Economic Reporting Review
By Dean Baker

April 19, 1999


Central Bank Cuts European Rates 
Anne Swardson 
Washington Post, April 9, 1999, page E1 

Europeans Cut Key Rate More Than Foreseen 
Edmund L. Andrews 
New York Times, April 9, 1999, page C1 

These articles discuss the European Central Bank's half point cut in its key short-term interest
rate. Both articles include assertions that this rate cut now places pressure on Europe's political
leaders to cut taxes and deregulate their economies, since they can expect no further cuts in
interest rates from the European Central Bank. 

It is worth noting that the European Central Bank's monetary policy is still quite contractionary
compared with the policy pursued by the Federal Reserve Board when the United States was
emerging from a recession in the early nineties. In 1992, the Federal Reserve Board set its
short-term interest rate at 3.0 percent, approximately the same as the inflation rate, making the
real interest rate zero. (The real interest rate is the difference between the nominal interest rate
and the inflation rate. It is the only interest rate that economists view as meaningful.) By
comparison, even after the half point drop, the short-term rate set by the European Central
Bank is 2.5 percent. Since the inflation rate in the European Union is under 1.0 percent, this
still leaves the real interest rate above 1.5 percent. 

Both the Times and Post articles include quotes from Thomas Mayer, a senior economist at
Goldman, Sachs in Frankfurt. While Mayer argues that "growth here was not weak because of
high rates," many of the world's most prominent economists disagree with him. This was one of
the key points in the Economists Manifesto, which was signed by three Nobel Laureates along
with two dozen other prominent economists (see "An Economists' Manifesto on
Unemployment in the European Union," BNL Quarterly Review, # 206, September 1998, pp
327-361). In addition to the quotes from Mr. Mayer, both articles include quotes from Wim
Duisenberg, the president of the European Central Bank. The only other people quoted or
cited in these articles are the French Finance Minister in the Times article, and Allison Cottrell
"of Paine Webber Inc. in London" in the Post. 

It is worth noting that Denmark and Sweden, which have two of the lowest unemployment
rates in Europe, also have heavily regulated economies and relatively high taxes. This suggests
that deregulation and tax cuts may not be essential to reducing unemployment in Europe as
argued in these articles. 


Joblessness is Down. Prices Aren't Up. Go Figure. 
Richard W. Stevenson 
New York Times, April 11, 1999, Section 4 page 18 

This informative article examines the state of economic knowledge after the Federal Reserve
Board's open market committee acknowledged that it really doesn't understand the inflationary
process. While the article calls attention to the failure of mainstream economic theory to
accurately predict the recent drop in the inflation rate, even as the unemployment rate fell to
thirty year lows, it ignores the long-time critics of this view, who had disputed the link between
inflation and the unemployment rate. The most prominent of these critics was the late Robert
Eisner, a former President of the American Economic Association, who produced a significant
body of research questioning the link between low unemployment rates and rising inflation.
Eisner actively promoted his work in columns in the Wall Street Journal and elsewhere until
his death last December. It might have been appropriate for the article to include some
reference to Eisner and other critics of the mainstream view on this issue, now that their
arguments appear to have been correct. 

The article also includes a graph showing the economy growing more than 7.0 percent annually
in each of the last seven years. In none of these years did the economy's growth exceed 4.0
percent, and the average has been under 3.0 percent. 


Computer Age Gains Respect of Economists 
Steve Lohr 
New York Times, April 14, 1999, page A1 

This article assesses attitudes among economists toward the view that computers have
qualitatively changed the pace of productivity growth. The article notes that productivity growth
has averaged close to 2.0 percent annually over the last three years, a rate well above the 1.1
percent trend of the previous quarter century. 

This comparison is very misleading for two reasons. First, it ignores the impact of recent
changes in the methodology used by the Bureau of Labor Statistics to measure productivity.
According to most experts, these changes have raised the measured rate of productivity
growth by approximately 0.4 percentage points annually, compared with methodology that was
in place earlier in the decade. (This issue is discussed in the 1999 Economic Report of the
President [p 94] and the 1999 Economic and Budget Outlook, published by the Congressional
Budget Office [p 30].) 

The second reason the comparison is misleading is that it ignores the cyclical nature of
productivity growth. One reason that it has been possible to have above trend productivity
growth over the last few years is that productivity growth had been so far below trend earlier in
the recovery. When the cycle is examined as a whole (the standard method among
economists), and adjustments are made for the recent changes in methodology so that a
consistent methodology is applied to the whole period, the annual rate of productivity growth
from 1989 to 1998 has been 1.1 percent, exactly the same as the rate from 1973 to 1989. 

