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Outstanding Stories of the Week

Low-Tech or High, Jobs Are Scarce in India's Boom
Amy Waldman
New York Times, May 6, 2004, Page A3

This article reports on the situation facing workers in India. It reports that unemployment is still very high and wages for most positions quite low, in spite of the recent surge in growth.

In the Spinoff Sunshine, Storms Are Easy to Forget
Gretchen Morgenson
New York Times, May 2, 2004, Section 3 Page 1

This article reports on the fact that the first quarter earnings reported by Motorola appear to have been substantially overstated as the result of counting the one-time gains in the value of a subsidiary as continuing earnings.


China

Another Leap by China, With Steel Leading Again
Keith Bradsher
New York Times, May 1, 2004, Page B5

This article reports on the rapid and continuing growth of steel production in China. At one point the article reports that China consumes twice as much steel as the United States, even though its economy is only one-eighth the size.

While this is true using currency conversion measures of GDP, the more accurate measure of output is a purchasing power parity measure. This measure assumes a common set of prices for all goods and services, regardless of where they are produced. Using a purchasing power parity measure of output, China's economy is approximately 60 percent of the size of the U.S. economy. If it maintains its projected growth rate, it will pass the United States as the world's largest economy by 2015.

China Anxiously Seeks a Soft Economic Landing
Keith Bradsher
New York Times, May 7, 2004, Page C1

This article reports on the efforts by China's government to engineer a gradual slowing of its economy. At one point the article notes that China is now running a trade deficit. It further argues that if its exports and imports were accurately measured, then its trade deficit would approximately the same size as the U.S. deficit, measured as a share of GDP.

While this assessment may be accurate, China's trade deficit does not pose nearly the same problem for two reasons. First, its GDP measured on a purchasing power parity basis is approximately four times its size measured on a currency conversion basis, the measure used in the article. Second, China is an extremely rapidly growing developing country. It would be expected that it has a current account deficit. Its growth rate is expected to average 7 percent annually for the foreseeable future, which means that a modest foreign debt will not impose a substantial burden in the future.


The Budget

Federal Deficit Likely to Narrow By $100 Billion
Jonathan Weisman
Washington Post, May 4, 2004, Page E1

This article reports on new data on tax receipts and spending which indicate that the fiscal 2004 deficit may be as much as $100 billion lower than the Office of Management and Budget had previously projected. The article begins by referring to "smaller-than-expected tax refunds." While the refunds have been smaller than many economists had projected, this was primarily due to sloppiness on the part of these economists.

The stock market experienced large gains in 2003, on which many investors had to pay capital gains tax. In contrast, most investors likely had substantial losses due to the stock market crash, which led to very low capital gains tax collections in 2001 and 2002. A careful analyst should have been able to recognize that the additional capital gains tax receipts in 2004 would largely offset the income tax refunds that many taxpayers were owed due to the 2003 tax cut (see ERR 01/20/04 or ERR 02/09/04).


Housing Vouchers

Housing Subsidies for the Poor Threatened by Aid Cuts 
David W. Chen
New York Times, May 4, 2004, Page A1

This article reports on the impact of the Bush administration's plans to cut back funding for housing vouchers for low-income families and also to change the rules that apply to these vouchers. At one point the article describes the debate over the proposed cuts as being part of "a broader war of ideas over the Bush administration's determination to revamp the voucher program by employing market principles and fiscal discipline." The article provides no evidence of any ideas held by the Bush administration related to this issue, other than the intention of spending less money on providing housing to the poor.


State Budgets

States' Tax Receipts Rise, Leading to Some Surpluses
James Dao
New York Times, May 4, 2004, Page A14

This article discusses states' fiscal situations. It reports that their budget situations are much better than in the last three years, primarily because tax collections have started to increase. Nonetheless, most states are still facing budget gaps that they will have to close. The article lists the size of the projected gap in several states. For example, it reports that California faces a deficit of approximately $15 billion, while Maryland is facing an $800 million shortfall for 2006, which is projected to grow to $1 billion the following year.

It would be helpful if these numbers were expressed relative to the size of the state budgets, so that readers would have a better sense of the extent of the budget problems facing these states. The $15 billion deficit projected for California is approximately 15 percent of its total budget. The $1.8 billion two-year deficit projected for Maryland is equal to approximately 8 percent of its budget over this period. The article also notes that spending is projected to rise by 2.8 percent between 2004 and 2005, compared to an average of 6.2 percent over the prior 26 years. This difference is somewhat smaller if spending is adjusted for inflation. Inflation averaged just under 4.0 percent over the prior 26 years, whereas it is projected to be just over 2.0 percent in the next year.


Agricultural Subsidies

Brazil's Road to Victory Over U.S. Cotton
Elizabeth Becker and Todd Benson
New York Times, May 4, 2004, Page W1

This article presents the background to Brazil's victory over the United States at the W.T.O. in a case on the legality of U.S. cotton subsidies. At one point the article refers to "$300 billion in subsidies and supports" that rich countries give to their farmers. Less than $90 billion of this figure is actually payments from governments in the form of subsidies. The bulk of this $300 billion is attributable to higher prices paid to consumers from supply restrictions including import quotas. Much of it also takes the form of indirect subsidies, such as funding for education and flood control in rural areas.

