Economic Reporting Review
August 6, 2001

By Dean Baker, co-Director of the Center for Economic and Policy Research

OUTSTANDING STORIES OF THE WEEK

"The Bondage of Poverty That Produces Chocolate," by
Norimitsu Onishi in the New York Times, July 29, 2001,
Section 1 page 1.

This article examines the working conditions of children
who work on cocoa plantations in the Ivory Coast. According
to the article, many of the children are held as virtual
slaves.

"Dispelling the Myth That Options Help Shareholders," by
Gretchen Morgenson in the New York Times, July 29, 2001,
Section 3 page 1.

This article reports the findings of two recent studies
that examine the impact of the re-pricing of stock options
on the retention of executives. (Re-pricing involves
lowering the share price at which executives can purchase
stock, as a result of the fact that the stock did not rise
as much as had been anticipated). The studies found that
the turnover among executives was actually higher in firms
that re-priced stock options than in those that did not.

"Analyzing Stocks With Rose-Colored Glasses," by Floyd
Norris in the New York Times, August 3, 2001, page B1.

This article discusses stock market analysts' assessments
of Oakley, Inc., a major manufacturer of sunglasses.
Earlier in the year, its largest competitor bought up
Sunglass Hut, a retail chain, which was also Oakley's
largest customer. All six analysts who follow Oakley
continued to recommend the stock. Last month, Oakley's
stock plunged after it was reported that Sunglass Hut was
significantly reducing its orders from it.


THE BUSH ENERGY PLAN

"House GOP Energy Bill Trims President's Plan," by Juliet
Eilperin and Eric Pianin in the Washington Post, August 1,
2001, page A2.

"House Republicans Gather Support for Alaska Drilling," by
Lizette Alvarez and Joseph Kahn in the New York Times,
August 1, 2001, page A13.

"Bush's Energy Plan Is Endorsed by House" by Eric Pianin
and Juliet Eilperin in the Washington Post, August 2, 2001,
page A1.

"Bush's Energy Bill Is Passed in House in a GOP Triumph,"
by Lizette Alvarez in the New York Times, August 2, 2001,
page A1.

These articles discuss the House of Representatives debate
and passage of President Bush's energy plan. Both of the
August 1 articles referred to claims by proponents of oil
drilling in the Arctic National Wildlife Refuge (one of the
measures in the bill), that this oil would create hundreds
of thousands of jobs (750,000 was the number repeated in
the Times article). It is almost inconceivable that the oil
coming from these fields would generate even one-tenth this
number of jobs.

Optimistic estimates put the potential oil production from
these fields at 1 million barrels a day. This would
increase world oil supplies by approximately 1.5 percent.
If there were no offsetting reductions in supply, which
would mean that OPEC took no action to try to maintain oil
prices, this could lead to a reduction of world oil prices
of around 5 percent. If a 5 percent decline in world oil
prices could lead to the creation of 750,000 jobs in the
United States, then the doubling of world oil prices
between the summer of 1999 and the present, should have led
to a loss of close to 15 million jobs. No economists are
anticipating job losses of this magnitude.

This job-creation estimate came from a study financed by
the oil industry. If its findings are to be reported at
all, it would be appropriate to both note the source of
funding and to point out the reasons why the findings are
implausible. Allowing such numbers to be presented without
any attempt at assessing their credibility (as often
happens with studies showing gains from trade agreements),
encourages the use of wildly exaggerated claims in policy
debates. Very few of the readers of the Times or Post would
have the time and expertise to evaluate the accuracy of the
claims put forward in this sort of study. The reporters who
cover an issue for these papers should.

Several of the articles include references to claims that
the oil removed from ANWR would reduce the nation's
dependence on foreign oil. While this is true during the
period when it is being removed, once the reserves are
depleted, the nation will be more dependent than ever on
foreign oil. If the oil is drained during a period like the
present, when foreign supplies are readily available, then
it will not enhance the nation's security at all while it
is being depleted, and leave it more vulnerable to a cutoff
of foreign oil in the future.

One of the other hotly debated issues in this bill was a
proposal to increase the mileage standards for cars and
trucks. The articles include several references to the fact
that higher mileage cars will tend to be lighter, and
therefore could lead to more deaths in traffic accidents
for drivers and passengers. It is worth noting, that if the
oil from ANWR actually did lower oil prices in the United
States, this would lead to more driving and also result in
more traffic fatalities. There was no discussion of safety
concerns in the context on the debate over ANWR. (If oil
prices dropped by as much as the industry claims, standard
estimates of the elasticity of miles driven with respect to
gas prices indicate that the increase in traffic fatalities
would be comparable to what is projected from a switch to
higher mileage vehicles.)


THE STRONG DOLLAR

"O'Neill's Strong-Dollar Talk Belies His Past," by Paul
Blustein in the Washington Post, August 3, 2001, page A1.

This article assesses the economic impact of a strong
dollar. Remarkably, it never assesses the sustainability of
a strong dollar. As a result of the dollar's current
strength, the United States is currently borrowing more
than $450 billion a year from abroad. Foreign borrowing of
this magnitude is no more sustainable than a budget deficit
of this size. If it continues, the foreign debt will exceed
GDP in less than 15 years.

