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Outstanding Stories of the Week

Friends in the White House Come to Coal's Aid
Christopher Drew and Richard A. Oppel Jr.
New York Times, August 9, 2004, Page A1

This article reports on the close ties between Bush administration officials and the coal industry. The Bush administration has supported the coal industry on a variety of environmental and health and safety issues.

Security for the Homeland, Made in Alaska
Leslie Wayne
New York Times, August 12, 2004, Page C1

This article reports on several major contracts signed by the Department of Homeland Security with corporations controlled by Alaskan natives. The contracts are actually being filled by major contractors who have partnered with the Alaskan native companies. Provisions in the law allow contracts to be awarded to the Alaskan native controlled companies without standard rules on competitive bidding.

Tech Company Settled Tax Case Without an Audit
David Cay Johnston
New York Times, August 10, 2004, Page C1

This article reports on a tax case was being settled with a tech company before the I.R.S. had even conducted an audit. According to the article, the auditor was asked to approve an agreement between the company and the I.R.S. without actually having done an audit to determine the company's liability.

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July Employment Report

Indicators Show a Cooling Economy
Nell Henderson
Washington Post, August 7, 2004, Page A1

Economy, Politics Collide for Bush team
Jonathan Weisman and Mike Allen
Washington Post, August 7, 2004, Page A1

Slow Job Growth Raises Concerns on U.S. Economy
David Leonhardt
New York Times, August 7, 2004, Page A1
Printed online as, "In Blow to Bush, Only 32,000 Jobs Created in July"

A Job Picture Painted With Different Brushes
Floyd Norris
New York Times, August 7, 2004, Page B1

These articles discuss the economic and political implications of the Labor Department's July employment report, which showed much slower job creation than most analysts had expected.

At one point the Times article by Leonhardt comments that the new data "rekindles fears that the relationship between economic growth and job creation has changed in important ways." While this is a possibility, the more obvious explanation of the weak job growth reported for July is simply that the economy is not growing very rapidly. According to the Commerce Department's data, consumption spending (which accounts for 70 percent of GDP) fell in June. Data from retail chains indicates that their sales in July fell from prior months. The Census also released data that showed construction spending fell in June. Given these reports and other developments, such as end to the mortgage refinancing boom, it is likely that the economy is growing rather slowly at present, and therefore creating relatively few jobs.

Both the Times article by Leonhardt and the Post article by Henderson note that the data show a rather healthy rise in the average weekly wage of $3.25 (0.6 percent). It is important to note that this increase is driven largely by a reported increase in the length of the average workweek. This data is very erratic - the 0.1 hour increase reported in July follows a decline of 0.2 hours reported in June. Most likely, there has been relatively little change in the actual duration of the workweek over this period, and June's reported decline and July's reported increase primarily reflected errors in measurement.

Both of the Times articles note the discrepancy between the weak job growth (32,000) reported in the establishment survey and the 629,000 jump in employment shown in the Labor Department's survey of households. It is actually not unusual for these surveys to show sharply divergent pictures of the labor market. For example, in November of 2002 the household survey showed a drop in employment of 534,000. The establishment survey showed a loss of just 37,000 jobs that month.

Virtually all economists recognize the establishment survey as being the better gauge of the labor market, since it is far less volatile and is designed to measure job growth. (The employment data in the household survey depends on an imputation of population growth. This imputation has often been highly inaccurate. For example, in the nineties it understated population growth by more than 3 million people, which led to an understatement of employment growth of more than 2 million.) The establishment survey is benchmarked each year to the state unemployment insurance filings, since this data covers near all employees in the country, it is highly unlikely that there will be any sustained divergence between the job counts in the establishment survey and actual employment in the economy.

The article by Weisman and Allen notes at one point that the economy will have to generate 372,000 jobs in the next three months if President Bush is to avoid being the first President to run for re-election showing a net loss of jobs. Actually, the job growth data for October will not be released until the Friday after the election. Job growth will have to average 558,000 over the next two months if President Bush is to show net job creation by election day.

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Energy Independence

Kerry Goal of U.S. Independence on Oil Divides Advisors
Neela Banerjee
New York Times, August 7, 2004, Page A1

This article reports on Senator Kerry's plans to try to reduce U.S. dependence on imported oil. At one point it refers to a proposal by Senator Kerry to spend $30 billion over the next 10 years on energy conservation and promote alternative fuels. This sum is equal to approximately 0.1 percent of projected federal spending over this period. The annual rate of spending is equal to approximately 2 percent of the country's current spending on imported oil.

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The Budget

In Hindsight, Kerry Says He'd Still Vote for War
Jim VandeHei
Washington Post, August 10, 2004, Page A1

Kerry Says His Vote on Iraq Would Be the Same Today
Jodi Wilgoren
New York Times, August 10, 2004, Page A18

These articles reports on a campaign visit by Democratic presidential nominee John Kerry to the Grand Canyon National Park. Both articles refer to Senator Kerry's criticisms of the Bush administration for failing to adequately fund the park system. Mr. Kerry said that he would add $600 million to current annual funding levels.

