Economics Reporting Review
April 16, 2001
By Dean Baker, co-Director of the Center for Economic and Policy Research

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OUTSTANDING STORIES OF THE WEEK 

"Tale of Lost Farms Reflects Muddle of Estate Tax Debate," by David Cay Johnston in
the New York Times, April 8, 2001, Section 1, page 1. 

This article points out that the survival of few, if any, family farms are actually
placed into jeopardy as a result of the estate tax. The current tax fully exempts
family farms with net worth of up to $4 million. The proponents of repealing the
estate tax have claimed that protecting family farms is one of their main motivations.
However, because of the large size of the exemption, family farms are virtually
unaffected by the tax. 

"Rebuilt City Starts to Feel Effects of the Slowdown," by Louis Uchitelle in the New
York Times, April 9, 2001, page A1. 

This article examines the ways in which the current economic slowdown is affecting
Pittsburgh's economy. It notes widespread cuts in investment spending and hiring
plans, as well as slower growth in sales tax collections, although car and house sales
appear to be still holding up reasonably well. 

"An Outbreak Waiting to Happen," by Joby Warrick in the Washington Post, April 9,
2001, page A1. 

This article reports on an investigation (with NBC News/Dateline) of food safety
conditions in the meatpacking industry. It finds that health inspections are
inadequate to prevent the sale of contaminated meat. 

"A Smaller I.R.S. Gives Up on Billions in Back Taxes," by David Cay Johnston in the
New York Times, April 13, 2001, page A1. 

This article reports on the decision of the I.R.S. to abandon collection efforts for
billions of dollars of unpaid taxes. This comes in the context of seriously diminished
efforts at enforcement more generally. Since the tax system relies overwhelmingly on
voluntary compliance, this inattentiveness to enforcement could encourage
widespread tax avoidance, as the article points out.





INADEQUATE NURSING CARE 

"Nursing Shortage Is Raising Worries On Patients' Care," by Milt Freudenheim and
Linda Villarosa in the New York Times, April 8, 2001, Section 1, page 1. 

This informative article reports on how hospitals may be endangering patients' health
because they do not maintain adequate nursing staffs. At one point the article notes
that nurses' salaries have not risen in real terms over the last decade. It would have
been worth mentioning that the real pay of doctors and top executives at hospitals
has risen substantially over this period. The accounts in the article indicate that
hospital administrators have chosen to jeopardize patients' care rather than grant
the same sort of pay increases to nurses that higher paid professionals have
received. The article should have examined why these administrators have been so
determined to prevent the pay of nurses from rising, even in the face of clear market
signals that higher wages are necessary to ensure adequate staffing. 


JAPAN 

"Japan Learns the Sun May Not Come Out Tomorrow," by Howard W. French in the
New York Times, April 8, 2001, Section 4, page 6. 

This article examines the prospects for an economic recovery in Japan. It argues
that Japan may face a bleak economic future. The argument is based primarily on
Japan's declining and aging population. The article declares that "the most basic raw
ingredient in economic power -- people themselves -- is probably Japan's biggest
vulnerability." 

There is no economic theory that would support this article's assertion. It also seems
flatly contradicted by countries such as India, Indonesia, and Bangladesh, all of
which have very large, and young, populations, but still rank among the world's
poorest nations. According to economic theory, a larger population is at least as
likely to be harmful as beneficial. A greater population imposes strains on natural
resources, including land, which is quite scarce is Japan. 

The real determinants of wealth are the education and skills of the labor force and
the amount of capital per worker. Japan ranks very high by these measures. It is also
worth noting, that while the U.S. is currently borrowing more than $1,500 per person
per year from abroad, Japan is lending abroad at almost the same rate. Its foreign
assets will be an important source of wealth that Japan will be able to draw on the
future, while the growing U.S. foreign debt will be a large burden. 

"Japan Becomes the Land of the Falling Price," by Clay Chandler and Akiko Kashiwagi
in the Washington Post, April 11, 2001, page A1. 

This article discusses the pattern of falling prices that Japan has been experiencing
over the last decade. The article repeatedly confuses falling relative prices and
general deflation, even though it includes an explicit warning from a Japanese
economist on precisely this issue. 

The article begins by reporting on the increasing interest of Japanese consumers in
discount retailers. It then reports on the general decline in the Japanese price level.
These are two completely different phenomena, which have no direct relationship to
each other. The spread of discount stores can mean the decline in relative prices of
the goods that can be purchased there. This does not imply general deflation -- the
price of goods sold in discount stores may be simply be rising less rapidly than other
goods. (It is worth noting that price indices do not typically make direct comparisons
across types of stores. So the fact that shoes are available at a lower price in a
discount store than in a traditional shoe store is not typically recorded as a fall in the
price of shoes. Prices indices implicitly assume that the differences in prices across
stores correspond to differences in service.) 

By contrast, a fall in the price level means that prices of goods in general are falling.
This would mean that the price of the goods sold in traditional retail outlets, as well
as the prices of other goods and services, are falling. 

Deflation raises a very different set of issues than the spread of discount stores.
While the availability of low cost goods offers many benefits to consumers, deflation
can be extremely harmful, especially for an economy in a slump like Japan's. Because
nominal interest rates cannot be negative, deflation raises the real interest rate at a
time when Japan badly needs low interest rates to stimulate the economy. (The real
interest rate is equal to the nominal interest rate minus the rate of inflation.
Deflation, a negative rate of inflation, means that the real interest rate is higher than
the nominal interest rate.) 

