Economic
Reporting Review
By Dean Baker
March 1, 2004
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Bush Assertion on Tax Cuts
Is at Odds With IRS Data
Jonathan WeismanThe Health of
Grocers, Workers
Michael Barbaro and Neil Irwin
Washington Post, February 24, 2004, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A488-2004Feb23.html
This article reports on IRS data
that show, contrary to claims by President Bush, that the vast majority of
small business owners are not in the top tax brackets. While the President has
repeatedly stated that his tax cuts have been motivated by a desire to help
small businesses, data from the IRS show that less than 4 percent of small
business owners have incomes in excess of $200,000 a year.
Waste
Cleanup May Have Human Price
Blaine
Harden
Washington Post, February 26, 2004, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A7073-2004Feb25.html
This article reports on the evidence
that private contractors cut corners in an effort to save money in their
cleanup of a nuclear facility in Hanford, Washington. The article also reports
that they subsequently sought to conceal evidence of the resulting health
risks. Many of the workers at the facility have since developed serious health
problems.
Edmund
L. Andrews
New York Times, February 26, 2004, Page A1
Fed
Chief Urges Cut In Social Security
Nell
Henderson
Washington Post, February 26, 2004, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A7099-2004Feb25.html
These articles report on Alan
Greenspan’s testimony before Congress in which he urged that Social Security
and Medicare benefits be cut as a way to keep deficits under control. It would
have been helpful to readers to note that Mr. Greenspan had publicly endorsed
President Bush’s tax cuts in 2001, because he said that the budget surpluses at
the time were too large. In Congressional testimony given in January of 2001,
Greenspan told Congress that the projected path of surpluses would cause the
country to quickly pay off the entire national debt, and then the government
would begin to own private assets. He told Congress that a tax cut would be an
effective way to lower the size of the surpluses, so that it would longer to
pay off the national debt.
It also is would be helpful to
mention that Mr. Greenspan chaired a commission in 1982 that designed the last
set of Social Security tax increases. These tax increases were intended to
build up a large surplus, which would then be drawn down to pay for the
retirement of the baby boom generation. If Congress follows Greenspan’s current
recommendations for cutting Social Security, the large surplus built up by the
Social Security trust fund (more than $1.7 trillion presently) will not be used
for Social Security. Instead, the money collected through Social Security taxes
will be used to pay for farm subsidies, defense, and other categories of
general government spending.
The Times article reports
that there is a “widespread view that the only solution [to the funding
problems for Medicare and Social Security] is to either cut benefits or raise
taxes by huge amounts.” It is worth noting that if U.S. health care costs,
adjusted for demographic change, only grew in step with per capita GDP growth,
then paying for Medicare over the next forty years would present no greater
problem than it did over the last forty years. In the case of Social Security,
the trustees' report shows that the tax increases needed to fund the program
over the next seventy five years are approximately the same size as tax
increases that were put in place in the decade of the fifties, the decade of
the sixties, the decade of the seventies, and the decade of the eighties.
Anyone who believes that the tax increases needed to maintain full scheduled
Social Security benefits are “huge” must also believe that the tax increases
put in place in each of those four decades are huge as well.
Economist’s
Challenge Puzzles Free-Trade Believers
Washington Post, February 26, 2004, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A7312-2004Feb25.html
This lengthy article discusses recent
statements and publications by conservative economist Paul Craig Roberts, in
which he questioned the merits of free trade. The article asserts “few tenets,
after all, are so widely shared among economics Ph.Ds as the belief in the
positive impact of free trade.”
This is not true. Most economists
support many forms of protectionism, most obviously patents and copyrights. As
a group, economists have also been untroubled by forms of protection that have
been intended to protect powerful special interests. For example, very few
economists objected to the restrictions that Congress placed on the number of
foreign medical residents allowed to enter the country in 1997, a measure that
costs consumers tens of billions each year in higher medical expenses. As a
rule, economists tend to object mainly to forms of protectionism that have the
effect of benefiting blue-collar workers.
