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Outstanding Stories of the Week

El Salvador Scarred by Child Labor
Kevin Sullivan
Washington Post, June 10, 2004, Page A8
This article examines the use of child labor in El Salvador's sugar industry

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The Reagan Legacy

Ronald Reagan Dies, Actor, Governor, President Icon
Lou Canon
Washington Post, June 6, 2004, Page A1

Sagging GOP Rebuilt in His Image

Dan Balz and Mike Allen
Washington Post, June 6, 2004, Page A1

Right-Leaning Policy Won a Nickname: Reaganomics
Glenn Kessler
Washington Post, June 6, 2004, Page A27

A Champion of Small Government Who Helped Reset the World Stage
Marilyn Berger
New York Times, June 7, 2004, Page A2
Published online with the title "Ronald Reagan Dies at 93; Fostered Cold-War Might and Curbs on Government" on June 6. 2004

An Impact Seen, and Felt, Everywhere
Todd S. Purdum
New York Times, June 7, 2004, Page A4

Historic Tax Code Changes Eroded in Years Since 1986
Jeffrey H. Birnbaum
Washington Post, June 7, 2004, Page A1

Schisms From Administration Lingered for Years
Eric Pianin and Thomas B. Edsall
Washington Post, June 9, 2004, Page A1

Reagan Policies Gave Green Light to Red Ink
Jonathan Weisman
Washington Post, June 9, 2004, Page A11

Critics See a Reagan Legacy Tainted by AIDS, Civil Rights and Union Policies
Robin Toner and Robert Pear
New York Times, June 9, 2004, Page A18

Favoring Tax Cuts and Tolerating Deficits
David E. Rosenbaum
New York Times, June 10, 2004, Page A23

These articles discuss the presidency and legacy of Ronald Reagan. Some of the assertions in the articles are inaccurate or provide an incomplete picture. For example, several articles refer to Reagan as an opponent of big government. While Mr. Reagan did oppose big government social programs, he was not opposed to large-scale government intervention in the economy.

For example, he supported measures that increased both copyright and patent protection. Such protection requires extensive government intervention in the economy on behalf of those to whom it has awarded patents and copyrights, and leads to enormous market distortions. In the case of prescription drugs, patent protection typically raises the price by several hundred percent above the competitive market price, and in some cases by several thousand percent. Copyright protection causes items such as recorded music and software to sell for high prices when they could otherwise be exchanged at no cost over the Internet.

These forms of intervention have also led to such measures as the recording industry suing the campfire girls in order to collect royalties for songs they have sung around campfires. They also have led to a rash of lawsuits against people who download music from the Internet. In one case a software engineer was arrested and imprisoned for a lecture he presented on breaking software locks at an academic conference.

Mr. Reagan never expressed any objections to these sorts of large-scale government interventions in behalf of the entertainment industry, the pharmaceutical industry, or other groups who benefit from intellectual property rights. Therefore it would be more accurate to describe Mr. Reagan as an opponent of big government social programs, not big government.

Some of the articles portray the Reagan era as a period of extraordinary economic growth. For example, the Kessler article describes the expansion of the eighties as being at the time "the longest economic expansion in history." This is not accurate, the expansion of the sixties was considerably longer. The article by Pianin and Edsall refers to the era as a "boom." The average growth rate in the eighties was the slowest of any decade in the post World War II era.

The fact that growth was weak in the Reagan years is especially important because Reagan's economic policies emphasized growth, with the claim that more rapid growth will benefit everyone, even if it is accompanied by an increase in inequality. As it turned out, there was a substantial increase in inequality during the Reagan years, but no upturn in the growth rate even in the short-term (the budget and trade deficits posed problems for long-term growth). This meant that most of the population was made worse off by the policies of the Reagan era, and in fact the real hourly wage for the typical worker actually fell during the Reagan presidency. In prior years, wages for most workers rose pretty much in step with productivity growth. This led to real wage gains of more than 2 percent annually in the fifties and sixties.

The trend toward increasing inequality (in both before and after-tax income) is given little attention in these articles, even though it was the most important economic fact affecting most people's lives in the Reagan years (most people were on the losing side). The Pianin and Edsall article does include a quote commenting on the increase in inequality, but the quote also includes the assertion that Reagan's policies were not responsible. Many of Reagan's policies clearly did contribute to the increase in inequality during the eighties.

For example, his decision to break the air traffic controllers' union and hire replacement workers ushered in a new era of labor-management relations, in which employers began to use the threat of hiring replacements as a standard weapon against unions. The National Labor Relations Board was also markedly more hostile to labor under Reagan than under his predecessors (from either party), which further reduced workers' bargaining power. Deregulation of major industries, such as trucking, communications, and the airlines (policies begun under Carter, but continued by Reagan) also placed downward pressure on the wages of millions of workers. In addition, the over-valued dollar in the mid-eighties forced millions of manufacturing workers to take pay cuts and/or lose their jobs. While there may have been other factors contributing to the growth of inequality in the Reagan years, clearly his policies were an important factor.

Several of the articles discuss the Reagan era deficits. This is not done in an informative manner. For example, the article by Weisman is accompanied by a chart showing the size of the Reagan deficits in nominal dollars. This is not meaningful to most readers, since it does not indicate their importance to the economy. The article by Purdum includes a chart showing the size of the deficit relative to GDP from the late sixties to the present, which is considerably more informative. However, the best measure would the change in the ratio of government debt to GDP. This rose from 33.4 percent when Reagan took office to 51.9 percent when he left office. By contrast, the ratio of debt to GDP had fallen during the administration of every prior post-war president, except Gerald Ford.

