Economic Reporting Review
April 15, 2002

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

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OUTSTANDING STORIES OF THE WEEK

Affluent Avoid Scrutiny on Taxes Even as I.R.S. Warns of Cheating
David Cay Johnston
New York Times, April 7, 2002, Page A1

This article examines the Internal Revenue Service's audit practices. It reports that the I.R.S. is far more likely to audit the returns of the working poor, who claim the earned income tax credit, than the returns of wealthy taxpayers who are self-employed or receive substantial non-wage income.

Tell the Good News. Then Cash In.
David Leonhardt
New York Times, April 7, 2002, Section 3 Page 1

This article reports on a number of instances in which top executives sold large amounts of stock in their companies, before they publicly acknowledged that the recession was having a large impact on their companies' profits. According to the evidence presented in the article, it is common for executives to sell stock shortly before making bad news public.

Those Sweet Trips to the Merger Mall
Andrew Ross Sorkin
New York Times, April 7, 2002, Section 3 Page 1

This article discusses a series of mergers, which led to large gains for the executives who carried them through, even though they do not benefit shareholders. As the article points out, executives planning mergers often award themselves bonuses of various types upon the completion of the merger, whether or not the merger proves to be a success from the standpoint of shareholders.


Trade Policy and Oxfam

New Faith in Free Trade
Paul Blustein
Washington Post, April 10, 2002, Page E1

This article discusses a new report by Oxfam International, an NGO committing to promoting development, which argues for the importance of removing trade barriers in wealthy nations to exports from developing nations. According to the article, the report claims that the elimination of trade barriers in rich nations will vastly improve the plight of people in developing nations. At one point the article asserts that the report, "is aimed both at shaming the governments of rich countries and rallying the anti-globalization movement behind a more nuanced stance than the hard-line opposition to trade espoused by many activists."

The article does not identify any individual or organization in the "anti-globalization" movement -- the label itself is problematic because it is not accepted by many, if not most, of those who are placed in this category -- who espouses an anti-trade position. It is not obvious that anyone in that movement could accurately be described in this manner. In fact one of the key issues for many in this movement has been the removal of trade restrictions, in the forms of patent and copyright protection, which the industrialized nations have sought to impose on developing nations. These restrictions impose much more obvious and direct harm to developing nations -- for example by raising the price of essential medicines by several hundred percent over the free market price -- than the tariff and quota restrictions that are the focus of this article.

The claim that removing tariffs and quotas in rich nations on apparel and agricultural products will lead to vast gains for developing nations, as argued in this report, is not supported by standard economic theory. In a recent study, the World Bank found that the complete elimination of the developed countries' import barriers on goods, phased in from 2005 to 2015, would raise GDP in developing nations by less than 1 percent, in 2015. This means that a country in
sub-Saharan Africa, which would otherwise have a per capita GDP of $500 a year in 2015, might have a per capita GDP of $505 a year, if the industrialized nations remove all barriers to the merchandise exports of developing countries.(World Bank, "Global Economic Prospects 2002", www.worldbank.org)

In fact, the removal of trade barriers may actually harm developing nations, according to standard economic models. An often cited study by three strong proponents of recent trade agreements ("CGE Modeling and Analysis of Multilateral and Regional Negotiating Options," by Drusilla Brown, Alan Deardorff, and Robert Stern) found that most developing nations were net losers as a result of the reductions in trade restrictions on agriculture and apparel that were part of the Uruguay Round WTO agreement. This is due in part to the fact that many of the rich nations' restrictions take the form of quotas. Quotas limit imports from developing nations, but keep the price of these imports above the world market price. If the quotas were eliminated, the ability to export more goods may not compensate for the lower prices that developing nations would receive for their exports.

While the article does note that the reasoning in Oxfam's report, "is not entirely based on orthodox free-trade economics," it would have been appropriate to point out that its largest departure from standard theory is in the claims it makes about the potential benefits of expanded trade.


Oil Drilling in the Arctic Wildlife Refuge

White House Ties Oil Cutoff By Iraq to Drilling in Alaska
David E. Sanger and David E. Rosenbaum
New York Times, April 11, 2002, Page A24

This article discusses the Bush Administration's efforts to gain support for oil drilling in the Arctic National Wildlife Refuge as a response to Iraq's decision to cutoff oil exports. At one point it reports that "Democrats countered that even if drilling in the refuge began today, no new oil would be available for a decade."

This is not just the view of Democrats. There is no real dispute that there will be a very long lead time between the time that drilling is permitted and when oil can actually begin to flow from the Refuge. The Energy Information Agency and other independent experts give comparable estimates of the time lag.


Terrorism Insurance

Citing Construction Slump, Bush Pushes Bill to Protect Insurers From
Terrorism Losses
Stephen Labaton and Joseph B. Treaster
New York Times, April 9, 2002, Page A15

This article reports on President Bush's efforts to get Congress to pass legislation which would limit insurers' liability from terrorist attacks. The article reports that Bush attributed the decline in construction projects to a lack of insurance.

It is worth noting that the decline in commercial construction preceded the September 11th attacks. According to data from the Commerce Department, by August of 2001 the monthly value of private non-residential construction had already dropped by more than 8 percent from its January level.