Greenspan
Calls for Better-Educated Workforce
Nell
Henderson
Washington Post, February 21, 2004, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A59064-2004Feb20.html
Staring
Into the Mouth of the Trade Deficit
Elizabeth
Becker
New York Times, February 21, 2004, Page B1
Campaign
Focus: Old Jobs, Not a New Economy
David
E. Sanger
New York Times, February 22, 2004, Section
4, Page 3
These articles discuss the impact of trade on the
U.S. economy. Some key issues in this discussion are either omitted or
represented inaccurately. For example, the articles by Becker and Sanger, both
of which are ostensibly overviews of the impact of trade on the U.S. economy,
never mention the contribution of trade to wage inequality over the last
quarter century. Virtually all economists agree that trade has played a role in
increasing inequality during this period. This fact should have been included
in these articles.
The article by Becker implies that issue being
debated is whether there should be trade. There is no one taking part in
national political debates who opposes trade; the issue is the terms under which
trade will take place. It also includes without comment a bizarre and
inaccurate statement from the president of the Washington Council on
International Trade, that “if the global economy doesn’t grow, then America’s
economy can’t grow.” The statement is bizarre because the global economy will
almost always grow, unless there is a cataclysmic war or financial crisis. It
is also inaccurate, because there is no economic theory or empirical evidence
that would suggest that the U.S. economy could not grow if the global economy
did not grow.
The article by Sanger comments, with regard to the
current trade debate, that “it is almost as if the 1990’s never happened, and
that the forces of globalization have been suspended.” The article does not
identify any events in the nineties that suggest that concerns about trade
displacing jobs and lowering wages are misplaced. Nor does it give any meaning
to the comment about the “forces of globalization being suspended.” No one in
the trade debate is opposed to globalization; rather the debate is over the
rules being applied. For example, the Clinton and Bush administration have
pushed hard to limit the free flow of ideas and instead insisted on stringent
patent and copyright protection. Workers have been more concerned about
protecting their jobs and wages, and care less about restricting the flow of
ideas.
Both the articles by Sanger and Henderson report
warnings from Federal Reserve Board chairman Alan Greenspan about the risks of
protectionism. Mr. Greenspan’s comments implied that protectionism would be
new, as opposed to an ongoing part of the economy. Many highly paid
professionals, such as doctors, have demanded and obtained protection against
foreign competition (see “Test Tied to Slip in Foreign Applicants for Medical
Residences,” New York Times,
September 4, 2002, page A19; and “Professional Protectionists: The Gains From
Free Trade in Highly Paid Professional Services,” [http://www.cepr.net/professional_protectionists.htm]).
Adam
Nagourney
New York Times, February 22, 2004, Page
A14
This article reports on the contest
between Senators John Kerry and John Edwards for the Democratic presidential
nomination. At one point the article reports that Kerry challenged Edwards to
“distinguish himself on free trade.” The term “free” has no obvious meaning in
this context. Edwards has claimed that he holds a different position on trade. Given
the nature of current trade debates, it would be more accurate to simply use
the term “trade” in this context.
Dana
Milbank
Washington Post, February 24, 2004, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A538-2004Feb23.html
This article reports on the fact
that the Bush Administration’s forecasts for the budget and the economy have
repeatedly been proven to be overly optimistic. When discussing the budget
projections, it quotes a Bush Administration official who (referring to the
sharp falloff in tax revenue) asserted, “nobody saw this happening.” It then
adds, “Democrats agree that in 2001, there was no concrete evidence that there
was an unusual decline in tax receipts.”
Actually, the falloff in tax revenue
was predicted by some economists and should have apparent to any careful
observer of financial markets and the economy (see CEPR 2001 Budget Byte [http://www.cepr.net/Bytes/cbo_budget_byte010131.htm]
or “Double Bubble: The Implications of the Over-Valuation of the Stock Market
and the Dollar [http://www.cepr.net/columns/baker/double_bubble.htm]).
This article includes no mention of the stock market bubble, which was the
major cause of the extraordinary increase in tax revenues in the late nineties,
or the crash that followed.
Dan
Balz and Paul Farhi
Washington Post, February 25, 2004, Page E7
http://www.washingtonpost.com/wp-dyn/articles/A3443-2004Feb24.html
This article reports on a campaign
speech by Democratic presidential candidate John Kerry. At one point it refers
to the recession “that began at the end of the Clinton Administration.” The
National Bureau of Economic Research, which officially dates recessions, puts
the beginning of the most recent recession in March of 2001, two months into
the Bush Administration. While the conditions for the recession were certainly
put in place during the Clinton years, the recession did not officially begin
until after President Bush took office.