The article also includes a misleading discussion about the continuing problems in measuring
output in the service sector. The article implies that Alan Greenspan and other economists now
believe that the economy may be able to sustain its high rate of recent GDP growth, because
productivity growth may be higher than current measurements indicate. 

In fact, if productivity growth is being undercounted, then GDP growth is being undercounted
by almost exactly the same amount. Productivity is calculated by first measuring output (GDP).
If the failure to accurately measure output in the service sector has caused productivity growth
to be understated, then it has also caused GDP growth to be understated by approximately the
same amount. This means that if productivity growth is actually 0.5 percentage points higher
than current data show, then GDP growth is also approximately 0.5 percentage points higher
than is presently indicated by official statistics. Therefore, any under-measurement of
productivity growth is logically irrelevant to the question of whether the current reported rate of
GDP growth can be sustained. 


Signs of Stability Are Identified in Russia's Economy 
Neela Banerjee 
New York Times, April 14, 1999, page C5 

Russia Refuses to Extend Deadline on Bonds 
Bloomberg News New York Times, April 15, 1999, page C4 

Both of these articles discuss aspects of Russia's current economic situation. The first article
discusses an independent assessment of Russia's economic prospects which suggests that the
economy has stabilized in recent months and actually begun to recover lost ground. According
to the article, Russia's industrial production now exceeds its level just prior to the collapse of
the ruble last August. 

This progress is striking because the ruble's collapse was generally portrayed as a cataclysmic
event at the time (e.g. see "Russian Crisis Saps Companies' Hope" by Sharon LaFraniere,
Washington Post, August 29, 1998, page A13; "Russia in Reverse" by David Hoffman,
Washington Post, August 30, 1998, page A1; and "Chernomyrdin Tries to Calm Fears of
Return to Soviet-Style Economic Policies" by Michael Wines, New York Times, August 30,
1998, Section 1, page 10). It is also noteworthy because the government that took power in
the wake of the financial crisis was regularly derided as being economically ignorant (e.g. see
"Primakov's Picks Recall Soviet Past" by David Hoffman, Washington Post, September 12,
1998, page A26 or "Economy Shift In Russia Worries U.S., Albright Says" by Steven
Erlanger, New York Times, October 3, 1998, page A6). The latter article includes a public
statement by Secretary of State Madeleine Albright in which she questioned whether "some
members of Primakov's team understand the basic arithmetic of the global economy."
Regardless of the level of their understanding of the arithmetic of the global economy, the
Russian economy has performed far better under the current government than under the
"reformers" who were favored by the United States and the I.M.F.. 

In spite of Russia's relatively successful economic performance, the article still refers to the
"wrenching economic changes needed in industry and banking." The previous government had
pushed through many such changes and managed to reduce the economy's size by
approximately 50 percent and introduce mass poverty to Russia. The news presented in this
article may suggest that "wrenching economic changes" may not be the best path to growth in
Russia. 

The second article repeats an assertion from the first article, that "Russia urgently needs new
financial aid from the International Monetary Fund." This claim is dubious, since most likely the
I.M.F. will only lend Russia enough money to meet its current interest obligations on its past
loans. This means that Russia will have no more if it gets the loan than if it doesn't. 


Brazil's Steep Rates Squeeze Consumers 
Simon Romero 
New York Times, April 13, 1999, page C8 

This article reports on the impact that high interest rates are having on consumers in Brazil. The
country is currently maintaining very high interest rates at the insistence of the I.M.F. At one
point the article comments: "Although Brazilians have lived with at least double-digit interest
rates since the beginning of an economic stabilization program begun by President Fernando
Henrique Cardoso in 1994, their patience is waning." 

This contrasts sharply with the view of the stabilization program presented in earlier coverage.
In these articles, the general availability of consumer credit was portrayed as the greatest
success of the stabilization program and the source of Cardoso's popularity (e.g. see "In Brazil,
High Times Turn to Hard Times" by Anthony Faiola, Washington Post, October 18, 1998,
page A 24 or "Brazil's Economic Half-Steps" by Diana Jean Schemo, New York Times,
August 1, 1998, page B1). 


