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Beat The Press: A Weekly Round-up of Dean Baker's Commentary on Economic Reporting

A weekly roundup of Dean Baker's commentary on economic reporting.

How High Are Stock Prices?

The NYT tells us that the price-to-earnings ratios in the stock market are just 16.8, only a bit higher than the long-term average of 15.7. This might make the stock market sound reasonably safe right now, but this misses an important piece of information.

Profits are currently at a cyclical high. Profits fluctuate hugely over the course of the business cycle. For example, the Congressional Budget Office (CBO) projects that profits will revert to their trend share of output over the next several years, so that in 2017, real corporate profits will be just 13 percent higher than in 2006. If this proves right, and stock prices rise in step with corporate profits over the next decade, it implies that real returns in the stock market will be just over 4 percent annually.

By comparison, a completely riskless inflation indexed treasury bond pays a return of 2.6 percent. This means that, if the CBO profit projections are in the ballpark, stockholders will receive a very low risk premium over the next decade.

--Dean Baker

Posted at 06:29 AM

David Broder: "Free-Trade" Enforcer

August 12, 2007

When it comes to cracking down on opponents of the selective protectionism that passes for free trade in Washington policy circles, David Broder is one of the foremost enforcers. He is working overtime this Sunday, denouncing the irresponsibility of the Democratic presidential candidates for not supporting his trade agenda.

Just to remind everyone, these trade deals are slectively protectionist because they only break down some trade barriers, while leaving others in place, and actually strengthening some forms of protectionism. The main barriers that the "free-traders" want to eliminate are the barriers to importing manufactured goods into the United States. Eliminating these barriers has the effect of placing U.S. manufacturing workers into direct competition with low paid workers in the developing world. While this lowers the price of manufactured goods for consumers in the United States, it also reduces the wages of manufacturing workers and less-educated (non-college educated) workers more generally. As a practical matter, the "free-traders" have largely succeeded in removing the barriers to trade in manufactured goods (we can buy anything we want from China), so the remaining deals will have little impact in this regard.

The free-traders are absolutely fine with the protectionist barriers which keep up the wages of highly paid professionals. There are professional and licensing barriers that prevent foreign doctors, lawyers, and other professionals from working in the United States. These barriers cost U.S. consumers hundreds of billions of dollars every year. The "free-traders" don't object to barriers that sustain their own high wages or those of their friends. (They all claim to oppose such barriers, but no one has ever been denounced in the pages of the Washington Post for not supporting liberalized trade in physicians services.)

The protectionist part of these trade deals is increasing the stringency of patent and copyright protection. Almost all of the trade deals pushed by the U.S. increase patent protection for prescription drugs and copyright protection for music, movies, and software. These are incredibly costly forms of protectionism since items that would otherwise be cheap (drugs) or free (downloaded music and software) are made very expensive as the result of government granted monopolies. But, the free traders like pharmaceutical companies and software tycoons more than they like textile workers and autoworkers, so they denounce the opponents of protectionism for their products as "protectionist."

So, it's ad hominum Sunday as Mr. Broder calls out those who aren't with the program. Enjoy the entertainment.

--Dean Baker

Posted at 08:35 AM

The Fed Does Not Buy Mortgage-Backed Securities!!!!!!

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