Associated
Press
New York Times, February 24, 2004, Page
C11
This article reports on a speech in
which Federal Reserve Board Chairman Alan Greenspan reportedly told his
audience that current levels of household debt should not be a concern, because
households own more than $14 trillion in real estate. It is worth noting that
there has been an extraordinary run-up in real estate prices in the last eight
years, with the rise in home prices exceeded the overall rate of inflation by
more than 35 percentage points. The United States has never before experienced
such a run-up in home prices. In the past, home prices have generally kept pace
with the overall the rate of inflation. The recent run-up in home prices, which
coincided with the stock bubble, is very similar to the pattern in Japan in the
eighties, which also experienced simultaneous bubbles in its real estate and
stock markets (see [http://www.cepr.net/publications/Harvard_Housing_Bubble.htm]).
The possibility that home prices are
being driven by a speculative bubble should provide serious grounds for
concern. The ratio of equity to value is at a record low 53.5 percent. This
compares to ratios of close to 67 percent in the seventies and eighties. With
much of the baby boom cohort nearing retirement, it would be expected that the
ratio of equity to value would be unusually high at present, as many families
should be near paying off their mortgages. Also, the bubble should raise the
ratio of equity to value, since any appreciation in home prices translates
directly into higher equity. If the housing bubble were to burst, and the
appreciation of home prices in excess of the overall rate of inflation were
eliminated, the ratio of equity to value would be less than 40 percent.
It is worth noting that Mr.
Greenspan never clearly identified the stock bubble in his public remarks prior
to its collapse. Even as the market was reaching record price to earnings
ratios in 1999 and 2000, Mr. Greenspan was telling investors that such prices
might be justified if the recent acceleration in productivity growth were to
continue.
Peter
Behr
Washington Post, February 21, 2004, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A59281-2004Feb20.html
Inflation
Is Mild, Despite Energy Costs
Associated
Press
New York Times, February 21, 2004, Page B2
Both of these articles discuss the recent rise in oil prices. It is worth noting that this rise in oil prices is not likely to be reversed, at least in its entirety, because part of it is attributable to the fall in the dollar. Over the last two years, the dollar has fallen by approximately 10 percent against a trade-weighted basket of currencies. This means that if oil stayed at approximately the same price against most other goods, it will have risen by 10 percent measured in dollars.
This is actually an important fact that deserves more attention than it has received. This rise in oil prices, in a context of extremely slow nominal wage growth, will lead to a drop in real wages. The 0.5 percent rise in consumer prices in January was considerably faster than the 0.2 percent increase in the average hourly wage reported for the month.
Bush
Chooses the F.D.A’s Chief to Run Medicare and Medicaid
Robert
Pear
New York Times, February 21, 2004, Page
A30
Several
States Investigate Importing Canadian Drugs
Bernard
Simon
New York Times, February 21, 2004, Page B3
These articles both discuss issues related to national
policy on prescription drugs. At one point, the article by Pear refers to
President Bush’s “free-market policies.” It is not clear that President Bush
has any commitment to free-market policies. He has been willing to increase
many forms of government intervention in order to help his political allies
(see “In Bush’s Policies, Business Wins,” by Thomas B. Edsall, Washington Post, February 8, 2004, Page
A5 [http://www.washingtonpost.com/wp-dyn/articles/A21990-2004Feb7.html]).
The article by Simon refers to Canadian price controls on
prescription drugs. While Canada does impose price controls, this only applies
to drugs on which it grants patent monopolies. The United States imposes patent
monopolies, but then lets drug companies charge whatever price they like. The
U.S. policy leads to far larger market distortions than the Canadian policy.
Christopher Marquis
New York Times, February 22, 2004, Page A1
This article discusses the Bush administration’s plans to
alter the criteria for awarding foreign aid. It would have been useful if the
article had described the foreign aid requests as a share of the total budget.
The $15 billion in aid being requested for 2005 is equal to approximately 0.6
percent of the projected budget. It is equal to approximately 0.12 percent of
projected GDP. The United States ranks near the bottom of the industrialized
world in the portion of its GDP that it devotes to foreign aid. Many European
countries provide an amount of aid that exceeds 0.4 percent of GDP.