Economics Reporting Review
By Dean Baker, co-Director of the Center for Economic and Policy Research
April 23, 2001

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OUTSTANDING STORIES OF THE WEEK 

"Bear Market? The Young Needn't Be Restless," by David Leonhardt in the New York
Times, April 15, 2001, Section 3, page 4. 

This article examines the returns that young people can expect to get from the stock
market in the future. It makes a seemingly obvious point, which has been absent
from most stock market reporting, that stock returns are inversely related to the
current stock price. In other words, if the market falls by another 50 percent, returns
after that point will be much higher than if the market remains at its current level. 

"Just Who Brought Those Duds to Market," by Andrew Ross Sorkin in the New York
Times, April 15, 2001, Section 3, page 1. 

This article examines the track record of initial public offerings (IPOs) of the last four
years. It notes that a large percentage of these IPOs have since gone bankrupt or
been de-listed by stock exchanges. The article names the investment banks and
brokerage houses that were most involved in underwriting these issues.





THE FEDERAL RESERVE BOARD AND THE ECONOMY 

"Fed, In a Surprise, Cuts Rates Again, Spurring Markets," by Richard W. Stevenson in
the New York Times, April 19, 2001, page A1. 

"Just In Time, Or Too Late?" by David Leonhardt in the New York Times, April 19,
2001, page A1. 

"Heeding Economic Danger Signs," by Steven Pearlstein in the Washington Post, April
19, 2001, page A1. 

These articles report on the Federal Reserve Board's decision to cut interest rates by
half a percentage point and the market's reaction to this decision. At one point,
Stevenson's article characterizes the Fed's rate cut as an effort "to make clear that
it understood the complex nature of the current slowdown, and the danger that it
could turn into a recession." 

It is worth noting that the Fed's recognition of this danger is a sharp departure from
its views of the recent past. A statement issued after the November 15th meeting of
the open market committee said: "the risks continue to be weighted mainly toward
conditions that may generate heightened inflation pressures in the foreseeable
future." In December, it placed equal emphasis on concerns over inflation and slower
growth. It has only gradually come to the recognition that there is a serious risk of
harm due to slow or negative growth. Since there are lags between when the Fed
cuts rates and when its full impact is felt, it is likely that it has acted too slowly to
keep unemployment from rising significantly. 

The analysis in the Leonhardt piece at one point mentions the fact that 38 percent
of the economists polled for the newsletter Blue Chip Economic Indicators now
expect a recession this year. It is worth noting that in September, this group had an
average forecast of 3.6 percent growth for the fourth quarter of 2000. The lowest
ten forecasters among this group had an average forecast of 2.7 percent growth.
Growth for the quarter was actually just 1.0 percent, so this group proved to be way
too optimistic in its assessment of the economy in the very recent past. 

At one point the article by Pearlstein notes the sharp fall-off of investment in recent
months and comments that investment had accounted for between one third and
one half of the economy's growth. Actually, investment has generally accounted for
somewhat less than one third of the economy's growth in recent years. It accounted
for 32 percent, 35 percent, 30 percent, and 32 percent of GDP growth in the years
from 1997 to 2000, respectively. The importance of investment in GDP growth has
often been exaggerated because of the Commerce Department's chaining method for
calculating constant dollar GDP. With this method, it is improper to directly compare
constant dollar quantities across categories, such as investment and consumption.
However, many observers do mistakenly make such comparisons. 

It is worth noting that the impact of investment on demand has been even less than
these numbers indicate, since demand depends only on nominal spending. In the last
year, investment spending accounted for 26.3 percent of the growth in nominal
spending. 


TURKEY 

"Turkey Unveils Economic Program to Address Crisis," by News Services in the
Washington Post, April 15, 2001, page A17. 

"Needing Cash, Turkey Plans More Sacrifice," by Douglas Frantz in the New York
Times, April 15, 2001, Section 1, page 10. 

