Economic Reporting Review
By Dean Baker
April 3, 2000:
Social Security Cuts; OPEC Output; Putin's Economics
SOCIAL SECURITY AND THE BUDGET
"Rosier Future for Medicare Is Forecast"
Glenn Kessler
Washington Post, March 31, page A1
"Outlook Better for Social Security and Medicare"
Robert Pear
New York Times, March 28, page A18
These articles report on the release of the year 2000 reports of the Social Security and
Medicare trustees. Both articles note that these reports extend the projected depletion date of
the Social Security trust fund to 2037, from 2034 in the 1999 report. The articles attribute this
extension to the nation's strong economy.
Actually, the strength of the economy had little to do with this extension of the Social Security
trust fund, or the extensions in the previous two years. The main reason that the fund is
projected to be healthier is cuts in benefit levels that have been put in place in the last five
years.
The Social Security benefits received by retirees are indexed to the rate of inflation as
measured by the consumer price index (CPI). The Bureau of Labor Statistics has implemented
a series of technical changes in the way it calculates the CPI in the last five years. As a result of
these changes, the CPI in place now shows a rate of inflation that is approximately 0.5
percentage points lower each year than the CPI that was in place in the year 1995.
The technical changes in the CPI will cause benefits to grow less rapidly than they would have
with the CPI that was in place in 1995. This reduction in future benefit levels is the main reason
for the improved financial situation of the Social Security program. When the changes in
measurement are taken into account, the Social Security trustees have actually lowered their
projected rates of real annual GDP and wage growth by approximately 0.4 percentage points
since 1996. If they still projected the same rate of real wage growth as in 1996 (adjusted for
measurement changes), the fund would be fully solvent until at least 2043.
At one point, the Post article inaccurately characterizes the trust funds of the two programs. It
contrasts them with private pension funds, saying that Social Security and Medicare trust funds
"do not actually hold funds--but merely IOUs from the government." The Social Security and
Medicare funds hold U.S. governments bonds. Like all bonds, these are IOUs. Private pension
funds generally do not keep large amounts of cash in vaults. They also hold stocks and IOUs,
including many issued by the government.
The Times article also includes an incorrect assertion about the authorship of the trustees
reports. The article states that the projections that appear in the Social Security and Medicare
trustees reports are "prepared mainly by actuaries and civil servants" and that the Clinton
administration appointees that serve as trustees "do not dictate their conclusions."
In fact, the numbers that appear in the trustees reports are decided by the trustees, not the
professional staff at the Social Security Administration and the Health Care Financing
Administration. The professional staff at these agencies do prepare memos providing
recommendations for how the projections should be changed year by year. But the projections
that actually appear in the trustees reports are determined by the trustees themselves, not the
staff.
Neither the memos, nor the minutes of the trustees meetings, are made public. Therefore, there
is no way to know the extent to which the projections in the trustees reports reflect the
judgment of the professional staffs of these agencies.
"Budget Rift, Not a Chasm"
Richard W. Stevenson
New York Times, March 25, page A1
This article discusses the current state of the budget debate in Congress. At one point, the
article briefly summarizes the Democrats' public claims about the proposed Republican budget:
"Democrats said the plan would push the government back into deficit, put Social Security and
Medicare at risk and force deep cuts in essential programs."
The Republican budget plan does call for significant cuts in inflation-adjusted domestic
discretionary spending. These cuts are even larger when measured as a share of GDP, which is
arguably the best metric. Unless the economy performs far worse than is currently projected,
there is no possibility that the Republican budget would push the unified budget (the budget
which includes the Social Security surplus) into a deficit.
According to the projections of the Medicare Trustees, that program will be fully solvent for
the next 15 years with no changes whatsoever. The Social Security trustees project that Social
Security will be able to pay all scheduled benefits through the year 2034, with no changes. This
means that the Medicare will be fully solvent right through the next seven terms of Congress,
and Social Security through the next 17, even if these Congresses do nothing to shore up the
programs. The projections for both programs from the non-partisan Congressional Budget
Office are somewhat more optimistic.
More about Social Security.
