Economic Reporting Review
April 29, 2002
By Dean Baker, co-Director of the Center for Economic and Policy Research
OUTSTANDING STORIES OF THE WEEK
After Welfare, Working Poor Still Struggle, Report Finds
Jodi Wilgoren
New York Times, April 25, 2002, Page A20
This article reports on the findings of a series of studies that examined the
conditions of families that left the welfare rolls after the 1996 reform. The
studies found that most of these families continued to be at the edge of the
poverty line, with high percentages reporting that they have to go without food
for periods of time, having their phones disconnected, or being forced into
homelessness.
The Dumping Ground
Jon Jeter
Washington Post, April 22, 2002, Page A1
This article reports on the state of Zambia's economy. It examines the impact
that the removal of import barriers has had on domestic industry in the last
fifteen years. In particular, it notes that a flood of imports of used clothing
has wiped out the domestic apparel industry.
Hospital Products Get Seal of Approval at a Price
Barry Meier
New York Times, April 23, 2002, Page A1
This article examines the practices of the Child Health Corporation of America,
a major hospital buying chain. It reports that the chain only endorses products
made by companies that pay for an endorsement.
Pension Folly: How Losses Become Profits
Floyd Norris
New York Times, April 26, 2002, Page C1
This article reports on how current accounting practices have allowed many firms
to claim large profits from their pension fund investments, even though these
investments have actually lost money.
The Budget and Capital Gains
Tax Revenues Lag, Threatening to Double Deficit
Richard W. Stevenson
New York Times, April 26, 2002, Page A1
This article reports on the latest evidence from tax collections, which indicate
that revenue for fiscal year 2002 will be considerably below CBO projections.
Due largely to lower than expected capital gains tax revenue, the deficit for
the year may be $30 to $70 billion larger than had been projected. It is worth
noting that some economists had recognized that the projections for capital
gains tax revenue were significantly overstated both for 2002, and for
subsequent years, as the over-valued stock market is not likely to produce
significant gains in the near future (see Letter to Congressional Budget
Office,
February 26, 2002).
This article includes the comment, which is repeated in the headline, that the
lower capital gains tax projections may double the deficit. The fact that a
relatively small deficit might double is not cause for concern. The significance
of the deficit depends only on its size relative to GDP. In this case, the new
projections imply an increase of between 0.3 to 0.7 percent of GDP.
Trade Barriers and the IMF/World Bank Meetings
U.S. to Use World Meeting To Focus on Terror Finances
Richard W. Stevenson and David E. Leonhardt
New York Times, April 20, 2002, Page A4
Rich Nations Agree on Plan Giving Poor Countries Time to Stretch Out
Their Debt Payments
Richard W. Stevenson and Stephen Labaton
New York Times, April 21, 2002, Page A15
These articles discuss the meetings of the I.M.F., World Bank, and G-8 finance
ministers that took place in Washington last weekend. The April 20th article
reported on comments by former Treasury Secretary Lawrence Summers, in which he
warned that "the benefits of globalization could be undone if capital and
educated people flow out of developing nations."
It is not clear what benefits Mr. Summers was referring to. The developing
nations have shown much less progress in almost every measure of economic and
social welfare in the era of globalization (1980-2000) than in the prior two
decades (see "The Scorecard on Globalization 1980-2000: Twenty Years of
Diminished Progress," [http://www.cepr.net/globalization/scorecard_on_globalization.htm]).
The concern about the possible outflow of capital from developing nations also
seems peculiar. There already has been a massive outflow of capital from
developing nations to the industrialized nations. For example, the United States
is currently borrowing more than $400 billion annually from the rest of the
world. As a result of instability in the international financial system,
developing nations have felt the need to hold massive amounts of foreign
reserves. These reserves are in held in low interest accounts denominated in
dollars, euros and other key currencies (see "Money for Nothing: The
Increasing Cost of Foreign Reserve Holdings to Developing Nations," [http://www.cepr.net/Reserves%20paper.htm].
While professionals in industrialized nations might see some reduction in their
income, it is difficult to see why it would be harmful to developing nations if
the barriers to their professionals working in rich nations were reduced or
eliminated. Standard economic theory indicates that there should be large gains
from the elimination of these barriers for both rich nations and poor nations.
In the case of poor nations, obviously the workers themselves would benefit
enormously, since they could earn salaries that are several times larger in the
United States and other rich nations than what they can earn in their home
countries. In addition, if these professionals send even a small of fraction of
their earnings back to relatives in their home
countries, it could be a large source of foreign exchange. It also likely that
many professionals would return to their native countries, after gaining more
skills and acquiring some capital in the rich nations. The return of émigrés,
many of whom started businesses and brought back important skills, has been a
significant impetus to growth in many successful developing countries such as
South Korea, Taiwan, and more recently China and India.
