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 reported on the release of new data from the Treasury Department showing a doubling in the number of redefaults on loans that had been permanently modified through the administration's HAMP program. The new data show that more than 1 percent of permanent modifications have already redefaulted. Since most of the modifications have only been completed in the last few months, this indicates that a very percentage of the permanent modifications are likely to end in default. Since the vast majority of homeowners facing foreclosure will not receive a permanent modification, these means that the program is likely to help only a small minority of homeonwers keep their home.

It would have been useful to point out that the money that the government spends on a failed modification goes to banks, not homeowners. Typically, the government will have subsitituted an FHA insured mortgage for the original mortgage issued by a bank. This means that when a redefault takes place, the bank will have received most of the principle back on the loan, with the government incurring the loss on the redefault. The net result of this policy is that far more money is likely to be given to banks through the HAMP than to homeowners. This should have been pointed out in this article.

 

--Dean Baker

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That might have been a good question for reporters to address when they reported on the February trade data released yesterday. The data showed that royalties and licensing fees had increased by $883 million from January, a rise of more than 40 percent.

This has occasionally happened in prior months and presumably reflects one-time payments to a producer or set of producers. However, this was a big part of the $2.8 billion rise in the overall trade deficit from January and it deserved some mention in the coverage of the February data.

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That's effectively what the Washington Post told readers in another front page editorial highlighting the need for deficit reduction. The article said:

"But by suggesting the deficit may have peaked, administration officials are taking a political gamble. If the favorable number does not hold up in coming months and the budget shortfall surpasses the $1.4 trillion recorded last year, voters in the November midterm elections could punish the Democrats for offering false hope."

That's a great story. Is it plausible that even 1 percent of voters are going to have any clue as to whether this year's deficit is marginally higher or marginally lower than last year's deficit? Is there any reason that anyone should care? Is there any evidence that this will influence their vote in an environment where they are concerned about their jobs and their homes?

In the Post's dreams maybe, but not on this planet.

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A new Pew poll of reporters and editors found a great deal of pessimism about the prospects for the newspaper industry. At one point, the article reports the poll's finding that: "about three-quarters of the editors who took part said they would have serious objections to accepting direct support from either the government or interest groups, and a similar number said their organizations had not seriously thought about taking donations from nonprofit groups."

Of course there are other ways in which new media can be supported. Currently the government supports newspapers by granting them copyright monopolies. Without this special protection anyone would be able to use content without paying for it, including for commercial purposes. So these editors are already taking government support, even if they don't realize it.

In the Internet era this mechanism of financing newspapers is obviously no longer adequate. It is striking that Pew failed to consider any of the obvious alternative mechanisms in its poll. The article could have also discussed such alternatives.

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In an article reporting on the debate over extending unemployment insurance benefits the Washington Post told readers: "on Wednesday, Federal Reserve Chairman Ben S. Bernanke warned that growing budget deficits imperiled the economy's long-term stability."

It is worth noting that in his capacity as a Federal Reserve Board governor from 2002 to 2005, chief economic adviser President Bush, and then Fed Chair since January of 2006, Bernanke never raised any concerns about the housing bubble and the threat it posed to the economy. Based on this history, readers may question Mr. Bernanke's ability to assess threats to economic stability. The Post should have informed readers of Bernanke's record on this issue.

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Paul Krugman asks in his column this morning why Texas managed to largely escape the worst of the housing bubble while Georgia leads the country in the number of failed banks. Both are states in which the major cities have relatively few zoning restrictions or natural barriers, which allows for easy sprawl to meet new housing demand. Krugman explains the difference by the better consumer protection legislation in Texas.

While this may have played a role, it is important to note that Texas had just been through a boom/bust cycle in the 80s. The state was at the epicenter of the S&L crisis. Land prices had soared with the oil boom at the start of the decade, but then collapsed along with the price of oil in the middle of the decade. Texas bankers who had lived through this experience might have had more realization that house prices could fall than bankers in other parts of the country. Of course, the experience of a recent boom and bust cycle did not affect in slowing the bubbles in either southern California or Colorado.

