, Medicaid and Social Security costs will catch up to the entirety of federal revenue as a percentage of GDP in coming decades if things don't change." However the graph included in the piece shows Medicare and Medicaid costs growing rapidly, while Social Security costs just edge upward slightly. The chart even carries the headline: "Medicare and Medicaid Expected to Grow Rapidly as a Share of the Economy." But, hey, when you're on a crusade to cut Social Security, why worry that the facts don't support your case.
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The Post corrected "5 myths about immigration" in the Outlook section today. The first of the myths is that "immigrants take jobs from American workers." It dismissed this concern by telling us that: "economists also estimate that for each job an immigrant fills, an additional job is created." It might have been helpful it had included some names here of economists who hold this view. There are certainly some economists, such as Harvard Professor George Borjas, who see immigrant workers as having a substantial downward impact on the wages of less educated workers.

There also is an important question about who gets counted as an "American worker" in this story. Some analyses have concluded that immigrant workers have little impact on the wages of native born workers, however they do have a substantial negative impact on the wages of other immigrants. Of course many immigrants will become American citizens after being in the country for 10-15 years. So, if we count naturalized citizens as "American workers" then the Post's assertion is completely untrue.

It is worth noting that recent immigrants have had a much more difficult time in catching up with the wages of their native born counterparts than was true in 60s and 70s. This can be partially explained by the larger flow of immigrants in the last two decades.

It is also worth noting that there may be a difference between the marginal impact of more immigrants and the impact of a larger flow over time. In industries like residential construction and meatpacking, native workers have been largely displaced by immigrants over the last three decades. These industries had provided relatively well-paying jobs to workers with little education. They also had a substantial union presence.

This is less true today as wages and conditions in these industries have worsened considerably, as they became almost entirely non-union. At this point, more immigrants are likely to primarily depress the wages of other immigrants working in these sectors, although if there had not been a sharp uptick in immigration over the last three decades it is reasonable to assume that these industries would still employ native born workers at a better wage than they would have been able to receive in other industries.

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In discussing the oil spill off the coast of Loiusiana the NYT told readers: "the country needs the oil — and the jobs." The basis for this assertion is not clear.

What is presumably at issue is the prospect of further drilling in currently protected areas. According to the Energy Information Agency, the potential yield from these areas is in the range of 200,000 barrels a day. This is equal to about 1 percent of U.S. oil consumption and around 0.2 percent of world oil consumption.

This amount of oil would have no notable impact on U.S. energy independence. (Actually, in a world where we can freely buy oil on world markets, from the standpoint of concerns about energy indepedence, it would make more sense to leave the oil in the ground so that it can be used if we actually are cut off from world markets.)

This amount of oil would have a trivial impact on oil prices, meaning that no one will notice a lower price at the pump because we open these areas to oil drilling. The jobs created directly by the drilling would also be trivial and would be dwarfed by a few days' job growth in a healthy economy. (The jobs would only come years down the road, since much exploration would have to precede major drilling.)

So, there is no apparent basis for the NYT's assertion about the need for drilling.

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In an article discussing the first quarter GDP data the NYT told readers that: "Economists are hopeful that families will continue to pick up the pace of purchasing and make the recovery more sustainable." Economists who know arithmetic (admittedly a tiny subset of economists as evidenced by the failure of almost the entire profession to see an $8 trillion housing bubble) are unlikely to share this perspective.

Tens of millions of baby boomers are at edge of retirement. Because of the collapse of the housing bubble and the resulting destruction of home equity, the vast majority of people in these cohorts has almost nothing saved for retirement. The median net worth for older baby boomers (people aged 55-64) is around $180,000. This means that if they took all their wealth (including their current home equity) they would  have approximately enough money to pay off the mortgage on the median home. This would leave them with absolutely nothing to support themselves in retirement other than their Social Security. The median net worth for younger baby boomers (people aged 45-54) is approximately $80,000.

The workers in these age cohorts desperately need to be saving more for retirement, especially in a context where the Peter Petersons and Robert Rubins of the world are devoting enormous resources to try to cut their Social Security and Medicare. For this reason, economists who know arithmetic are not hoping for a consumption led recovery. They are hoping that the government will take further measures to stimulate the economy. These measures could also boost private sector investment. Economists who know arithemtic are also hoping that the Obama administration will take steps to end the dollar's over-valuation, thereby leading to more net exports.

Unfortunately, because economic policy is dominated by economists who do not know arithmetic, we may be dependent on consumption to drive the recovery.

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This is in the preemptive strike category. It seems from initial reports that no one bothered to notice that half of this quarter's GDP growth (1.6 percentage points) was driven by inventory accumulation. If we pull out inventories, final demand grew at a 1.6 percent annual rate, almost exactly the same as the 1.7 percent rate in the 4th quarter of 2009 and the 1.5 percent rate in the 3rd quarter of 2009.

