Economics Reporting Review
May 7, 2001
By Dean Baker, co-Director of the Center for Economic and Policy Research

THE WORLD MARKET FOR OIL

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OUTSTANDING STORIES OF THE WEEK 

"A Software Company Runs Out of Tricks," by Alex Berenson in the New York Times,
April 29, 2001, Section 3, page 1. 

This article reports on a series of accounting tricks that the firm Computer
Associates used to make its profits appear higher than they may actually have been.
Now that these tricks have come to light, the company has lost most of its stock
value and its survival is questionable. 

"Renamed Prozac Fuels Women's Health Debate," by Shankar Vedantam in the
Washington Post, April 29, 2001, page A1. 

This article reports on Sarafem, a new drug being marketed by Eli Lilly. Sarafem is
currently being sold as Prozac. Since the patent is about to expire on Prozac, Eli Lilly
has developed a new disorder (premenstrual dysphoric disorder or PMDD) and
received a new patent on Sarafem as a drug to treat PMDD. This is exactly the sort
of abuse that conventional economic theory would predict would result from patent
protection. 

"Finding Federal Spending's Dividends," by Glenn Kessler in the Washington Post, May
1, 2001, page A1. 

This article examines the evidence that various types of federal social programs --
such as Head Start or increased funding to reduce average school class size -- have
had a positive effect on the lives of the children affected.





ENERGY INDEPENDENCE 

"Bush Launches Effort to Sell Energy Policy Overhaul," by Eric Pianin and Dana
Milbank in the Washington Post, May 4, 2001, page A2. 

This article reports on President Bush's efforts to gain support for his energy policy.
It quotes President Bush as saying that his plans to increase drilling for oil and gas,
with its risks to the environment, is necessary to promote energy independence. It
would have been worth noting that this policy can only temporarily reduce
dependence on foreign energy supplies. After the new sources have been depleted,
the United States would be more dependent than ever on foreign sources, since it
would no longer have substantial reserves in environmentally sensitive areas that
could be tapped in an emergency. 


ENERGY PRODUCTION 

"Bush Energy Plan Will Emphasize Production," by Mike Allen in the Washington Post,
May 1, 2001, page A1. 

"Cheney Promotes Increasing Supply As Energy Policy," by Joseph Kahn in the New
York Times, May 1, 2001, page A1. 

These articles report on the Bush administration's energy policy. Both articles note
the administration's intention to increase sources of domestic production. It is worth
noting that any benefits from increasing domestic oil production will be virtually
invisible to U.S. consumers. There is a single world market for oil, and increased
production in the U.S. will have no more effect on prices paid by people here than
increased production from anywhere else in the world. It would only make a
difference if the United States were cut off from foreign supplies, as it was briefly in
the 1970s due to an oil embargo by Arab states. Otherwise, the main impact of
increased domestic production is to drain reserves, which will not then be available in
the event of some future crisis. 


LABOR PROTECTIONS AND PRODUCTIVITY GROWTH 

"Rich Nations Consider Fund of Billions to Fight AIDS," by Joseph Kahn in the New
York Times, April 29, 2001, Section 1, page 6. 

This article reports on a meeting of G7 finance ministers. At one point it comments
that the United States "pushed Japan and European nations to undertake what are
known as 'structural reforms' or changes to labor laws and investment barriers that
are thought to stifle productivity and growth." According to data from the OECD,
annual productivity growth over the period from 1979 to 1997 in France, Germany,
and Japan averaged 2.2 percent, 2.2 percent, and 2.3 percent, respectively. By
contrast, productivity growth in the United States was reported as averaging 0.9
percent. It is not clear why anyone would think that labor laws and investment
barriers were hampering productivity growth in Europe and Japan. 

It is worth noting that most workers in Europe and Japan experienced significant
increases in real wages and living standards over this period, unlike workers in the
United States. Most economists believe that the regulations in these countries
helped to ensure that the gains from productivity growth were widely shared. 


GERMANY 

"Germany Looks Like Europe's Weak Economic Link," by Edmund L. Andrews in the
New York Times, April 28, 2001, page B2. 

This article discusses Germany's current economic situation. It notes its slow recent
growth and relatively high rate of unemployment, and attributes these problems
entirely to labor market protections (such as minimum wage laws and restrictions on
layoffs) and recent tax increases. Remarkably, the article never mentions the high
interest rate policy that was pursued first by the Bundesbank and more recently, the
European Central Bank. Even Treasury Secretary O'Neill and the IMF have identified
this policy as a cause of slow European growth. 