Most importantly, if the barriers to foreign professionals working in the rich
nations are removed (i.e. so that it is as easy for a smart kid in Bombay or
Shanghai to become a doctor in New York as for a smart kid from Long Island),
then it would be expected that banks and other financial intermediaries would be
willing to provide loans to support the education of children in developing
nations. This process could be advanced enormously if the World Bank and other
development agencies offered the same sort of loan guarantees for loans to
students to the developing world, as the U.S. government does for students in
the United States. This could vastly improve the economic prospects for children
throughout the developing world.
The removal of educational and licensing barriers would also provide enormous
economic gains for people in rich nations. According to data from the OECD,
doctors in the United States earn more than twice as much as the average for
other wealthy nations. If the wages of the doctors in the United States was
brought down to the average for other industrialized nations, as a result of
more doctors from developing nations working in the United States, then
consumers would save $80 billion a year. This dwarfs the estimates of
the gains from most recent trade agreements. The gains would be even larger when
the benefits of having access to lower-paid accountants, lawyers, and other
professionals are
factored in.
Trade negotiators have spent the last fifty years removing the barriers to
transferring manufacturing facilities to developing nations, thereby placing
manufacturing workers in the industrialized nations in direct competition with
the lowest paid workers anywhere in the world. However, they have not made
comparable efforts to standardize education and licensing requirements to
facilitate the movement of professionals across national boundaries.[This is not
an immigration issue, even if a foreign doctor moves to the United States, they
will still find significant obstacles to practicing medicine in the U.S.] In
fact, restrictions were recently tightened to make it more difficult for foreign
doctors to practice in the United States because of concerns that they were
depressing doctors' wages in the
United States (see "Caught in the Middle," by Lena H. Sun, Washington
Post, March 19, 1996, Health Section, page 10; "A.M.A. and Colleges Assert
There is a Surfeit of Doctors," by Robert Pear, New York Times, March 1,
1997, page A7 and "U.S. to Pay Hospitals Not to Train Doctors, Easing
Glut," by Elisabeth Rosenthal, New York Times, February 15, 1997, page A1).
If negotiators had focused their attention on facilitating competition among
professionals and highly skilled workers, it would have led to enormous gains
for people in both the developed and developing world. To ensure that a
"brain drain" did not become a problem, it would be a relatively
simple matter to include temporary work requirements in loan agreements, which
require that professionals in developing nations who benefit from subsidized
loans, work for some number of years in these nations after completing their
education.
This article also includes a comment that the Bush administration's decision to
impose tariffs on imported steel led other governments to conclude that
"Washington is more interested in domestic political concerns than in the
principles of free trade." It would be surprising if foreign governments
had ever believed that politicians in the United States would jeopardize their
election prospects over any principles associated with trade.
The second article refers to the debate over a Bush administration proposal to
replace many of the loans currently being given to poor nations with grants. The
article reports that, "many European governments fear such an approach
could lead to cutbacks in the amount of aid that rich nations make
available." It is worth noting that the conversion of loans to grants
cannot possibly reduce the net flow of money to developing nations. While the
repayment of the loans will provide more resources for development banks, these
resources will be coming from developing nations. Not requiring the repayment of
loans simply reduces the funds available to these banks; it does not reduce the
money available to developing nations.
France
Parties Vow To Unite To Bar Rightist in France
Keith B. Richburg
Washington Post, April 23, 2002, Page A1
This article examines the French political situation after Jean-Marie Le Pen, a
far-right wing candidate, made it into a run-off election for president. At one
point the article notes the balance between left and right in France and
comments that, "many analysts said it has led to paralysis and the
inability to make needed reforms of the economy and administration."
The article does not identify anyone who holds these views nor give any hint as
to what reforms are considered needed. According to the United States Bureau of
Labor Statistics, France has the highest labor productivity of any nation in the
world. Its productivity took a further jump as a result of the reform of working
our regulations, which made a 35-hour work week standard. Given the strength of
France's economy, there is no obvious need for reform; therefore, the article
should have identified the type of reforms that these analysts view as
necessary.
Social Security and the Budget
Facing Wartime President, Democrats Focus on Home Front
Alison Mitchell
New York Times, April 22, 2002, Page A23
This article discusses the Democrats' strategy to challenge President Bush's
domestic agenda. At one point it notes their charge that his tax cut would
"eat into Social Security."
It is worth noting that the tax cut has no direct impact on Social Security.
Under the law, the trust fund uses its surplus to buy government bonds. It holds
the exact same amount of government bonds regardless of whether or not the
government spends the money it borrows. It would be helpful to include this
fact, since much of the public is confused about this issue.
