Economics Reporting Review
April 30, 2001
By Dean Baker, co-Director of the Center for Economic and Policy Research
LABOR STANDARDS, ROUND TWO
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OUTSTANDING STORIES OF THE WEEK
"The Law Rides Into the Valley," by David Streitfeld in the Washington Post, April 22,
2001, page A1.
This article reports on a series of investigations -- and prosecutions -- of illegal
activity in Silicon Valley firms. The article notes that there were numerous instances
in which executives at high-tech companies used questionable accounting practices,
engaged in insider trading and even outride fraud.
"Lifting the Curtain on the Real Costs of Making AIDS Drugs," by Melody Petersen in
the New York Times, April 24, 2001, page C1.
This article examines evidence on the cost of producing AIDS drugs. It points out
that the entrance of generic producers from developing nations has shown that many
of these drugs can be profitably manufactured for 5 percent or less of their market
price in the United States.
"Salomon Faces Complaints Over Options At WorldCom," by Gretchen Morgensen in
the New York Times, April 24, 2001, page C1.
This article reports on the investment advice that consultants at Salomon Smith
Barney gave employees at WorldCom. According to the article, the consultants gave
advice about dealing with options that benefited WorldCom to the detriment of its
employees. Such practices may have been commonplace at firms that relied on
options as large portion of employee compensation.
LABOR STANDARDS IN DEVELOPING NATIONS
"Labor Standards Clash with Global Reality," by Leslie Kaufman and David Gonzalez in
the New York Times, April 24, 2001, page A1.
This article purports to show the limited benefits of activists' efforts to restrict labor
abuses in developing nations. The article examines the situation at a textile factory
producing garments for the Gap in El Salvador, which has been subject to a
monitoring agreement. The evidence presented in the article does not support the
headline's assertion, nor many of the other claims made in the article.
For example, the article implies that demand for cheap clothes by U.S. consumers are
forcing sweatshop conditions in El Salvador and other nations. Numbers presented in
the article suggest otherwise. The article indicates that each worker faces a quota
of more than 55 shirts or trousers a day. If the average worker puts in a 14-hour
day, this implies just over 3 per hour. According to the article, the current wage rate
is 60 cents per hour. If this were increased by 50 percent (a very large increase), it
would imply an increase in labor costs of 10 cents for every shirt or pair of pants. It
is questionable whether U.S. consumers would balk at this sort of price increase if
they knew it was needed to guarantee minimum wage standards.
At one point the article also implies that the monitoring system that Gap has put in
place at this factory is prohibitively expensive, noting that the cost of installing
similar systems at all its factories would be equal to 4.5 percent of its annual profits.
The profit share of corporate GDP has risen by approximately 20 percent compared to
the profit peak of the last business cycle in 1988. If the Gap and other U.S.
corporations were forced to see a cut in profits of this magnitude in order to prevent
labor abuses, they would still be getting a far higher return on investment than in the
1980s or prior decades. Remarkably, in listing the parties with an interest in the
battle over labor standards, this article does not include the company's shareholders.
While the article notes the possibility that the factory could be closed if wages are
pushed too high, it never considers the situation that most anti-sweatshop activists
would view as their ultimate goal -- that retailers would not be able to sell items in
the United States if working conditions did not meet some minimal standard. If this
were the case, any individual factory would not have to worry about being undercut
if it paid workers a decent wage. This is always the point of establishing minimum
wage and working standards, whether in the U.S. or in developing nations.
It is worth noting that this is the second front-page Times article in the last ten
days implying that efforts to improve labor conditions in developing nations were
likely to have little beneficial effect or could even hurt the people they were intended
to help (see "Lives Held Cheap in Bangladesh," by Barry Bearak, New York Times,
April 15, 2001, Section 1, page 1 and ERR 4-20-01).
IMF-WORLD BANK MEETINGS
"As World Tanks, Protests Lose Spotlight," by Steven Pearlstein and Manny
Fernandez in the Washington Post, April 27, 2001, page E1.
This article discusses the agenda for the annual meeting of finance ministers and
central bankers at the World Bank and International Monetary Fund (IMF) this
weekend. The article notes that the world appears to be on the brink of a recession.
It asserts that this has put protesters' concerns about poverty on the back burner.
Actually, many of the critics of the World Bank and IMF have pointed out that their
policies have both had negative distributive consequences and slowed economic
growth, thereby exacerbating poverty through both channels. The policies of these
agencies have repeatedly failed in every corner of the world, as per capita GDP
growth has slowed nearly everywhere over the last two decades.
QUEBEC TRADE TALKS
"Bush Uses Quebec Forum to Push for Trade Powers," by Dana Milbank and Paul
Blustein in the Washington Post, April 22, 2001, page A1.
"Bush Will Press Free-Trade Issue at Quebec Talks," by David E. Sanger in the New
York Times, April 21, 2001, page A1.
