Economic Reporting Review By Dean Baker June 24, 2002

Economic Reporting Review By Dean Baker June 24, 2002 Outstanding Stories of the Week Big Accounting Firm's Tax Plans Help the Wealthy Conceal Income David Cay Johnston New York Times, June 20, 2002, Page A1 This article reports on some of the tricks used by Ernst & Young, one of the nation's largest accounting firms, to allow wealthy clients to evade their taxes. The Enforcers of Wall St.? Then Again, Maybe Not Gretchen Morgenson New York Times, June 20, 2002, Page C1 This article reports on the firing of two executives at major financial firms who were fired when they tried to expose illegal or unethical actions by others in their firms. The article indicates that people are more likely to be punished than rewarded for calling attention to improper conduct. Mexican Workers Pay for Success Mary Jordon Washington Post, June 20, 2002, Page A1 This article reports on the movement of factory jobs from Mexico to China. While pay in Mexico is far lower than in the United States, workers in China are often paid less than one quarter of what they earn in Mexico. As a result, firms that are looking for the lowest-cost labor are moving their facilities from Mexico to China. Peru Support for Toledo Wanes As Peru's Poor Get Poorer Scott Wilson Washington Post, June 16, 2002, Page A22 This article reports on the drop in public support for Peru's President, Alejandro Toledo. The article reports at some length Mr. Toledo's support of fiscal conservatism and other policies, which it claims are "delighting foreign investors." It then refers to endorsements by international business interests as "macroeconomic successes." While it is possible that a favorable business environment can lead to strong economic growth and benefits for the whole country, this is not always the outcome. Pleasing foreign investors, by itself, does not constitute macroeconomic success. The only discussion of economic growth in this article notes that Peru is projected to have 3.7 percent growth in 2002. This is weak growth for a developing nation, although with much of the world still feeling the effects of the recession, it is a better performance than that of many other developing nations. Stanley Fischer and Citigroup Citigroup Fills International Post Dow Jones / AP New York Times, June 19, 2002, Page C4 This article reports on the Citigroup's announcement that it had selected Stanley Fischer, the former first deputy managing director at the I.M.F. The article notes the I.M.F.'s involvement in the East Asian and Russian financial crises during these periods, and asserts that, "he was an important figure in organizing aid packages to rescue these economies." Given the large drop in GDP resulting from the East Asian financial crisis, and the fact that several economies continued to shrink even after receiving I.M.F. aid, it is questionable whether the I.M.F. "rescued" these nations. In the case of Russia, the I.M.F. continued to provide support through the first half of 1998, as long as Russia followed an economic program approved by the I.M.F. This program included maintaining its currency at a fixed exchange rate with the dollar. This proved untenable, and in August of 1998 Russia gave up its peg and suspended payments on its debt. This led to a financial crisis, which worsened the economic situation temporarily, but by the end of the year Russia's economy was growing again. This renewed growth occurred at a time when Russia had broken off its dealings with the I.M.F. Therefore it is not clear that any I.M.F. "rescue" or "attempted rescue" of Russia occurred during Stanley Fischer's tenure as deputy managing director. Social Security Report Predicts Deep Benefit Cuts Under Bush Social Security Plan Richard W. Stevenson New York Times, June 19, 2002, Page A22 This article discusses a new report that projects the benefits cuts implied by the plans designed by President Bush's Social Security Commission. At one point it notes that "by 2041, Social Security would exhaust its 'trust fund' of bonds." There is no obvious reason that the words "trust fund" should appear in quotation marks. It is the proper name for the reserve fund held by the Social Security program. Using quotation marks to describe the trust fund is comparable to using quotation marks for the "State Department" or "Supreme Court." Housing Starts Housing Starts Rise 11.6%, Easily Top Expectations Sandra Fleishman Washington Post, June 19, 2002, Page E1 Home Building Up Sharply; Price Index Flat Reuters New York Times, June 19, 2002, Page C2 These articles discuss the release of new data from the Commerce Department that showed a sharp increase in housing starts in May compared to the level reported for April. Both articles report that this data implies continued strength in the housing market. Monthly housing data is extremely erratic. The March and April data both showed sharp declines in housing starts. It is likely that part of the increase reported for May was attributable to housing starts that took place in April, but were misreported for some reason. Such misreporting would both lower the number of starts reported for April and raise the starts reported in May. Even with the jump in reported starts in May, the level was still below the figure reported for February. Home Ownership Among Minorities Bush Calls for Increasing Minority Homeownership Dana Milbank Washington Post, June 18, 2002, Page A2 Bush Calls Transformed Area A Model Program for Housing David E. Sanger New York Times, June 18, 2002, Page A19 These articles discuss several initiatives by the Bush Administration which are supposed to reduce the gap in the homeownership rate between black and Hispanic families and white families. Currently this gap is approximately 26 percentage points. The articles report that one of the programs would subsidize the down payment of 40,000 low-income families a year. The other program would provide a tax credit to builders for 200,000 low-income homes. There are currently approximately 18 million black and Hispanic families (9 million of each). If half of these subsidies go to black and Hispanic families buying homes for the first time (twice their share of the population), and there is no overlap between beneficiaries of the two programs, then after ten years the programs will have increased the homeownership rate among these minorities by less than 1.6 percentage points, an amount equal to approximately 6 percent of the current gap in homeownership rates. It would have been helpful to include information on the number of black and Hispanic families so that readers could better assess the size of these programs relative to the magnitude of the problem. Trade Bush's Popularity