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Those are the questions that readers of the WAPO's Sunday Outlook section must be asking. The Post told readers that: "this year, China's economy is expected to produce about $5 trillion in goods and services. That would put it ahead of Japan as the world's second-biggest national economy, but it would still be barely one-third the size of the $14 trillion U.S. economy."

This reflects China's GDP measured on an exchange rate basis. However, economists typically use purchasing power parity measures of GDP for international comparisons. By this measure, China's economy is expected to be about $9.5 trillion this year. At its current growth rate, it will pass the size of the U.S. economy in about five years.

By many measures it is already larger than the U.S.. For example, it has more Internet users, college graduates in science and engineering, a larger car market, and about twice as many cell phone users.

The article also tells readers that the exchange rate will not have much impact on the trade deficit with China. Virtually all economists believe that an increase in the price of imports from China by 20-30 percent would substantially reduce imports. it is not clear why the author of this article believes otherwise.

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The NYT notes that interest rates have recently risen and are generally predicted to continue to rise. It then told readers: "That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession."

Okay, what are they smoking there? We have just been through a period of extraordinarily low interest rates. Interest rates fell to their lowest levels in more than 50 years. This was a deliberate policy response to the worst downturn since the Great Depression. Once we are out of the worst of this downturn, everyone expected that interest rates would rise even if we had a balanced budget and moderate inflation, the latter of which is predicted by almost all economists.

In other words, the standard projections from the Fed, the Congressional Budget Office and most private economists is that interest rates will be rising to normal levels from very low levels. Almost no one is projecting soaring interest rates in response to "the nation’s ballooning debt and the renewed prospect of inflation." This is the invention of the NYT.

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This would have been a better headline for the Washington Post article on the testimony before the crisis commission of Fannie's former chief executive as well its top regulator. The discussion before the commission was apparently whether Fannie and Freddie were motivated by profit when they moved into Alt-A mortgages in 2005 and 2006 or whether they were trying to fulfill their mission of increasing homeownership.

While there may be some debate over individual motivations, the obvious point that apparently went unmentioned in this article was that if the executives at Fannie and Freddie were not totally clueless about the housing market, they would have been cutting back on buying mortgages altogether in 2005 and 2006, when house prices were at levels badly inflated by the bubble. It was guaranteed that prices would drop and a high percentage of even traditional prime mortgages would go bad.

In this environment, the responsible route for Fannie and Freddie would have been to only issue mortgages that could be justified by appraisals of rental values. If a house price exceeded a multiple of 15 of its appraised annual rent, then F&F should not have purchased it. This action, along with its public justification by F&F executives and economists, likely would have had a substantial impact in dampening the bubble. This action would have best filled both the institutions' responsibility to promote homeownership and also likely kept them out of conservatorship.

Fannie and Freddie's executives should have been questioned on why they did not see the bubble. This was their biggest failing in the crisis. After all, these are both huge institutions and housing is all they do. The commission failed badly in its task and the inept reporting helped to conceal the commission's failure.

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We need reporters to do this? In the course of the report NPR assured readers that there was nothing that could be done about AIG's explosive issuance of credit default swaps (CDS) because it was an insurance company that operates in hundreds of countries. And furthermore, the federal government doesn't even regulate insurance, states do.

Did this mean that the Fed could do nothing if it chose? Where were the statutory powers that allowed the Fed to arrange the unraveling of the Long-Term Capital Hedge Fund? Neither NPR's reporters nor anyone else would be able to find any statutory authorization for this action. The Fed used its authority and its ability to threaten non-cooperative actors to force most of the major banks to join this effort.

In the same vein, if it had decided that the issuance of trillions of dollars of CDS by AIG was a problem, there were certainly steps it could have taken. For example, it could have told the major banks that they should not be buying CDS from AIG. The Fed is also allowed to talk to other regulatory agencies, like the state insurance agency in NY, which would have had authority over much of AIG's activity. The Fed opted to do nothing in this case because it did not want to do anything, not because it lacked the ability to restrain AIG.

The piece also absurdly claims that the bills before Congress will take care of the problem of "too big to fail" banks. Few analysts would agree with this assessment. The bills leave in place huge financial conglomerates that would be extremely difficult to unravel in the event of a financial crisis.

