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Outstanding Stories of the Week

Concerns Raised Over Consultants To Pension Funds
Mary Williams Walsh
New York Times, March 21, 2004, Page A1

This article reports on the practices of consultants to public sector pension funds. The article reports that many of these consultants have apparent conflicts of interest, and encourage public sector funds to invest in businesses in which they have a financial stake.

IRS Opting Not to Go After Many Scofflaws
Jonathan Weisman
Washington Post, March 20, 2004, Page A1

This article reports on the decision by the Internal Revenue Service to drop collection efforts against individuals owing a total of $16 billion in taxes. This amount is equal to 1.8 percent of income tax collections in 2003, and is larger than the budget for NASA or international aid.


The Economy and Fuel Efficiency Standards

Kerry Is Sticking With Plan to Raise Auto Fuel Efficiency
Danny Hakim 
New York Times, March 26, 2004, Page C1

This article discusses a proposal by Senator John Kerry to increase fuel efficiency standards for automobiles by 50 percent by 2015. The article includes a reference from a Bush Administration official to a report from the Energy Information Administration (EIA), that shows that this proposal would "cost 450,000 jobs and result in $170 billion in 'lost economic output' from 2003 to 2020.  

It would have been useful to point out that $170 billion in lost output corresponds to approximately 0.07 percent of projected GDP over this period. In other words, the projections from the EIA model imply that the higher efficiency standards will cost the country approximately 7 cents on every hundred dollars of income. It is also worth noting that the projected economic costs of higher fuel efficiency standards would be dwarfed by other recent policy changes, such as the expansion of the military over the last three years. Standard economic models would show that this build-up of the military leads to far greater loss of jobs and declines in economic output than a proposed increase in fuel efficiency standards. Neither the Times or Post has run a single article discussing the economic costs of this military build-up.   


The Budget and the Presidential Race

Bush Camp to Spotlight Kerry's Fiscal Policy

Mike Allen and Dan Balz

Washington Post, March 22, 2004, Page A4

New Exchange Spotlights Parties' Tug of War Over Fiscal Responsibility

Robin Toner and Jim Rutenburg

New York Times, March 23, 2004, Page A17

In a War of Words Over Numbers, Both Campaigns Have Problems

Dan Balz and Jim VandeHei

Washington Post, March 25, 2004, Page A5

These articles report on disputes over Senator John Kerry and President Bush's budget plans over the next ten years. The articles include repeated references to President Bush's claim that Kerry's plans have a $1 trillion gap. Few readers can attach any significance to this figure since it involves a projected shortfall over the next decade. 

The article by Allen and Balz reports on a claim by President Bush that the homeownership rate is currently at a record. It is worth noting that the homeownership rate generally rises through time. It only stagnates or falls during exceptionally bad economic times. Therefore, the claim that homeownership is at a record rate is largely meaningless. It is not very different from claiming that GDP is at a record level, a statement that is true except when the economy is in a recession. 

The article by Balz and VendeHei asserts, "more ominous [than current budget deficits] to many budget experts, Medicare and Social Security are edging toward insolvency. Managing this fiscal situation will be a top task of the next president and, therefore a top issue in the campaign." 

It is not true that either program is "edging toward insolvency." In fact, according to the newly released 2004 Social Security trustees report, the program will be fully solvent until the year 2042, with no changes whatsoever. This means that Social Security is in better financial shape than it has been through most of its existence. It had been necessary to increase taxes to sustain the program in each decade from the forties through the eighties. 

The latest Medicare trustees' report shows that Medicare is less healthy, with its funding only projected to support the program until 2019. However, this is still much longer than had been projected in prior reports. For example, in 1997, the program was only projected to have sufficient funds to remain solvent for four years. 

While the winner of the presidential election may opt to deal with the problems facing Medicare (and the longer term problems facing Social Security) there is no reason that they must deal with these problems during their term of office. If these programs become a top issue in the campaign that will be due to the actions of the candidates or a decision by the media; it is not dictated by any necessity to address problems with the programs themselves.

The Military and the Budget

After 19 Years in Senate, Kerry of Today Is Far From Kerry of 1985

Katherine Q. Seelye

New York Times, March 20, 2004, Page A10

This article examines Senator John Kerry's Senate record on the military. At several points it refers to measures to cut spending appropriations. These cuts are all expressed in dollar terms. It would be far more informative to readers to express the amounts as percentages of the budget or percentages of total military spending. Using percentages of the budget is especially important in this context, since some of the budget items go as far back as the mid-eighties, when the economy was less than half as large (measured in nominal dollars) as it is today.

For example, the article notes Kerry's opposition to a number of Reagan era weapons systems that it estimates as costing $54 billion in 1985. This amount was approximately 18.7 percent of military spending at the time and 5.7 percent of the budget. 

The article also mentions a 1995 Kerry proposal to cut $1.5 billion over five years from the country's intelligence budget. This amount is equal to approximately 1 percent of projected intelligence spending over this period, or 0.015 percent of total federal spending over the period.

Welfare

Despite the Sluggish Economy, Welfare Rolls Actually Shrank
Robert Pear
New York Times, March 22, 2004, Page A1

This article reports on the fact that welfare rolls have continued to decline over the last three years even as the labor market has remained weak. The article includes several assertions that the recent downturn has been harder on the higher skilled segment of the labor force than on lower skilled workers. This is not true. Measured against their low points at the peak of the last business cycle, the unemployment rates for workers without high school degrees, or with only a high school education, have risen by more than two percentage points. By contrast, the unemployment rate for college graduates has risen by just over one percentage point. It seems likely that declining welfare enrollment rates are more the result of tightening eligibility restrictions, rather than an improvement of labor market conditions for low- wage workers.