There is little evidence to support the contention that labor market protections have
been a major contributor to German or European unemployment. In most cases,
these protections were stronger thirty or forty years ago than they are now. At that
time, Germany and most of Europe had unemployment rates of less than 2.0 percent.
Also, the predicted outcome of labor market rigidities would be a higher relative rate
of unemployment for less skilled workers than for high skilled workers. In fact, OECD
data show the opposite, the ratio of the unemployment rate for less skilled workers
to highly skilled workers is actually lower in Germany than in the U.S. 

The article also makes a big point of contrasting a supposedly dynamic French
economy with a stagnant German economy. The unemployment rate in France, at 8.8
percent is still higher than the German rate of approximately 8.0 percent
(approximately 6.5 percent in former West Germany). Also, the most important
economic policy shift in France in the last two years has been the introduction of a
thirty-five hour workweek. This is a huge increase in labor market protection. 


GDP GROWTH 

"Economy Beats Expectations," by John M. Berry in the Washington Post, April 28,
2001, page A1. 

"Economy's Growth Proves Steadfast Although Modest," by David Leonhardt in the
New York Times, April 28, 2001, page A1. 

These articles report on the Commerce Department's release of data on first quarter
GDP growth. At one point, the Times article notes that "government spending rose 4
percent, and a drop in imports also helped domestic growth. (Lower imports
contribute to growth, since it means that domestic production is replacing imports.)
This is a bit of an understatement: the drop in imports contributed 1.62 percentage
points to the growth rate, accounting for more than 80 percent of the 2.0 percent
growth in the quarter. 

The Post article notes that a "significant drop in the U.S. trade deficit" contributed to
growth in the quarter. It would have been helpful to point out that the entire
improvement in the trade deficit was attributable to lower imports, as exports
actually fell during the quarter. 

The Times article later refers to comments by Allen Sinai, the chief economist at
Decision Economics, in which he warns of the impact of a decline in information
technology investment, which he places at more than 7 percent of GDP. Actually,
information technology accounted for just 5.6 percent of GDP in the first quarter
($557.5 billion out of $10,039.4 billion). Continued weakness in this sector will be
important to the economy, but somewhat less so than Mr. Sinai indicated. 


ARGENTINA 

"IMF Set to Resume Loans to Argentina," by Steven Pearlstein in the Washington
Post, April 30, 2001, page A4. 

This article discusses a new IMF loan package for Argentina. At one point the article
discusses Argentina's decision to link its currency to the dollar and notes the
beneficial effect this had in bringing down inflation. It then comments, "In the past
few years, however, the rise in the value of the dollar has had the perverse effect of
making Argentine goods uncompetitive on world markets." 

In fact, the sort of problems that Argentina has faced from this policy were entirely
predictable. By tying its currency to the dollar, Argentina was effectively handing
over its monetary policy to the Federal Reserve Board. The Fed runs a monetary
policy that it considers to be appropriate for the United States, not Argentina. As
the dollar rose, the Argentinean currency rose with it, making Argentine's goods less
competitive in world markets. Also, when the Fed raised interest rates to deliberately
slow the U.S. economy, Argentina has found that the interest rates it has needed to
maintain the fixed exchange rate (higher interest rates boost the domestic currency
by attracting capital) have further depressed demand, throwing the economy into a
severe recession. Most countries have chosen not to link their currency to the dollar
precisely to avoid this sort of situation. It is also worth noting that the IMF
encouraged Argentina in its dollar policy by showering it with loans, as the article
points out. 


GLOBAL WARMING 

"New Tack On Climate Treaty Is Possible," by Eric Pianin in the Washington Post, April
28, 2001, page A1. 

This article discusses the possibility that President Bush will pursue a new path to
reduce greenhouse gas emissions. At one point it refers to the collapse of the
international negotiations in The Hague last fall, which it attributes in part to the
fact that the United States wanted to get credit for its forests and farmlands (which
absorb carbon dioxide). It would be worth pointing out that this effectively meant
raising the emission caps that the United States had agreed to at Kyoto three years
earlier. Everyone present at this earlier meeting recognized that the United States
had forests and farmlands. These were taken into account at the time in setting the
ceilings. 

"Daschle Backs Off Climate Pact Remarks," by Eric Pianin in the Washington Post, April
29, 2001, page A1. 

This article discusses Senate minority leader Tom Daschle's decision to reaffirm his
support for mandatory reductions in greenhouse gas emissions. At one point it notes
that the Kyoto agreement would have required the U.S. to reduce its emissions by 7
percent compared to 1990 levels (ignoring trading), which it characterizes as "a huge
cutback after years of unprecedented economic expansion." 

The last decade has not been a time of unprecedented economic expansion, nor
would this statement be true for any sub-period within the decade. Growth from
1990 to 2000 averaged 3.4 percent annually, compared to 3.2 percent in the 1980s,
3.3 percent in the 1970s, and 4.5 percent in the 1960s. Growth averaged 4.5
percent in the four years from 1996 to 2000, but this was worse than the 4.7
percent average growth rates from 1982 to 1986 and 1975 to 1979, and no better
than the 4.5 percent decade long average for the 1960s. 


