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Outstanding
Stories of the Week
Option
Pie: Overeating Is a Health Hazard
Gretchen
Morgenson
New
York Times,
April 4, 2004, Page 1
This
article reports on a new
study which shows that large option grants for top executives do not lead to
higher returns to shareholders. The study found that option grants were
associated with somewhat lower returns in the short-term (one to three years)
and had no effect on returns in the longer-term.
Altering of Worker Time Cards Spurs Growing Number of Suits
Steven
Greenhouse
New
York Times, April 4, 2004, Page 1
This
article reports on evidence that employers are increasingly altering their
workers time records in order to avoid paying them for the full amount of time
they worked, and in particular to avoid paying for overtime.
Kerry's
Budget Plans
Kerry
Targets
Budget Deficit
Jim
VandeHei and Jonathan Weisman
Washington
Post, April
8, 2004, Page A1
Kerry
Says His Economic Plan Calls for Federal Spending Caps and Clinton-Era Rules
Katherine Q. Seelye
New
York Times, April 8, 2004, Page A18
These articles discuss a speech by Senator Kerry describing his economic agenda,
if he is elected president. Both articles note that Kerry pledged to hold
increases in most discretionary programs to the overall rate of inflation. It
would have been helpful to point out that restricting spending growth to the
rate of inflation would imply that most programs will be cut relative to the
needs that they are meant to serve, because the economy and the population are
growing. For example, the number of children in school is growing by close to
1.0 percent annually. If federal spending for education only increases at the
rate of inflation, then real (inflation adjusted) spending per student would be
cut at the rate of approximately 1.0 percent annually. The plan put forward by
Senator Kerry would imply a real cut in per student federal education spending
of close to 8.0 percent after two terms of a Kerry administration.
At one point the Post article comments that Kerry's plan "avoided some
of the most difficult choices in his budget framework," pointing out that
the plan "does not spell out ways to cut or contain the costs of
entitlement programs, such as Medicare or Social Security." It is not clear
why Kerry would propose plans for cutting these programs, especially Social
Security, since the program is projected to be able to pay all scheduled
benefits for the next 38 years with no changes whatsoever. According to the most
recent Social Security trustees' report, the program is currently in sounder
financial shape than it has been through most of its existence. Given its
financial strength, there is no obvious economic reason for cutting the Social
Security program.
This article also refers to a proposal by Senator Kerry to raise $17
billion by extending "Superfund" environmental clean-up requirements.
It would have been helpful to readers to know the number of years over which
this $17 billion would be saved.
The Times article reports that Kerry asserted that the years of the Clinton
presidency was "the most prosperous era in American history." Kerry's
assertion is wrong. There is no commonly used measure of economic well-being
that would show this to be the case, as the quarter century following World War
II was far more prosperous. GDP growth averaged 4.0 percent annually from 1947
to 1969, compared to 3.4 percent from 1993 to 2001. Productivity growth averaged
2.7 percent over this period, compared to 1.9 percent annually from 1993 to
2001. Median family income grew at an average rate of 3.0 percent annually from
1947 to 1967, compared to just 1.8 percent annually during the Clinton years. In
addition, the average unemployment rate from 1948 to 1969 was 4.7 percent,
compared to 5.2 percent in the Clinton years. It would have been helpful to
point out Kerry's mistake to readers.
The article also notes the switch from large projected surpluses at the end
of the Clinton administration to large projected deficits in the Bush years.
While most of this shift is due to the Bush administration's tax cuts and to
increases in military spending, close to a third of the shift is attributable to
the fact that the original projections were erroneous. The 2000 projections
effectively assumed that the stock market bubble would continue to expand
indefinitely, and therefore that the high levels of capital gains tax revenue
from the late nineties would continue. These projections also did not take into
account the impact of the recession, which was an inevitable result of the
collapse of the stock bubble.
Kerry
Tries to Portray As Borrow-and-Spend Leader
Katherine
Q. Seelye
New
York Times, April 5, 2004, Page A20
This article reports a speech by John Kerry in which he laid out his key budget
proposals. The article reports that Kerry's advisors criticized Bush's fiscal
policies and claimed that they would jeopardize the government's ability to pay
for Medicare and Social Security.
Social Security, as well as most of the Medicare program, are actually
financed by separate taxes. Under the law, the funding for these programs is not
affected at all by the overall budget deficit. The ability to pay for these
programs would only be affected if the government defaulted on the government
bonds held by these programs, which they rely upon to pay benefits in the
future. The United States government has never defaulted on its debt in the past
and it is questionable whether defaulting would be politically acceptable at any
point in the future.
The article also includes a reference to President Bush's plans for
"slowing the growth in spending." Mr. Bush's budget actually calls for
keeping spending increases to less than the rate of inflation for large segments
of the budget. This amounts to a real cut in spending, since it will not be
possible to maintain the same level of government services under Mr. Bush's
proposals.