Listeners would be better served if NPR focused on making the issues surrounding the bill understandable rather than spending its brief news time telling its audience how complicated it is.

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The Washington Post (a.k.a. Fox on 15th) feels so strongly that we should reduce the budget deficit that they ran yet another front page editorial on the topic. The piece told readers in the second paragraph:

"This mounting government debt poses a painful choice for developed countries such as Britain, Japan and the United States: either a deep reordering of public expectations about everything from the retirement age to tax rates, or slower growth as record levels of borrowing crimp economic activity."

Well, that's pretty clear. The Washington Post told us in no uncertain terms that things will have to be pretty bad, no two ways about it. Only those who bothered to read to page two would find out that there is actually considerable uncertainty about the point at which debt really poses a serious burden on the economy. On page two they would discover the United States actually had a debt to GDP ratio that was nearly twice as high as it is presently. This did not prevent it from having three decades of extraordinarily rapid growth.

The Post's sharp paragraph two warning also ignores the great Citigroup profit trick that the Post applauded last week. The Citigroup profit trick involved the government buying Citigroup stock, guaranteeing the company's survival when it otherwise would have been bankrupt, then selling the stock at a profit when the price rises because of the government guarantee.

The Post warmly applauded this move and saw it as giving the government money -- a great win-win story. Of course, the government can follow the same route pretty much without limit. It can take large stakes in all sorts of companies, then guarantee the companies' debts, thereby lowering borrowing costs and increasing profits. This will raise the stock price, thereby allowing the government to sell at a profit.

The real story of course is that the economy is well below its full employment level of output. This means that it can increase output by just printing money. However, superstitions held by the people who set economic policy and write about it at leading outlets like the Post are preventing the government from taking this simple and obvious step to increase demand. So, if the straightforward route is blocked by superstition, then we effectively accomplish the same thing by using Citigroup profit trick and win great applause the Post and other deficit hawks.

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The Washington Post (a.k.a. Fox on 15th Street) told readers that: "Social Security is already draining resources from the broader federal budget, as spending on benefits has risen above this year's Social Security tax collections."

Yes, Social Security benefit payments exceed the money currently being collected in Social Security taxes. The gap is being made up by the interest it earns on the $2.5 trillion in government bonds held in the Social Security trust fund. It is peculiar to describe spending money from its interest earning (or for that matter the bonds themselves) as "draining resources from the broader federal budget." However, if that is the standard the Post wants to use, then we should say that any individual or entity that draws interest from the federal government on bonds it holds is also "draining resources from the federal budget."

This means that billionaire Wall Street investment banker and long-time foe of Social Security Peter Peterson is also draining resources from the federal budget by the Washington Post standard (assuming that he owns some government bonds. No doubt the WAPO will have a story on this fact sometime in the near future.

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That is the only thing that readers can conclude from a statement in an article on Federal Reserve Board Chairman Ben Bernanke's urgings to reduce the deficit. The WSJ told readers that: "The government is running a budget deficit in excess of about $1.3 trillion, more than 10% of the nation's total economic output." Of course, the Commerce Department is telling us that GDP for the fourth quarter of 2009 was $14.5 trillion, which would mean that the deficit is less than 9.0 percent of GDP.

This trouble with numbers carries over to the substance of the piece which is supposed to be that the country faces an imminent crisis in being able to sell its debt. It warns readers that: "yields on 10-year Treasury notes have risen from around 3.25% in late November to just under 3.9% today, in part because of concerns in credit markets about the mountains of government debt investors are being asked to buy to fund U.S deficits."

Hmmm, we are paying 3.9 interest because there are concerns in credit markets about "mountains of government debt." Were investors also concerned about "mountains of government debt" when they demanded interest rates of more than 6.0 percent to hold federal debt back in 2000? Oh yeah, we had a $250 billion surplus back in 2000.

The reality is that the WSJ is just telling us that they don't like the government's debt. The markets did not tell them why interest rates rose from the extraordinarily low levels of last November. They are just making this stuff up and feeding it readers as truth.

We expect this sort of thing on the WSJ editorial page. We expect better in the news section.

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The NYT reports that China's government signed a deal with the state of California and General Electric to provide engineering expertise and high tech parts for the construction of high-speed rail. This is a fascinating and totally predictable story which cause great pain to many purveyors of the economic conventional wisdom (CW).

