Economic Reporting Review
June 10, 2002

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

OUTSTANDING STORIES OF THE WEEK

Strict Limits on Welfare Benefits Discourage Marriage, Studies Say
Nina Bernstein
New York Times, June 3, 2002, page A1

This article reports on the finding of two new studies which showed that stricter work requirements for welfare recipients discouraged marriage. The findings of this study are especially interesting in light of the Bush Administration's plans to both further tighten work requirements and to promote marriage among welfare recipients.

Accounting Reform: A Bright Line Vanishes
Floyd Norris
New York Times, June 7, 2002, page C1

This article reports on the Financial Accounting Standards Board weakening of a new accounting rule. The rule was designed to make it more difficult for companies to hide liabilities in shell companies, as Enron did.

Downturn and Shift in Population Feed Boom in White-Collar Crime
Stephen Labaton
New York Times, June 2, 2002, page A1

This article reports on a recent upturn in various forms of white-collar crime, which has accompanied a sharp decline in most types of violent crime.

THE EUROPEAN AND US MODELS

Golden Moment Eluding Europe
Steven Pearlstein
Washington Post, June 4, 2002, Page E1

This lengthy article, which has the sub-headline "Resistance to Reform Stymies Bid To Become Economic Rival of U.S.," reports on the reluctance of most European governments to adopt U.S.-style capitalism. It asserts that this reluctance to follow the U.S. path is harming Europe's economy. Some of the facts that the article presents as evidence that Europe's economy is losing out to the U.S. either show the opposite or provide no clear basis for comparison.
There is also little evidence that some of the "reforms," which the article appears to advocate, would actually increase European prosperity.

For example, the fact that French investment abroad is much greater than foreign investment in France is presented as evidence of the weakness of the French economy. By contrast, there is a net inflow of more than $400 billion of foreign investment annually into the U.S. economy. This difference implies that the French are, on net, lenders to the rest of the world - the normal status of mature industrial economies - while the United States is a net borrower. The
borrowing by the United States is draining away money that could otherwise be invested in developing nations. It also means that, while the French population is accumulating foreign assets, which will help support its growing population of retirees, in the United States families are saving relatively little, even as the baby boom generation nears retirement.

At another point it cites as a positive development that increasing numbers of German firms are opting out of industry-wide collective bargaining agreements. There is a large body of economic research which consistently shows that coordinated wage bargaining is associated with lower rates of unemployment. These research findings indicate that this change in Germany's economy is likely to lead to higher rates of unemployment.

The article notes that a smaller share of Europe's population is employed than in the United States, and that the people who are working spend an average of 20 percent less time on the job. Although some of the difference in employment rates is due to a lack of jobs in Europe, much of it is attributable to the greater tendency among Europeans to retire early. While the article presents shorter work years and work lives in Europe as a problem, there is no economic reason to oppose workers' decisions to take part of the benefits of higher productivity in the form of more leisure.

Remarkably, this article does not once mention the role of the European Central Bank (ECB) in slowing European economic growth and raising the unemployment rate. The short-term interest rate set by the ECB is currently 3.25 percent. By contrast, the rate set by the Federal Reserve Board in the United States is just 1.75 percent, in spite of the fact that the United States has higher inflation and lower unemployment. If the Federal Reserve Board had pursued the same monetary policies as the ECB, the unemployment rate in the U.S. would surely be considerably higher than it is at present.  

At one point the article quotes an economist commenting on Germany: "you can't get a nanny, you can't get affordable household help and you can't shop at nights or on weekends because all the stores are closed." It then characterizes these features of the German economy as "problems." Most people seem to prefer not to work as nannies, as household help, or as retail clerks putting in odd hours. In the United States many people take these jobs because they lack better options. The fact that German workers don't feel this
need is evidence of its economic success, not failure.