The
Australian Dollar
Australia
Feeling Nervous as Its Dollar Soars
Karen Middleton
New York Times, April 8, 2004, Page W1
This
article reports on the recent rise in the value of the Australian dollar. While
the article discusses many of the economic effects of this rise, it does not
mention Australia's foreign debt. Currently, Australia has a net foreign debt
equal to almost 40 percent of its GDP. At present, Australia is borrowing an
amount equal to 5 percent of its GDP. Given its current level of indebtedness,
it is not clear that foreign creditors will be willing to continue to lend this
substantial amount of money to Australia for much longer. This point should have
been included in the discussion.
Medicare
Prescription Drug Benefit
New
Drug Law's Cost Impact Debated
Ceci
Connolly
Washington
Post, April 9, 2004, Page A3
This
article reports on the debate over whether the federal government should
directly negotiate drug prices with pharmaceutical companies or whether it
should leave negotiations to private insurance companies, as required in the new
law providing a Medicare drug benefit. At one point the article cites opponents
of government price negotiations as being concerned about a government monopoly
buyer setting prices. It then counters this point, saying that "the other
side [supporters of government negotiations] counters that Medicare recipients,
expected to consume $1.6 trillion worth of medication over the next decade,
would be a major player but not a monopoly in a marketplace estimated at $4.6
trillion."
It would have been useful to point out that the only reason that drug prices
are high is that the government gives the industry a patent monopoly, preventing
private sector competition. Without these monopolies, drug prices would likely
decline by 80 percent, or more. It is the drug industry that favors government
monopolies (awarded to them). Proponents of government price negotiations want
to limit the ability of the industry to exploit this monopoly, while the
industry wants an unlimited monopoly.
European
Labor Market Protections
European Economic Liberalization: Often Forecast but Never Done
Floyd
Norris
New
York Times, April 9, 2004, Page C1
This
article discusses the progress of economic restructuring proposals, which are
intended to weaken the welfare state in Europe. The article concludes by
asserting that these plans "strike economists as necessary." Actually,
many economists do not view these proposals as necessary, since there is very
little evidence that they lead to improved economic outcomes. Many of the
countries in Europe that enjoy the lowest unemployment rates, such Denmark,
Ireland, Norway, and Sweden, have very strong welfare state protections. By
contrast, some of the countries with the highest unemployment rates, such as
Spain and Italy, have relatively weak systems of social protections (see "Labor
Market Protection and Unemployment: Does the IMF Have a Case?".
The article implies that Europe is facing a crisis because it has slower growth
than the United States, and includes a chart comparing growth rates. The more
relevant measure for economic well-being is per capita GDP growth. This would
show a much more even picture, since Europe's population is growing at a rate
that is about one percentage point less than the rate of growth in the United
States.
It is also worth noting that Europe is running a substantial current account
surplus, which means that it will have increased wealth to draw upon as its
population ages. By contrast, the United States is running a current account
deficit equal to approximately 5.3 percent of its GDP. This means that it is
selling off its capital stock to foreigners, leaving it with fewer resources too
draw upon in the future.
At one point the article implies that Germany's economy is currently suffering
because its leaders have proposed to cut pension benefits in the future, but
have not yet been able to implement these cuts due to political opposition. The
article then notes that this situation has led to weak consumer spending.
Economic theory predicts that pension cuts would lead to increased saving and
therefore reduced consumer spending. Presumably, proponents of pension cuts
desire reduced consumer spending, since that is the expected result of their
policy.
Germans
Protest Cutbacks in Welfare Benefits
John
Burgess
Washington
Post, April 4, 2004, Page A17
This
article reports on a massive protest in Berlin, and other major cities, against
government plans to cut back Germany's welfare state. While the article reports
the contention of German Chancellor Gerhard Schroeder, and other proponents of
reform, that cutbacks in the welfare state are necessary, it does not cite any
of the economists who question this assessment, nor does it present any evidence
on the topic.
Pell
Grants
Kerry Cites Growing Deficit In Scaling Back Proposals
Katherine
Q. Seelye and Neil A. Lewis
New
York Times, April 7, 2004, Page A17
This
article reports on campaign speeches by Senator John Kerry and President Bush.
In his speech, President Bush proposed a new program that would provide Pell
grants for low-income students to study math and science and in college.
According to the article, Mr. Bush said that the money for this program would
come from limiting students enrolled in four-year colleges to eight years of
Pell grant support, while students enrolled in two-year colleges would be
limited to four years of support. According to the numbers in the article, the
proposed program would cost approximately $100 million, an amount equal to
approximately 1 percent of current spending under the Pell grant program. It
seems unlikely that 1 percent of the spending in this program goes to students
who have been enrolled in an four year program for more than eight years or a
two year program for more than four years. In other words, it will almost
certainly not be possible to finance President Bush's new program through the
mechanism described in the article.
Japan
Luxury
Electronics Power Japan's Recovery
Anthony
Faiola
Washington
Post, April 6, 2004, Page A1
This
article reports on Japan's apparent economic rebound. The article notes that the
country has experienced a recent export boom based largely on increased sales to
China. It then quotes a Japanese business executive warning that Japan must
limit its dependence on China because "the Japanese economy is still far
bigger." Actually, the Chinese economy is far bigger when it is measured on
a purchasing power parity basis. On a purchasing power parity basis, China's
economy is equal to about $6 trillion annually. By comparison, Japan's GDP is
close to $4 trillion.
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