Economic Reporting Review
April 1, 2002
By Dean Baker, co-Director of the Center for Economic and Policy Research
OUTSTANDING STORIES OF THE WEEK
Brazil's Prized Exports Rely on Slaves and Scorched Land
Larry Rohter
New York Times, March 25, 2002, Page A1
This article reports on the widespread use of slave labor in the
Amazon to tend cattle and cut wood. According to the article, the
number of people being held against their will is in the tens of
thousands.
When a Buyer for Hospitals Has a Stake in Drugs It Buys
Written by Mary Williams Walsh with assistance from Walt Bogdanich
and Barry Meier
New York Times, March 26, 2002, Page A1
This article presents some of the findings of an investigation of the
practices of the major hospital buying groups. This piece reports
that Premier Inc., one of the biggest buying groups, favored the
purchase of drugs in which it had a financial interest, even if they
were inferior to other drugs.
Consumer Confidence Up Sharply in March
John M. Berry
Washington Post, March 27, 2002, Page E1
This article presents the latest readings on consumer confidence. It
includes a careful analysis of the meaning of the confidence index
for consumer behavior and the economy.
Executive Privilege?
Steven Pearlstein
Washington Post, March 24, 2002, Page H1
This article examines the incentives created by having stock options
comprise a large part of executive compensation. It presents the
views of many experts that excessive use of stock options often
encourages bad management practices.
Telecom, Tangled in Its Own Web
Gretchen Morgenson
New York Times, March 24, 2002, Section 3 page1
This article reports on many of the ploys that the telecommunications
companies used to inflate their revenues and profits.
England
Thatcher Exits, but, List, Is That a Voice Offstage?
Warren Hoge
New York Times, March 25, 2002, Page A4
This article reports on former British Prime Minister Margaret
Thatcher's decision to withdraw from public life due to health
problems. In an assessment of Ms. Thatcher's years in office, the
article comments that she "reduced taxes and carried out economic and
labor reforms that made Britain the world's fourth-largest economy."
When Ms. Thatcher left office in 1990, Britain was the world's eighth
largest economy behind the United States, Japan, West Germany, the
Soviet Union, France, China, and Italy. During her tenure in office,
Britain was passed by China and Italy.
Flat Taxes in Russia
Russia Imposes Flat Tax on Income, and Its Coffers Swell
Sabrina Tavernise
New York Times, March 23, 2002, Page A3
This article reports on a surge in tax collections in Russia, which
the article attributes to Russia's decision to adopt a flat tax.
According to the article, "personal income tax revenues jumped by 47
percent in 2001," the year the flat tax was implemented. It is worth
noting, that the chart included with the article shows that revenue
rose by an average of 140 percent in the two years prior to the
introduction of the flat tax, from approximately 250 billion rubles
in 1998 to 1 trillion rubles in 2000. This suggests that revenue was
rising for reasons other than the introduction of the flat tax, and
that revenue growth actually slowed after the flat tax was
implemented.
Italy
Italy's Unions Seem Ready For Battle
John Tagliabue
New York Times, March 29, 2002, Page A8
This article reports on the battle between Italy's unions and its
Prime Minister over his efforts to weaken laws protecting workers.
The article asserts that "the central issue is competitiveness."
While this may be Mr. Berlusconi's claim, it is not apparent that it
is true. There are many nations with substantial legal protection for
workers, such as France and the Netherlands, with highly competitive
economies. The unions certainly do not argue that they are against
competitiveness.
Trade Policy
A Free-Trade Gamble by the U.S.
Paul Blustein
Washington Post, March 29, 2002, Page E1
This article discusses the implications of President Bush's decision
to impose tariffs on imported steel. At one point it comments that "a
little protection may beget a lot more, and the president may lose
the moral high ground he needs to prod other countries to open their
markets."
The United States has many types of protectionist barriers that have
far more impact than the steel tariffs. For example, it deliberately
restricts the number of foreigndoctors in the country in order to
maintain high salaries. A main focus of its trade policy has been to
extend copyright and patent protection, two very expensive forms of
protectionism, which typically raise the price of goods by several
hundred percent. By comparison, the maximum steel tariff is 30
percent.
This article's claim, that the economic policy of U.S. trading
partners is motivated by morality, rather than economic interests, is
worth noting.