"In the Streets, Fervor, Fears and a Gamut of Issues," by Anthony DePalma in the
New York Times, April 22, 2001, Section 1, page 4.
"Bush Links Trade with Democracy at Quebec Talks," by David E. Sanger in the New
York Times, April 22, 2001, Section 1, page 1.
These articles report on the progress of negotiations in Quebec for a hemispheric
trade agreement, and the protests in the street against this process. All of these
articles refer to the agreement being negotiated as a "free trade" agreement. (The
April 21st article by Sanger uses the expression ten times, not including quotes or
direct references to the name of the treaty.)
It is inaccurate to characterize the trade pact as a "free trade" agreement since it
extends some protectionist measures, notably copyrights and patents. It is common
for political leaders to use expressions that characterize their agenda in a favorable
light. For example, President Reagan briefly referred to the MX missile system as the
"Peacekeeper." The media appropriately refused to accept this term in its reporting
on the debate over the missile. Similarly, it should adopt a neutral stance on trade
issues and refer to the pact simply as a "trade agreement" -- or more accurately, a
commercial agreement, since its provisions dealing with investment, and effects on
investment, will probably have more economic, environmental, and social impact than
the trade provisions (as was the case with NAFTA).
The April 21st article by Sanger also comments that opposition to the inclusion of
labor and environmental standards in the pact stems from countries like Brazil or
Venezuela, who oppose letting other countries "dictate minimum wages, working
conditions or the internal workings of their economies." An unwillingness to let other
countries dictate internal working conditions of their economies could not possibly be
the basis for the opposition to labor or environmental standards. These countries
have already agreed to the TRIPS provisions of the WTO, which requires that these
countries establish patent and copyright laws similar to those in the United States.
These provisions are a far greater, and more costly, intrusion into the economies of
other nations than the sort of labor or environmental standards being discussed. At
most, the labor and environmental standards would be applied to goods exported to
other signatories of the agreement. The TRIPS provisions apply to every item sold in
these countries, and even items that may not be sold (e.g. songs played over the
radio). This trade agreement, like the WTO, may actually restrict the ability of
nations to implement their own environmental laws governing domestic consumption
and production.
Both the April 22nd article by Sanger and the Milbank and Blustein article repeat
implausible assertions from the Bush administration about the gains from the WTO
and NAFTA. The Sanger article refers to a statement from Trade Representative
Robert Zoellick that employment grew in Mexico by 22 percent in the five years after
NAFTA passed. (Mexico's employment increased by approximately 15 percent from
1994 to 1999 [click here for more information].) In the article by Milbank and
Blustein, Zoellick is cited as claiming that the average family has gained between
$1000 and $1300 from the NAFTA and the last WTO round.
Proponents of trade agreements have a history of making outlandish claims about
their potential economic benefits in order to win political support. For example, the
Clinton administration widely promoted a study predicting that the U.S. would gain
200,000 jobs from NAFTA (e.g. Economic Report of the President, 1994, page 230).
Even the authors of this study (Gary Hufbauer and Jeffery Schott) now concede that
this claim was used out of context. (In fact, instead of expanding, as predicted by
the Hufbauer and Schott study, the U.S. trade surplus with Mexico turned into a
large deficit after the passage of NAFTA, leading to a net loss of jobs.)
The Milbank and Blustein article concludes by noting two of President Bush's
misstatements in his public comments at the negotiations. This has been a common
topic in news articles. It would be more helpful to readers if news reporting focuses
attention on the substantive inaccuracies issued by President Bush's Administration,
rather than the president's verbal gaffes.
"Protests a Success of Sorts," by Paul Blustein in the Washington Post, April 23,
2001, page A11.
"Biggest Obstacle to Selling Trade Pact: Sovereignty," by David E. Sanger in the New
York Times, April 22, 2001, page A6.
These articles assess the political prospects of the FTAA. Both of these articles
inaccurately present standard economic views on the impact of trade. The Times
article asserts that "among serious critics of free trade accords, the fundamental
problem is that they have no control over the forces that set environmental or labor
rules." The Post article claims that fears of a "race to the bottom ... are regarded as
unfounded by many mainstream economists."
Standard trade theory predicts that one of the outcomes of expanding trade
between the United States and developing nations will be a decline in the relative
wages of less skilled workers. This is exactly what the U.S. has experienced over the
last two decades, as non-college educated workers -- who comprise more than 70
percent of the labor force -- have seen their real wages stagnate even as the
economy has continued to grow at a respectable pace. William Cline, an economist
who strongly supports recent trade agreements, estimated that 39 percent of the
decline in the relative wages of less skilled workers can be attributed to the impact
of trade (Trade and Income Distribution, 1997, Institute for International
Economics.)
