Economic Reporting Review
April 7, 2003
By Dean Baker, co-Director of the Center for Economic and Policy Research
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OUTSTANDING
STORIES OF THE WEEK
In
Commodities, It May Become Tougher to Tell Who’s Who
Gretchen Morgenson
New York Times,
March 30, 2003, Section 3 Page 1
http://query.nytimes.com/gst/abstract.html?res=FB0717F93D5D0C738FDDAA0894DB404482
This article reports on a weakening of regulations
that were designed to protect commodity traders from abusive practices by
brokers.
Help for Bad Times Now Helps Rich
David Cay Johnston
New York Times, April 4,
2003, Page C1
http://www.nytimes.com/2003/04/01/business/01INSU.html
This
article reports on how an old loophole in the tax code, which was designed to
aid poor farmers in getting insurance, is now being used as a tax shelter by
rich people.
The Bush Tax
Cut
The End of Taxes as We Know Them
Daniel Altman
New York Times,
March 30, 2003, Section 4 Page 1
http://query.nytimes.com/gst/abstract.html?res=F50C15F83F5D0C738FDDAA0894DB404482
This article discusses the merits of President
Bush’s proposals for large tax cuts directed primarily at the wealthy. The
article refers to the record of the Reagan era tax cuts and argues that this
experience left the merits of supply-side tax cuts open to debate, because
military spending increases created large deficits, which “swamped whatever
supply-side benefits the tax cuts might have had.”
Actually the military build-up of the Reagan years
does not make it any more difficult for economists to assess whether the tax
cuts had their intended effect. The alleged goal of supply-side tax cuts is to
increase incentives to save. A simple way to determine whether the tax cuts were
effective is to see what happened to the savings rate in the eighties. In the
five years before the tax cut was implemented (1977-81), the savings rate
averaged 9.6 percent of disposable income. In the five years after the tax cuts
were fully phased (1984-88), the savings rate averaged 8.6 percent of disposable
income. By this most basic measure the supply-side tax cuts were a complete
failure. It is worth noting that deficits of this era should have increased
incentives to save, by raising interest rates, so the decline in the saving rate
is even more striking. (Corporations also increased their dividend payout rate,
which should have increased the savings rate as well.)
This article never discusses the plausible magnitude
of the growth effects of supply-side tax cuts. Even in a best case scenario, it
is unlikely that the Bush tax cuts would increase the annual growth rate by even
0.05 percentage points, a gain in growth that would probably be too small to
even be noticed by anyone in their lives. (The Congressional Budget Office
recently estimated that the Bush tax cuts would reduce GDP under most scenarios.
The only situations in which they led to an increase in output over the next
decade, is if people assumed that the deficits from the tax cuts would lead to
higher taxes in future years. In these scenarios, people have incentive to work
more in the next decade – a period of relatively low taxes – rather than in
later years when they expect taxes to be higher [http://www.cbo.gov/showdoc.cfm?index=4129&sequence=0])
This article also never discusses the possibility
that the intention of the Bush tax cuts is simply to redistribute money to the
wealthy – their one undisputed effect. This would be like discussing the steel
tariffs without ever raising the possibility that their purpose might be to
protect jobs of workers in the steel industry and to increase the profitability
of steel manufacturers.
At one point the article asserts that President
Bush’s plan to establish tax-free savings accounts, “could quickly shelter
most families entire portfolios from taxation.” Actually, the vast majority of
families' can already shelter their entire portfolios from taxation in the way
that this article is describing. Only 2 to 3 percent of families reach the
current limits on the amount that can be placed into tax sheltered retirement
accounts such as IRAs or 401(k)s.
Bush’s Domestic Agenda Suffers Hill Setbacks
Jim VanderHei
Washington Post,
March 30, 2003, Page A5
http://www.washingtonpost.com/wp-dyn/articles/A48911-2003Mar29.html
This article discusses the problems that President
Bush’s domestic agenda is facing in Congress. The article twice asserts that
President Bush has proposed the elimination of the tax on stock dividends. This
is not accurate. The majority of stockholders hold most of their stock in
retirement accounts. The dividends earned on this stock would still be subject
to taxation, just as it is now, when workers draw down this money after
retirement.
