Economic Reporting Review
By Dean Baker
September 9, 2002

OUTSTANDING STORIES OF THE WEEK

Free Market Upheaval Grinds Mexico's Middle Class
Ginger Thompson
New York Times, September 4, 2002, page A3
http://www.nytimes.com/2002/09/04/international/americas/04MEXI.html

This article reports on the continuing financial problems facing middle class Mexican families. It points out that most middle class families have seen little benefit from two decades of economic liberalization.

2 Companies Reduce Roles in Lobby Group for Generics
Melody Petersen and Reed Abelson
New York Times, September 4, 2002, page C1
http://www.nytimes.com/2002/09/04/business/04DRUG.html

This article reports on the fact that two major corporations have withdrawn from an alliance in support of legislation that would make generic drugs more readily available. These corporations both have large contracts supplying materials to major pharmaceutical firms. The pharmaceutical companies apparently used these contracts as leverage to force their suppliers to change their position on generic drugs.

Forecast Too Sunny? Try the Anxious Index
David Leonhardt
New York Times, September 1, 2002, Section 3 page 4
http://query.nytimes.com/search/abstract?res=F00A14F8395B0C728CDDA00894DA404482

This column reports on the fact that economic forecasters almost never forecast a recession. This is possibly due to the fact that many work for financial firms that want to encourage people to buy stocks. It notes that forecasts on a separate measure-the risk of a recession-are far more likely to predict a recession.


The Stock Market and the Federal Reserve Board

Policy Makers Hone Debate: When to Hold, When to Fold
Richard W. Stevenson
New York Times, September 3, 2002, page C1
http://www.nytimes.com/2002/09/03/business/03ECON.html

This article reports on the discussions at the Federal Reserve Board's annual meetings in Jackson Hole. At one point, it reports the assertion of Lawrence Meyer, the former vice-chairman of the Federal Reserve Board, that the Fed could not have publicly pointed out the irrationality of the stock market during the recent bubble. According to Meyer, this would have destroyed wealth and "that's a politically untenable situation for a central bank to be in."

Mr. Meyer's assertion is enormously important and should have been the central focus of this article (which would belong on the front page). The stock bubble was extremely damaging to the nation's economy (the bubble wealth was temporary and illusory). It led to hundreds of billions of dollars in wasted investment in telecoms and other tech sectors. It also caused millions of workers to save too little for their retirement or their children's education because they assumed that the bubble prices of their stock holdings would endure. In addition, the federal government grossly overestimated capital gains tax revenue in its tax and spending decisions.

There is little dispute about these negative effects of the stock bubble. However, Mr. Meyer is arguing that for political reasons, the Fed could not have taken steps to prevent the growth of the bubble. The Fed is designed to be politically independent, with 7 members of its core decision making body appointed by the President (subject to congressional approval) to 14 year terms, and the other five appointed through a process dominated by banking interests.

While this process is often defended as allowing the Fed the freedom to act in the nation's overall economic interests, Mr. Meyer is suggesting that political interests still prevent the Fed from doing what it views as best for the economy. Presumably, he is referring to the financial interests that would have been hurt most immediately by the Fed's efforts to deflate the bubble. This claim about political restrictions on the Fed's conduct is a powerful argument for altering the Fed's structure. It suggests that in order for the Fed to be free to act in the nation's economic interest, the influence of the financial industry will have to be reduced.

The article also includes an assertion that the view that "interest rate policy is best focused on fighting inflation rather than on stimulating economic growth," is growing in acceptance. This seems at odds with what is happening in the world at present. The Federal Reserve Board reduced its key interest rate from 6.75 percent in December of 2000 to 1.75 percent in September of 2001 in order to spur growth, not to fight inflation. Similarly, Japan's central bank is anxiously trying to promote growth with its current policy. The European Central Bank (ECB) continues to focus on inflation, but this policy has been the brunt of harsh criticisms from many prominent economists, and even the I.M.F. While a single-minded focus on containing inflation did gain popularity in the mid- nineties, the poor growth performance of Europe, combined with prolonged stagnation in Japan and the apparent success of the Fed in using interest rates to spur growth in the United States, has led many economists to reconsider their positions.

Greenspan Defends Fed Moves
John M. Berry
Washington Post, August 31, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A18063-2002Aug30.html

To Greenspan, 90's Bubble Was Beyond Reach of the Fed
Richard W. Stevenson
New York Times, August 31, 2002, page B1
http://query.nytimes.com/search/abstract?res=FB0911FC385B0C728FDDA10894DA404482

These articles report on a speech by Alan Greenspan, in which he claimed that there was nothing the Federal Reserve Board could have done about the stock bubble. Both articles imply that the Fed's main tool for dealing with the bubble would have been to raise interest rates, with the Times article also noting the possibility that it could have raised margin requirements.

