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Outstanding Stories of the Week

Estimates of Job Creation vs. the Facts
Eduardo Porter
New York Times, April 2, 2004, Page C3

This article compares forecasts of monthly job gains with the actual increases. It shows that forecasts have vastly exceeded actual job growth for the most of the last year.

Accounting Board Wants Options to be Reported as an Expense
Floyd Norris
New York Times, April 1, 2004, Page C1

This article reports on the Financial Accounting Standards Board's new rule requiring that stock options be deducted as an expense against profits. It describes how this rule change would affect reported profits at some firms and the possible implications for executive compensation.

Grocery Workers Try to Keep the Good Life

Michael Barbaro

Washington Post, March 29, 2004, Page A1

This article examines the situation of unionized workers at major grocery chains in the Washington area by focusing on the family of a cashier who has worked at Safeway for thirty years. The article shows that the wages and benefits had been sufficient for the cashier, together with a working spouse, to have a comfortable middle class life style. This is not likely to be true in the future as workers are being forced to accept cuts in pay and benefits.

Owing More On an Auto Than It's Worth As a Trade-In

Danny Hakim

New York Times, March 27, 2004, Page B1

This article reports on increasing levels of indebtedness among new car purchasers. It reports that as many as 30-40 percent of new car buyers owe more than the trade-in value on their previous cars. 

The Election and the Economy

Bush Sets Internet Access Goal
Mike Allen
Washington Post, March 27, 2004, Page A4

Kerry Proposes Corporate Tax Cut

Jim VandeHei

Washington Post, March 27, 2004, Page A5

Economy Is the Star of the Campaign Trail as Bush and Kerry Court Voters

Jodi Wilgoren and Robert Pear

New York Times, March 27, 2004, Page A6

These articles report on the role that several economic issues are playing in the presidential campaign. Both the article by Allen and the Times article refer to President Bush's claim that the homeownership rate has reached a record level under his administration. It is worth noting that homeownership generally rises, except in extraordinarily bad economic times. The claim that the rate of homeownership is at a record is comparable to claiming that GDP is at a record; it is largely meaningless.

The Times articles discusses President Bush's efforts to describe Senator Kerry as a "protectionist." In fact, both candidates are strongly committed to protectionist policies. For example, both support restrictions on the number of foreign doctors that are admitted to practice in the United States. Both also support strengthening patent and copyright protections, which raise the price of goods by several hundred percent above the free market price. It would be helpful to readers to point out the candidates' actual record on free trade and protectionism.

The article by VandeHei reports on a proposal by Senator Kerry to lower corporate income taxes. In 2003, corporate income taxes were equal to just 20.9 percent of capital income in the corporate sector, the lowest level in the post-war period. In the fifties, taxes were equal to close to fifty percent of capital income. This had fallen back to around 40 percent in the sixties. The tax share has continued to decline further over the last three decades. It would have been helpful to include this background information in the article. 

Tax Cuts and the Economy

Consumer Income Up More Than Spending
Nell Henderson
Washington Post, March 27, 2004, Page E1

Confidence Unexpectedly Shows a Rise

Bloomberg News

New York Times, March 27, 2004, Page B4

These articles report new data on consumer confidence and spending. Both articles refer to analysts' expectations that tax refunds,  due to last year's tax cuts,  will lead to large increases in disposable income and consumer spending. While this claim has been widely repeated in recent months [e.g. " Unemployment Down, But New Jobs Are Rare," Washington Post, 1-10-04; A1  and "As Far as Jobs Go, Bush Can Only Wait," New York Times, 1-10-04; B1 , it appears to be wrong. 

While the tax cuts, which were passed in the middle of the year but applied retroactively to the beginning of 2003, should add to the size of refunds, this will be almost completely offset by higher tax payments on capital gains. In 2003 the stock market had a substantial increase, after experiencing large declines in the prior three years. Higher tax payments on capital gains should almost completely offset larger refunds due to the tax cuts. This fact appears to be borne out by evidence in the Times article. It reports that tax refunds are up by just 5 percent in 2003, approximately the same as nominal GDP growth over the year.

The Post article includes a discussion of inflation. It focuses the discussion on the core inflation indices, which are rising less rapidly than the overall indices. The core indices exclude food and energy prices because of their volatility. While it usually is more appropriate to focus on the core index, because rapid increases (or declines) in food and energy prices are likely to be reversed, this is not necessarily the case at present. The increase in domestic energy prices is largely attributable to the fall in the dollar. If oil is getting the same price in euros, it will cost roughly 20 percent more in dollar terms than it did two years ago. This increase is not likely to be reversed, unless the dollar rises substantially against other currencies. Few, if any, economic analysts are predicting this sort of rebound in the value of the dollar.

Gas Prices

Kerry to Unveil Plan to Reduce Gas Prices

Jim VandeHei and Mike Allen

Washington Post, March 30, 2004, Page A4

This article reports on Senator John Kerry's plans to temporarily lower gasoline prices. The article includes several comments suggesting that the recent price increases will be temporary. While gas prices are always erratic, at least part of the increase in gas prices is attributable to the decline in the dollar. This portion of the increase is not likely to be reversed, since the dollar is unlikely to rise to its levels of two years ago.  

