Economic Reporting Review
April 22, 2002
By Dean Baker, co-Director of the Center for Economic and Policy Research

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OUTSTANDING STORIES OF THE WEEK

Tax Treaties With Small Nations Turn Into a New Shield for Profits
David Cay Johnston
New York Times, April 16, 2002, Page A1

This article reports on how several major corporations have been able
to take advantage of tax treaties with small countries to drastically
reduce their federal income tax bill.


Wait a Second: What Devils Lurk in the Details?
Gretchen Morgenson
New York Times, April 14, 2002, Section 3 Page 1

This article examines the accounting in General Electric's most recent
quarterly reports. It shows that the report may overstate recurring
profits by more than 15 percent, which would imply that future profits
may be far lower than is generally expected.


Venezuela

Chavez's Gloomy Legacy for The Left
Scott Wilson
Washington Post, April 13, 2002, Page A16

This article, which was written in the period in which Venezuelan
President Hugo Chavezhad been placed under arrest in a failed coup
attempt, provides an assessment of his legacy. At one point the
article comments that "Chavez's legacy is a bleak one for Latin
America's radical left, now pushing against the prevailing political
current of free trade, capitalism and a general nod to U.S. interests."

It is not clear in what sense Mr. Chavez's legacy would be viewed as
especially bleak, nor is clear that his policies are representative of
those that would be pursued by Latin America's radical left. Since he
took office in 1998, Venezuela's economy has not performed especially
badly compared to other countries in the region. According to data
from the World Bank, it shrank by approximately 6 percent in 1999,
largely due to low oil prices. It has been growing at approximately a
3 percent annual rate over the last two years. While this is weak
growth for a developing country, it is a better performance than that
of many other nations in the region, such as Mexico and Brazil, which
are currently experiencing drops in output in the wake of the U.S.
recession.

Venezuela's economic performance during Chavez's tenure has been far
better than Argentina's, which was until recently the model nation for
the "Washington Consensus" path of development. Argentina's economy
has been in recession since the second quarter of 1998, and is
projected by the I.M.F. to decline another 10 percent in the current year.

It is also worth noting that policies of "free trade" are often
directly opposed to U.S. interests. For example, United States trade
negotiators have pushed hard to impose copyright and patent protection
on developing nations.


Venezuela Chief Forced to Resign; Civilian Installed
Juan Forero
New York Times, April 13, 2002, Page A1

This article reports on the situation in Venezuela following the
attempted coup the previous day. At one point it discusses the
measures taken by the Pedro Carmona Estanga, the head of Venezuela's
major business federation, who was made president by the military. It
reports that Mr. Estanga's government repealed 49 recently passed
economic laws, which it described as "legislation that business
leaders feared would damage the economy."

While these business leaders may have claimed that they feared the
measures would damage the economy, this is not necessarily their
actual view. Business leaders tend to oppose any measures that could
reduce their profits, for example higher corporate taxes. Usually they
publicly argue against such measures on the basis of their alleged
harm to the economy, rather than their effect on corporate profits. It
is not easy to know whether they actually believe the claims that they
make in public debates.

It would be more appropriate to simply report the business leaders'
claims, rather than infer their actual views.


Venezuela and Oil

Oil Prices Surge on Turmoil in Venezuela
Kenneth Bredemeier
Washington Post, April 16, 2002, Page E1

This article reports on a surge in oil prices after Venezuela's
President Hugo Chavez was restored to power when a military coup
collapsed. The article reports that in the months before Mr. Chavez
came to power in 1998, Venezuela had pumped 40 percent more oil than
it does at present, and subsequently began to restrict output.

It is worth noting that, because oil prices at the time were only about
60 percent of their current level, Venezuela was actually earning
about 15 percent less from its oil output in 1998, in spite of its far
higher production levels. Since it costs money to produce oil,
Venezuela has gained even more than the increased revenue by
restricting output. In addition, less production also means less
environmental damage, and preserves a non-renewable resource for the
future.