Deflation has also worsened the debt burden of many Japanese firms and banks, as
well as the government. If the country had experienced a modest rate of inflation
(e.g. 3.0 percent) over the last decade, in contrast to its deflation of close to 1.0
percent annually, the real debt burden for many firms and the government could be
almost one third lower than it is at present. 


TRADE AGREEMENTS 

"U.S. Vows to Pursue Jordanian Trade Pact," by Dana Milbank in the Washington Post,
April 11, 2001, page A18. 

This article discusses the state of negotiation between the United States and Jordan
on a new trade pact. The article refers to the pact as a "free trade" agreement. It is
inappropriate to characterize the pact as a "free trade" agreement since it would
increase some forms of protectionism, specifically copyright and patent protection.
Clearly proponents of these sorts of agreements prefer to characterize them as
promoting "free trade." Newspaper reporting should take a more neutral stance on
these pacts. 


THE BUSH BUDGET 

"First Bush Budget Proposes to Raise Aid For Education," by Robert Pear in the New
York Times, April 10, 2001, page A1. 

"Putting Faith in Discipline," by David E. Rosenbaum in the New York Times, April 10,
2001, page A1. 

These articles examine some of the main features of President Bush's budget
proposal. Both articles note that it may not be possible to carry through with
President Bush's tax cut proposal, increase spending in the areas he has designated
and still avoid spending the Social Security surplus over the next ten years. While
this issue may have some political significance, it is worth noting that the economic
consequences of modest deficits in the non-Social Security portion of the budget
(e.g. $100-200 billion) are almost too small to be measured. In other words, there is
little reason that anyone in the country should care about the possible shortfalls
described. 

While this budget describes a spending path for ten years, it is also worth noting
that Congress approves a new budget every year. If the course projected by this
budget leads to a decision that is considered undesirable in seven or eight years,
then Congress would be able to correct the situation, as it has in the past. 


THE BUSH TAX CUT 

"Well Off but Still Pressed, Doctor Could Use Tax Cut," by Jim Yardley in the New
York Times, April 7, 2001, page A1. 

This article examines the situation of a doctor who earns $300,000 a year, and
supports the Bush administration's tax cut proposal because he feels he needs more
money. At one point, the article states that the doctor's income places him among
the wealthiest 2 percent of all families. Actually, the income indicated in the article
would place the doctor's family in the richest 1 percent of families. 

The article twice states the debate over the Bush administration's proposal is a
debate over who should get a tax cut. This is not true. All the tax cut proposals
currently being given serious consideration by the Congress would give this doctor a
tax cut; the difference is whether the proposal will give this doctor a vastly larger
tax cut than the typical family receives. The proposals being supported by most
Democrats would give every taxpayer the same tax cut, where as the Bush proposal
would give wealthier taxpayers a much larger tax cut. 


ELECTRICITY DEREGULATION IN CALIFORNIA 

"California's Largest Utility Files for Bankruptcy," by Laura M. Holson in the New York
Times, April 7, 2001, page A1. 

This article reports on the decision by the Pacific Gas and Electric Company to file for
bankruptcy. At one point it asserts that the utilities problems stems from "flawed
state deregulation that did not allow the utilities to pass on rising costs to
consumers." This assertion implies that the flaw was not allowing the utilities to pass
on higher wholesale prices. It is much more plausible to argue that the main flaw was
allowing a highly concentrated electricity industry to operate without regulation.
Economic theory would, and did, predict that suppliers would withhold electricity to
push up the price. 

Wholesale prices also soared after deregulation in southern California, although in
that case, utilities were allowed to pass on the price increases to consumers. The
resulting rate increases led to a political firestorm and eventually price controls were
re-imposed. 


WEALTH DISTRIBUTION AND ECONOMIC EDUCATION 

"Greenspan Urges Better Money Sense," by Bloomberg News in the New York Times,
April 7, 2001, page B14. 

This article reports on a speech by Alan Greenspan, in which he argued that much of
the public needs more education on financial matters. As evidence, Mr. Greenspan
noted that the median net worth for all families increased by 17.5 percent between
1995 and 1998, while it fell for the families with incomes below $25,000 and largely
unchanged for non-whites and Hispanics. While Mr. Greenspan attributes this to a
lack of financial education on the part of poorer families and minorities, a more likely
explanation would be that this group has experienced significant declines in their real
wages in recent years. 

It is also worth noting that higher income households are likely to see large declines
in their net worth as a result of the recent plunge in the stock market. According to
Mr. Greenspan's reasoning, these higher income families are in dire need of better
education in financial matters. 


PREDICTING RECESSIONS 

"The Downturn's Early Bird Who Catches Flak," by Steven Pearlstein in the
Washington Post, April 7, 2001, page E1. 

This article discusses the views of Steve Roach, the chief economist at Morgan
Stanley, who was one of the first analysts to predict the current downturn. At one
point the article asserts that "the recession Roach has been looking for hasn't
materialized." The article does not indicate the evidence it is using for this claim. It is
often very difficult to recognize the onset of a recession. According to the
transcripts of a Federal Reserve Board meeting, in July 1990 Alan Greenspan thought
the economy would continue to grow at a steady pace for the immediate future. The
beginning of the last recession is now dated as June 1990. The decline in jobs in
March and the recent sharp reductions in inventories are both consistent with the
beginning of a recession, but it will be necessary to have several more months of
data to be able to know if the economy had entered a recession as of April. 

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