China has been building high-speed trains, the United States hasn't. This means that the country has substantially more expertise in this area than the United States. As a result the transfer of this green technology will go from China to the United States, the opposite direction assumed by purveyors of the CW.

More generally, this story shows the absurdity of the assumption of the purveyors of the CW that somehow the U.S. will transfer all its grunt work (i.e. manufacturing) to the developing world and leave the high tech stuff for our smart workers. The reality is that the developing world has hundreds of millions of smart workers who are able to do everything that our smart workers do, but are willing to accept much lower wages. If we subject our more highly educated workers to the same sort of international competition as we have subjected our low-wage workers, they will also lose. This will only change when currencies adjust and wages in the developing world move closer to U.S. levels.

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Steven Pearlstein often has insightful columns, not today. He discusses a conference he attended in which a repeated theme was how the media contributed to the crisis with its poor reporting. He then comments: "although it's a bit overdone, I'll admit there is a dollop of truth in it."

A "dollop?" How about an enormous ocean full of truth to it and Pearlstein continues to contribute to the crisis today by covering up the earlier failure. He tells readers that:

"Three years after the onset of what was then thought of as the "subprime crisis," there remarkably is still no consensus on why it happened, who is to blame, how necessary the government bailouts were and what needs to be done to prevent such a cataclysm from happening again. Over time, the issues have been overwhelmed by populist anger, infused with political ideology, distorted by partisan maneuvering and special-interest pleading, and ultimately eclipsed by economic recovery."

Yeah, it's all really really complicated. Except it isn't.

Nationwide house prices had diverged from a 100-year long trend, increasing by more than 70 percent in real terms. There was no remotely plausible explanation for this run-up. What is hard to to understand to about this? What is complicated? Third grade arithmetic was all that was needed. It's simple, not complicated.

The run-up in house prices was driving the economy. This was also really easy to see. The government publishes GDP data every quarter. The data showed that housing construction had exploded as a share of the economy. You just had to look at the data. It's simple, not complicated.

The data also showed that consumption was booming and savings had fallen to near zero. This was driven by the well-known housing wealth effect. It's simple, not complicated.

It was also easy to see the explosion in subprime and Alt-A loans that people were using to buy homes they could not otherwise afford. These loans were sure to reset at higher interest rates. This works until house prices stop rising. It's simple, not complicated.

And, it was easy to see that house prices would stop rising. Vacancy rates were running at record levels. There is a concept called "supply and demand" in economics and the data showed that we had serious amounts of excess supply. It's simple, not complicated.

And when house prices started to fall, we knew that millions of loans would go bad, construction would plummet and consumption would fall back to more normal levels. This implied a really bad recession and serious financial problems. It's simple, not complicated.

So, Pearlstein is badly misleading reading when he tells us that it is all very complicated. Obviously the buffoons and hacks who either could not see the bubble or deliberately misled the public about it have good reason to tell everyone that it is all very complicated, but it isn't and was not. They did not do their job.

Include the Post high on the list of those who did not do their job. They had no space in their pages for anyone warning of the dangers of the bubble. The paper's main source for information on the housing market was David Lereah, the chief economist of the National Association of Realtors and the author of Why the Real Estate Boom Will Not Bust and How You Can Profit From it.

The Post and the rest of the media failed disastrously at their job to inform the public and they continue to do so. It's simple, not complicated.

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David Leonhardt had a column discussing overuse of expensive medical care in the NYT today. Remarkably, this discussion did not mention the effect of patents in complicated decisions on treatment and raising costs.

Patents are essential to this discussion for two reasons. First, drugs and medical tests that are very expensive are generally expensive because of government granted patent monopolies, not their inherent cost. For example, a new generation of cancer drugs that can cost tens of thousands per year would be relatively cheap in the absence of patent protection. These drugs were expensive to develop, but once they have been developed, the production is cheap. By forcing patients to pay the high patent protected price, an otherwise simple decision (use the cheap drug) can instead be made very complicated.