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USAIRWAYS
"USAirways Averts Shutdown"
Frank Swoboda
Washington Post, March 26, 2000, page A18
This article discusses the settlement between the flight attendants at USAirways and the
management, which averted a threatened job action and lockout. At one point the article
comments that USAirways is having difficulty maintaining profitability because it has higher
per-mile costs than its competitors. While the article goes on to note that most of USAirways
flights are on short routes in the Northeast, it claims that this is additional factor raising costs,
rather than pointing out this is the main reason that USAirways has higher per-mile costs than
its competitors.
Short plane trips always have higher per-mile costs than longer ones. The fares charged for
shorter trips are also considerably higher on a per-mile basis than fares charged on longer
flights, on a per mile basis. Therefore the fact that an airline that primarily flies short flights has
relatively high per-mile labor costs is virtually irrelevant to its competitive position.
More about labor.
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INTERNET TAXES
"Gephardt Urges Protections for Internet"
Juliet Eilperin
Washington Post, March 29, 2000, page A1
This article reports on the decision by House Minority Leader Richard Gephardt to support the
extension of a moratorium on Internet taxes. At one point the article quotes Rep. Gephardt as
saying the exemption from taxes "is critical--the best and quickest way to kill the golden goose
of the Internet is to tax it to death."
The vast majority of goods that are sold in this country are subject to a retail sales tax. The fact
that Internet sales are generally not subject to this tax constitutes a large subsidy. There is no
economic rationale for subsidizing this type of commerce at the expense of traditional retail
sales. Since people who shop on the Internet have higher incomes on average than the
population as a whole, the tax subsidy is a transfer from lower-income households to
higher-income households.
More about the Internet.
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LATIN AMERICA
"Treasury Secretary Wants New Stress on Latin Poverty"
Joseph Kahn
New York Times, March 28, page C4
This article reports on a speech by Treasury Secretary Lawrence Summers at a meeting of the
International Development Bank, in which he expressed concern that economic growth in Latin
America has not had much effect on poverty rates in the region. The article, following the line of
the speech, incorrectly implies that the policies promoted by Bank and the Clinton
administration have led to rapid growth in Latin America.
For example, at one point the article refers to "boom years of the early and mid-'90s" in Latin
America. Later it refers to the merits of "high and sustained growth" as though this is something
that Latin American nations have been experiencing in recent years. At another point it
comments that "Brazil, Mexico, Argentina and other major Latin American nations have all
grown faster in the last year than economists anticipated."
These assertions about Latin American growth contradict data from the World Bank, IMF and
other authoritative sources, which show that growth was actually quite weak in most of Latin
America in the '90s. For example, according to the World Bank's 1999 World Development
Report, per capita GDP growth in Brazil from 1990 to 1997 averaged just over 1.0 percent a
year. In Mexico, per capita GDP growth was barely positive over this period. By comparison,
in the years from 1960 to 1980, annual per capita GDP growth averaged 4.7 percent in Brazil
and 3.7 percent in Mexico. Since Argentina's economy has declined by approximately 4.0
percent in the last year, economists must have had extremely negative projections for this
outcome to be better than anticipated.
While it is accurate to say that the policies supported by the Bank and the Clinton
administration have not significantly reduced poverty in Latin America, it is inaccurate to claim
that they have led to strong economic growth in the region.
More about Latin America.
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OIL PRICES
"OPEC Oil Increase Likely to Fall Short of Clinton's Target"
Edmund L. Andrews
New York Times, March 27, page A1
"OPEC Fails to Agree on Boost in Output"
William Drozdiak
Washington Post, March 28, page A1
"Bowing to U.S., OPEC Agrees to Hike Ouput"
William Drozdiak
Washington Post, March 29, page A1
"With Iran Balking, OPEC Nations Plan to Sell More Oil"
Edmund L. Andrews
New York Times, March 29, page A1
"Reluctant Iran Falls in Line With OPEC Production Rise"
Edmund L. Andrews
New York Times, March 30, page A10
These articles discuss the current and likely future path of oil prices in the wake of OPEC's
decision to increase oil production. None of these articles place the price of oil in an historical
perspective, thereby implying that current prices are unusually high.
