Economic Reporting Review
By Dean Baker
January 20, 2004
Outstanding Stories of the Week
Study Disputes View Of Costly Surge In Class-Action Suits
Jonathan D. Glater
New York Times, January 14, 2004, Page C1
This article reports on a new study that examines recent trends in the size of settlements and lawyers fees in class-action lawsuits. The study found that there has been little change in the average or median size of either the settlements or the fees charged by lawyers over the decade from 1993-2002.
Few Signs of Recovery
Jonathan Weisman
Washington Post, January 14 2004, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A14344-2004Jan13.html
This article examines labor market conditions in Cleveland Ohio. It reports that workers in the area are having difficulty finding jobs, in spite of evidence of a turn around in several macroeconomic indicators.
In-House Audit Says Wal-Mart Violated Labor Laws
Steven Greenhouse
New York Times, January 13 2004, Page A16
http://query.nytimes.com/gst/abstract.html?res=F30714FF39540C708DDDA80894DC404482
This article reports on an internal audit at Wal-Mart, which found evidence that the company's stores routinely violated labor laws by such practices as requiring workers to work unpaid hours and having teenagers work late into the night. The audit was prepared for the company to help in its defense against several suits alleging labor law violations.
Incentives Lure Many to Quit, Starting Tough New Job Hunt
Louis Uchitelle
New York Times, January 11 2004, Page A1
http://query.nytimes.com/gst/abstract.html?res=F60816F63C540C728DDDA80894DC404482
This article discusses a growing tendency for firms to persuade older workers to accept buyout packages at a point in their career where they are not yet ready to retiree.
California Budget Crisis
Calif. Governor Unveils Budget
Rene Sanchez
Washington Post, January 10, 2004, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A4711-2004Jan9.html
Governor Seeks Big Cuts in California Spending
John M. Broder
New York Times, January 10, 2004, Page A17
http://query.nytimes.com/gst/abstract.html?res=F30B15F93D540C738DDDA80894DC404482
These articles report on California Governor Arnold Schwarzenegger’s plans to deal with the state’s budget crisis. Both articles report on Mr. Schwarzenegger’s proposed budget cuts without indicating how large the cuts are relative to current spending, whether the cuts are measured against a baseline that allows current service levels to be maintained, or if the cuts represent absolute reductions in spending against current levels.
For example, the Post article reports that Schwarzenegger plans call for "eliminating $2 billion in promised aid to public schools." The Times article reports that he cut $2.7 billion from health and human service programs. Without knowing current spending levels for these categories of spending, how these cuts are being measured, or even if they refer to single year or two-year cuts (California has two-year budgets), it is not possible for readers to have a clear sense of the impact of the proposed cuts.
Tax Cuts
Unemployment Down, But New Jobs Are Rare
Nell Henderson
Washington Post, January 10, 2004, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A2949-2004Jan9.html
As Far as Jobs Go, Bush Can Only Wait
Edmund L. Andrews
New York Times, January 10, 2004, Page B1
http://query.nytimes.com/gst/abstract.html?res=F3081FFE3C540C738DDDA80894DC404482
These articles report on the economy’s near-term prospects following the release of employment data for December. Both articles refer to big tax refunds that they assert people will receive this spring. It is questionable whether these tax refunds will be large enough to have a significant impact on the economy.
The basis for the view that people will receive large tax refunds is that the tax rate was lowered in the middle of the year. The lower rate was made retroactive, so that many people paid tax at a higher rate in the first half of the year than is necessary under the new tax law. In principle, this money will be refunded when taxpayers file returns for 2003.
However, the $40 billion estimate that appears in the Times article may substantially overstate the amount of excess tax payments. Most of the tax rebates will go to high-income taxpayers. Many of these people file their own returns quarterly, because they are either self-employed or have substantial income from savings. In some cases, these people will have already effectively adjusted their tax payments to limit their overpayment for 2003. More importantly, many of these people will end up with a substantial capital gains tax liability for 2003, due to the run-up in stock prices last year. By contrast, capital gains tax payments were very small for 2001 and 2002, because most investors with gains could offset them with large losses on other stocks. (This is one reason for the large shift in the federal budget from surplus to deficit.) Higher capital gains tax payments are likely to absorb much of the tax rebate for the upper income taxpayer, which means that the economic boost from such rebates will be limited.
Immigration
Business Cheers Bush’s Plan to Hire Immigrants More Easily, but Labor Is Wary
Steven Greenhouse
New York Times, January 11, 2004, Page A12
http://query.nytimes.com/gst/abstract.html?res=FB0C13F93F540C718DDDA80894DC404482
This article reports on the reactions of business and labor groups to the Bush administration’s proposals to make it easier for immigrants to work in the United States. It reports that businesses say that the plan will make it easier for them to fill jobs, but notes that unions say that competition from immigrants will drive down wages. In the next to last paragraph the article asserts that the Bush administration, "as well as many economists and business executives," say that labor shortages are hurting the economy.
