Economic Reporting Review
April 8, 2002

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


Outstanding Stories of the Week

Do You Plan to Retire? Think Again
Louis Uchitelle
New York Times, March 31, 2002, Section 4 Page 1

This article examines the savings and pensions accrued by the
cohort of workers that is currently approaching retirement age. It
points at that most workers have managed to accumulate very little
money in defined contribution pension plans. This means that the vast
majority of workers, who lack traditional defined benefit plans, will
be mostly dependent on Social Security for their retirement income.

Home as Shield From Creditors Is Under Fire
Philip Shenon
New York Times, April 4, 2002, Page C1

This article examines how many of the prominent figures in
the Enron scandal may be able to shield millions of dollars of
assets, even if they are forced into bankruptcy. A provision in
several state bankruptcy laws allows a person to have unlimited
wealth in their own home, even while their debts are voided by
bankruptcy.


Outrage Is Rising as Options Turn to Dust
Gretchen Morgenson
New York Times, March 31, 2002, Section 3 Page 1

This article reports on how many employees of tech or telecom
companies saw fortunes that they accumulated in stock options
disappear, due to the fact that they were were not allowed to sell
their stock before the price collapsed. In many cases, top executives
did not face the same restrictions in selling their stock.



Social Security

How the Democrats Might Come Out Fighting
Richard L. Berke
New York Times, March 31, 2002, Section 4 Page 3

This article discusses the Democrats' political prospects in
the fall elections. At one point it discusses the possibility that
the Republicans may be vulnerable on Social Security, "because Mr.
Bush broke his vow to protect the Social Security trust fund. His
budget uses surpluses to pay for other programs through 2013."

It is worth noting that using the Social Security surpluses
to pay for other programs has no effect on the Social Security
program. Under the law, the surplus is used to buy government bonds.
The Social Security trust fund holds the exact same number of bonds,
regardless of whether the trust fund is saved or spent.


The Budget

Critics Say Budget Plans Ignore Reality
Glenn Kessler
Washington Post, March 31, 2002, Page A4

This article presents assessments of the budget over the next
decade. At one point it discusses the probability that the
alternative minimum tax will be adjusted in the near future to avoid
a sharp tax increase on middle-income families. This is described as
one of several "important budget issues," which could blow "a $300
billion hole in the budget over the next decade." Later it refers to
the possibility that Congress will adopt some sort of Medicare
prescription drug benefit. This is described as "politically
important."

This framing of issues seems to imply that the treatment of
the alternative minimum tax is of greater consequence for the budget
than a Medicare prescription drug benefit. In fact, both items will
only appear as budget issues because of prospective political
pressure. The treatment of prescription drugs over the next decade is
of much greater consequence for the budget and the nation.

According to the Congressional Budget Office, spending by
Medicare beneficiaries on prescription drugs is projected to rise at
a rate of more than 10 percent annually over the next decade. By
2012, the average expenditure is projected to be $5,820 ($4,550 in
today's dollars). This will be unaffordable for the vast majority of
seniors. For comparison, the median income of a woman over age 65
living alone is currently less than $17,000. As a result, there is
going to be enormous pressure to have the government pick up some of
these costs, if it fails to hold down drug prices. If it is assumed
that the government pays for just 20 percent of projected
prescription drug costs over the next decade, the budgetary impact
would be larger than the $300 billion impact from the adjustment of
the alternative minimum tax and other technical provisions of the tax
code.

At one point the article comments that "the long-term
challenge of preparing the nation for the baby boom generation's
retirement has been sidelined." There is no obvious reason that the
nation, or at least the federal government, should be preparing for
the retirement of the baby boom generation. The projected increase in
expenditures for retirement programs over the next three decades is
approximately the same as the increase (measured as a share of GDP)
over the last three decades (approximately 3.0 percentage points).The
government did not prepare in advance for the increase from 1972-
2002, and there is no obvious reason it should prepare in advance for
the projected increase from 2002-2032.


