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OUTSTANDING STORIES OF THE WEEK
Pollution Regulation
Drop in Budget Slows Superfund Program
Jennifer 8. Lee
New York Times, March 9, 2004, Page A23
This article reports on the sharp reduction in the number of toxic waste sites that have been designated for clean-up in the last three years. The average number of sites proposed for clean-up has fallen by more than two-thirds from its prior level.
How Power Lobby Won Battle Of Pollution Control at E.P.A
Christopher Drew and Richard A. Oppel Jr.
New York Times, March 6, 2004, Page A1
This article reports on how the electric power industry was able to use its political connections to weaken pollution regulation.
Trade
Trade Gap Exceeds $43 Billion
Paul Blustein
Washington Post, March 11, 2004, Page E2
Deficit In Trade Tops $43 Billion, Monthly Record
Edmund L. Andrews and Elisabeth Bumiller
New York Times, March 11, 2004, Page A1
These articles report on the release of January trade data by the Commerce Department. The data showed the monthly deficit was a record $43.1 billion. The trade deficit, which is now running at annual rate of more than $500 billion, has approximately the same impact on the economy of a budget deficit of the same magnitude. Given its importance, it is difficult to see why the Post only ran the story on page 2 of the business section. Far less important budget stories regularly appear on the front page.
The Times article includes a discussion of a speech by President Bush in Ohio, in which he criticized Democrats for supporting protectionist trade measures. The article reports that he cited the 16,000 jobs in at Honda factory in Ohio as an example of the benefits of freer trade.
Actually, these jobs suggest the precise opposite. Honda opened its factory in Ohio in the eighties, during a period in which the Japanese manufacturers' access to the US market was restricted. Producing cars in the United States provided Honda and other Japanese manufacturers a way to get around import restrictions. In fact, direct foreign investment is often a substitute for trade, and import barriers have often been used as an effective mechanism to promote foreign investment. It would have been appropriate to point out this mistake in Mr. Bush's speech.
Stocks Plummet After Attacks
Nell Henderson
Washington Post, March 12, 2004, Page E1
Greenspan Warns Congress Not to Create Trade Barriers
Edmund L. Andrews
New York Times, March 12, 2004, Page C6
These articles both discuss warnings from Federal Reserve Board chairman Alan Greenspan against protectionist measures intended to preserve jobs. According to the articles, Mr. Greenspan warned that such measures would slow economic growth.
It would have been worth noting that Mr. Greenspan has not been a consistent opponent of protectionist measures. He has openly supported the strengthening of patent and copyright laws, protectionist measures that raise the prices of items by several hundred percent above the competitive market price. He also has never objected to measures that protect U.S. doctors from foreign competition. U.S. consumers would save $80 billion a year (more than 200 times as much as the cost of the steel tariffs), if doctors in the United States were paid same salaries as doctors in other rich countries.
Labor Is Feeling Embattled As Union Leaders Convene
Steven Greenhouse
New York Times, March 8, 2004, Page A12
This informative article reports on the state of organized labor in the United States as the AFL-CIO prepared for the annual meeting of its executive council. At one point, it refers to President Bush's support for "free-trade" agreements. The trade agreements put forward by Mr. Bush actually do not necessarily move toward freer trade. Mr. Bush has done little or nothing to remove professional and licensing restrictions that protect professionals such as doctors and lawyers from foreign competition. He has also actively promoted strengthening patent and copyright protections, which have the effect of raising the price of products by several hundred percent above their competitive market price.
Tax Increases
New Bush Ad Assails Kerry on Taxes, War
Howard Kurtz
Washington Post, March 12, 2004, Page A1
This article reports on a new television ad being run by President Bush's re-election campaign. The ad charges that Senator Kerry, the likely Democratic candidate, wants to raise taxes by $900 billion. It would have been helpful to readers if this number were expressed in relation to national income, since few people have the ability to assess the importance of $900 billion over the next decade. This figure is equal to 0.55 percent of projected GDP over this period. In other words, President Bush's campaign is accusing Senator Kerry of wanting to raise taxes by an amount equal to 55 cents of every 100 dollars of income.
Jobs and the Economy
Job Growth Near Standstill In February
Nell Henderson and Kirstin Downey
Washington Post, March 6, 2004, Page A1
Growth in Jobs Is Still Sluggish Despite Forecast
David Leonhardt
New York Times, March 6, 2004, Page A1
These articles discuss the Labor Department's release of the February employment report. At one point the Post article refers to the views of unidentified "economists" who say that the economy will grow between 4 and 5 percent in 2004. It would be useful to know which economists had produced this projection. It is also worth noting that most economists forecast that the economy would experience solid growth in 2001, a year in which the economy fell into recession and had zero growth. (Every single one of the "Blue Chip" 50 forecasters made this mistake.) It would be helpful to include the views of economists who have not had such a poor track record in the recent past.
This article also attributes the view to "many economists" that rapid productivity growth has been responsible for the economy's failure to generate jobs over the last three years. Usually, rapid productivity growth is accompanied by rapid job growth. The unusual aspect of the recent period has been that rapid productivity growth has not led to wage growth, as real wages are now falling. This means that workers lack the buying power to sustain high levels of demand growth. The problem is not therefore rapid productivity growth, but the fact that productivity growth has become disconnected from wage growth.
The Times article notes ongoing disputes between whether the Labor Department's survey of households or its survey of establishments gives a more accurate measure of job growth. The household survey shows a gain in employment of more than 1 million over the last three years, while the establishment survey shows a loss of more than 2 million jobs. The article correctly points out that the establishment survey is generally viewed as being more accurate, both because it is larger and because it surveys firms whom together employ more than 45 millions workers.