In other words, we are still looking at a very weak economy; one far weaker than would be expected coming out of such a severe downturn and one which may not even be growing fast enough to create any jobs at all.

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NPR told listeners that the public has supported drilling offshore because they objected to the country's dependence on foreign oil and the wars in the Middle East.This is very interesting because it shows how badly the media have reported on this issue. There are no projections that show drilling offshore will have any noticeable effect on U.S. dependence on foreign oil. The media (including NPR) have horribly misrepresented the potential impact of offshore oil so that tens of millions of Americans actually believe that it has anything to do with dependence on foreign oil.

It would have been interesting to report the attitudes towards offshore drilling among those who know that it will not have any noticeable impact on U.S. dependence on foreign oil or the price of gas.

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There were down slightly last week, but the 4-week moving average is still 462,000. Usually claims have to be under 400,000 to be consistent with steady job growth.

This release got no mention in the Post even though it provides far more information about the state of the economy than other data releases that are routinely covered, such as the consumer confidence indexes. Perhaps the Post will give the data more attention when it starts showing fewer claims.

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New York Times columnist Floyd Norris told readers that: "China ties its currency to the dollar, and despite American jawboning, there is little that the United States can do about that." Actually, the U.S. government is free to set its own higher exchange rate of the yuan against the dollar.

The Chinese government sets an exchange rate puts the value of the yuan at approximately 14 cents. There is nothing that prevents the Treasury of offerring to buy yuan at a higher price, for example 20 cents. If the Treasury made this commitment and was prepared to stand behind it, it would like raise the value of the yuan to 20 cents. This competing exchange rate would be highly unusual, but there is nothing that literally prevents the U.S. government from doing it.

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University of Chicago economist Casey Mulligan makes the case that housing is now on the upswing. The part of the story that he seems to have missed is that after house prices rose last fall as a result of low mortgage interest rates, a hyperactive HUD, and the first time homebuyers tax credit, they have recently reversed course and are heading downward by most measures. We'll look for Professor Mulligan's account of the second housing slump in 6 months or so. Add a comment

That should not be a surprise given the paper's hostility to Social Security and its outrage over the fact that unionized auto workers can earn $56,000 a year, but the Post's editorial calling for reform does miss an important part of Greece's story. While aspects of Greece's welfare state almost certainly do need to be changed (a retirement age of 60 is hard to support in a modern economy), it is also important to note that there is massive tax evasion in Greece, especially by the wealthy.

The OECD estimated the size of Greece's underground economy at more than 30 percent of its official economy. Even if this is an overstatement, the existance of a large uncounted sector inidcates that Greece's debt burden is considerably smaller relative to the size of its economy than the official data imply. It also points to the fact that many wealthy people are likely paying the taxes that they legally owe. Greece's citizens are likely to be less amenable to giving up benefits like a relatively generous Social Security system in a context where the wealthy are avoiding their tax obligations. This is an important part of the story that needs to be mentioned in  any discussion of Greece's fiscal problems.

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Just about the whole economics profession missed the housing bubble that sank the U.S. economy. Fortunately for them, economics is not a profession where performance matters. The "experts" who completely missed the largest economic disaster in 70 years are still the sole source for the overwhelming majority of news stories on the crisis.

This is especially painful in coverage of the Greek and now larger euro crisis. Those of us who read Keynes (a group which should include all economists, but apparently excludes nearly all media "experts") know that the problem is that the European Central Bank has to make more money available to its members to get through this crisis. While many governments hold superstitions about the benefits of rain dances and the causes of inflation, there is no basis for concern that printing money will cause inflation in the current economic situation.

The story that reporters should be writing that is that the superstitions of many European governments (with Germany topping the list) are needlessly inflicting pain on tens of millions of people across Europe. Ironically, these superstitions may ultimately have a severely negative effect on Germany's economy as well.

Economists who are not clueless about this crisis could explain this situation to readers. It is unfortunate that most major media outlets have chosen to rely exlcusively on economists who are.

 

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It's possible that he doesn't know this, but it is what he said. According to the NYT, Volcker said that: "He [Volcker] and other speakers expressed fear that without some action in the next year or two that reduces deficits for decades to come, interest rates could spike, the dollar could lose value or some other financial crisis would occur."

A drop in the dollar is the only plausible way to get our trade deficit closer to balance. A large trade deficit, by definition, means that the United States must have low national savings (barring an extraordinary and unprecedented uptick in investment). Low national saving means that we must either have large budget deficits or very low private savings, or some combination. So proponents of a high dollar (like Mr. Volcker) want a large budget deficit and/or very low private savings. It would have been helpful to point this fact out to readers.

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