The Times article presents a response from the Bush campaign, which claims current funding is 20 percent higher than when Mr. Bush took office, and that funding is at its highest level ever on a per acre, per employee, or per visitor level. According to the Bush administration's Office of Management and Budget, spending on national parks was $2,289 million in 2001 (approximately 0.1 percent of total spending), the last budget prepared by President Clinton. It requested $2,361 million for 2005, an increase of 3.0 percent over the 2001 level. It would take an increase in spending of approximately 10 percent over this period to keep up with inflation. Furthermore, the parks have been forced to deal with additional responsibilities related to homeland security, so they would need an increase in funding well in excess of 10 percent to perform the same park related services in 2005 as in 2001.

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Tax Proposals

Bush Remark Touches Off New Debate on Income Tax
Edmund L. Andrews
New York Times, August 12, 2004, Page A18

This article discusses the possibility that President Bush may propose a major restructuring of the tax system as part of his re-election campaign. It notes that some of his advisors advocate replacing the income tax with some type of national sales tax or value added tax, arguing that such a tax "would be simpler and fairer than the traditional income tax, because it would not provide the opportunities for loopholes and sophisticated tax reduction schemes that tend to favor wealthy taxpayers."

The incidence of the income tax has been extensively researched. There is no serious dispute that its far more progressive than any other major tax, with the exception of the estate tax. While loopholes may cause the incidence of the tax to be somewhat less progressive, it is still far more progressive than a sales tax or value-added tax. These taxes would increase the relative burden on the middle class and poor, in both cases because they consume a larger share of their income than the rich, and also because they would have less ability to escape the tax by consuming in other countries.

Stumping Bush Calls Kerry A Reluctant Ally on Iraq
Carl Hulse
New York Times, August 11, 2004, Page A14

This article reports on criticisms of Senator Kerry by President's Bush and his campaign staff. At one point it reports the accusation that Senator Kerry's tax proposals will make the deficit worse, because he would preserve the portion of President Bush's tax cuts that go to middle income families.

While this proposal would make the deficit worse when compared to the Congressional Budget Office baseline, which assumes that this tax cut expires in 2010, it does not make the deficit worse compared to President Bush's own proposal. Senator Kerry would take back the portion of the tax cuts going to the richest 2 percent of the population (roughly half of the total). In this sense, Senator Kerry's tax proposals go further towards addressing the deficit than do President Bush's proposals.

Cheney Gets in Jab on Terror as Kerry Throws a Punch on the Economy
Jodi Wilgoren
New York Times, August 13, 2004, Page A16

This article reports on campaign comments by Vice-President Cheney and Senator Kerry. At one point it refers to a set of proposed tax cuts by Senator Kerry that would total $420 billion. It is important to note that this sum is a ten year total. The tax cuts would be equal to approximately 1.5 percent of projected revenue over this period. The cuts average approximately $150 per person per year.

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The Federal Reserve Board

Bush Welcomes Fed's Move
Nell Henderson
Washington Post, August 12, 2004, Page E1

This article discusses the reaction to the Federal Reserve Board's decision to raise interest rates earlier in the week. It reports that President Bush's campaign welcomed the Fed's statement that the economy remains strong and is just experiencing a temporary patch of weakness, since this supported Mr. Bush's own statements on the economy.

It would have been worth noting the inaccuracy of the Fed's recent assessments of the economy. For example, the Fed projected growth for 2004 of 4.5 percent. The annual growth rate for the first half of the year was 3.8 percent. The available data for the third quarter indicates that the growth rate is likely to be less than 3.0 percent, which means that the 4.5 percent forecast is almost certainly going to be substantially above actual growth. The Fed also missed the onset of the recession in 2001. In the fourth quarter of 2000, Alan Greenspan used almost the same wording to describe the economic slowdown as he is currently.

At one point the article asserts that the Fed "carefully guards its political neutrality in overseeing national monetary policy." While the Fed certainly likes to be regarded as political neutral, it is not clear that this characterization is accurate. In January of 2001, Alan Greenspan testified to Congress that President Bush's tax cuts would be desirable, because he was worried that the government would otherwise pay off the national debt too quickly. At the time, Mr. Greenspan's testimony was seen as very important in securing the support needed to pass the tax cut.

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Medicare Prescription Drug Plan

Medicare Drug Benefit Fails to Boost Bush, Survey Finds
Ceci Connolly
Washington Post, August 11, 2004, Page A6

Survey Finds Beneficiaries Largely Fault Medicare Law
Robert Pear
New York Times, August 11, 2004, Page A14

Kerry Courts Seniors in Nevada
Jonathan Finer
Washington Post, August 12, 2004, Page A6

Democrats Give Republicans a Fight for the Elderly
David M. Halbfinger
New York Times, August 12, 2004, Page A141

These articles discuss President Bush's Medicare prescription drug benefit and its likely impact on the election. The articles note that the plan does not appear to be winning support for President Bush among seniors. It is worth noting that seniors will pay more on average for prescription drugs with the plan in effect in 2006, than they did without a plan in 2000, when drug costs were a major issue in the presidential campaign. This might explain why the plan is winning relatively little support among seniors.

The Post article by Finer notes that the plan is projected to cost $564 billion. It would have been helpful to point out that this is a projection for the period from 2005 to 2014. It is equal to approximately 2 percent of projected spending over this period.

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