This point is important, because previous budget debates between liberals and conservatives were over deficits that were far smaller in size than the deficits of the Reagan years. While many liberals had maintained that deficits that left the debt-to-GDP ratio either unchanged or falling slightly were acceptable, few, if any, had ever argued for deficits of the size incurred during the Reagan years. For example, even though the budget was almost continually in deficit during the Kennedy-Johnson administrations, the ratio of debt to GDP fell from 56.0 percent in 1960 to 42.5 percent in 1968. The deficits of the Reagan-Bush years were qualitatively different from the deficits that had been run in prior administrations, and the debt expansion that they caused was unsustainable.

In this respect, the article by Canon includes an assertion that "the deficits appeared less harmful in hindsight." The basis for this comment is not clear. There are few economists who believe that the government could have continued to accumulate debt at the rate it did in the eighties. The real interest rate was also considerably higher in the eighties than it had been in prior decades (or in the nineties). This is exactly what would be predicted from large deficits, although restrictive monetary policy almost certainly played a role as well. Investment was also very weak in the Reagan years and the country ran a large trade deficit, two other outcomes that would be predicted from large budget deficits.

The large trade deficits of the Reagan era are not mentioned in any of these articles. These deficits transformed the United States from being the world's largest creditor nation at the beginning of the Reagan era to being the world's largest debtor nation by the time he left office. As a result, instead of drawing income from foreign assets, future generations will be paying interest to foreign owners of U.S. financial assets. (The level of foreign indebtedness also increased sharply in the Clinton and George W. Bush administrations.)

The articles by Birnbaum and Rosenbaum both include discussions of the 1986 tax reform. The main purpose of this reform was to eliminate many special tax preferences, but then lower the overall tax rate. The articles point out that tax preferences were later added back into the code, both citing education and saving credits proposed by President Clinton. By far the largest tax preferences that have been inserted into the tax code were the favored treatment of capital gains and dividend income. Special treatment of capital gains was put in by the senior Bush in 1990, with the tax rate on capital gains lowered further in the Clinton and current Bush administration. Special treatment of dividends (on stock held outside of retirement accounts) was the result of the 2003 tax cuts. The revenue lost due to these preferences is far greater than the cost of President Clinton's tax credits.
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The Economy and President Bush's Popularity

Economy Provides No Boost For Bush
Jonathan Weisman
Washington Post, June 10, 2004, Page A1

This article discusses the fact that President Bush's approval ratings are continuing to fall, even though the economy is showing more positive signs. It begins by asserting that "wages have begun to rise." While nominal wage growth has been somewhat more rapid in the last few months, it has not kept pace with the rate of inflation. In the last three months, real wages have been falling at a 3.2 percent annual rate, assuming that the consensus estimate for the May CPI of 0.4 percent is correct.

The article notes that President Clinton was relatively unpopular going up to the 1994 elections, even though the unemployment rate had fallen by more than a percentage point and the economy was growing rapidly. It is worth noting that real wages for most workers were still declining in 1994. It was not until 1996 that increases in the median wage begin to outpace the inflation rate

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Open Source Software

Showdown With The Linux Gang
Jonathan Krim
Washington Post, June 10, 2004, Page E1

This article reports on the efforts by some software firms, including Microsoft, to stem the growing use of open source software. Unlike proprietary software, open source software can be used without charge. At one point the article quotes from a letter from a critic of open-source software, which charges that open source software means "fewer jobs, less software revenue, and reduced incentives for software companies to innovate."

It would have been appropriate to include some economic analysis of these contentions. Copyrights effectively impose a tariff on software. The impact of this tariff is comparable to the imposition of tariffs on steel, sugar, or any other good. It raises the price to consumers, leading to less demand for the product and higher costs for the economy as a whole. Since impact of copyrights on the price is far larger than the impact of standard tariff (software that would otherwise be available at no cost, can cost hundreds or thousands of dollars), their negative economic impact will be far larger. Since the software itself is a major input for the software industry, is entirely possible that software copyrights not only damage the economy as a whole, but lead to less software production as well

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Venezuela

Chavez Recall Vote: Edging Closer, but Still Facing Obstacles
Juan Forero
New York Times, June 5, 2004, Page A2

This article examines the prospects of a referendum for recalling Venezuela's president Hugo Chavez. At one point the article refers to a "two year, 19 point plunge" in Venezuela's economy, as a factor that may lead many to support the recall. Over the last two years, Venezuela's economy is down by 6.7 percent. It is worth noting that most of this decline was due to a strike in the oil industry organized by the opposition with the stated purpose of removing Chavez from office
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Outsourcing

Not Many Jobs Are Sent Abroad, U.S. Report Says
Eduardo Porter
New York Times, June 11, 2004, Page C1

This article reports on the findings of a labor department survey, that only a small percentage of job loss is attributable to the outsourcing of work to foreign producers. This survey only examined layoffs of more than fifty workers and relies on firms self-reporting the reason for the layoff. Given this methodology, it is not surprising that the survey finds little evidence of job loss due to outsourcing. These facts are mentioned in the article, but the headline and the prominence of the piece on the front page of the business section may lead many readers to believe that this study is more conclusive than in fact is the case.
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