The possibility of a budget deficit arising 15-20 years in
the future has been treated as a major problem. The reality
of a very large current account deficit in the present is a
far more serious economic problem. The focus of this
reporting can only be explained by political concerns, not
economic ones.


SOCIAL SECURITY

"House Social Security Bill Shows Trade-Offs for Bush," by
Richard W. Stevenson in the New York Times, July 29, 2001,
Section 1 page 1.

This article reports on a plan for privatizing Social
Security that is being forwarded by Representatives Jim
Kolbe and Charles Stenholm. The article implies that the
Social Security Administration (SSA) has calculated
workers' benefits under this plan. This plan calls for
investing money in individual accounts in the stock market.
SSA has no projections for stock returns, and therefore it
cannot develop its own projections for benefits from plans
that call for investing in the stock market. In this case,
and others, it used projections for stock returns that are
suggested by others outside the agency. The only
projections for stock returns that have actually been
derived from current stock valuations and the Social
Security trustees' projections for profit growth show that
returns from stock will be only slightly higher than the
return projected for government bonds, over Social
Security's planning period.

The article also reports that the ceiling on the wage
income subject to the Social Security tax rises in step
with inflation each year. Actually, it rises in step with
the growth of average wages.

At one point, the article asserts that "Social Security is
taking in more through payroll taxes than it needs in
benefits. But that situation will change rapidly in about
15 years as the bulk of Americans born between 1946 and
1964 retire. By 2016 ... Social Security will need to draw
on its holdings of government bonds to pay benefits."

Actually, the date 2016 is completely meaningless to both
the Social Security program and the overall budget. Social
Security's annual surplus of tax revenue over benefits
payments is projected to peak in 2006, at $110.8 billion.
It then begins to fall in each subsequent year. From the
standpoint of the rest of the federal budget, the decline
in the size of the surplus is money (an average of
approximately $11 billion annually over the decade from
2006 to 2016) that must be made up by either tax increases,
spending cuts, or other borrowing. (Or, if the rest of the
federal budget is in surplus, as currently projected, there
would be reduced debt repayment). The year 2016 is when the
annual surplus of Social Security payroll taxes over
benefits falls below zero for the first time, and turns
into a deficit. But since the federal budget would have
already been getting by on smaller annual surpluses for a
decade at that point, the zero point has no consequence.

For an analogy, suppose a family borrowed $1,000 every year
from a rich aunt. After a period of time, the aunt decides
to reduce the amount of the annual loan by $100 each year
(for example, next year she will only loan $900, in two
years she will only loan $800, etc.), and to eventually get
her past loans repaid. The crunch for the family begins
when the size of the loans first begins to shrink, not in
the 11th year when it repays its first $100.

The article also asserts that both sides obscured "tough
choices" during the last presidential campaign. According
to the projections from the Social Security trustees
report, the program can pay all scheduled benefits for the
next 37 years with no changes whatsoever. This was not true
at any point in the decades of the '40s, '50s, '60s, or
'70s, as the program required several fixes over these
years.

If the political parties were negligent for not having
discussed "tough choices" about Social Security in the last
presidential campaign, every presidential candidate from
Truman to Reagan was much more guilty of negligence, since
the problems facing Social Security were far more immediate
at the time of these earlier elections.


STOCK PRICES

"A Plunge in Profits Is Raising Risk for Stock Market and
Economy," by Alex Berenson in the New York Times, July 29,
2001, Section 1 page 1.

This is a useful examination of the impact that reports of
lower corporate profits are having on stock prices. At one
point the article comments that as a result of weaker
profits, "investors hoping for a rebound in stock prices
may have to wait." Currently the price-to-earnings ratio in
the stock market still averages close to 25-to-1, more than
70 percent above its historic average of 14.5-to-1, as the
article notes at a later point. The Congressional Budget
Office (CBO) projects that real profit growth will be very
slow over the next decade, averaging just 1.0 percent a
year. This means that if price-to-earnings ratios move back
towards their historic average, and the CBO projections of
profit growth prove accurate, investors will have to wait
for more than a decade before they see any real upturn in
stock prices.


SUBWAY PRIVATIZATION IN LONDON

"American Embroiled in British Subway Debate," by Warren
Hoge in the New York Times, July 29, 2001, Section 1 page
8.

This article reports on the debate over the privatization
of the subway system in London. At one point the article
asserts that Gordon Brown, the chancellor of the exchequer,
sought to privatize London's subway system "as a way of
transferring risk from the public purse to the private
sector."

The article does not indicate how it determined Mr. Brown's
motives. Other efforts at privatization have been driven by
ideology or by industries that hope to profit through
privatization. Since the evidence reported in the article
indicates that privatization would have been disastrous, it
is not clear how these motives for privatization could be
ruled out in this particular case.


ARGENTINA

"Argentina Passes Austerity Plan," by Anthony Faiola in the
Washington Post, August 1, 2001, page A15.

"Austerity Plan in Argentina Provokes Wide Protests," by
Clifford Krauss in the New York Times, August 1, 2001, page
A3.