The I.M.F. and Argentina

Fewer Clouds Overhead For IMF, World Bank
Paul Blustein
Washington Post, April 18, 2002, Page E1

This article discusses the I.M.F. and World Bank's recent record as
they prepare for their spring meetings. At one point the article
presents comments from I.M.F. director Horst Koehler, asserting that
Argentina will have to adjust to lower living standards because of its
past profligacy. It is worth noting that Argentina's central
government actually kept its non-interest-payment spending constant,
measured as a share of GDP, from 1994 --when it was held up as a model
by the I.M.F. and World Bank -- until 2001, when it had to default on
its debt.

It developed large deficits over this period primarily because it had
to pay higher interest rates on its past debt. The rise in interest
rates was in turn explained both by the peg of its currency to the
dollar, which was supported by the I.M.F., and also by a series of
international financial crises, including the 1995 Mexican peso
crisis, the 1997 East Asian financial crisis, and the Russian and
Brazilian financial crises of 1998-99.

The other major factor contributing to Argentina's deficits were the
transition costs associated with its decision to privatize its Social
Security program, at the recommendation of the World Bank, in 1994. If
Argentina had not privatized Social Security, it would have had a
balanced budget in 2001 (see "The Role of Social Security
Privatization in Argentina's Economic Crisis," by Dean Baker and Mark
Weisbrot).


Tax Cuts

Bush Uses Tax Deadline To Push for Lasting Cut
Mike Allen
Washington Post, April 16, 2002, Page A2

Bush Pressing To Make Cut In Tax Rates Permanent
David E. Sanger
New York Times, April 16, 2002, Page A21

These articles report on a speech by President Bush, in which he urged
Congress to make his tax cuts permanent, rather than letting them
expire in 2010. According to the articles, the main argument given by
President Bush is that it is important that the tax cut be made
permanent, because otherwise people will find it difficult to make
long-term plans.

The Post article reports the White House's claim that if the tax cuts
are allowed to lapse, it would amount to a tax increase of an average
of $1,040 for 104 million citizens. While the article does not
indicate how this figure was calculated, for all but the richest 5
percent of families, the tax cuts will amount to less than 2 or 3
percent of annual income. There are very few families that would be
able to predict their income with less than a 3 percent margin of
error for even the next year. Most families have only the vaguest
guess of what their income would be 8 years from now, so it is not
plausible that the future of the tax cut would be affecting their plans.

Furthermore, uncertainty about government spending on programs such as
a prescription drug benefit for senior citizens, child care, or
college aid probably provide a much greater basis for uncertainty than
the possibility of a tax increase. It is also worth noting that there
is almost nothing that this Congress can do, within the current
constitution, to eliminate the uncertainty about future tax rates.
Every two years a new Congress is elected. The tax rates in 2010 and
subsequent years will be determined the Congress that is sitting at
the time, not the current Congress. Since the current projections
indicate large deficits in the distant future, any family attempting
to make long-term plans would rationally assume that they will
eventually be paying higher taxes, regardless of whether or not
Congress votes this year to make the tax cut permanent.

The Post article includes statements from several Democrats that making
the tax cut permanent will jeopardize Social Security. It would have
been appropriate to note that there is no connection between the tax
cuts, and any resulting deficits, and the Social Security program.
Only if Congress were to default on the national debt -- a possibility
that no politician has suggested -- would there be any impact on the
Social Security program.

The article also refers to predictions that the cost of the tax cut in
the decade after 2012 will "explode" to $4 trillion. Very few readers
are able to assess the significance of $4 trillion in debt. It would
have been far more informative to report this sum as a share of the
GDP projected for this period. Since GDP for this decade is projected
to be close to $250 trillion, the tax cut is projected to cost
approximately 1.6 percent of GDP. This would be equal to approximately
$170 billion a year at present.

At one point the article asserts that Congress is likely to make the
tax cut permanent, because "Congress would be loathe to allow what
would amount to a sudden rebound in rates." This statement assumes
that future Congresses will act very differently than past Congresses.
There were four major tax increases in the years between 1982 and
1993. Even in this very conservative era, Congress was prepared to
raise taxes when it felt that additional revenues were necessary. The
article does not explain why it assumes that future Congresses will
behave differently.