Social Security and Medicare

A Dire Report on Medicare Finances

Amy Goldstein

Washington Post, March 24, 2004, Page A1

 
Medicare Overseers Expect Costs to Soar in Coming Decades

Robert Pear

New York Times, March 22, 2004, Page A1

These articles discuss the 2004 reports of the Medicare and Social Security trustees. Both articles stress the deterioration in the projected health of the Medicare fund, which is now projected to face depletion in fifteen years, in 2019. The Post article, unlike the Times piece, does little to put this projection in context for readers. 

For example, the Times piece includes a chart showing that Medicare reports had projected the depletion of the trust fund in as few as four years in the mid nineties. In this context, the current report should not provide great cause for alarm. The Post article also includes a reference to the report's projection that Medicare faces an unfunded liability of $27.7 trillion. This projection is the discounted sum of Medicare's unfunded liability over its seventy-five year planning period. Few readers have any basis for assessing the importance of this sum. It would be far more helpful to report the measure as a percent of income (approximately 3.5 percent) over this period. It is also worth noting, that if the United States manages to contain the growth of its health care costs, a feat accomplished by every other wealthy country, then most of this shortfall would disappear.  


Kerry's Job Plan 

Kerry to Offer Cut in Corporate Taxes

Jim VandeHei

Washington Post, March 26, 2004, Page A1

Kerry to Propose Eliminating a Tax Break on U.S. Companies' Overseas Profits

Edmund L. Andrews and Jodi Wilgoren

New York Times, March 26, 2004, Page A11

These articles report on a proposal from presumptive Democratic presidential nominee John Kerry that would provide special tax breaks to firms that create "new" jobs. As a practical matter, it is virtually impossible to determine when a job is a new job. For example, a corporation can create a new subsidiary and then transfer many of its current employees to this subsidiary. Under Mr. Kerry's proposal, these firms would likely be highly rewarded for this sort of tax gaming, as would the accountants who design such mechanisms. This is the reason that virtually all economists oppose this sort of tax incentive. 

The Post article also includes a reference to economic projections that the U.S. economy will grow by 4.1 percent this year. It is worth noting that the consensus forecast among the "Blue Chip" forecasters for 2001 was 3.5 percent, with not a single forecaster projecting a recession for the year. Actual growth for the year was zero. 


Bush Campaign Ad

A Bush Spot Scrutinizes Kerry's Voting Record on the Economy
Jim Rutenburg
New York Times, March 26, 2004, Page A11

This article examines a television campaign ad for President Bush, which criticizes John Kerry's willingness to support tax increases. The ad charges Kerry with supporting an increase in taxes on Social Security benefits. The section of the article examining the accuracy of the ad should have noted that this measure affected only a small segment of Social Security beneficiaries. Only the wealthiest Social Security beneficiaries paid higher taxes as a result of the bill supported by Kerry. Taxes for more than 80 percent of beneficiaries were not affected.


Germany's Welfare State

Listen to the Germans: Oh, What a Sorry State We're In
Richard Bernstein
New York Times, March 24, 2004, Page A4

This article discusses current attitudes in Germany, which it describes as extremely pessimistic. The article includes several assertions that Germany can no longer afford its welfare state. This is not true. Like other countries, Germany is experiencing labor productivity growth, which makes it richer every year, not poorer. If it was able to afford its welfare state in the past, it will be able to afford it in the future. The obstacles to the survival of the German welfare state are political, not economic. 

The article asserts at one point that Germany's unemployment rate is 10 percent. This measure counts people as being unemployed if they worked less than 15 hours per week. By comparison, the U.S. measure counts anyone who worked even a single hour as being employed. Germany's unemployment rate using the U.S. measure would be just under 9.0 percent, with the bulk of the unemployment concentrated in former East Germany. The area that used to West Germany would have an unemployment rate somewhat over 6.0 percent using the U.S. measure, not very different from the current unemployment rate in the United States.  

The Budget Deficit and the Current Account Deficit

House Approves $2.4 Trillion Budget Plan

Charles Babington

Washington Post, March 26, 2004, Page A5

This article includes a quote from Democratic House Minority Whip Steny H. Hoyer, asserting that "Democrats believe that it is irresponsible  indeed, immoral to plunge our nation even deeper into debt and to force future generations to pay our bills." It is worth noting that the Clinton administration consciously pursued a high dollar policy, which led to the record current account deficits that the U.S. is currently experiencing. As a result of this high dollar policy, the United States has borrowed more than $2 trillion from abroad over the last six years. The interest and dividend payments on this borrowed money will reduce the living standards of future generations.

South Korea

Strong Exports Bolster South Korean Economy

Samuel Len

New York Times, March 24, 2004, Page W1

This article reports on South Korea's economic growth in 2003. The article reports that South Korea's economy grew by 2.7 percent in the fourth quarter of the year. This 2.7 percent figure is a quarterly rate of growth (as are the numbers that appear in the chart accompanying the article). In the United States, GDP growth figures are almost always expressed as an annual rate. South Korea's 4th quarter growth expressed as an annual growth rate would be approximately 10.8 percent. It would be helpful to readers to convert quarterly growth rates into the annual growth rates that they are more accustomed to seeing.