These articles discuss the Argentine Parliament's passage
of an austerity bill and the protests provoked by the
measure. According to the articles, the bill will cut
salaries and pensions for government workers by up to 13
percent.

At one point, the Times article asserts that the bill was
"forced" on Argentina's president. It does not identify the
institution that "forced" this sort of measure on the
government, but it may be referring to the IMF, which has
made a reduction in Argentina's budget deficit a condition
of its loans.

Argentina has been suffering from a recession for the last
three years. The primary cause of this recession is the
link of Argentina's currency to the dollar. When the dollar
rose in value in late 1997, Argentina's currency rose with
it, making its goods uncompetitive in international
markets. Its situation was worsened when its central bank
was forced to follow the Federal Reserve Board in raising
interest rates, beginning in the summer of 1999, in order
to maintain the link to the dollar.

Argentina's current budget deficit can be largely
attributed to its recession. It is normal, and in fact
desirable, for a nation to run a budget deficit when its
economy is in a recession. The deficit helps to stimulate
demand. The IMF's insistence that Argentina reduce its
deficit is likely to worsen its economic situation, as was
pointed out in a recent column by Princeton economist Paul
Krugman.

Both articles discuss the prospect of devaluing the
Argentinean currency as posing a disaster for Argentina's
economy. It is worth noting that very similar language was
used to discuss the prospect of devaluations in Russia in
1998 and Brazil in 1999. In both cases, after an initial
period of instability immediately following devaluation,
both countries experienced substantial economic growth.


JAPAN

"Koizumi Sees Election Victory as Mandate," by Stephanie
Strom in the New York Times, August 1, 2001, page A6.

"Consumer Spending Declines as Japanese Try to Save More,"
by Miki Tanikawa in the New York Times, August 1, 2001,
page W1.

These articles report on the current economic situation in
Japan. The article by Strom reports on how plans for
"structural reform" by Japan's Prime Minister, Junichiro
Koizumi, are meeting opposition from many political figures
and government officials in Japan. It would have been
appropriate to note that there is some basis for these
people's concern about the impact of Mr. Koizumi's plans.
From 1960 to the present, Japan, with its "crony
capitalism," was able to sustain a far higher rate of per-
capita GDP growth, than has any nation that followed the
model being advocated by Mr. Koizumi.

It is also worth noting that this might be an especially
bad time to introduce the measures being proposed by Mr.
Koizumi. The nation is already suffering from inadequate
demand in the economy. Mr. Koizumi's measures are likely to
reduce bank lending to businesses, thereby curtailing
investment further, and raise fears of job loss among
workers, slowing consumption. The second article reported
on a sharp decline in consumer spending in June, which is a
predictable outcome of Mr. Koizumi's agenda.

At one point the article by Strom contrasts Mr. Koizumi's
plans for structural reform with economic stimulus, which
it comments is "how Japan has coped with its economic woes
so far." This claim is dubious. The country has tried
fiscal stimulus to boost the economy, although this has not
been very systematic. (It put in place a large tax increase
in 1998.) While the central bank has lowered its interest
rate to almost zero, it has refused to print enough money
to stop deflation. The fact that prices continue to fall
means that the real short-term interest rate in Japan is
still close to 1.0 percent, somewhat higher than in the
United States.

It would have been equally accurate to claim that Japan has
tried structural adjustment to cope with its economic woes.
In the last decade, the country has instituted serious
reforms in its financial system, its laws restricting
retail stores, and many other areas of economic life. If
the economic stimulus attempted to date has not been
successful in lifting Japan out of its slump, neither has
the structural reform.


TRADE NEGOTIATIONS

"Two Camps At WTO Said to Be a Bit Closer," by Elizabeth
Olson in the New York Times, August 1, 2001, page W1.

"GOP Delays Effort to Give Bush Latitude on Free Trade," by
Alison Mitchell in the New York Times, August 1, 2001, page
A5.

These articles report on the current status of the
international debate over a new round of WTO talks and the
domestic debate over giving President Bush fast-track trade
authority. The article on the WTO reports on some concerns
of developing nations, but does not mention the
reconsideration of the TRIPS agreement. This is an item
that will appear on the agenda for the talks in Qatar, at
the insistence of developing nations. Developing nations
are concerned about TRIPS because it can lead to a massive
outflow of money for royalties and licensing fees, as a
result of imposing copyright and patent protection in
developing nations. It also may cause many life-saving
drugs to become unaffordable to people in developing
nations.

There have been several articles in the Times and Post in
the last several months that have discussed the concerns of
developing nations at the WTO. None of them has mentioned
the TRIPS agreement (for example, see " Seattle Failure
Weighs on Future of New Trade Talks," by Elizabeth Olson,
New York Times, June 26, 2001, page W1; and "Poor Nations
May Not Buy Trade Talks," by William Drozdiak, Washington
Post, May 15, 2001, page E1).

It is also worth noting that both articles use the term
"free trade" to refer to the U.S. trade agenda at several
points, including the headline of the article by Mitchell.
This is inappropriate since part of the agenda actually
strengthens protectionist measures, like patents and
copyrights.