It is also worth noting the establishment survey is benchmarked to state unemployment insurance tax rolls every March. Since more than 99 percent of employees are covered by unemployment insurance, these filings provide a virtual census of the population. While the establishment survey can undercount or over-count jobs in the periods between benchmarks, the benchmarks themselves should provide a very accurate measure of the number of jobs in the economy.
This means that the error is almost certainly mostly on the side of the household survey. This survey is not benchmarked, and its rate of job growth depends on underlying assumptions about population growth. In the nineties, this survey hugely undercounted employment because the imputed rate of immigration understated actual immigration by almost 3 million over the course of the decade. Presently, the household survey is likely overstating the rate of immigration.
The Times article also includes an assertion that bad weather is likely to have lowered the pace of job growth in February. To support this contention, it notes that construction jobs were reported as falling by 24,000 in the month. It is worth noting that the number of construction jobs jumped by an extraordinary 34,000 in January. At least part of this increase was probably attributable to better than usual weather in the month, or just random error. The decline reported for February is probably more attributable to a reversal of exceptionally strong numbers reported in January than any real development in the economy.
Health Care Costs
A Heftier Dose to Swallow
Kirstin Downey
Washington Post, March 6, 2004, Page E1
This informative article examines the extent to which high health care costs puts U.S. manufacturing firms at a disadvantage in international competition. The article correctly points out that employers are largely responsible for picking up health care costs in the United States, whereas in other developed countries, health care costs are largely paid by the government out of general tax revenue. It would have been worth adding that, in addition to the difference in the payment mechanism, health care also costs far less in other rich nations. The average per person cost for health care in other rich countries is approximately half of what it is in the United States. It is also worth noting that almost all of the other developed countries enjoy better health outcomes, in the forms of longer life expectancies and lower infant mortality rates, than the United States.
Teacher Shortages
New Visa Ceiling Called Threat to Teacher Recruitment
Karin Brulliard
Washington Post, March 8, 2004, Page A3
This article reports on complaints from several school administrators that restrictions on the number of H-1B visas issued for foreign workers will make it difficult for them to get enough teachers for their classrooms. The article refers to critics of the H-1B program who argue that foreign workers are displacing U.S. workers. It then cites the claims of school administrators who claim that there is an insufficient supply of domestic teachers to fill the demand.
It would have been helpful to include the views of an economist in this article. Unless there is a market failure, which is never identified in the article, then it will be possible to fill the demand for teachers if salaries rise to competitive levels. As the article notes, one of the factors contributing to a shortage of teachers is "low salaries."
Economic theory predicts that it will be not be possible to get a sufficient supply of teachers if school districts offer a wage that is less than that offered for comparably trained individuals in other occupations. This shortfall can be filled either by raising teachers' wages to make them competitive or by bringing in foreign teachers who are willing to work for lower wages. This view is completely consistent with the claims of both the critics of the H-1B program, who presumably would like to see teachers get higher wages, and the school administrators who would like to higher teachers at below market wages.
Argentina and the IMF
Argentina Threatening to Default on Payment to I.M.F.
Tony Smith
New York Times, March 8, 2004, Page W1
This article discusses the possibility that Argentina might default on its debt to the I.M.F. At one point it presents the views of an Argentine political analyst who notes the overwhelming public support for refusing to meet the I.M.F.'s loan conditions and then comments that "the local population is misinformed about the capacity of a gigantic opponent and its willingness to take action."
It would have been helpful if the article had provided readers with more information about the measures available to the I.M.F. if Argentina defaulted on its debt. The article does note that creditors might seek to claim Argentine owned assets abroad, but then comments that "there is actually very little to be had." Since Argentina has very little that can be seized by foreign creditors it is not clear that the I.M.F. can do much legally to punish Argentina, if it chooses to default on its debt.
Argentina Agrees to Pay IMF
Paul Blustein
Washington Post, March 10, 2004, Page E1
Argentina Skirts Default On $3 Billion With I.M.F.
Tony Smith
New York Times, March 10, 2004, Page C1
These articles report on the fact that Argentina came to an agreement with the I.M.F. on repaying its loans. The Post article includes an assertion that Argentina would have faced "enormous potential costs" from not reaching agreement, which it then spells out as "deeper isolation from the international community." The article presumably meant further isolation from the business community. As an open society with a democratically elected government, Argentina is not isolated from the international community.
It is also not apparent that "further isolation" would have any significant costs for Argentina at this point. The economy is growing rapidly and the country enjoys a large current account surplus, which means that it is not in need of new foreign loans. In fact, if Argentina does not repay its debt, it is not clear that it would ever have to borrow again from abroad. The article presents no evidence to support its assertion concerning the costs of a default to the I.M.F.
The Times article notes that "many Argentines blame the I.M.F. and international banks, rather than their own politicians, for the countries unmanageable indebtedness." It would have been appropriate to note some of the policies promoted by the I.M.F. and World Bank that provide the basis for this view. For example, the I.M.F. insisted that Argentina maintain an over-valued exchange rate at a time when most economists recognized that a devaluation of the currency was necessary. This required Argentina to maintain interest rates of more than 20 percent, throwing the economy into a recession and sharply increasing the country's interest burden.
Argentina privatized its Social Security system at the insistence of the World Bank. If Social Security taxes had not been diverted into private accounts, Argentina would have been running a balanced budget in 2001, the year it defaulted on its debt (see The Role of Social Security Privatization In Argentina's Economic Crisis).
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