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Outstanding Stories of the Week

Cost of Benefits Cited As Factor In Slump In Jobs
Eduardo Porter
New York Times, August 19, 2004, Page A1

This article reports on the impact that rising health care costs are having on employment growth. It notes that high health care costs appear to have made many firms more reluctant to hire new workers than would ordinarily be the case at this point in a business cycle.

Appalachia Is Paying the Price for White House Rule Change
Joby Warrick
Washington Post, August 17, 2004, Page A1

This article reports on the Bush' administrations' not to enforce environmental regulations that restrict strip mining. It notes that strip mining has led to serious environmental damage in West Virginia and other centers of the mining industry.

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The Trade Deficit

U.S. Trade Deficit Increased 19% in June
Nell Henderson
Washington Post, August 14, 2004, Page E1

Trade Deficit, $55.8 Billion, Sets Record
Bloomberg News
New York Times, August 14, 2004, Page B14

These articles report on data showing that the U.S. trade deficit hit a record $55.8 billion in June, more than $6 billion higher than the previous record set in April. This news was striking, with the deficit far above analysts' projections. While data for a single month is highly erratic, the deficit has been running at an annual rate of more $600 billion (5.5 percent of GDP) for the last three months.

The trade deficit affects the economy in approximately the same way as the budget deficit. It corresponds to borrowing from abroad, which will lead to lower living standards in the future for people in the United States, since a larger share of future output will be paid out as interest or dividends to people living abroad. The recent news on the trade deficit is comparable to a new report on the budget deficit that indicates it will be $60-$100 billion higher than previously projected. Such news about the budget deficit would almost certainly be a major front page story. In this case, the Post article was on the front page of the business section, while the Times ran a wire service story deep inside the business section, where few readers would be likely to see it.

Neither article discusses the cause of this deficit – the main mechanism for equating imports and exports is the value of the currency. In other words, the deficit is attributable to the dollar being too high given wage levels and productivity in the United States. (A higher value of the dollar makes imports cheaper for consumer in the United States, leading them to buy more imports. It also makes U.S. exports more expensive to foreigners, leading foreigners to buy fewer goods produced in the United States.)

The United States consciously pursued a high dollar policy during the Clinton administration. While it has allowed the dollar to fall under the Bush administration, the dollar clearly remains far above levels that are consistent with a sustainable trade deficit (approximately 1 to 2 percent of GDP).

The Post article includes a comment reflecting the views of economists that foreign investors may stop purchasing enough U.S. financial assets to support the trade deficit. (The deficit is financed by foreign purchases of U.S. stocks, real estate, government and private bonds and other financial assets.) Foreign investors have already largely stopped purchasing U.S. financial assets. The trade deficit is currently being financed by purchases of U.S. financial assets by foreign central banks, primarily the Japanese, Chinese, and Indian central banks.

The Post also reports on comments from Alan Greenspan saying that world currency markets are large enough to allow for a stable downward adjustment in the dollar, rather than a crash. It is worth noting that Mr. Greenspan now claims that he recognized the stock market bubble in the late nineties, but thought that it was inappropriate for him to say or do anything to correct the imbalance. If Mr. Greenspan acts in the same way with regard to an over-valued dollar as he did to an over-valued stock market, then he would not warn of a precipitous decline in the dollar, even if he actually thought it was likely.

At one point, the Times article notes that the economy reportedly grew at a 3.0 percent rate in the second quarter of 2004, it slowest pace in more than a year. The trade data reported for June will lead to a sharp downward revision is the growth rate. Based on the trade data, and upward revisions to consumption data, the revised growth rate for the second quarter will be close to 2.5 percent.

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Europe

Europe Ponders the Meaning of Life
Mark Landler
New York Times, August 15, 2004, Section 4 Page 1

This article reports on the prospects that the European welfare state will be rolled back in the future. It makes numerous assertions about economic necessity that are not supported by any evidence and contradict economic theory. For example, the article assets that the conditions that allowed for Europeans to enjoy long vacations, short workweeks, and a generous welfare state were "an anomaly." In fact, Europe's economies all continue to experience productivity growth of between 1 and 2 percent annually. This means that their economies are continuing to grow richer through time, allowing workers to enjoy both higher standards of living and a continued decline in working hours. There are no economic projections whatsoever that productivity will stop growing; therefore it is difficult to understand the basis for the assertion, made repeatedly in this article, that Europeans will have to accept less leisure in the future.

At several points the article attributes the need to work longer hours to globalization. In standard economic theory, trade makes countries richer, not poorer. While globalization may raise issues of distribution, it will not make European countries too poor to maintain their current standards of living.

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Brazil and Intellectual Property Claims

Brazil Starts to Crack Down on Counterfeit Claims
Todd Benson
New York Times, August 17, 2004, Page W1

This article reports on efforts by Brazil's government to crackdown on the sale of unauthorized copies of copyrighted and trademarked goods. According to the article, United States manufacturers claim that they are losing $750 million annually due to such unauthorized sales. It argues that Brazil's government is cracking down on unauthorized goods because the United States is threatening to eliminate a preferential trade program, under which Brazil exports $2.5 billion a year to the United States.

