By
Dean Baker
February
23, 2004
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OUTSTANDING
STORIES OF THE WEEK
The Health of Grocers,
Workers
Michael Barbaro and Neil
Irwin
Washington Post, February 17, 2004, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A46553-2004Feb16.html
This article reports on the changes
taking place in the grocery industry. It shows how the spread of Wal-Mart into
the sector is depressing wages. Chains that have unionized workforces, and
which provide decent wages and benefits to their workers, have great difficulty
competing with Wal-Mart. Wal-Mart generally pays its workers far less and only
provides very limited health care and pension benefits.
Talking
Simplicity, Building a Maze
David
Cay Johnston
New York Times, February 15, 2004, Section
3 Page 1
This article discusses some of the complexities in the tax code. It points out that while most people strongly favor more simplicity in the tax code, special provisions tend to have powerful backers, which tend to obstruct any serious move towards greater simplicity.
Jonathan
Weisman and Paul Blustein
Washington Post, February 14, 2004, Page A8
http://www.washingtonpost.com/wp-dyn/articles/A40854-2004Feb13.html
U.S.
Trade Deficit Reaches A Record $489.4 Billion
Elizabeth
Becker
New York Times, February 14, 2004, Page B3
These articles report on the Commerce Department’s
release of trade data for December. The data showed that the country ran it
second highest monthly trade deficit ever in December. The year round trade
deficit was a record 4.5 percent of GDP.
It is worth noting that the December deficit was
considerably higher than what the Commerce Department had assumed in it advance
estimate of fourth quarter GDP. The December numbers will lower the estimate of
GDP for the quarter by approximately a 0.5 percentage point to 1.0 percentage
point. It will have approximately the same impact on productivity growth,
lowering the rate for the quarter to approximately 2.0 percent.
Other data that has come in since the advance GDP
report, most importantly inventory data for December, will push the estimate of
GDP upward, but the impact of a surprisingly negative trade report on the
estimate of GDP for the 4th quarter deserves some attention. It
implies that the economy is growing considerably less rapidly than is generally
believed.
The Post article includes a discussion of the
possibility that the large trade deficit will push Democrats towards adopting a
“protectionist stance,” and asserts that President Clinton pursued “free trade”
policies. This is not true. President Clinton openly pursued protectionist
policies, most notably increasing copyright and patent protection in developing
countries. These forms of protection increase the price of affected products by
300 to 400 percent, or more, above the competitive market price. The resulting
distortions are far larger than those created by most tariffs or quotas. The
Clinton administration also supported measured restricting the number of
foreign doctors that could practice in the United States. It did favor reducing
trade barriers when the main effect would be on manufacturing workers, but it
certainly did not support free trade as a general policy.
Democrats
Will Try a Hybrid of Old, New Policies
Jim
VandeHei
Washington Post, February 15, 2004, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A42676-2004Feb14.html
AFL-CIO
Backing Gives Kerry a Boost
John
F. Harris and Jim VandeHei
Washington Post, February 20, 2004, Page A12
http://www.washingtonpost.com/wp-dyn/articles/A55862-2004Feb19.html
These articles both discuss the positions of the
Democrats on trade. Both articles make references to proponents of “unfettered
free trade” or “unregulated free trade.” There are no prominent proponents of
unfettered or unregulated free trade in the Democratic Party. Virtually all
prominent Democrats support copyright and patent protection for internationally
traded goods. They also have been supportive of protectionist measures that
restrict the number of foreign doctors practicing in the United States, in
order to sustain high salaries for U.S. doctors.
There are prominent Democrats who support trade
agreements, such as NAFTA, a main purpose of which was to eliminate trade
barriers that helped to protect the wages of blue-collar workers. In short,
while most of the party is strongly supportive of protectionist measures, there
are differences on trade policies that benefit less skilled workers.
Many
New Causes for Old Problem of Jobs Lost Abroad
Steve
Lohr
New York Times, February 14, 2004, Page
A17
The
Bright Side of Sending Jobs Overseas
Eduardo
Porter
New York Times, February 14, 2004, Section
4 page 3
These articles discuss the implications of the
increased outsourcing of U.S. jobs to countries with lower wages. Both articles
imply that outsourcing will be limited to relatively less-skilled jobs, with
the best paying, highest skilled jobs remaining in the United States.
There is no economic theory or empirical data to
support this view. It is much cheaper to train workers at any level of skill in
relatively poor countries like China or India than in the United States. This
means that in a free market, workers from these countries will likely be able
to compete successfully even for the most skilled positions. This process would
continue until wages in the United States moved closer to those in developing
countries.
At present, many highly skilled workers in the
United States do not have to compete against workers from developing countries
because of protectionist barriers, such as professional and licensing
restrictions (see “Professional Protectionists: The Gains From Free Trade in Highly
Paid Professional Services,” [http://www.cepr.net/professional_protectionists.htm]).
It is also illegal for employers to bring workers into the United States for
the explicit purpose of paying lower wages. While this law is not likely to
ever be enforced on farms or in restaurants, a hospital or university (or
newspaper) that sought visas for foreign professionals, explicitly because they
would work for lower wages than U.S. citizens, would almost certainly be shut
down. It is this sort of barrier that preserves many high-paying jobs for U.S.
workers, not anything intrinsic to the dynamic of the economy.