Isn't Aiding GOP Domestic Agenda Dana Milbank Washington Post, June 16, 2002, Page A4 This article discusses President Bush's unwillingness to use his personal popularity to advance the agenda of conservatives within the Republican party. At one point it refers to President Bush's efforts to pass "free trade legislation." It is inaccurate to characterize this legislation as "free-trade." Many of the items that are being discussed in current negotiations have little to do with trade, such as rules governing health and safety restrictions. In some cases the Bush Administration is actually trying to increase barriers to trade, for example through increasingly stringent patent and copyright protection. It would be more accurate to refer to these negotiations as covering simply "trade" or "commercial" arrangements. H.M.O.'s and Medicare Drug Benefits Experts Wary of G.O.P. Drug Plan Robert Pear New York Times, June 16, 2002, Page A17 This informative article discusses the views of a number of health policy experts who are skeptical of the ability of private insurers to efficiently provide insurance for prescription drugs to the elderly. At two points the article refers to efforts to keep down Medicare costs through the increased use of H.M.O.'s. It would have been helpful to point out the General Accounting Office's finding that H.M.O.'s raised the cost of serving Medicare beneficiaries, instead of lowering it. House GOP Offers Third Hill Plan for Prescription Drugs Amy Goldstein and Jim VandeHei Washington Post, June 18, 2002, Page A4 House G.O.P. Offers Bill for Drug Payments for the Elderly Robert Pear New York Times, June 18, 2002, Page A18 These articles report on a Republican proposal that would provide $350 billion over the next decade to subsidize prescription drugs for senior citizens. According to the Congressional Budget Office, senior citizens will spend $1,773 billion on prescription drugs over this period, which means that the program would cover approximately one fifth of their total costs. Since the cost of prescription drugs is projected to more than double over the decade after adjusting for inflation senior citizens would face higher drug expenses in 2012 than they do at present, even with the Republican drug plan in place. Food Subsidies and Developing Nations Raising Farm Subsidies, U.S. Widens International Rift Elizabeth Becker New York Times, June 15, 2002, Page A3 This article reports on criticisms of U.S. farm subsidies by people who claim that they will hurt developing nations. Insofar as farm subsidies have the effect of lowering the price of U.S. farm products in world markets, their impact is identical to a drop in the dollar or an increase in agricultural productivity. Anyone who believes that a decline in U.S. farm prices due to government subsidies is harmful to developing nations must also believe that a decline of the same magnitude attributable to an over-valued dollar or increased productivity is equally harmful. At one point the article describes the subsidies in the farm bill as a "huge" increase over the prior subsidy level, later saying that the bill provides for an 80 percent increase in subsidy levels. In fact, the new farm bill provides an average of $18 billion annually in subsidies. This is 80 percent larger in nominal dollars (about 50 percent in real dollars) than the subsidy specified in the last farm bill. However, Congress has approved emergency assistance for farmers the last three years, raising the actual subsidy level to $20 billion. This means that the subsidies written into the new farm bill imply a decrease, in both nominal and real dollars, relative to current spending on farm subsidies. Corporate Accounting Higher Fees Ahead for Reshaped Accounting Sector Matt Moore Washington Post, June 17, 2002, Page A5 This article reports that the fees charged by accounting firms are likely to go up as a result of the conviction of Arthur Anderson. It bases this assertion on the statement of the Dean of an Accounting School, that the conviction will lead firms to be more careful in documenting their conduct and auditing procedures, which will require more time and lead to more costs. It is not clear that the conviction will require more documentation of audits. Arthur Anderson was convicted of deliberately falsifying audits, not of being negligent in its record keeping. There is no reason to believe that a firm which did not intend to violate the law would have run into the same sort of problems. It is also possible that the conviction will make it easier for accounting firms to ensure that their employees respect the law. If accountants fear public disclosure and prosecution of illegal conduct, which could ruin their professional career, they will be less likely to engage in improper behavior. In this way, the conviction may allow firms to get by with less monitoring and thereby save money. The Stock Market and the Economy No Market Rebound Until Companies Come Clean Jerry Knight Washington Post, June 17, 2002, Page E1 This article discusses the fact that the stock market has been slumping even while the economy appears to be recovering. It interprets this divergence in directions as a case of where the stock market "is not reflecting the economy." In fact, the ratio of stock prices to corporate earnings is still more than 20 to 1. This is far above the historic average of less than 15 to 1. The fact that the market is declining can be seen as evidence that it is reflecting the economy. Its extraordinary rise in the late nineties was not reflecting the actual growth of corporate profits. The Budget Deficit to Top $100 Billion, CBO Says Compiled from reports by the Associated Press and Reuters Washington Post, June 15, 2002, Page A7 This short article reports on new projections from the Congressional Budget Office, that the deficit for 2002 will exceed $100 billion. The article describes this as "ominous fiscal news." Even with this new projection, the deficit on the unified budget will be less than 1.5 percent of GDP, and the deficit on the "on-budget" budget (non-Social Security) will be approximately 3 percent of GDP. Deficits of this magnitude can be sustained indefinitely. There is nothing especially ominous about running a deficit of this magnitude, especially in a year when tax collections are depressed due to a recession. The article attributes the increase in the projected deficit to the new farm bill and a new set of tax cuts passed this year. By far the main factor behind the rise in the projected deficit is a sharp drop in capital gains tax revenue. As a result of the drop in the stock market the last two years, capital gains tax revenue will fall below projections by more than $60 billion this year.