It is worth noting the headlines of the other articles featured on the front page of the Post business section alongside this piece extolling the superiority of American capitalism: "Tyco CEO Resigns Amid Criticism: Kozlowski Says He Is Subject of Tax Probe," "Energy Firm Executive Kills Self: El Paso Corp. Denies Rumors of Revelations," "Anderson Witness Says He Advised Against
Shredding," "Cash Missing at Venture Capital Association: President Won't Discuss Former Director's Unannounced Resignation," and "SEC Says Microsoft Broke Law."

THE ESTATE TAX

GOP-Led House Votes to Make Bush Tax Cuts Permanent
Jackie Koszczuk
Washington Post, June 7, 2002, Page A5

This article reports on a measure passed by the House of Representatives that would make the repeal of the estate tax permanent in 2011. At one point the article notes that under the Republican tax cut passed last year, the estate tax is phased out as of 2010, but then reverts back to its prior level in 2011. It attributes this pattern to "a quirk in the way Congress enacts tax legislation."

Actually, this pattern was a deliberate effort by the Republicans to conceal the true cost of their tax cut. The cuts are conventionally scored over a ten-year period. By writing the law so that the estate tax returns in 2011, the tax cut was scored as costing significantly less, even though no one expects that Congress will actually allow the estate tax to return to its prior level after 2010.

While this article reports Republican claims that this issue will be important to suburban voters, it does not point out that only a tiny percent of the population ever pays the estate tax even under current law. The article also fails to mention a Democratic alternative that would completely exempt estates of less than $3 million. The passage of the latter bill would mean that fewer than 0.3 percent of estates would pay any tax at all (see "House Backs Permanent End to Estate Tax," by Carl Hulse, New York Times, June 7, 2002, page A1 ).

PROTECTIONISM AND DEVELOPMENT

Flirting With Free Markets
Richard W. Stevenson
New York Times, June 2, 2002, Section 4 page 1

This article considers Africa's development prospects in the wake of the tour by the Treasury Secretary Paul O'Neill and the singer Bono. At one point it notes that the path of successful development followed by Japan and several other east Asian economies, which included extensive protection for key industries, "would not be tolerated by today's trading system."

This is an extremely important observation, but the article does not pursue any of its implications. Specifically, it implies that hundreds of millions of people may be locked into poverty in developing countries because the rich nations have created a trading system that prohibits successful development strategies. 

Social Security

Social Security Issue Is Rattling Races for Congress
Robin Toner
New York Times, June 4, 2002, page A1

This article examines how Social Security is likely to arise as an issue in the fall congressional campaigns. The article reports several facts as political assertions; it also reports some political assertions that are demonstrably false, without comment.

For example, the article refers to "the looming threat of privatization" as simply an assertion of the Democrats. President Bush appointed a commission explicitly to design a plan to privatize Social Security, which it produced last fall. He has said on numerous occasions in very clear terms that he wants to privatize a portion of the Social Security system. There is no basis for disputing that privatization is a real possibility at this point. The article also describes the fact that privatization will lead to cuts in the existing program as an allegation of Democrats. All three plans developed by President Bush's commission called for cuts in the existing program.

At another point the article refers to a Republican pollster's comment that for younger voters, having money in individual accounts, "sounds a lot less risky than trusting that the government will be able to fund the program in 30 years." It is virtually inconceivable that the government will be unable to fund the program in thirty years - it would imply a default on a portion of the federal debt. It would have been appropriate to note this fact and the extraordinary confusion among younger voters that the Republicans apparently hope will provide the basis for their privatization plans.

The article also reports Democratic charges that Republicans are "raiding the Social Security trust funds." The trust funds have not been affected at all by the decision to spend them; they hold the exact same amount of government bonds. It would have been appropriate to note the inaccuracy of the Democrats' assertion, especially since so many voters have been misled on this issue.