Jonathan
Weisman
Washington Post, February 17, 2004, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A46543-2004Feb16.html
This article examines the impact
that the economy is likely to have on the presidential election. It asserts
that it is likely to help president Bush since most families are feeling better
off now than they were four years ago. Most of the evidence, including that
cited in the article, suggests that most families have not been faring well,
and are not likely to vote for President Bush based on their current economic
situation.
For example, the article reports
that average weekly wages, adjusted for inflation, are up 4.1 percent since
2001. While average real wages have risen over this period, this is entirely
due to the momentum coming out of the late nineties boom. The rate of real wage
growth, which had been approximately 2.0 percent annually from 1996 to 2001,
has fallen to zero in the last year. Furthermore, since most workers are paying
more out of pocket for their health care costs (a factor not included in the
consumer price index), most workers have been seeing the value of their take
home pay decline in the last year.
The article also reports that workers
are seeing rising disposable income due to the Bush tax cuts of the last three
years. Actually, these tax cuts would make little or no difference to most
workers. For a worker earning the median wage, slightly less than $30,000 a
year, the tax cuts would make little difference in disposable income. For the
approximately 30 percent of workers who do not have income tax liability, the
Bush tax cuts made no difference whatsoever. Other items mentioned in the
article – such as the recent run-up in stock prices – would also make little
difference to the vast majority of workers.
The fact that most families do not
see themselves as doing well in the Bush economy is supported by polling data
cited in the article, which shows that the public overwhelmingly gives Bush a
negative rating on the economy. It would have been useful if the article
examined the reasons for this negative rating instead of only looking at
reasons that people might view the economy of the Bush years positively.
The article also includes some
questionable assertions about the overall state of the economy. For example, at
one point it comments that “after nine quarters of slow but steady growth, the
economy as a whole is poised for a take off.” The article does not give the
basis for this view. In fact, GDP growth has slowed markedly from its
extraordinary 8.4 percent growth rate in the third quarter of last year, to a
growth rate that is likely to be revised to less than 3.5 percent for the
fourth quarter. With little employment growth over the last six months, there
seems no obvious basis for the view that the economy is about to “take off.”
The article also focuses on the unemployment rate, which is not very high by
historic standards. However, many economists, most notably Ben Bernacke, the
vice-chairman of the Federal Reserve Board, have focused on the extraordinary
two percentage point drop in the employment to population ratio as a better
measure of labor market slack.
The article also notes the
extraordinary run-up in home prices over the last eight years that has made
many families feel wealthier. This run-up in home prices has not been
accompanied by a comparable increase in rental prices. In fact, rental prices
are now falling in many areas in response to a nationwide record rental vacancy
rate. No economist has been able to produce an explanation as to how home
prices can rise in an environment in which rental prices fall, except if they
are being driven by a speculative bubble. Reporting on the temporary benefits
of this housing bubble, without noting the eventual problems that its collapse
will create, would be comparable to reporting on the status of major
shareholders in Internet companies at the beginning of 2000, without mentioning
the tech bubble. Since the housing market is featured so prominently in this
article, it would have been appropriate to include more background on its
recent dynamics.
Pin
the Label on Tax Policy
David
E. Rosenbaum
New York Times, February 15, 2004, Section
3, page 1
This article discusses the
importance of tax policy in the presidential race. At one point it notes that
Senator John Kerry has proposed taking back the Bush tax cuts for people
earning more than $200,000 a year, but not for people earning less than this amount.
It then adds, “ but it is not clear how Mr. Kerry would go about charging
taxpayers with incomes of more than $200,000 a higher rate of taxes on stock
dividends and capital gains than would be owed by people with smaller incomes.”
The tax code is full of complex phase outs, for
example the child tax credit and most deductions are phased out at higher
levels of income. If Kerry stuck strictly to his pledge (as opposed to leaving
families earning less than $200,000 on average no worse off), then presumably
he would put in some comparable phase out system for the lower tax rates on
dividends and capital gains. It would be extremely unusual for a presidential
candidate to discuss this sort of detail in their campaign. It is not clear why
the article views such details, or their absence, as important.
Micheline
Maynard
New York Times, February 17, 2004, Page C2
This article reports on efforts by US Airways and
United Airlines to reduce their labor costs. At one point it refers to the
assessment of industry analysts that US Airways has the highest average cost
per passenger mile in the industry. Cost per passenger mile is not necessarily
a good measure of relative labor costs. US Airways has a disproportionate
number of short flights. These flights have relatively high costs, but also
have higher fares on a per mile basis. For example, the distance from New York
to Los Angeles is more than ten times the distance from New York to Washington;
however the air fare on the longer route would not be close to ten times as
high as the fare on the New York to Washington route.
Reuters
New York Times, February 18, 2004, Page
C10
This article discusses the Federal
Reserve Board’s release of data on industrial output in January. The headline
is inaccurate. While the overall industrial production index did show an
impressive 0.8 percent increase from its December level, the bulk of this
increase was attributable to a 5.2 percent rise in utility output. This
increase was attributable to cold weather, not the state of the economy. The
rise in manufacturing output was a modest 0.3 percent, approximately the
increase needed just to keep employment constant. Furthermore, the new report
revised down the increase previously reported for December, from 0.3 percent to
0.1 percent. The new data implies that output in manufacturing has increased at
an average rate of just 0.2 percent over the last two months. This growth rate
would imply declining employment in the sector.