These articles report on Turkey's plans to implement new economic austerity plans in
coordination with the IMF, and the large protests against these plans. The articles
note some of the protesters' criticisms of the negative effects of IMF policies. It
would have been helpful to readers to point out that in the last 54 years, the IMF
has designed seventeen failed economic programs for Turkey (see "In Turkey, a
Quieter Day to Examine Core Problems," by John Ward Anderson, Washington Post,
February 27, 2001, page A19), which suggests that it does not have a very good
track record. 


FTAA 

"NAFTA Lite? Hemisphere-Wide Trade Pact Faces Opposition From Brazil to Capitol
Hill," by Paul Blustein in the Washington Post, April 15, 2001, page H1. 

This article previews the summit meeting in Quebec to discuss a hemisphere-wide
trade agreement. The article repeatedly makes allusions to the history of NAFTA as a
backdrop. Some of the allusions are of questionable appropriateness and accuracy. 

For example, the article notes that Ross Perot's claim that NAFTA would cost millions
of jobs has been proven false because the U.S. economy has created 20 million jobs
since NAFTA. The fact that U.S. economy has created a large number of jobs in the
last seven years says nothing about the impact of NAFTA on employment growth.
The U.S. could have created 20 million jobs in spite of a very negative impact of
NAFTA and, in fact, the U.S. trade deficit with the NAFTA nations (Mexico and
Canada) has grown by more than $60 billion since NAFTA was passed. This implies
that the direct effect of increased trade with these nations was a net loss of close
to 700,000 jobs. 

It is also questionable whether Ross Perot is an appropriate spokesperson for
opponents of NAFTA. While he is apparently popular with the media, there are large
organizations who are working on this issue and they have spokespeople with far
more grounding in economics than Mr. Perot. 

At one point the article reports the predictions of Jeffrey Schott, an economist at
the Institute for International Economics, about the potential for a new trade
agreement to increase exports to Latin America. It would have been worth noting
that Mr. Schott was the co-author (with Gary Hufbauer) of a 1993 study that
predicted that NAFTA would lead to a large increase in the U.S. trade surplus with
Mexico. In fact, the U.S. trade surplus quickly turned into a large deficit. 

The article also asserts that Mexico's economy quickly recovered from its financial
crisis in 1994. This is a questionable assertion. Many farmers and small business
owners remain heavily burdened by debt as a result of the crisis, and the real wages
of Mexican workers are just now coming back to their pre-crisis levels. 

It is also worth noting that the article repeatedly refers to the trade pact as a "free
trade" agreement. One of the major goals of the United States in these negotiations
is to increase patent and copyright protection throughout the hemisphere, thereby
reducing free trade. It would be more appropriate to refer to the pact as simply a
"trade" agreement. 

"Bush Says He'll Press Effort for Hemisphere Trade Pact," by Christopher Marquis in
the New York Times, April 18, 2001, page A4. 

"Bush to Talk Trade at Summit," by Dana Milbank and Paul Blustein in the Washington
Post, April 20, 2001, page A1. 

"Bush's Quebec Task: Push Case for Free Trade in Americas," by Anthony DePalma in
the New York Times, April 20, 2001, page A16. 

All of these articles discuss President Bush's agenda for the trade negotiations in
Quebec. At one point the article by Marquis notes that many Latin American nations
oppose including labor and environmental rules in any trade agreement because they
"do not want other nations dictating their domestic laws." 

While these nations may not want other nations dictating their domestic laws, they
have been willing to tolerate exactly this practice in a wide range of areas that are
being discussed in recent trade talks, including rules on investment restrictions,
copyright and patent protection, and even environmental regulations (some types of
environmental regulations have been ruled as unlawful trade restrictions by the
WTO). So these nations are clearly willing to let other nations dictate their domestic
laws under some circumstances. 

At one point, this article also refers to comments by Chile's president, Ricardo Lagos,
who argued that there was a need for Latin American governments "to show the
connection between trade and growth on one hand and greater well being for
ordinary citizens on the other." It would have been appropriate to note that the
expansion of trade in Latin America in the last two decades has not been
accompanied by increased economic growth. According to World Bank data, per
capita GDP growth in Latin America slowed from an average of 2.8 percent annually
in the 1960-1980 period to just 0.3 percent annually in the last twenty years. It may
be possible to show a link between growth and greater well being for ordinary
citizens, but the data indicate that it will be far more difficult to show a positive
connection between trade and growth. 