Pensions

Pension Change Puts the Burden On the Worker
Edward Wyatt
New York Times, April 5, 2002, page A1

This article presents a very informative analysis of recent
trends in pension coverage. It notes both the rise in defined
contribution plans at the expense of traditional defined benefit
plans, and also the increasing portion of pension savings that come
directly out of workers' wages.

In its assessment of the adequacy of future retirement
income, it would have been appropriate to note that the stock market
is approximately 60 percent above its historic price-to-earnings
ratio. This means that unless the price-to-earnings ratio continues
to rise, which very few economists consider likely, workers will see
extremely low returns on the assets currently in their retirement
accounts. This makes the prospects for their retirement even
dimmer.


Japan

Young People Feel a Chill in Japan's Hiring Season
James Brooke
New York Times, April 1, 2002, page A3

This article discusses the employment prospects for young
Japanese students currently leaving school. At one point, it presents
the comment of one 18-year-old woman that, "my generation's living
standard will be lower than our parents." While it is interesting
that some young Japanese have this attitude, it would have been
appropriate to present the assessment of an economist.

If Japan can maintain an average rate of productivity growth
of 1.5 percent per year, which is a much lower rate of productivity
growth than it has maintained in the past, then average output per
hour will be nearly 50 percent higher for this generation of workers
than for their parents. Even if there were very large tax increases
to support the retirement of their parents, as the article warns,
this generation would still enjoy much higher living standards than
their parents. For example, tax increases of 15 percentage points
would still leave an after-tax wage that is approximately 25 percent
higher than what their parents received.


Copyrights

In Mexico, Pirated Music Outsells the Legal Kind
Graham Gori
New York Times, April 1, 2002, page C5

This article discusses the sale of unauthorized copies of
compact discs in Mexico. It reports that approximately 73 million
unauthorized copies were sold last year, at an average price of $1
each. By comparison, 57 million legal copies were sold.

The article discusses at length how the spread of
unauthorized CDs is threatening the livelihood of Mexico's recording
artists. If the price of a legal CD is approximately $12, and the
elasticity of demand for CDs is 1 (this means that demand will
increase or decrease by the same percentage as the price change),
then it would mean that the sale of legal CDs would increase by
approximately 6 million a year, if no unauthorized copies were
available. This is an increase of approximately 10 percent from
current levels, which would presumably increase the money going to
recording artists by approximately the same percent. It is
questionable whether this would make a qualitative difference in the
prospects of Mexico's recording artists. (If the recording artists
get $1 to $2 per CD, it would increase total royalties payments by
between $6-12 million annually. Since much of this would go to
foreigners, the gain for Mexican recording artists would be far less.)

The loss of access to unauthorized CDs would be a huge cost
to Mexican consumers, raising prices by more than 1000 percent. When
the Bush administration imposed tariffs on imported steel, which had
a maximum level of 30 percent, the reporting included extensive
discussions of the cost that these tariffs would impose on the
economy. The economic distortions that would result from the strict
imposition of copyrights in Mexico are proportionately far larger
than the ones that result from the imposition of steel tariffs in the
United States. It would have been appropriate to present the views of
an economist on this issue.


Housing Prices

Economy's Rock: Homes, Homes, Homes
Daniel Altman
New York Times, March 30, 2002, page B1

This article discusses the housing market, which has remained
surprisingly strong through the economic downturn. The article
includes a chart that is titled "interest rates have fallen, raising
home prices, at a more rapid rate." The third chart, which shows the
year-over-year increase in home prices, is misleading. It shows that
the rate of year-over-year appreciation has soared in the last few
months. The more rapid rate of growth in home prices shown for this
period is attributable to a fall in prices in the comparison period
at the beginning of 2001, not rapid price growth in the last few
months.

It is worth noting that the pattern of housing price
appreciation has characteristics of a bubble. The article presents
accounts of people opting to buy homes, solely because they
anticipate price appreciation. This can lead to a situation at some
point in the future where housing prices fall rapidly, when the rate
of price appreciation slows and people stop expecting that housing
prices will continue to rise.