JAPAN 

"Finance Chiefs Cheer Economy," by Steven Pearlstein in the Washington Post, April
29, 2001, page A1. 

This article reports on the annual meetings of finance ministers with the World Bank
and IMF. At one point the article discusses the current problems facing Japan's
economy. It asserts, "At the heart of Japan's problem is a financial system on the
verge of bankruptcy because of an estimated $263 billion in bad loans held by
Japanese banks." The article does not indicate how it has determined that this is the
core problem facing Japan's economy. 

Princeton economics Professor Paul Krugman, one of the most distinguished
economists in the world, has repeatedly argued that the biggest problem facing
Japan is the contractionary monetary policy pursued by its central bank. This policy
has lead to continually falling prices over the last decade. Professor Krugman has
noted that a modest rate of inflation (e.g. 2-3 percent annually) would lower real
interest rates, thereby spurring consumption and investment, and reduce the real
value of debt owed by firms, banks, and the government. 


THE HIGH-TECH BUBBLE 

"Collapse of Dot-Coms Stifles Tech Innovators," by Ariana Eunjung Cha in the
Washington Post, April 30, 2001, page A1. 

This article reports on the slowdown in the rate at which new high tech innovations
are being introduced, as a result of the collapse of the bubble in technology stocks.
The article reports on this slowdown as though it is necessarily a bad thing. In fact,
the huge amount of resources that were being diverted to this sector were coming
at the expense of investments in other parts of the economy. For example, it is now
clear that California under-invested in maintaining its electricity generating system.
In every sector of the economy, there will be some worthwhile projects that do not
get undertaken because they are less profitable than others. This will inevitably be
the case in the tech sector as well. 


SOCIAL SECURITY 

"Bush to Unveil Panel on Social Security Change," by Amy Goldstein in the
Washington Post, May 2, 2001, page A1. 

This article reports on the commission selected by President Bush to devise a plan for
privatizing Social Security. The article makes several inaccurate assertions that make
Social Security's finances appear worse than they are. 

For example, it claims, "According to the most recent projections, the program will
begin to take in less money than it spends in 15 years." Actually, the latest
projections show that the trust fund will continue to take in more revenue than it
spends every year until 2025. The annual surplus is projected to be more than $250
billion in 2015 (Social Security Trustees Report 2001, Table III.B2). 

The article also asserts that the "the long-term future of Social Security ... is
becoming increasingly precarious. Americans are living longer and the enormous baby
boom generation will begin to reach retirement age in less than a decade." In fact,
the trustees have pushed back the date of the fund's projected depletion in each of
the last five reports. Also, the trustees continue to project economic growth rates
that are significantly lower than other forecasters. If they used the growth
projections from the Congressional Budget Office, it would imply that the fund would
be fully solvent until 2041. It is worth noting that even after the fund is projected to
be depleted, the program will always be able to pay a larger real (inflation adjusted)
benefit than what current retirees receive. 

Also, life-spans have always increased, as a result of improved medical care and
increasing affluence. While longer retirements are more expensive than shorter
retirements, it is perfectly normal than a wealthier population would choose to spend
a greater portion of their growing income on their retirement. The article does not
explain why it views this possibility, which has happened repeatedly in the past, as a
serious problem. 

At one point the article refers to the claims of proponents of privatization that
investing in individual accounts will provide greater returns than those delivered by
the current system. The only projections of stock returns that have been derived
from the Social Security trustees' projections, show that (given its current valuation)
the market will provide real returns that average only 3.6 percent annually
(see Letter to Martin Feldstein). The difference between
this return and the return on the government bonds held by the Social Security trust
fund would not even be large enough to cover the administrative costs of individual
accounts. 

"Social Security Panel Gears Up for Revamp," by Amy Goldstein in the Washington
Post, May 3, 2001, page A1. 

"Social Security Panel Faces Challenges," by Richard W. Stevenson in the New York
Times, May 3, 2001, page A14. 

These article discuss the prospects facing the Social Security Commission
established by President Bush. Both articles repeat without comment President Bush's
statements that Social Security faces an imminent crisis. 

The president's assertions are contradicted by the projections in the Social Security
trustees' report, which show that the system can pay all scheduled benefits for the
next thirty-seven years, even if nothing is ever done, and that it will always be able
to pay beneficiaries a larger real (inflation adjusted) benefit than current retirees
receive. Since polls regularly show that tens of million of Americans are confused on
this point, and fear that Social Security will not be able to pay them benefits, it
would have been appropriate for these articles to point out the errors in the
president's remarks.