Argentina
Argentine Congress Tightens Rules on Bank Withdrawals
Larry Rohter
New York Times, April 26, 2002, Page A8
This article, which reports on recent banking legislation in Argentina, also
discusses the economic choices facing the Duhalde government, mainly from the
point of view of certain critics. It cites, for example, an Argentine columnist
who praises a recent agreement with the provinces for preventing "Mr.
Duhalde, a populist, from 'embarking on any lunatic statist program of national
independence.' " The article also notes "a commitment to spending cuts
and revising the existing system of revenue sharing between federal and
provincial governments, under which the provinces have run up huge debts"
... Similar promises have been made several times in the past but never carried
out, which led the International Monetary Fund to suspend credit to Argentina in
early December."
It is not clear why the provincial deficits, which reached 1.5-2.0 percent of
GDP before the central government's default, would be considered
"huge" in the context of a recession that began in the second quarter
of 1998 and continues to worsen. It is also worth noting that Federal revenue
sharing with the provinces remained constant from 1997 to 2000, so the
provincial spending did not directly affect the financial situation of the
federal government. In fact, the Argentine government actually cut spending
significantly in this period: the IMF noted that Argentina's austerity measures
in fiscal 2000 were equal to 2 percent of GDP (the equivalent of $200 billion of
deficit reduction in the United States -- see "When 'Good Parents' Go Bad:
the IMF in Argentina," by Mark Weisbrot and Dean Baker, http://www.cepr.net/When%20Good%20Parents%20Go%20Bad.pdf
).
Argentina kept its primary (non-interest payment) spending constant, as a share
of GDP, from 1993-2001. Government spending and deficits increased during that
period only because interest rates on existing debt increased sharply. This, in
turn, was due to a series of external shocks, beginning with the Fed's rate
hikes of 1994, through the Mexican, Asian, Russian, and Brazilian financial
crises. It is not clear that any amount of fiscal austerity could have avoided
Argentina's descent into crisis, default, and devaluation.
A number of economists, including Nobel prize winner Joseph Stiglitz, have
argued that Argentina's spending cuts exacerbated the economic crisis, and that
further spending cuts will prolong the depression. This article should have
included such arguments, instead of only presenting the opposite point of view.
Venezuela
Tenuous Truce in Venezuela for the State and Its Oil Company
Simon Romero
New York Times, April 24, 2002, Page A6
This article reports on the current relationship between Venezuela's President,
Hugo Chavez, and the management of Petroleos de Venezuela, the state owned oil
company. The article reports that an important source of tension between the two
was Chavez's insistence that the company adhere to the production quota set by
OPEC. According to the article, "top executives at Petroleos de Venezuela
chafed as this policy diminished the nation's position in the global
industry."
It is worth noting that Chavez's decision to curtail production has led to far
greater profits for the oil company, and therefore more money to finance
Venezuela's development. While the company had been producing 40 percent more
oil prior to Chavez taking office, because this additional production depressed
world prices, it was only earning about 60 percent as much per barrel. Therefore
it was grossing less revenue from its oil sales, even though it was incurring
higher costs as a result of producing more oil.
It is understandable that the executives in the oil industry would want to be
important players in the global market. But it is also understandable that the
political leaders of Venezuela would want to run their oil industry in a way
that maximizes its benefits for the Venezuelan population. It would have been
helpful to readers to more explicitly detail this conflict of interests.
Tax Incentives for Energy Conservation
Tax Vote Agreement Clears Way for Action On Energy Legislation
Helen Dewar
Washington Post, April 24, 2002, Page A24
This article discusses the progress of an energy bill through the Senate. It
reports the bill will contain $14 billion in tax incentives to increase domestic
energy production and to promote conservation. It would have been helpful to
point out that these incentives are spread over a 10-year period. This amount
will be equal to approximately 0.05 percent of projected federal spending over
this period or approximately 0.2 percent of total national expenditures on
energy.
The Stock Market
A Simple Strategy: Stay in the Market
James K. Glassman
Washington Post, April 21, 2002, Page H1
This article discusses investment strategies. It argues that investors would be
wise to keep their money in the stock market, because on average it has provided
higher returns than alternative investments. Currently the ratio of stock prices
to pre-recession earnings is approximately 60 percent above its historic
average. Since the Congressional Budget Office and other forecasters project
that profit growth in the coming decades will be far below its historic average,
this implies that the stock market is significantly over-valued. Even if it the
current ratio of stock prices to earnings holds up, investors would receive a
return that is only minimally higher than what is available from holding
government bonds (see Letter to Martin
Feldstein, May 15, 1999).
It is worth noting that the logic in this article implies that investors in
Japan would have been wise to keep their money in the stock market in 1989, when
the Nikkei index reached 39,000. Currently the index is hovering near 12,000.