While the Times has made this non-subsidy support for agriculture a regular theme of its news reporting (and also its editorials), it almost never mentions such support in the context of other sectors. For example, patent protection for prescription drugs transfers more than $150 billion annually to drug companies in the U.S. alone; however this fact has never been mentioned in a Times article. Similarly, quotas and other restrictions limiting the ability of foreign doctors to practice in the United States add in the neighborhood of $80 billion to U.S. payments for doctors each year, but this governmental support has also never been mentioned in the Times.


Gas Prices

Drivers Tend to Shrug Off High Gas Prices, for Now
Neela Banerjee
New York Times, May 4, 2004, Page C1

This article discusses the impact that higher gas prices are having on car buying and driving patterns. It reports that higher prices appear to be having little effect thus far. At one point the article refers to tax cuts and low interest rates as factors that have shielded consumers from the effect of higher gas prices. While these factors have certainly increased the ability of many households to pay more for gas, their effect is largely offset by the fact that real wages have stopped growing. In the late nineties, wages were rising by approximately 2 percentage points more than inflation, each year. In the last two years, wages have risen at roughly the same rate as inflation, and in the last six months wage growth has been slightly less than the rate of inflation.


Corporate Tax Cuts

Corporate Tax Legislation Remains Stalled in the Senate
Edmund L. Andrews
New York Times, May 6, 2004, Page C5

This article reports on a provision of a tax bill that would allow a one-year tax holiday, during which corporations could repatriate profits from abroad, without paying any taxes on the money. The article asserts that the purpose of this tax break is "to encourage companies to reinvest that money in the United States."

While the politicians supporting this measure may present this argument as the rationale for their action, it is also possible that they support the measure simply to give the corporations affected more money. The link between profits and investment is extremely weak, so there is little basis for believing that this tax break would actually increase investment. The article does not indicate how it determined what the proponents of this bill actually thought its effect would be.


Japan

A Tough Sell: Japanese Social Security
James Brooke
New York Times, May 6, 2004, Page W1

This article reports on efforts by the Japanese government to increase compliance with its Social Security taxes. The article includes several assertions about the demographic problems facing Japan that are not true.

For example, the article claims that in the next twenty years Japan will shift from "the demographics of Florida, to the demographics of a Florida retirement community." The article provides no basis for this assertion. All projections show that Japan will still have considerably more workers than retirees in twenty years.

The article also includes an assertion that Japan will be forced to accept lower living standards in the future because of its aging population. This also is not supported by standard economic projections. Assuming normal productivity growth, Japan's per capita income would be more than 80 percent higher in thirty years, if its ratio of workers to population remain unchanged. This means that if even if the ratio of workers to population fell by forty percent (for example from 50 percent to 30 percent), average living standards would still rise over this period. There is no projection that shows a decline in the working population that is anywhere near this rapid.


Health Care

Candidate Health Care Plans Analyzed
Ceci Connolly
Washington Post, May 6, 2004, Page A8

This article reports on a study that analyzed the health care proposals being put forward by President Bush and Senator Kerry. At one point the article refers to the study's finding that Kerry's proposal would save $298 billion over the next decade. It would have been helpful to put this figure in the context of total medical spending. It is equal to approximately 1.3 percent of projected health care spending over this period.


U.S. Debt

Greenspan Says High-Debt Economy Won't Last
Nell Henderson
Washington Post, May 7, 2004, Page E1

Greenspan Warns of Deficit as Big Threat to the Economy
Edmund L. Andrews
New York Times, May 7, 2004, Page C7 

These articles report on a speech by Federal Reserve Board Chairman Alan Greenspan. The Times article refers to comments in which Mr. Greenspan indicated that consumer debt burdens are not a cause for concern. He attributed the recent run-up in debt to a rise in homeownership, which implies that people are substituting mortgage debt payments for monthly rent payments. The Federal Reserve Board's (FRB) data shows that this has not been an important factor in the rise in debt burdens. The FRB's financial obligations ratio, which includes both rent and mortgage payments shows the same rise as its debt service ratio. Both are at near record levels, having fallen slightly from peaks reached in 2002. Since household income is growing at the slowest pace in the post-war period, this ratio is not likely to be reduced quickly by income growth.

The Post article refers to Greenspan's discussion of the willingness of foreign investors to finance the U.S. trade deficit by buying up U.S. financial assets. Foreign investors are not financing the U.S. trade deficit. In the last year and a half, the bulk of the capital that has financed the U.S. trade deficit has come from foreign central banks, especially the Japanese and Chinese central banks. In order to keep their currencies from rising against the dollar, these banks have been purchasing hundreds of billions of dollars in the last year and a half.

When presenting Mr. Greenspan's views of the economic situation it would be appropriate to remind people of his track record. In January of 2001, Mr. Greenspan testified in support of the first round of Bush tax cuts because he was worried that the government would pay off the national debt too quickly. Mr. Greenspan also missed the onset of the recession, telling Congress that the economy only faced a minor slowing. He also missed the stock market bubble, repeatedly telling the public that the record high price-to-earnings ratios of the late nineties could be justified by the speed-up in productivity growth.