For example, the first Times article concludes by commenting that, with prices close to $28 a
barrel, "they were at levels that most producers would consider close to Nirvana." After
adjusting for inflation, this price is approximately the same as oil producers received in the late
'80s and early '90s (not counting the price spike associated with the Persian Gulf War). In
inflation-adjusted dollars, it is less than half the price that oil producers received in 1980.
It is also worth noting that the decision of the OPEC nations to increase their production almost
certainly ran counter to their own interests. Since the demand for oil is highly inelastic (at least
in the short-run), the increase in production means that these nations will be producing more oil
for less money. The fact that many OPEC nations were reluctant to agree to an increase in
production is treated as being peculiar. Actually, most nations are usually reluctant to carry
through actions that are harmful to their economic interests.
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RUSSIA
"Putin Promises Stable Antidote to Yeltsin Years"
David Hoffman
Washington Post, March 26, 2000, page A24
"Russian Vote Reveals Shift in Fault Lines"
David Hoffman
Washington Post, March 28, 2000, page A1
"Russian Economy Shows Signs of Life"
David Hoffman
Washington Post, March 29, 2000, page A16
These articles assess the situation in Russia as the nation was holding elections in which
Vladimir Putin was voted into a full term as president. While all three articles discuss Russia's
current economic problems, none of them note the extent to which they have been exacerbated
by the transition away from a centrally planned economy towards the current market system,
which is almost universally acknowledged to be extremely corrupt.
For example, at one point the first article describes the Yeltsin years, which ended in
December with Putin's appointment as acting president as being characterized by "the massive
transfer of Soviet state-owned property to private hands, the breakout from central planning,
the demise of the Communist Party, the wild growth of unbridled capitalism, the violent
suppression of a parliamentary rebellion and Russia's entry into the global economy." These
years were also a period in which Russia's economy experienced an unprecedented economic
collapse, as the economy shrunk by close to 50 percent in eight years. The massive decline in
living standards and the virtual collapse of the healthcare system led to large reductions in life
expectancy for the Russian population.
The second article repeatedly refers to the people who ran Yeltsin's economic policy as
"reformers." This is a dubious characterization of people who presided over the give-away of
much of Russia's wealth to a clique of well-connected businessmen.
The third article notes that Russia's economy has been growing at a respectable rate in recent
months, which it attributes to "a boom in the price of oil." The price of oil has not boomed, it
has simply recovered from extraordinarily low levels in recent years. The low oil prices of the
last few years did have a substantial negative effect on Russia's economy.
This article also describes Putin's economic team as having "some of Russia's best and brightest
economists." It does not explain how it has evaluated the team's intelligence of their
performance as economists. It is worth noting that many of economic advisors in the Yeltsin
years, whose policies lead to Russia's economic collapse, were frequently described in similar
terms.
More about Russia.
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OUTSTANDING STORIES OF THE WEEK
"Federal Tax Level Falls for Most"
Glenn Kessler
Washington Post, March 26, 2000, page A1
This article reports on the findings of four different studies, all of which show that the
percentage of income paid in federal taxes has been falling in recent years for the vast majority
of families.
"Companies Try Dipping Deeper Into Labor Pool"
Louis Uchitelle
New York Times, March 26, 2000, Section 1 page 1
This article examines the efforts that corporations have used to find workers to fill job openings
even as the unemployment rate has fallen to a 30-year low. It notes that higher wages have not
been the main tool.
"Investments on Borrowed Times"
Lanthe Jeanne Dugan
Washington Post, March 29, 2000, page A1
This article discusses the huge increase in margin debt in the last four years as investors are
increasing borrowing money to buy stocks. As the article notes, this could prove dangerous to
many investors and the market as a whole, since much of the borrowing appears to be going to
purchase volatile technology stocks.
"Modigliani's Message: It's a Bubble, and Bubbles Will Burst"
Floyd Norris
New York Times, March 31, 2000, page C1
This article presents the views of Franco Modigliani, a Nobel laureate and one of the world's
leading experts on financial markets, that the stock market is in a bubble, which will inevitably
burst. Modigliani points out that profits cannot possibly grow fast enough to make sense of
current stock prices.
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Dean Baker is an economist and the co-director of the Center for Economics and Policy
Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The
Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.
ERR is edited by Jim Naureckas.