MEDICARE 

House Republican Plan Would Increase Medicare Payments to Providers
Robert Pear
New York Times, June 5, 2002, page A14

This article reports on plans to increase the rate at which Medicare compensates hospitals and H.M.O.'s. At one point the article discusses Republican proposals to restructure Medicare to increase the percentage of beneficiaries enrolled in H.M.O.'s. It then quotes a Democratic senator, saying that H.M.O.'s don't save Medicare money.

It would have been appropriate to point out that this is not just the view of a Democratic senator. Both the Congressional Budget Office and the General Accounting Office have examined the cost-effectiveness of H.M.O.'s within the Medicare system and found that H.M.O.'s have increased the cost of the program.

NEW CENSUS DATA

'90s Boom Had Broad Impact
Washington Post Staff Writers
Washington Post, June 5, 2002, Page A1

Gains of the 90's Did Not Lift All, Census Shows
Peter T. Kilborn and Lynette Clemetson
New York Times, June 5, 2002, page A1

These articles report on the release of new data from the 2000 census. It is worth noting the difference in the assessment of this data, as indicated by the articles' headlines. The Post article emphasizes that income gains were widespread, based on the fact that most demographic groups saw a rise in their real income. The Times article points out that, for families at the bottom end of the income distribution, these gains were small, and that poverty rate fell very little, given the strong growth of the second half of the decade.

At one point the Post article notes the large increase in families with incomes of more than $100,000, and the income growth even at the bottom end of the distribution, which it describes as "upward income mobility." This phrase usually refers to people from poor families becoming relatively rich, not to general income growth, as it is used in the article. The Census contains little data that provides useful information on income mobility.

The Times article refers to demand being created for "low-wage workers to build homes, staff restaurants and hotels and do other low paid service work." Actually, building homes is a relatively well-paying job, with an average hourly wage just under $19 an hour.

DIGITAL TELEVISION AND COPYRIGHT

Digital TV Founders on Fears of Internet Privacy
Mike Musgrove
Washington Post, June 1, 2002, Page E1

Digital TV's Big Hurdle: Copy Protection
Washington Post Staff Writer
Washington Post, June 5, 2002, Page E1

Hollywood Has a Setback in Controls for Digital TV
Amy Harmon
New York Times, June 5, 2002, page C4

These articles report on the difficulty that the entertainment and electronics industry are having in reaching an agreement on the appropriate formats for digital television. The entertainment industry wants to make sure that digital recording devices will include locks which will limit the copying and transmission of digital material.

None of these articles include any assessment of the economic impact of protection sought by the entertainment industry. Since the imposition of copyright laws will raise the price of this material by several hundred percent above the free market price (or infinitely more, in the cases where the material would otherwise be available at literally no cost), it is reasonable to expect that the costs to the economy will be substantial. By comparison, the implementation of steel tariffs have raised the price of imported steel by less than 30 percent. It would have been helpful to include an economist's assessment of the impact of these agreements.

MALAYSIAN BOND DISPUTE

UBS and Malaysian Utility In Costly Dispute on Bonds
Wayne Arnold
New York Times, June 1, 2002, page B3

This article reports on a dispute between a British investment bank and a Malaysian utility company over the terms of a loan. At one point the article comments that, "full details of the disputed refinance agreement are not known, but Tenaga apparently agreed to let UBS replace the original bonds with new 20-year ones if United States Treasury yields fell."

The article asserts that the British bank is in the right, and that Tenaga does not appear to be following through with its obligations. Since the article asserts that "full details of the disputed refinance agreement are not known," it is not clear how it can determine that the British investment banking firm is in the
right in this dispute.

CANADA

Canada's Finance Chief Ousted, Igniting Crisis
Clifford Krauss
New York Times, June 3, 2002, page A6

This article reports on the resignation of Canada's finance minister, Paul Martin. At one point the article comments that "Mr. Martin's importance to the economy" was demonstrated by the fact that the Canadian dollar fell, when as an April Fool's Day joke, a gossip column reported that he was resigning. This fact might have demonstrated Mr. Martin's importance to financial markets, but it does not indicate his importance to the economy.