Germany
German Immigration Bill Wins Disputed Vote
Edmund L. Andrews
New York Times, March 23, 2002, Page A3
This article discusses a bill that was passed by Germany's
parliament, which would allow for a greater number of foreign
workers. At one point the article estimates that "Germany will need
450,000 more workers a year to support the growing number of
retirees." It is important to note that these estimates assume that
there is no increase in tax rates. If Germany were prepared to raise
taxes, then it would not need any additional immigrants to support
its retirement system.
In past decades, Germany, like all other industrialized nations, has
chosen to raise its Social Security taxes to support its growing
population of retirees. (The rate of growth of the portion of
retirees among Germany's population is not projected to be very
different in the future than in the past.) Due to productivity
growth, workers can enjoy rising after-tax wages even if a greater
portion of their wages are taxed away to finance a longer retirement.
It is probably more reasonable to assume that taxes will rise at
approximately the same rate in the future as they did in the past,
instead of projecting that Germany would never raise taxes again.
This article also asserts that unemployment in Germany is "nearly 10
percent." According to the OECD's measurement of unemployment, which
is similar to the U.S. measure, the unemployment rate in Germany is
close to 8 percent. It is close to 6 percent in the regions of the
country that were formerly West Germany.
Trade and Aid
The Right Aid Formula This Time Around?
Paul Blustein
Washington Post, March 24, 2002, Page A27
Bush, in Monterrey, Speaks of Conditional Global Aid
Elisabeth Bumiller
New York Times, March 23, 2002, Page A7
More Aid, More Need: Pledges Still Falling Short
Tim Weiner
New York Times, March 24, 2002, Page A4
Peru Support of Free Trade Draws Praise In Bush Visit
Juan Forero
New York Times, March 24, 2002, Page A8
Central America Waiting To Reap Benefits of Peace
David Gonzalez
New York Times, March 24, 2002, Page A8
These articles discuss U.S foreign aid and trade policy in the
context of President Bush's visit to the summit on development in
Monterrey, Mexico and several other nations in Latin America. The
article by Bumiller refers to a commitment by President Bush to
increase foreign aid by 50 percent as of 2006. The inflation-adjusted
increase, which is a more meaningful number, is approximately 36
percent. Since much of the discussion of foreign aid has focused on
shares of GDP, it is worth noting that under the Bush proposal, the
share of U.S. GDP devoted to foreign aid would rise from
approximately 0.1 percent in 2002 to 0.12 percent in 2006, as is
noted in the Weiner article.
The articles by Gonzalez and Forero both refer to U.S. efforts to
promote "free trade." The latter article refers to "principles of
free trade so cherished by the United States." The United States has
pushed trade policies that benefit politically powerful sectors. This
can result in the removal of trade barriers, or the increase of
barriers, as has been the case with the extension of copyright and
patent protection to developing nations. It is inaccurate to
characterize the U.S. agenda as "free trade" or to describe its trade
policy as being motivated by principles, as opposed to political
considerations.
The Weiner and Sullivan articles include assertions that expanded
trade will produce large benefits for the nations of Central America.
Much of the discussion is misleading. For example, the Weiner article
compares estimates of lost sales due to protectionist barriers, with
the size of aid flows. These sums have very different meanings. The
lost sales can be seen as comparable to the wages that a worker loses
if she is denied a particular job. If the worker gets another job,
which is comparable, then the net loss might be minimal, and is in
any case far less than the total wages. The gain from being able to
export more to another country is simply the additional earnings in
excess of what the resources (land, labor and capital) actually did
receive. By contrast, if aid flows are unrestricted (which is seldom
the case), they are a pure gain for developing nations, comparable to
a gift from a family member.
It is not clear that developing nations will always benefit from
trade liberalization by industrialized nations. Many import
restrictions in industrialized nations take the form of quotas.
Quotas restrict the volume that developing nations can export to
industrialized countries, but they allow them to sell their exports
at a premium above the world market price. If the quotas were
eliminated, then it is possible that many developing countries would
end up as net losers, since they would no longer be able to sell any
of their products at a premium over the world market price. In a
recent study, three prominent economists, all of whom are strong
proponents of recent trade agreements, concluded that most developing
nations would lose as a result of the liberalization of trade in
textiles and agriculture that was part of the 1994 Uruguay Round
Agreement that created the WTO (see "CGE Modeling and Analysis of
Multilateral and Regional Negotiating Options," by Drusilla Brown,
Alan Deardorff, and Robert Stern).