OPEC Advances Plan to Cut Oil Production by Million Barrels a Day

Simon Romero

New York Times, April 1, 2004, Page C1

This article reports on the decision by OPEC to cut production in order to raise prices. At one point the article asserts that "the impact of OPEC's decision is likely to be greater in the United States than Europe … because oil prices around the world are set in dollars and the euro has gained strength against the dollar in recent months." 

Actually, the impact of a rise in oil prices will be identical in Europe and the United States. OPEC is cutting production, so prices will be higher in both euros and dollars than would be the case if OPEC did not cut production. Europe will be able to get all imported goods (including oil) at a relatively lower price, when the euro rises against the dollar; but the fact that oil is generally priced in dollars makes no difference whatsoever. 

Stock Options 

House Opposition To Expensing of Options Increases 

Jackie Spinner 

Washington Post, March 30, 2004, Page E1 

This article reports on efforts by several powerful members of Congress to overturn a ruling by the Financial Accounting Standards Board, that stock options should be deducted as an expense against profits. The article reports on the debate as though there is a serious dispute among economists, accountants, and financial experts as to whether stock options should be treated as an expense. This is not true. Financial experts from across the political spectrum, including former Federal Reserve Board Chairman Paul Volcker, current chairman Alan Greenspan, and investor Warren Buffet have argued strongly for expensing stock options. The alternative view, effectively advocated by these members of Congress, that options have no cost to the companies that issue them, is absurd on its face. It would be difficult, if not impossible, to find an independent expert who would support this view. That fact should have been made clear in the article.

Proposal on Stock Options Issued 

Jackie Spinner 

Washington Post, April 1, 2004, Page E1 

This article reports on the debate over a new rule requiring that firms list employee stock options as an expense against profits. The article reports that opponents claim that this will hurt small firms and start-ups, who have used stock options as a way of attracting employees. It is worth noting that nothing in this rule would prevent these firms from issuing stock options. This rule could only have an effect if investors have been misled about the value of stock options.

Welfare Reauthorization

Senate Welfare Debate Opens With Child Care
Helen Dewar
Washington Post, March 30, 2004, Page A5

This article discusses the Senate debate over welfare reauthorization. The article reports that many senators are pushing for an additional $6.0 billion over five years for child care programs, although this faces substantial opposition from some Republicans. The proposal for additional child care funding would add approximately 0.06 percent to total spending over this period. It comes to approximately $300 per year for every person receiving welfare. Expressing spending as a share of the total budget or relative to the size of the population being served is likely to be more informative to readers than simply giving the dollar amount, since few readers have a good conception of the impact of $6.0 billion over five years.

Tax Cuts and Government Revenue

Bush Plans For Tax Cuts Barely Avert House Setback
Richard A. Oppel Jr.
New York Times, April 1, 2004, Page A18

This article discusses a vote in the House on budget rules that would have required that any future tax cuts were matched by offsetting budget reductions. At the end of the article, it reports statements by Tom DeLay, leader of the House Republicans, claiming that Republicans believe that tax cuts generate enough revenue to pay for themselves.

It would have been appropriate to point out that no independent economist believes this. Economic models from the Congressional Budget Office, and other independent sources, show that tax cuts will at most generate enough revenue to offset one quarter of the cost of the tax cut. It would also be appropriate to do more investigative reporting to determine how many Republicans in Congress actually claim to believe something comparable to the arguments put forward by Mr. DeLay.

Free Trade

Treasury Chief Defends Outsourcing of U.S. Work

Edmund L. Andrews

New York Times, March 31, 2004, Page C7

This article reports on a published interview with Treasury secretary Jack Snow, in which he defended outsourcing as good for the economy. The article refers to the Bush administration as defending "global free trade." The Bush administration does not defend global free trade. It supports numerous protectionist measures. For example, it supports restrictions on the number of foreign medical residents who can practice in the United States – a policy put in place in 1997 to help protect the pay of U.S. doctors. It also supports patent and copyright protection, which raise the price of protected items by several hundred percent above the free market price.

The article also cites a comment by Federal Reserve Board vice-chairman Benjamin Bernanke, in which he blames the economy's failure to create jobs on rapid productivity growth. The economy has experienced rapid productivity growth in prior decades and still maintained a healthy pace of job growth. The recent period has been different primarily because there has been a sharp divergence between real wage growth and productivity growth, with real wage growth having stopped and possibly reversed in the last year. As a result, workers are seeing no income growth, which in turn slows consumption growth, so that the economy is not growing rapidly enough to generate new jobs. 

 

Manufacturing Employment

A Factory Index Last Month Had Best Rise Since the 80s

Bloomberg News

New York Times, April 2, 2004, Page C3

This article reports on the release of the Institute for Supply Management's monthly survey for March. The first sentence reports that the index showed "more factories added jobs than at any time since the 1980's." It is worth noting this index has suggested that manufacturing firms have been adding jobs for month, even though the Labor Department's far more comprehensive survey of manufacturers has continued to show job losses in this sector. 

Child Protection Programs

Lawsuit Challenges Mississippi's Short-of-Resources Child Protection System

Andrew Jacobs

New York Times, April 1, 2004, Page A14

This article reports on the shortfall in funding facing Mississippi's child protection agency. At one point the article reports that Mississippi gets less federal money ($50 million a year) for its child protection program than any state that has federal support for its programs. It would be more relevant to know how much funding Mississippi gets on a per person, or per child, basis. If it gets less money because it has fewer children, then it would not imply that its program was under-funded.