In fact, Mr. Greenspan could have taken advantage of his extraordinary standing in financial markets to highlight the irrationality of stock prices as they rose to unsustainable levels. The markets' plunge in response to his qualified comments about "irrational exuberance" in December of 1996 suggests that this may have been a potent weapon against the bubble. It is also worth noting that the subsequent discussion at the conference apparently viewed this approach as a serious possibility (see "Policy Makers Hone Debate: When to Hold, When to Fold," by Richard W. Stevenson, New York Times, September 3, 2002, page C1 at http://www.nytimes.com/2002/09/03/business/03ECON.html).


Unemployment in Germany

German Election Race Tightens, With 2 Rivals in Full Flow but
Unpersuasive to Some
Steven Erlanger
New York Times, September 3, 2002, page A8
http://www.nytimes.com/2002/09/03/international/europe/03GERM.html

This article reports on the election campaign in Germany. At several points it includes assertions implying that Germany must reduce its labor market protections (e.g. relatively generous unemployment benefits and restrictions on firing workers) in order to reduce its unemployment rate. For example, it quotes an economics professor's assertion that "Stoiber's [the Christian Democratic Party candidate for chancellor] priority has to be to stimulate the economy and bring down unemployment, which every economist knows can only be done by changing labor laws." 

This is not true. Many prominent economists, including Nobel Prize winner Robert Solow and Princeton University Professor Paul Krugman for example, have argued that unemployment could be substantially reduced in Germany and the rest of Europe if the ECB lowered its interest rates. Its key interest has been set at 3.25 for almost a year. By contrast, the Federal Reserve Board has lowered its main interest rate to 1.75 percent. Even the IMF has been critical of the ECB's policy. While many conservative economists do argue for the need to eliminate protections for workers to stimulate the economy, economists are far from unified in accepting this position.


Capital Gains Tax Revenue in California

California Budget Passes With Cuts and, Critics Contend, Smoke and Mirrors
John M. Broder
New York Times, September 2, 2002, page A8
http://www.nytimes.com/2002/09/02/national/02CALI.html

This article reports on the new budget approved by California's legislature. It reports the assertions from California's governor, Gray Davis, that the state had not "devised a way to protect itself from the effects of falling stock markets," noting that capital gains tax revenue had fallen from $17 billion in 2000, to $6-$7 billion in the current fiscal year. It would have been worth noting that it was an extraordinary failure of planning to assume that capital gains tax revenues would continue at the levels of a stock bubble peak. A competent budget planner would have anticipated a sharp decline in capital gains tax revenues and adjusted budgets accordingly.


Free Trade

Fewer Foreign Doctors Seek U.S. Training
Compiled from reports filed by Reuters and Associated Press
Washington Post, September 4, 2002, Page A7
http://www.washingtonpost.com/wp-dyn/articles/A34894-2002Sep3.html

Test Tied to Slip in Foreign Applicants for Medical Residences
Associated Press
New York Times, September 4, 2002, page A19
http://www.nytimes.com/2002/09/04/health/04MED.html

These articles report a drop of more than 50 percent in the number of foreign medical students entering residency programs since the government began requiring a clinical skills test in 1997. This test, which is only administered in Philadelphia and costs the applicant $1,200, is only required of foreign medical students, not medical students trained in the United States. This is exactly the sort of restriction that would be eliminated if the United States pursued free trade in physicians' services in the same way it has pursued free trade in manufactured goods and other areas.

As a result of such protectionist barriers, doctors in the United States receive much higher pay than doctors anywhere else in the world. The costs of these barriers are far larger than the costs resulting from most other trade barriers, such as the steel tariffs recently imposed by President Bush.

The United States spends roughly four times as much on doctors each year as it does on steel. If doctors in the United States were paid the same as doctors in other rich nations, the savings would be approximately $80 billion a year. This is at least ten times as large as the highest estimate of the cost of the steel tariffs.

While the steel tariffs have been the subject of many major stories in both the Post and Times, the protectionist measures excluding foreign doctors have gone almost completely unnoticed. These articles are both wire service stories buried deep in the middle of the paper. Also, the articles themselves never discuss the discriminatory tests imposed on foreign medical students as a form of protectionism, nor do they mention the costs that this protectionism imposes on the U.S. economy or consumers.

U.S. Rebuked: Slapping the Hand That Fed Free Trade
Edmund L. Andrews
New York Times, September 1, 2002, page A4
http://query.nytimes.com/search/abstract?res=F20E16FC3B5B0C728CDDA00894DA404482

This article examines attitudes toward trade in the United States. It includes repeated assertions that recent trade agreements have sought to promote "free trade" and that President Bush has "free-market principles." These assertions are not true. A main thrust of recent trade agreements has been to increase some types of protectionism, most notably copyrights and patents. For example, the TRIPS agreement, which was part of the 1994 WTO round of negotiations, requires developing nations to adopt U.S.-style patent and copyright protections. According to estimates from the World Bank, these forms of protectionism will cost developing nations tens of billions of dollars each year in royalty payments and licensing fees.