The Post article refers at one point to an argument from the White House, that U.S.
exports to the rest of the western hemisphere would increase dramatically if a new
trade agreement was reached. It would have been appropriate to note that the
Clinton administration made the exact same argument about NAFTA prior to its
passage. Since NAFTA went into effect, imports have increased far more than
exports, which means that the direct effect of the agreement has been a loss of
jobs. 

Both of the Times articles refer to the trade pact being negotiated as a "free trade"
pact. As noted above, since the pact will likely also include the extension of
protectionist measures such as copyrights and patents, it is more accurate to refer
to it simply as a "trade" pact. 


ARGENTINA 

"Argentina Invests Its Hopes In Economic 'Super-Minister,'" by Anthony Faoila in the
Washington Post, April 20, 2001, page A14. 

This article discusses the role of Domingo Cavallo, Argentina's economics minister, in
designing a program to get Argentina's economy out of its current slump. The article
notes that Mr. Cavallo is widely praised for his plan for linking Argentina's currency to
the dollar in 1991, which ended a period of hyper-inflation. It would have been worth
pointing out that many of Argentina's current problems are directly attributable to
this decision. 

The Argentine currency has risen in step with the dollar, making Argentina's goods
less competitively internationally. Also, to maintain the link to the dollar, Argentina's
central bank was forced to raise interest rates in step with the Federal Reserve
Board's rate hikes over the last two years. While Greenspan was raising interest rates
because he feared the U.S. economy was growing too rapidly, Argentina's economy
was already in a slump. These are the sort of predictable problems that have kept
most nations from following the lead of Argentina and tying their currency to the
dollar. 


DRUG PATENTS 

"Global Issues Dog South Africa on AIDS," by Jon Jeter in the Washington Post, April
20, 2001, page A1. 

"Clash Over Patents," by Andrew Pollack in the New York Times, April 20, 2001, page
A16. 

Both of these articles present overviews of the future of drug patents in the
developing world in the wake of a decision by 39 drug companies to abandon a
lawsuit against South Africa over patent enforcement. Both articles note that the
lack of patent protection could have a negative impact on drug research by the
pharmaceutical industry. It would have been appropriate to note that most
bio-medical research is actually not supported by patent protection. The U.S.
government, together with universities, foundations and private charities, supports
considerably more research than does the pharmaceutical industry. If it proves
difficult to support industry research through enforcing patent laws, then expanding
these alternative sources of research funding would seem to be a promising option. 


BANGLADESH 

"Lives Held Cheap in Bangladesh," by Barry Bearak in the New York Times, April 15,
2001, Section 1, page 1. 

This informative article examines the working conditions in sweatshops in Bangladesh.
It points out that workers toil often long hours, at low wages, in dangerous
workplaces. At one point it attributes these conditions to the fact that "consumers
want bargains." The difference that eliminating the worst labor abuses would make in
the price that consumers pay for clothing would in most cases be minimal. According
to the article, wages for adults are in the range of 6 cents an hour (children earn
less). This means that if workers produce one shirt an hour, doubling their wages
would raise the price of a shirt by an average of 6 cents (0.3 percent on a $20
shirt). The article provides no evidence that a price increase of this magnitude would
have a noticeable effect on demand. 

The article also reports on the impact of efforts by "do gooders," who have tried to
block imports of goods produced with child labor. The article reports that these
do-gooders are "suspected of shallow thinking," because the result of these
restrictions was the mass firing of children under fourteen. It claims that many of
these children were hired as a favor to impoverished parents, and that it actually did
no harm to the factory owners to lose them as workers. 

It seems implausible that these factory owners would be so altruistic in hiring children
as a favor to the poor, but so unwilling to provide their workers with safe and
humane working conditions. It is also worth noting that any child labor law that
actually has an impact results in the firing of children whom their parents would like
to be employed (unless the children are working against their parents' will). In other
words, what the article has identified as the result of "shallow thinking" by
do-gooders is the inevitable result of effective child labor legislation. 

The term "do gooder" is pejorative. It does not belong in a news article.