Economic Reporting Review
By Dean Baker
April 14, 2003
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OUTSTANDING STORIES OF THE WEEK
Advisors May Get 2nd Chance To Fail
Gretchen Morgenson
New York Times, April 6, 2003, Section 3 Page 1
http://query.nytimes.com/gst/abstract.html?res=FB0B16FD3F5C0C758CDDAD0894DB40448\2
This article reports on a clause in a bankruptcy bill before Congress, which
would allow financial firms that had advised a company prior to bankruptcy to
continue in that role after bankruptcy. As the article points out, this can lead
to a conflict of interest, since the financial firm may be liable to debtors to
some extent as a result of its pre-bankruptcy advice.
Is That Your C.E.O. Cashing Out?
David Leonhardt
New York Times, April 6, 2003, Section 3 Page 1
http://query.nytimes.com/gst/abstract.html?res=F30814FB3F5C0C758CDDAD0894DB40448\2
This article reports on a number of incidents in which C.E.O.'s are selling off
much of their holdings in the companies they run. It notes that this information
is generally difficult to find in corporate filings.
Again, Money Follows the Pinstripes
Patrick McGeehan
New York Times, April 6, 2003, Section 3 Page 1
http://query.nytimes.com/gst/abstract.html?res=F20613FA3F5C0C758CDDAD0894DB40448\2
This article reports on the latest data on C.E.O. compensation. It notes that
many C.E.O.'s have continued to receive very large compensation packages, even
when the firms they operate have done very poorly.
Employment Data
Job Cuts Reached 108,000 In March
John M. Berry
Washington Post, April 5, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A31577-2003Apr4.html
This article reports on the Labor Department's release of employment data for
March. The March data showed a second consecutive month of sharp job losses,
with the two month decline in the payroll survey totaling 465,000. This article
adds in January's reported job growth of 203,000, and then suggests that much of
the 262,000 job loss over the three month period could be attributed to the
call-up of national guard and reserve soldiers, who may have left their jobs and
not been replaced.
It is worth noting that the January increase was largely a statistical
aberration, since it followed a loss of 144,000 jobs in December, with most of
the changes attributable to the retail sector. It is very difficult to make
proper seasonal adjustments in the retail sector for Christmas. The four month
job decline was 409,000. At most, one-third of this can be explained by the
call-up of national guard and reserve soldiers.
The article also notes that the number of people reported as being employed in
the Labor Department's survey of households, which is released at the same time,
rose by almost 200,000 in March. The month- to-month movements in this survey
are highly erratic. For example, in May of 2002, the number of employed persons
was reported as rising by 441,000. It fell by 364,000 the following month. For
this reason, economists generally ignore the monthly movements in this data. The
fact that monthly changes in employment in the household survey have little
meaning was actually noted last year in an article with the same byline
("Jobless Rate Declined Slightly Last Month; Recovery Isn't Adding Many
Jobs, Data Show, by John M. Berry, Washington Post, June 8, 2002; E1).
The only two analysts cited in this article worked for financial firms. It would
be useful to rely on a broader range of experts.
Dueling Surveys Cloud U.S. Employment Picture
John M. Berry
Washington Post, April 11, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A5191-2003Apr10.html
This article notes the divergence between the number of jobs lost over the last
two years, as reported in the Bureau of Labor Statistics (BLS) payroll survey,
and the change in the number of people reported as being employed in the BLS
household survey. The article reports that the payroll survey shows a loss of
nearly 2.1 million jobs since the beginning of 2001, whereas the household
survey shows a drop of "only about 600,000."
The reason there is a large discrepancy between these two surveys is that the
household survey was adjusted in January of 2003 to incorporate the population
data from the 2000 census. This created a break in the series, with the new
census data increasing the number of employed persons by approximately 1
million. The adjustment in the survey data in January 2003 reflects the BLS's
assessment that the household survey had understated employment growth by
approximately this amount over the prior decade. As a result of this
re-benchmarking in January, employment data from the months after January 2003
cannot be directly compared with the months before January of 2003. If an
adjustment is made for the re-benchmarking, then the household survey would show
a decline of approximately 1.7 million employed people since January of 2001, a
figure that is very similar to the 2.0 million lost jobs reported in the payroll
survey over the same period.