THE ECONOMIC DOWNTURN
"Bush Team Sensed Economic Slump Early," by Richard W. Stevenson in the New
York Times, April 22, 2001, Section 1, page 16.
This article reports on the extent to which Bush administration officials anticipated
the onset of an economic downturn after the election was decided. The only
non-administration source cited in this article is Gene Sperling, who was a top
economic advisor to President Clinton. It would have been appropriate to find an
independent economist as a source for this article, preferably one who saw the
downturn coming, unlike Mr. Sperling.
"Did Fed Hit the Brakes Too Hard, Too Late?" by John M. Berry in the Washington
Post, April 22, 2001, page H1.
This article assesses the Federal Reserve Board's responsibility for the recent
economic downturn. The discussion misrepresents several important issues.
For example, the article asserts that the economy's recent 4.0 percent
unemployment rate was "previously believed possible only in a world of increasing
inflation." While most mainstream economists did believe this, there were several
noteworthy exceptions who argued that low unemployment would not necessarily
lead to higher inflation, such as James Galbraith of the University of Texas, Ray Fair
of Yale University, and the late Robert Eisner of the Northwestern University. It
would have been appropriate to present the views of the some of the economists
who have turned out to be right on this issue, instead of writing an article that
depends exclusively on those who have been proven wrong.
The article also misrepresents the situation in describing current criticisms of Alan
Greenspan as "second guessing." There were economists who recognized the stock
market bubble several years ago, and criticized Greenspan at the time for not
addressing the problem.
Even more serious, the article wrongly implies that raising interest rates -- and
therefore slowing the whole economy -- was the only possible method of deflating
the stock market bubble. In fact, Greenspan could have used other tools. For
example, the Federal Reserve Board controls the margin requirement, the percentage
of a stock purchase that a person must put up in cash when he or she buys stock on
credit. If Greenspan had raised the margin requirement, this would have reduced
purchases of stock on credit and would have sent a powerful signal to the stock
market.
This brings up the second important tool at Greenspan's disposal -- talk. Chairman
Greenspan enjoys enormous respect in financial circles. If he had used his public
engagements, such as congressional testimony, to explain that stock prices were
(and still are) way out of line with any plausible forecast of future profit growth, it
likely would have gone far to deflate the stock market bubble. The best evidence for
this belief is the fact that the stock market plunged in 1996 in response to an
elliptical comment that Greenspan made about "irrational exuberance" in the stock
market. Had Mr. Greenspan gone beyond this elliptical comment (which he later
retracted), and given a careful explanation of the arithmetic of the bubble, it is
unlikely that the market would have ever become over-valued to the extent it did.
HOME SALES
"U.S. Home Sales Surge Despite Slowing Economy," by Bloomberg News in the New
York Times, April 26, 2001, page C4.
This article reports on the release of data for new and existing home sales in March.
The article presents this as evidence of unexpected strength in the economy in
March, which it attributes to low mortgage interest rates for the month. Actually,
the March data is reflecting home purchases in January and early February. Homes
sales are reported at the point where the transaction is completed. It typically takes
6 to 8 weeks from the signing of a contract until the sale is completed.
SOCIAL SECURITY
"Social Security Is Next, Treasury's O'Neill Says," from staff reports and news
services in the Washington Post, April 21, 2001, page A4.
This article reports on Treasury Secretary O'Neill's statement that the Bush
administration will soon act on producing a restructuring plan for Social Security. The
article asserts that the Social Security program "is projected to run out of cash in
2038." This is inaccurate. The program is projected to be short of cash, so it would
be unable to pay full scheduled benefits in 2038, but it would still have plenty of
cash coming in. In fact, the projections show that the program would still be able to
pay a real (inflation adjusted) benefit that is more than 10 percent higher than
current benefits, even if nothing is ever done. The latter seems unlikely, since the
country has never gone even half this period (18 years) without changing the Social
Security program. It seems extremely unlikely that no action would be taken over a
37 year period, even if projections continually show that the program will run short of
revenue.
JAPAN
"Challenger Wins Japanese Primary By Large Margin," by Calvin Sims in the New York
Times, April 24, 2001, page A1.
This article reports on the victory of Junichiro Koizumi in a Liberal Democratic Party
primary to determine the next prime minister of Japan. At one point the article
asserts that Mr. Koizumi "is widely seen as ready to take the difficult steps needed
to pull Japan out of its decade-long economic slump." The article does not indicate
how it has determined what steps are needed to accomplish this task. Princeton
Professor Paul Krugman, one of the world's most distinguished economists, has
argued that the most important policy for Japan to pursue is to print money to bring
about a modest rate of inflation. A modest rate of inflation would reduce government
and corporate debt burdens and lower the real interest rate. Since this policy would
not be especially difficult, presumably the article is referring to other policies.
However, it does not explain how it determined that Professor Krugman's policy
prescription is wrong and that other ones are preferable.