The other reason why patents play such an important role in this discussion is that they give a party (the patent holder) a huge stake in misrepresenting the issues. Because drug companies or makes of medical equipment stand to make patent rents on the use of their product, they have an enormous incentive to promote its use even in cases where it may not be appropriate. This can lead to overuse and misuse, especially since the patent holder has the most information on their product. They may conceal evidence that it is less beneficial than claimed or even that it is harmful.

This column is the sort of place where it would be expected that readers would find a serious discussion of the role of patents in complicating decisions on appropriate care. It is disappointing that this issue is not addressed.

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California has done some really really stupid things (like a tax credit for first time homebuyers), but the NYT did the state and its readers a disservice in going after California's pension fund liabilities. The basic story is that if you assume a 4.14 nominal rate of return on pension fund assets, then the state's pension liabilities look really really bad.

The big question that readers should ask is, so what?

There have been few people who have been more critical of assuming exaggerated market returns than me, but 4.14 percent nominal? Anyone want to take a bet that California's pension funds will do better than this?

Look, the market has plummeted from its prior levels. This is good news for future returns. Lower price to earnings ratios open the door for higher future returns. The logic is simple: you are paying much less for each dollar of profits. For this reason, the assumption of 4.14 percent average nominal returns (that gives us just over 2.0 percent real, assuming a 2.0 percent inflation rate) is ridiculously low.

Suppose we assume that pension liabilities grow at the nominal rate of 5 percent a year. If we sum the liabilities over 40 years, using a 4.14 percent discount rate gives a 70 percent higher cost than using a 7.0 percent discount rate. Stocks have historically provided a real return of 7 percentage points above the inflation rate, so assuming a nominal return of 7.0 percent for the mixed portfolio is hardly unreasonable.

In short, the story of outsized pension liabilities in this article is driven largely by a ridiculous assumptions about pension returns. There is no reason whatsoever that the state of California should use this 4.14 percent discount rate in assessing its pension liabilities. This calculation would lead it to exaggerate its pension liabilities and therefore raise taxes or cut pensions and/or other spending unnecessarily.

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Okay, it's not quite that bad, but when someone who pretends to be serious wants his readers to celebrate the fact that: "the average American worker is nearly 10 times more productive than the average Chinese worker," it's getting pretty silly. (Actually it's probably closer than 7-8 times, but this is David Brooks we're talking about.)

People in the United States are used to comparing their living standards to countries like Canada and Germany, not China. While China is a rapidly developing country, it is still a relatively poor country in a process of catching up. It's more than a bit silly to tell people in the United States that our productivity is many times higher than that of a poor peasant agricultural worker in central China.

Brooks seems fascinated by the fact that our income is on average projected to rise. This is true and always has been true and it is true for almost every other country in the world. Incomes rise, incomes rise, incomes rise. Let's say that a few thousand more times so that no columnist will ever again write it up as though it is news.

This is the normal state for economies. Incomes rise through time because people become more educated, we get more and better capital, and our technology improves. The real issue is the rate at which incomes rise. For most people in the United States the rate of increase in income or living standards (this can also be the result of more leisure) has been extremely slow in the last three decades. Projections show that rising health care costs will eat up much of the projected gains in income over the next three decades. This is the sort of issue that serious people would look at.

Instead, Brooks touts our growing population -- hey we should be like Congo or Ethiopia, they even faster population growth. It's hard to know what planet Brooks lives on, but on this one, population growth is not a measure of prosperity. In fact, in a world where there is a desperate need to limit greenhouse gas emissions, population is decidedly unhealthy.

Well, Brooks did warn serious people to not read his column. They would be well advised to take this advice.

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I don't ordinarily use BTP for addressing items that mention me or my work, but I'll make an exception in the hope of getting a good exchange going. Brad DeLong was good enough to begin a review of my book False Profits on his blog. After graciously giving me credit for recognizing the housing bubble and the dangers it posed, Brad goes on:

"But let me start by saying how I disagree with the book. I think that its story of the linkages between our current crisis and Federal Reserve policy is significantly overstated. Its argument about how excessively-low interest rates caused the housing bubble is exaggerated. I think that its belief that the Federal Reserve could have taken much more action to curb the housing bubble while is underway is also exaggerated, and does not recognize the very real constraints that the Federal Reserve works under and all but ignores the costs of austerity. And it overstates the strength of the links between the housing bubble and the housing crash on the one hand and our current situation of macroeconomic despair on the other."