The Trade Deficit and GDP

Rebound 'Strong' So Far, Greenspan Says
John M. Berry
Washington Post, April 18, 2002, Page E1

Imports Lift Trade Deficit to $31.5 Billion
Bloomberg News
New York Times, April 18, 2002, Page C2

The Times article reports on the trade deficit in February, which was
larger than most economists had expected. This information appeared in
a small wire service story on the inside of the business section. The
Post reported this news in a 3 sentence "Business in Brief" segment.

The trade deficit translates directly into foreign borrowing. As a
result of the trade deficit, the United States is currently borrowing
more than $400 billion a year from abroad. This borrowing has
approximately the same impact on future living standards as a budget
deficit of the same size. While budget deficits, or even the prospect
of future budget deficits, are given considerable attention by both
papers, the large trade deficit has been virtually ignored.

The Post article discusses Alan Greenspan's testimony before the Joint
Economic Committee of Congress. At one point it refers to economic
forecasts that the economy will grow between 5 percent to 6 percent in
the first quarter. The larger than expected trade deficit will have a
substantial impact in dampening GDP growth. If the March trade deficit
is comparable to the February one, then GDP growth is likely to fall
in a range of 2 percent to 3 percent for the quarter.


Health Care in Britain

In Calculated Risk, Blair Proposes Tax Rise
Warren Hoge
New York Times, April 18, 2002, Page A6

This article reports on British Prime Minister Tony Blair's plan to
increase taxes to improve the national health care system. It reports
that he plans to increase spending by 43 percent by 2008, which would
leave health care spending at approximately double its level of 1997,
when Blair first took office. It is worth noting that close to half of
this increase is due to inflation. Also, the projected increases in
British health care spending are smaller than the ones currently
projected for the U.S. health care system by the Health Care Financing
Administration. Its latest projections show that spending in 2008 will
be approximately 210 percent of its 1997 level.


Tax Cuts and Social Security

Gore Returns With an Attack
Dan Balz
Washington Post, April 14, 2002, Page A1

Eyeing November, Democrats Intensify Attacks
Dan Balz
Washington Post, April 15, 2002, Page A5

Both of these articles discuss Democrats' attacks on President Bush for
dipping into the Social Security and Medicare surpluses to pay for his
tax cut. It would have been appropriate to point out that this has no
effect whatsoever on these programs. They hold the exact same amount
of government bonds regardless of whether the government spends or
saves the surplus. Since many people are confused on this issue, it
would have been appropriate to mention this fact in the article.

The article on Gore refers to his comments implying that he would have
not spent any of the surplus, even as the economy slipped into a
recession. This implies that he would have either raised taxes or cut
government spending. Both of these policies would have made the
recession more severe, according to standard views of the economy.


Superfund Taxes

Political Battle Looming Over Superfund Plan
Raymond Hernandez
New York Times, April 15, 2002, Page A25

This article reports on the debate over the renewal of a tax to fund
the clean-up of toxic waste dump sites. It reports the contention of
an aid to Representative Don Nickles that the tax increase "might
damage the economy just when it was beginning to pull out of a slump."
According to the article, the tax would raise approximately $1.5
billion a year in revenue, an amount equal to approximately 0.014
percent of GDP. The economic impact of a tax increase of this
magnitude would be far too small to measure.


Free Markets and Campaign Contributions

Campaign Reform Put to Test in Mass.
Thomas B. Edsall
Washington Post, April 14, 2002, Page A5

This article discusses the prospects of a Massachusetts law, which
provides public funding for political campaigns. It describes the
dispute over this measure as a debate over whether "campaign finance
reform [should] be used to insulate politics from the inequities of
the free market."

It is unlikely that proponents of the bill would accept this
description of the debate. Many of the inequities that have concerned
reformers are not rooted in the free market, but rather are
attributable to policies implemented by politicians. These politicians
in turn have their campaigns financed by the people who profit from
these policies. For example, patent and copyright protections are
deepened through laws passed by politicians who often get large
contributions from the pharmaceutical or entertainment industries.
Similarly, many firms have grown hugely profitable through government
contracts that appear to depend on political connections. The notion
that there is a "free market" that determines outcomes independent of
political intervention is a myth that helps to conceal these
interventions.