The Blustein article presents an informative account of the mixed
record of foreign aid in promoting development. It notes how in some
cases, especially in sub-Saharan Africa, living standards have
actually declined. It is worth noting that the declines in living
standards in sub-Saharan Africa were primarily a phenomenon of the
last two decades, when many nations were embracing neo-liberal
policies. Most sub-Saharan nations experienced a moderate improvement
in living standards in the sixties and seventies.
Social Security
Lockbox or Not, Social Security's Ills Grow
Richard W. Stevenson
New York Times, March 24, 2002, Section 3 page 6
This article assesses Social Security's long-term economic prospects.
At one point it notes the projected increase in spending on Social
Security and Medicare together. Most of this projected increase stems
from the increased cost of Medicare, which in turn results from
projected rises in health care costs.
The U.S. is the only nation in the industrialized world that has been
unable to contain the growth of its health care costs. If current
trends continue, then rising health care costs will impose an
enormous burden on the economy in future decades. Insofar as these
costs are born by the public sector, through Medicare, Medicaid, and
other programs, it will impose a large burden on the budget. While
the political power of the health care industry may make cost
containment difficult, it is nonetheless important that rising health
care costs be identified as the source of the problem, not the aging
of the population.
The article presents the argument that paying off the national debt
will make it easier for the government to borrow when "over the next
few decades" as its Social Security bill grows. Under current
projections, the United States should face no difficulty borrowing
for many decades into the future, even if it doesn't pay off its
national debt. More importantly, it is not clear what point would be
served by borrowing. The Social Security deficit is projected to get
larger as the century progresses, due to increasing life
expectancies.
Even With No Bull Market, Baby Boomers Can Thrive
Allan Sloan
Washington Post, March 26, 2002, Page E1
This article provides investment advice to baby boomers. It asserts
that Social Security's future appears doubtful, due to the Bush tax
cuts. Actually, the tax cuts have no effect whatsoever on the
system's finances. The article also informs readers that they can
expect an average return on stocks of approximately 9 percent
annually over the next two decades. If profits grow at the same rate
as the Congressional Budget Office projects for the economy, this
would imply that the price-to-earnings ratio will be more than 40 to
1 in 2022, approximately 30 percent higher than its peak in 2000.
Housing Sales
Sales of New Homes Rise in Much of the U.S.
Associated Press
New York Times, March 28, 2002, Page C3
This article reports on data on home sales in February. At one point
it notes that new homes sales plunged in January, even while the
sales of existed homes hit a new record. It comments that
economists "were hard pressed to explain" this data.
Actually, this is easy to explain. The sales of existing homes are
reported when they are closed, which is usually 6-8 weeks after the
sale was contracted. This means that January sales of existing homes
are primarily reflecting contracts signed in November. By contrast,
new homes sales are reported in the month they are contracted, so the
January data refers to contracts signed in January.
Accounting For Stock Options
Move to List Options As Expense Faltering
Jonathan Krim
Washington Post, March 23, 2002, Page E1
This article reports on congressional efforts to require companies to
list the value of stock options as an expense that is counted against
profits at the time they are issued. At one point the article warns
that if this requirement were put into law, "the earnings that many
companies report could be cut by millions of dollars, in some cases
meaning the difference between showing a profit and showing a loss."
At another point, the article reports the view of technology company
executives, that "the current system successfully ties compensation
to company performance and gives start-up companies a way to attract
top talent without tapping precious cash in their incubation days."
It is important to note that this change in accounting would not on
average affect the underlying health and profitability of the company
at all. (The timing of tax write-offs will have an effect, helping
some companies and hurting others.) It could only have consequences
if investors are confused by how stock options are currently
reported, or by the way they would be reported after the change. If
most investors are knowledgeable, then this accounting change would
be completely irrelevant. For this reason, a change in the accounting
of stock options should not affect the decisions to use stock options
as a form of employee compensation, unless investors have difficulty
recognizing the costs implied by the options.