This article also refers to strong productivity growth as one explanation as to
why the economy has not created more jobs. Data on productivity (output per hour
worked) is derived primarily from the
employment data in the payroll survey. If the article's assessment of the job
situation were correct -- that the lower rate of job loss shown in the household
data was actually more accurate than the payroll survey -- then productivity
growth would be considerably weaker than current data show.
Northwest Airlines Pensions
Pension Shift at Northwest Raises Fears
Mary Williams Walsh
New York Times, April 5, 2003, Page C1
http://query.nytimes.com/gst/abstract.html?res=F10F14FF3E5C0C768CDDAD0894DB40448\2
This article reports on a proposal by Northwest Airlines to temporarily place
company stock in its pension fund to make up a funding shortfall. While the
article presents the company's view that this is a safe and prudent proposal,
and the view of union representatives that this plan will put the fund in
jeopardy, it would have been appropriate to also present the views of an
independent analyst. If there was really as little question about the value of
the stock as the company claims, then it should have little difficulty borrowing
in credit markets against this stock. It could then use this borrowed money to
replenish the pension fund. The fact that the company is apparently unable to
arrange such borrowing indicates that the market views this stock as carrying
considerable risk.
Brazil
Success for Brazil Despite Naysayers
Tony Smith
New York Times, April 10, 2003, Page W1
http://www.nytimes.com/2003/04/10/business/worldbusiness/10LULA.html?ex=10505520\00&en=28b210d0cb119b8d&ei=5007&partner=USERLAND
This article presents an assessment of the Brazilian government's performance
now that President Luiz Inacio Lula da Silva has been in office for 100 days. At
one point the article refers to the view of analysts that, "Brazil must be
careful not to veer off the path to solid economic growth." It is not clear
that Brazil is on a path of solid economic growth. It has raised short-term
interest rates to very high levels in order to keep its inflation rate in line
with targets set by the I.M.F., and has cut government spending for the same
reason. As a result, it currently is experiencing very slow economic growth. It
is possible that this growth slowdown is temporary, but it is also possible that
Brazil will find itself in a situation where it must continually adopt further
austerity measures in order to appease the I.M.F. and foreign investors.
Pensions
Pension Proposal Is Under Fire
Albert B. Crenshaw
Washington Post, April 10, 2003, Page A12
http://www.washingtonpost.com/wp-dyn/articles/A1216-2003Apr9.html
This article reports on a new set of guidelines from the Treasury Department to
regulate the conversion of traditional defined benefit pension plans to
"cash-balance" pension plans. The article notes that there is
considerable opposition by some workers to these conversions. It reports that
"critics say companies implement cash-balance plans to cut costs, and often
rely on the complexity of pension calculations to hide that fact from
workers." In defense of the conversion to cash-balance plans the article
refers to the arguments of companies that cash-balance plans distribute benefits
"more democratically," because 20 percent of workers get 80 percent of
the benefits under defined benefit plans.
This discussion misrepresents the key issue in these conversions. Many older
workers have remained at companies for long periods of time, precisely because
the existing defined benefit pension plan provided much greater benefits to
long-serving workers. If a cash balance plan had been in place during their
whole careers, these workers would not have remained with their employers for 20
or 25 years. In this sense, the conversion to a cash balance plan is taking away
money that workers had already worked for. This is "democratic" in the
same way that redistributing the previous earnings of top executives to current
workers would be democratic. The article never makes it clear that the key issue
in the debate is over the right of older workers to pension benefits that,
arguably, they have already earned.