Stock Options

Bush Weighs In on Debate Over Stock-Option Rules
Stephen Labaton
New York Times, April 10, 2002, Page C4

This article reports on an interview with President Bush, in which he supported the current accounting method for stock options granted to company employees. Under this system, options are never deducted as an expense against profits, like wages or any other form of labor compensation. Instead, after options are exercised, the new shares are included in the total when the company calculates earnings per share.

It is important to note the system currently in place will not produce an accurate measure of corporate profits. This can be easily demonstrated.

Suppose that a firm is just covering its costs, so that it is making zero profit, and is expected to continue to do so for the indefinite future. In principle, this firm could cut its wage bill by 10 percent, if it provided its workers with enough options that they were willing to accept this pay cut. If the firm engineered such a shift in compensation, then it would be showing a profit (an amount equal to 10 percent of the wage bill), using the current accounting method, even though the true cost of its labor compensation had not changed at all. Adding the new shares to the base, when calculating earnings per share, will reduce the overstatement of profits, but it does not prevent an unprofitable firm from still showing profits in this scenario. The Federal Accounting Standards Board has insisted that options should be treated as an expense at the time they are issued -- just like any other form of labor compensation -- in order to prevent this type of deceptive accounting.


Israel

Israel Today
Research by Robert E. Thomason
Washington Post, April 7, 2002, Page A14

This column presents a series of descriptive charts and statistics about Israel. One of the charts shows that Israel's per capita GDP has more than tripled between 1980 and 2000, going from approximately $6,000 in 1980 to nearly $19,000 in 2000. According to data from the World Bank, Israel's real (inflation adjusted) per capita GDP has risen by approximately 50 percent over this period. The data presented in the chart may be nominal dollars, which are not adjusted for inflation. It is misleading to present these numbers, since only the inflation-adjusted data provide information on living standards.


Venezuela

Strike Challenges Chavez
Scott Wilson
Washington Post, April 10, 2002, Page A14

This article reports on a strike by the managers of Venezuela's state owned oil company, over President Hugo Chavez's plans for the company. At one point it reports that Chavez rejected the company's plans to double production. Instead, he wanted to restrict production, and encourage other OPEC members to do the same, in order to raise prices.

The article includes the comments of a former president of the oil company, who denounced this decision by Chavez, and argued that it was taking the country on a path to communism. It would have been appropriate to include comments from someone with economic expertise. It is very plausible that Venezuela will get more money from its oil if it restricts production -- especially if it succeeds in getting other OPEC members to do the same -- than if it tries to maximize its oil output. This is the reason that even non-OPEC members, such as Norway and Mexico, have opted to limit their oil production.


March Employment Data

Unemployment Rose in March; Payrolls Up
John M. Berry
Washington Post, April 6, 2002, Page E1

This article reports on the Labor Department's release of employment data for the month of March. The article notes that the unemployment rate increased by 0.2 percentage points, even though the economy was reported as adding 58,000 new jobs. It comments that "the jobless rate and number of payroll jobs can move in different directions for several reasons, including the fact that they result from separate surveys. ... Labor experts generally regard the payroll numbers as the more accurate measure of changes in the labor market."

While it is true that the data come from separate surveys, and the payroll data is generally viewed as more accurate, there is a much simpler explanation of the divergence in this data in March. Because the labor force is growing at a rate of approximately 1.0 percent annually, the economy has to create approximately 100,000 jobs per month just to keep the unemployment rate constant. In January, the unemployment rate was 5.6 percent. In the two months since then, the payroll survey shows that the economy added a total of just 56,000 jobs, therefore it is not surprising that the unemployment rate has risen from 5.6 percent to 5.7 percent over this period.

The article also notes that hours worked appear to have fallen somewhat in the last three months, while many economists are projecting strong GDP growth for the quarter. The article reports these facts as evidence that productivity growth has been very strong in the quarter. It is important to note that monthly (and quarterly) measures of hours worked are very inaccurate, and are often subject to substantial revision. Any projections of productivity growth for the first quarter based on the data currently available are extremely speculative. 

The Recovery

Bush Wary Of Upturn In Economy
Mike Allen
Washington Post, April 8, 2002, Page A1

This article reports on President Bush's concern that the economic recovery may not be very strong, and will therefore damage his re-election prospects. As an example of the caution with which Mr. Bush views positive economic news, the article notes that he had no celebratory statements when February's employment report showed the economy adding jobs and the unemployment rate falling.

While the article points out that the unemployment rate rose again in March, it is also worth noting that the job gain reported for February was revised to show a loss of 2,000 jobs in the month.


Trade

U.S. Envoy Campaigns For Trade Pacts On Asian Trip
Jane Perlez
New York Times, April 7, 2002, Page A5

This article reports on United States trade representative Robert Zoellick's efforts to promote new trade pacts in East Asia. The article discusses a trade agreement between the United States and Singapore which is nearing completion. At three different points it refers to this agreement as a "free trade" pact. This is an inaccurate characterization. Some parts of the agreement involve rules on patents and copyrights, which would actually increase protectionism. Also, much of the agreement sets rules for foreign investment and other areas not directly related to trade. It would be more appropriate to call the pact a "commercial agreement" or simply a "trade agreement."