It would have been useful to point out that many economists also say that competition from immigrants will drive down the wages of substantial segments of the U.S. labor force. While most economists may agree that increased immigration will lead to more rapid economic growth, it is almost certainly true that they also believe that competition from immigrants depresses wages for the workers with whom they are competing. It would also be worth noting that this proposal seems to do little to subject highly paid professionals, like doctors and lawyers, to competition from immigrants – it seems intended to increase competition only among less educated workers.
Trade
As Iowa Voting Nears, New Attack Ads Appear
Dan Balz and Jim VandeHei
Washington Post, January 14, 2004, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A14103-2004Jan13.html
Tighter Race, Tougher Talk: Gephardt Makes Case Against Dean
Jim VandeHei and Ceci Connolly
Washington Post, January 15, 2004, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A18200-2004Jan14.html
These article report on the last week of campaign for the Iowa Democratic Party presidential caucus. The articles repeatedly make references to candidates’ position on "free trade." None of the Democratic presidential candidates (nor any other prominent political figures) favor free trade. All of them support some forms of protectionism, such as patent and copyright protection. Also, the candidates seem content to allow barriers to trade in professional services, such as restrictions on the number of foreign medical residents who can enter the United States each year.
Given the candidates positions, it is inaccurate, and serves no obvious purpose, to use the word "free" in reference to trade policy.
Genetically Altered Food
More Acres Devoted To Biotech Crops
Justin Gillis
Washington Post, January 14, 2004, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A14331-2004Jan13.html
This article reports on a new study that shows that bio-engineered crops are being rapidly adopted in many regions of the world. The article notes that the crops are spreading in spite of concerns over safety. It would be helpful to include some additional background – most of the concerns over the safety of bio-engineered crops would not directly affect the farmers who use them.
The biggest concerns stem from the possibility that genetically altered crops could have unpredictable and potentially harmful consequences to the environment. For example, a genetically altered crop may prove harmful to an animal that is important to specific ecosystems. The probability that a farmer will be negatively affected in such a situation will be largely independent of their decision to use bio-engineered crops. In other words, they are likely to use bio-engineered crops if saves them money, with little concern for the potential environmental implications.
Pension Funds
U.S. Insurer of Pensions Says Its Deficits Have Soared
Mary Williams Walsh
New York Times, January 16, 2004, Page C1
This article discusses the financial situation of the Pension Benefit Guaranty Corporation (PBGC), which is currently facing a record deficit due to the collapse of several major pension funds. The article notes that the problems facing the fund are attributable to the fact that pension funds held large amount of stock and that stock returns are unpredictable.
Actually, the problem was not that stock returns are not predictable; rather the problem was that these funds held large amounts of stock when prices were inflated due to a bubble. The fact that prices would fall and that subsequent returns would be very low or negative was entirely predictable [http://www.cepr.net/stock_market/stock_returns_for_dummies.htm]. Pension funds face a problem because they were allowed to use assumptions on stock returns that were virtually impossible. Had the PBGC been properly exercising its oversight authority, it would have insisted that the funds it guarantees use realistic projections for stock returns.
Medicare Drug Benefit
Health Chief Attacks Democrats on Medicare
Robert Pear
New York Times, January 13, 2004, Page A23
http://query.nytimes.com/gst/abstract.html?res=F20E17FC39540C708DDDA80894DC404482
This article reports on the political debate over the Medicare prescription drug benefit approved by Congress last year. At one point the article notes that the bill prohibits the government from using its market power to negotiate with drug companies for lower prices. It explains this prohibition by asserting, "the law’s sponsors adopted that provision for fear that government involvement would overwhelm the free market and set prices."
While it is possible that these politicians were motivated by abstract concerns over government intervention, it is also possible that they were motivated by a desire to increase the profits of the pharmaceutical industry. Many of the key supporters of the bill have received large contributions from the industry. The article does not explain how it could determine the sponsors were motivated by concerns over government intervention rather than a desire to benefit an important political backer.
It is also worth noting that the pharmaceutical industry is dependent on government intervention – in the form of patent monopolies – for a large portion of its profits. This fact makes it seem unlikely that members of Congress prohibited government negotiations due to their general opposition to government intervention.
European Budget Deficits
European Commission to Sue Over Deficits of 2 Countries
Mark Landler
New York Times, January 14, 2004, Page C1
This article reports on plans for the European Commission to sue France and Germany over the size of their budget deficits, which exceed the limits set in the Stability Pact for countries that are part of the euro zone. At one point the article describes these two countries as "fiscally profligate."
While the deficits being run by both countries exceed the limit of 3.0 percent of GDP specified in the Stability Pact, it is not clear that this constitutes inappropriate policy. During a recession, budgets always move towards larger deficits, which has a stabilizing impact on the economy. This is one reason why the deficit in the United States is expected to be near 5.0 percent in 2004.