War Related
Hostility to U.S. Business
When a Brand Becomes a Stand-in for a Nation
Rob Walker
New York Times,
March 30, 2003, Section 4 Page 1
http://query.nytimes.com/gst/abstract.html?res=F10B14F93D5D0C738FDDAA0894DB404482
This article discusses the hostility that is being
directed against McDonald’s restaurants around the world because the chain is
seen as a symbol of the United States. At one point the article quotes a
spokesperson for McDonald’s as saying that boycotts and vandalism directed
against McDonald’s restaurants only hurt local business people, because the
franchises are locally owned and operated.
This is not true. The value of McDonald’s
franchises is determined by the profit that owners can anticipate. If the threat
of boycotts and vandalism lower the expected profit, then this will reduce the
amount of money that McDonald’s earns from by selling franchises.
Greenspan’s Record at the Federal Reserve Board
Another War, Same General
Edmund L. Andrews
New York Times,
March 30, 2003, Section 3 Page 1
http://query.nytimes.com/gst/abstract.html?res=F1091EF93D5D0C738FDDAA0894DB404482
This article examines Federal Reserve Board
Chairman’s assessment of the economy as he attempts to deal with the effects
of the war. At several points, the article presents the views of people who
admire Greenspan’s stewardship of the economy. It would have also been
appropriate to include views of some of the Chairman’s critics. By failing to
do anything to halt the growth of the stock market bubble, Mr. Greenspan made
one of the largest blunders that a central banker has ever made. He also helped
to spur on the housing and dollar bubbles, which will create serious problems
for the U.S. economy in the not very distant future.
In addition, with regard to the likelihood that the
U.S. economy will again fall into a recession, it would have been appropriate to
point out that he not only missed the 1990-91 recession (which was brought about
at least in part by his raising short-term interest rates), but he also missed
the 2001 recession. He continued to say all through the recession that he
thought the economy was just experiencing a period of slow growth.
The article also gives Mr. Greenspan credit for
slowing the economy in 1994-95 without pushing it into a recession. Mr.
Greenspan raised interest rates to slow the economy at the time, because he
believed that inflation would get out of control if the unemployment rate got
below 6.0 percent. The experience of the late nineties proved that this was not
true, implying that there was no reason to slow the economy in 1994-95, and that
Mr. Greenspan’s decision to raise interest rates therefore kept millions of
people out of work for nothing.
Trade
Nations Fail to Agree on Farm Subsidies
Elizabeth Becker
New York Times,
March 31, 2003, page C2
http://www.nytimes.com/2003/04/01/business/worldbusiness/01TRAD.html
This article reports on a deadlock in WTO
negotiations over reducing protections for agriculture. The article includes a
series of assertions that are not supported by the evidence. For example, the
article asserts that “there is little disagreement that these [agricultural]
subsidies are among the biggest trade barriers for poor nations.” It goes on
to attribute the growing gap in income between rich and poor countries to
agricultural subsidies. According to the World Bank, the complete removal of all
merchandise trade barriers in developing nations (both agricultural and
non-agricultural) would raise income in developing nations by an average of 0.6 percent
(Global Economic Prospects and the Developing Countries 2002, table 6.1).
This means that
a poor country like Ethiopia would see its per capita income rise from
approximately $600 a year at present to $603.60 if the rich countries removed
all their agricultural subsidies, as well as all their other barriers to
merchandise trade. This gain would have virtually no impact on the size of the
gap between poor and rich nations.
The article claims that the subsidies to agriculture
in rich nations are $300 billion annually. The United States pays out
approximately $20 billion a year in subsidies to its farmers, and the European
Union pays out approximately $50 billion. Since the U.S. and EU comprise more
than two thirds of the developed world, the $300 billion figure used in this
article appears to be a sizable overstatement.