While recent trade agreements have done much to put less skilled workers in the United States in direct competition with low paid labor in the developing world, they have not sought to break down barriers to competition in highly paid professions. If this had been a goal of these agreements, then there would have been movement towards the standardization of education and licensing requirements in professions such as medicine, law, and accounting. There would also be prohibitions against government institutions (e.g. government hospitals and universities) discriminating against hiring foreigners for these positions.

Given this reality, it is inaccurate to characterize recent trade agreements as "free trade agreements." It is also inaccurate to assert that President Bush has "free-trade principles," given his embrace of protectionist measures-economically the same as tariffs or other trade barriers, but much larger-that benefit many powerful interest groups.

For AFL-CIO and White House, The Great Divide Is Deepening
Thomas B. Edsall
Washington Post, September 2, 2002, Page A10
http://www.washingtonpost.com/wp-dyn/articles/A24466-2002Sep1.html

This article discusses the Bush Administration's relationship with organized labor. At one point it refers to President Bush's belief in "free-market capitalism." Mr. Bush has frequently supported measures that are directly at odds with a belief in free market capitalism. For example, he is a supporter of strong copyright and patent protections-which are enormous obstacles to the working of the free market; he has supported special tax breaks for people who invest in the stock market; and he wants the government to subsidize insurance for large real estate projects by providing free terrorism insurance. While Mr. Bush may find it politically helpful to be labeled as a believer in free-market capitalism, this view is not reflected in his policy agenda.

The article also includes an assertion that many unions may support President Bush because his energy policies, such as drilling in the Arctic Wildlife Refuge, will create more union jobs. In fact, serious estimates show that these projects will lead to relatively few union jobs. Most, if not all, unions will stand to lose more members through unfavorable decisions by President Bush's National Labor Relations Board than they can possibly hope to gain from such energy projects. It is far more plausible that some unions have supported President's Bush's energy agenda in the hope of getting some other political benefit.

Trees Fall in Canada's Forests, but U.S. Isn't Buying
Clifford Krauss
New York Times, August 31, 2002, page A3
http://query.nytimes.com/search/abstract?res=F70A1EFE385B0C728FDDA10894DA404482

This article examines a dispute over timber prices between the United States and Canada. At one point it reports the claims of a Canadian environmental group that Canadian lumber companies do not have to adhere to the same environmental standards as companies operating in the U.S., and therefore they have lower costs. If this is true, it is worth noting that it would not be a basis for restricting imports of Canadian lumber under NAFTA. NAFTA explicitly prohibits the consideration of these sorts of "process" issues. The importation of an item can only be restricted if the product itself presents a safety or environmental hazard.


Brazil

Brazil Builds Up Its Trade-Talks Team
Tony Smith
New York Times, September 4, 2002, page W1
http://www.nytimes.com/2002/09/04/business/worldbusiness/04TRAD.html

This article reports on efforts by the Brazilian government to increase the capabilities of its team of trade negotiators. At one point it notes that Brazil had a relatively closed economy until fairly recently, a situation that it characterizes as "slumbering for decades behind a high wall of import tariffs." Actually, Brazil's economy grew quite rapidly during the period when it had high tariff barriers. In the years from 1960 to 1980, per capita GDP grew by 141 percent. In contrast, per capita GDP has grown less than 7 percent in the last two decades, the period in which it has lowered these barriers.

At one point the article comments that all four candidates in the presidential election "say that Brazil's Achilles' heel is its chronic trade deficit." Actually, Brazil is now running large trade surpluses. It does still have a current account deficit, but this is attributable primarily to interest payments on past borrowing from abroad.


The Budget

Tax Cut Plan Mired in Economic, Political Debate
Jonathan Weisman
Washington Post, September 5, 2002, Page A5
http://www.washingtonpost.com/wp-dyn/articles/A37959-2002Sep4.html

This article reports on the status of a set of tax breaks for large investors that President Bush is reportedly considered. The first paragraph of the article characterizes this tax package as being "aimed at boosting the stock market." As the article later points out, the impact of the tax package on the stock market is not clear. It is clear that the tax package will give tax breaks almost exclusively to high-income families. Since it is not clear that the package will actually help the stock market, it is inaccurate to describe this as the purpose of the tax breaks.

As Deadline Nears, Congress Slogs in a Fiscal Quagmire
Carl Hulse
New York Times, September 5, 2002, page A15
http://www.nytimes.com/2002/09/05/politics/05SPEN.html

This article reports on the current status of budget legislation in Congress. It notes that most of the conflict involves $9 billion to $13 billion in disputed items out of total discretionary spending of $750 billion. It then reports the administration's response that this amount will compound (due to growth in the programs and interest on borrowing) to $200 billion over 10 years. This amount is less than 1 percent of the $25 trillion that the government is projected to spend over this period.