Clinton Details Plan for New Retirement Savings Accounts 
George Hager and Amy Goldstein 
Washington Post, April 15, 1999, page A9 

Clinton Proposes Grants as a Way to Encourage Savings 
Richard W. Stevenson 
New York Times, April 15, 1999, page A18 

Both of these articles report on President Clinton's plan to establish a system of individual
retirement savings accounts that will supplement Social Security benefits. The Post article
repeatedly characterizes Social Security as facing a severe crisis. For example, it asserts that it
"is destined to be on life support by early in the next century" and that the public debate is
"over how to overhaul the Social Security system." While the article eventually notes that the
program can pay all scheduled benefits for the next thirty five years, with no changes
whatsoever, it still characterizes the prospect that some changes may eventually be needed as a
"crisis," although one that "remains distant in political terms." 

It is common for the government to increase its spending on various programs. For example, it
increased its spending on the military by an amount equal to 1.8 percent of GDP between
1978 and 1986, approximately the same increase in spending that Social Security will consume
over the next thirty years. Between 1966 and 1996 it increased its spending on Medicare by
2.4 percent of GDP. If the prospect of eventually devoting more resources to Social Security
constitutes a crisis, by the same logic, the United States must have also faced a crisis in 1950,
because 28 years later it would begin to spend more money on its military. 

The Times article includes a very misleading statement in an accompanying chart. It states that
a person who placed the maximum contribution of $1000 a year in their account would
accumulate "$253,680 after 40 years, assuming 5 percent real rate of return." This sum
assumes an annual inflation rate of approximately 2.5 percent, which is not mentioned
anywhere. In current dollars, the accumulation would be approximately $134,000. It is also
important to note that it will not be possible for people to earn 5.0 percent real returns on
average if the Social Security Trustees economic projections are correct. The real rate of
return that would be consistent with these projections is approximately 3.3 percent. At this
rate, the accumulation would be just $87,000, assuming no administrative expenses. When
these are factored in, the accumulation would be approximately $69,000. 

At one point, the Times article asserts that Clinton "could not make the incentives [for his plan]
so appealing that the new accounts would lead people to divert savings from existing 401(k)
accounts and other plans." The article does not indicate why this outcome should be viewed as
bad. Presently, workers lose an enormous amount of their savings to administrative fees on
these accounts. A government plan could be run at a fraction of the cost. There is no obvious
public goal served by denying workers the opportunity to obtain low cost retirement accounts,
except protecting the profits of the financial industry. 


Republicans Seize the Banner on Social Security 
Alison Mitchell 
New York Times, April 18, 1999, page A18 

This article reports on the Republican budget resolution which just passed Congress. At one
point the article asserts that "in the past, successive Congresses and Administrations routinely
spent Social Security money and used it to mask the true size of the Federal deficit." The article
does not explain how Social Security money was used to "mask" the size of the Federal deficit.
While Social Security is included in the "unified budget," which is generally the focus of public
debate, every year, the Federal government publishes its "on budget" deficit in official
documents such as the President's Budget, the Economic Report of the President, and the
Congressional Budget Office's Economic and Budget Outlook. The "on budget" budget does
not include Social Security revenue or expenditures. Any reporter who considered the "on
budget" budget the more meaningful measure of government fiscal policy could have chosen to
report the size of the "on budget" deficit, instead of the deficit in the unified budget. Any
masking of the true size of the deficit could only have occurred if reporters focused on the
wrong budget. 


Outstanding Stories of the Week

I.R.S. Figures Show Drop In Tax Audits For Big Companies 
David Cay Johnston 
New York Times, April 12, 1999, page A1 

This article reports on new evidence from the I.R.S. that shows a large drop in the number of
audits of corporations and high income individuals. 


Poor Workers Lose Medicaid Coverage Despite Eligibility 
Robert Pear 
New York Times, April 12, 1999, page A1 

This article reports on evidence that welfare reform measures have led hundreds of thousands
of families to be dropped from Medicaid, even though they are still eligible. 


Count Corporate America Among NATO's Staunchest Allies 
Tim Smart 
Washington Post, April 13, 1999, page E1 

This article details the lobbying efforts of several major defense contractors during the planned
50th anniversary celebration for NATO. The article notes how various contractors will be
hosting a series of events connected with the anniversary. 


Government Says H.M.O.'s Mislead Medicare Recipients 
Robert Pear 
New York Times, April 13, 1999, page A18 

This article discusses evidence in a General Accounting Office report that H.M.O.'s routinely
mislead elderly people on the services they provide. 


Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. 


Recent articles can be found on the websites of the New York Times and Washington Post.