Okay, let's go point by point.

  1. "Its argument about how excessively-low interest rates caused the housing bubble is exaggerated."

    That doesn't sound like my book. I argued that the weak economy caused by the crash of the stock bubble demanded stimulatory policy. Low interest rates were the right policy -- we needed them to recover from the stock bubble. However, this did create an environment that was conducive to the growth of bubbles. If the Fed had kept the Federal Funds rate at 5.0 percent I feel pretty confident in saying that we would not have had a housing bubble -- very high unemployment, but no housing bubble.

  2. "I think that its belief that the Federal Reserve could have taken much more action to curb the housing bubble while is underway is also exaggerated, and does not recognize the very real constraints that the Federal Reserve works under and all but ignores the costs of austerity."

    Let's see, my policy prescription was to have every last staffer at the Fed devoting all of his/her time to documenting the evidence for the bubble and the dangers it would cause to the economy. I would have had Alan Greenspan use his congressional testimonies and other public speaking engagements to warn of the risks of the bubble. This doesn't mean mumbling "irrational exuberance," it means carefully showing with charts and graphs how house prices have followed an unprecedented and unsustainable path. He also should have warned explicitly what would have happened to the banks that had made big bets on the bubble when it burst.

    In addition, they should have made full use of their regulatory power (including working with other regulators) to crack down on the issuance and securitization of junk mortgages. The "who could have known" line is crap. These loans were being issued by the million, there is no way Greenspan could not have known about them.

    Would this have worked? Brad for some reason is very confident it would not have. It certainly would have been nice if the Fed had tried (what was more important?), then we would both know for sure.

    As a last resort I would have raised interest rates. I hate to throw people out of work (except Wall Street bankers and economists), but it would have been better to preemptively burst the bubble rather than let it run its course and be where we are today.

  3. "It overstates the strength of the links between the housing bubble and the housing crash on the one hand and our current situation of macroeconomic despair on the other."

    There is a pretty direct line from the falloff in residential construction due to the overbuilding caused by the bubble, the falloff in non-residential construction due to the overbuilding caused by the bubble, and the falloff in consumption as a result of the lost housing bubble wealth and where the economy is today. I don't see much obvious room for a financial crisis in this explanation. The crisis may have brought the downturn on more quickly, but it seems that the basic problem is the loss of the demand generated by the bubble.

    I have a strong ally in this argument: Spain. Spain did not have a financial crisis, but it now has 19 percent unemployment, the highest in the EU. The explanation is that Spain had a really huge housing bubble. It is not easy to find new sources of demand to replace 8-10 percentage points of GDP.

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A front page Washington Post article told readers that:

"The number of people looking for jobs rose by more than 200,000 last month compared with February, according to the Economic Policy Institute -- and that's a good sign, economists say. It means that Americans are seeing more jobs being created and that they're optimistic about their prospects."

Umm, actually no. This increase in the size of the labor force is too small to be statistically significant. It is not uncommon for there to be big jumps in the size of the labor force for no obvious reason. For example, the labor force was reported as rising by 543,000 people in September of 2002, a time when the economy was still shedding jobs and by 554,000 jobs in April of 2009, when employment was still plummeting. There is no reason to think that the modest job growth shown for March would have any notably effect on job seeking.

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In the middle of an article telling readers about Alan Greenspan's (yes, the guy who couldn't see an $8 trillion housing bubble) assessment of the economy, the NYT refers to the "paradox" that the Labor Department reported that the economy created 162,000 jobs in March but the unemployment rate remained fixed at 9.7 percent.

This is hardly a paradox. The labor force is growing at the rate of about 125,000 workers a month. This means that March's job growth was just a little faster than what is needed to keep the unemployment rate from rising. There was no reason that anyone should have expected a decline in the unemployment rate. In fact, the number of people reported as being employed in the household survey used to measure the unemployment rate has grown far more rapidly than the number of workers on payrolls as measured in the establishment survey. Given the data reported in the establishment survey, it is surprising that the unemployment rate has not been rising the last four months.

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