Russia
Russia's Economy Seems to Be Starting to Bloom
Michael Wines
New York Times, April 11, 2003, Page A6
http://www.nytimes.com/2003/04/11/international/europe/11MOSC.html?ex=1050638400\&en=d9cadcdab3e8b11c&ei=5007&partner=USERLAND
This article discusses Russia's current economic outlook. The article presents a
misleading assessment by reporting figures using currency conversion data for
output, rather than purchasing power parity measures. For example, it reports
that Russia's current GDP is $346 billion, but that it is expected to triple by
2010. This GDP figure puts Russia's per capita GDP at less than $2,000 per year,
which would make it poorer than any country in Latin America. In order for its
GDP to triple by 2010, Russia's economy would have to grow at an average rate of
almost 15 percent annually over the rest of the decade.
According to data from the World Bank, Russia's per capita GDP is currently
about $3,200 per year, which makes its GDP approximately $600 billion on a
purchasing power parity basis. Even if Russia's economy performs extremely well,
it is unlikely to sustain growth of more than 7 percent over the decade.
While this article reports that Russia's economy has been growing at a healthy
pace for the last several years, it is worth noting that when Russia devalued
its currency and broke with the I.M.F. in 1998, these steps were widely reported
as leading to an economic disaster (e.g. "Yeltsin Must Resort to Reform by
Decree," by Sharon LaFraniere, Washington Post, July 18, 1998, page A14;
"Russian Bailout Fails To Ease Market Fears," by Sharon LaFroniere,
Washington Post, July 28, 1998, page A1; and "Yeltsin and Crew Are Sinking
Like the Ruble," by Michael Wines, New York Times, August 22, 1998, page
A1).
Bush Tax Cuts
GOP Leaders Strive for Unusual Deal on Budget
Jim VandeHei
Washington Post, April 10, 2003, Page A3
http://www.washingtonpost.com/wp-dyn/articles/A1250-2003Apr9.html
This article reports on efforts by the Republican congressional leadership to
try to resolve differences between House and Senate members on the size of the
tax cut. At one point that article describes the battle as being between
moderates who are concerned about the deficit and conservatives "who want
large tax cuts to spur economic growth."
It is not clear that promoting economic growth is the main motivation of those
who advocate large tax cuts. As the recent analysis from the Congressional
Budget Office showed, these tax cuts are not likely to spur much growth even
under the best case scenarios [http://www.cbo.gov/showdoc.cfm?index=4129&sequence=0
]. (In scenarios that showed the tax cuts producing growth in the next decade,
the growth was attributable to the fact that people anticipated tax increases in
the years after 2013, and therefore chose to work harder in the relatively low
tax years before 2013. The more rapid growth of the next ten years was therefore
at the expense of slower growth in later years.)
While it is possible that advocates of the tax cuts may really believe that
these cuts will lead to more rapid growth in spite of any economic evidence in
support of this view, it is also possible that they simply want to give more tax
breaks to wealthy backers.
The Economy
For Bush, Time to Mend Economy Is Running Out
Dana Milbank
Washington Post, April 5, 2003, Page E1
http://www.washingtonpost.com/ac2/wp-dyn/A31614-2003Apr4?language=printer
This article assesses the ability of the Bush administration to pass a stimulus
package in time to boost the economy enough to help his re-election campaign.
While the article refers to President Bush's tax proposal as a "stimulus
plan," it is worth noting that the administration has avoided describing it
this way. By targeting its tax breaks towards the wealthiest taxpayers, who are
least likely to spend their tax break, the plan would be a very poor form of
stimulus. Since the administration does not describe the plan as a stimulus
package, and it does not really fit the description of a stimulus package, it is
inappropriate to characterize it as a stimulus package.
In assessing the economy's near-term prospects, the article makes no mention of
the housing bubble. The rapid run-up in home prices over the last seven years
has created approximately $3 trillion in excess housing wealth compared with a
situation in which prices had just kept pace with inflation. Ignoring this
bubble, which could collapse at any time, would be like reporting on the economy
in 2000 without mentioning the stock market bubble.