At one point the article refers to talks aimed at
“a trade deal that would help developing nations fight AIDS, tuberculosis,
malaria and other diseases.” Actually, developing nations had previously been
able to freely import and produce drugs to combat these diseases. The current
round of talks are part of an effort to restrict their ability to import and
produce drugs that fight these diseases by applying patent protections to many
drugs. The talks are aimed at determining the exact meaning of the new patent
rules.
While the article asserts that this round of trade
talks will benefit developing nations, and includes quotes that also make such
assertions, it does not present the views of anyone who is critical of the
process.
Hill Moves Closer to Passage of War; Anti-Terror
Funds
Helen Dewar and Juliet Eilperin
Washington Post,
April 4, 2003, Page A8
http://www.washingtonpost.com/wp-dyn/articles/A24755-2003Apr4.html
House and Senate Approve Bush’s Wartime Spending
Request
David Firestone
New York Times,
April 4, 2003
http://www.nytimes.com/2003/04/04/international/worldspecial/04COST.html
These articles report on an amendment to the
supplemental appropriations bill to pay for the Iraq war, which would prohibit
Russia, Germany, and France from getting contracts associated with rebuilding
Iraq. This amendment was proposed as a retaliation for these nations’
opposition to the war. It would have been appropriate to point out that this
amendment is almost certainly a violation of W.T.O. rules, which prohibit this
sort of politically motivated discrimination in awarding contracts.
I.M.F.
Bankruptcy System for Nations Fails to Draw Support
Paul Blustein
Washington Post,
April 2, 2003, Page A14
http://www.washingtonpost.com/wp-dyn/articles/A6562-2003Apr1.html
This article discusses the apparent failure of an
I.M.F. proposal to establish a mechanism that would allow heavily indebted
nations to relieve a portion of their debts through bankruptcy. At one point the
article refers to opposition to the proposal from developing nations because
they were worried that it could cut off their access to “cheap money.” It is
not clear that many developing countries would have this concern, since most
must pay very high interest rates on the money they borrow. For example, Brazil
has been paying real interest rates of between 15 percent and 20 percent on the
money it has borrowed in the last eight years. Argentina had paid a real
interest rate of well over 20 percent before its collapse in December of 2001.
While it is possible that interest rates would go still higher if a bankruptcy
mechanism were put in place, it is not accurate to say that developing countries
currently have access to “cheap money” through international financial
markets.
The Airline Industry
Rivals Likely to Imitate American’s Stance on Labor
Edward Wong
New York Times,
April 2, 2003, page C2
http://www.nytimes.com/2003/04/02/business/02PLAC.html
This article discusses the possibility that other
airlines will follow the example of American Airlines in using the threat of
bankruptcy to force workers to accept pay cuts. The article repeatedly uses
labor cost per passenger mile as a unit to assess the relative labor costs of
the major airlines, including a chart showing labor costs per passenger mile for
all major airlines.
Labor costs per passenger mile is actually not a very
good measure of relative labor costs, since an airline that focused on shorter
flights – U.S. Air, for example – would be expected to have much higher
labor costs per passenger mile. This is not necessarily a problem for the
airline because ticket prices are not generally proportionally to the distance
of the flight – the distance from coast to coast is more than 15 times the
distance from New York to Washington, but a coast to coast ticket would only
cost two or three times as much as a ticket from New York to Washington.
Wal-Mart and the War
In Wal-Marts Close to Bases, Emotions Spill Into
Aisle
Constance L. Hays
New York Times,
April 4, 2003, page A1
http://www.nytimes.com/2003/04/04/international/worldspecial/04SHOP.html
This article discusses the situation of workers at
Wal-Marts near military bases, many of whom have family members fighting in the
military. The article focuses on the company’s efforts to comfort workers who
are concerned about the plight of their families. It would have been appropriate
to note that Wal-Mart has often harassed or fired workers who have not been
viewed as sufficiently cooperative with management (e.g. “Suits Say Wal-Mart
Forces Workers to Toil Off the Clock,” New York Times, June 25, 2002, Page A1). Workers who did not believe
that Wal-Mart had been sufficiently accommodating of their needs could fear
losing their jobs if they discussed this fact with a reporter. This article
essentially presents the company’s view of how it is helping its workers deal
with the situation.