If these numbers are accurate, it indicates that Brazil will be a big loser by carrying through this crackdown. Current tariffs in the United States are already quite low - generally averaging under 5 percent. This means that if Brazil lost preferential treatment for its exports to the United States, it would have to sell these products at a somewhat lower price - at most a 5 percent price reduction, if they would otherwise be subject to a 5 percent tariff. If Brazil had to sell all of these exports at a 5 percent price reductions (an extreme assumption, since some of the exports could certainly be sold elsewhere), then it would cost the country $125 million a year. This is one sixth of the $750 million that U.S. manufacturers claim that Brazil would lose by buying its products instead of unauthorized copies. In other words, if the numbers in the article are correct, then Brazil's government would be harming its economy to benefit U.S. manufacturers by this crackdown.

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Presidential Tax Proposals

Jobs? Oil? Iraq? On Second Thought, Let's Talk Taxes
Edmund L. Andrews
New York Times, August 15, 2004, Section 3 page 1

This article reports on various tax proposals being considered by president Bush, all of which would give more preferential treatment to money that was invested. It notes that the proposals are intended to appeal to a desire to make the tax code fairer and simpler.

The proposals mentioned in the article – a national sales tax or a consumption tax – have been extensively researched by economists. This research shows that they are not in any obvious way simpler than the current income tax. (A national sales tax would likely have to tax the rental value of owner-occupied housing and a consumption tax would require a one-time audit of everyone's wealth.) They are also unambiguously less progressive – higher income people will pay less tax and middle class people will pay more with these systems in place. The article attributes this view to critics of the proposals, but it is in fact an accepted feature of consumption-based taxes.

This article asserts at one point that "Mr. Bush is correct in asserting that the economy is strengthening, " and then points to the 3.0 percent growth rate for the second quarter. Actually, the data on jobs, consumption, construction, and trade all showed the economy weakening at the end of the second quarter. The trade data for June is likely to lead to a downward revision in GDP growth for the quarter to a meager 2.5 percent.

Styles Similar in Bush and Kerry Duel on Deficit Numbers
Edmund L. Andrews
New York Times, August 15, 2004, Page A18

This article compares the tax and spending proposals being put forward by President Bush and Senator Kerry.  It would be helpful if the numbers in the article were expressed as a share of the total budget or total revenue. For example, the article points out that Senator Kerry has proposed $419 billion in new tax cuts over the next ten years. This is equal to approximately 1.4 percent of projected revenue over this period. He is also proposing $207 billion in spending on education. This is equal to 0.7 percent of projected spending.

The article refers to President Bush's plan to freeze domestic discretionary spending. It would be useful to explain the meaning of a "freeze." By not allowing spending to keep up with inflation, this implies a cut of close to 20 percent by 2014 in this broad category of spending, which includes education, the national park system, and the criminal justice system. The freeze implies a cut of more than 30 percent compared to the spending that would be needed to have these areas of government grow as fast as the economy, as has generally been the case with prior administrations.

The article also includes a statement that Mr. Bush is assuming that more rapid growth will lead to more tax revenues. It is worth noting that the current deficit estimates by the Congressional Budget Office include the effects of any increase in economic growth due to his tax cuts.

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River Project in Oregon 

Candidates Cross Paths in Oregon
John F. Harris and Jonathan Finer
Washington Post, August 14, 2004, Page A9

Bush and Kerry, in the Northwest, Again Cross Paths
Jodi Wilgoren and Carl Hulse
New York Times, August 14, 2004, Page A11

These articles report on campaign trips to Oregon by Senator Kerry and President Bush. Both articles mention a promise by President Bush that he would appropriate $15 million to deepen the Columbia river channel, which would increase its shipping capacity. The Times article includes comments from a critic of this spending, who suggests that it is wasteful pork barrel spending. The proposed spending is equal to approximately 0.0006 percent of federal spending each year (although the project may take more than one year). While this spending may or may not be wasteful, it is clearly a minor item in the context of the federal budget.

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The Pension System

United Plan for Pensions Not Legal, Agency Says
Albert B. Crenshaw
Washington Post, August 14, 2004, Page E1
Published online as, "United Says Pensions' Termination Likely"

This article reports on the decision by the Pension Benefit Guaranty Corporation (PBGC), the agency that insures defined benefit pensions, to sue United Airlines over its decision to suspend payments to its pension plans. The article points out that the termination of United's pension plans will cost the agency more than $6 billion and put its own financial condition in jeopardy. The article concludes by asserting that strong economic growth could allow the PBGC to recover from its financial health. This is unlikely, this since the PBGC relies on contributions from active pension plans. The number of active defined benefit pension plans has been contracting rapidly and is likely to continue to do so for the foreseeable future. With a diminished base of contributors, the prospects of making up any shortfall are very poor, even if the economy grows at a healthy pace.

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The Budget

Polluted Sites Could Face Shortage of Cleanup Money
Felicity Barringer
New York Times, August 16, 2004, Page A9

This article reports on a projected shortfall in the Environmental Protection Agency's Superfund program, which is designated for cleaning up hazardous waste sites. The article notes that the budget has remained flat at $1.3 billion for several years. It would be helpful to express this expenditure as a share of the total federal budget. It is equal to approximately 0.05 percent of annual spending.

World's Anti-AIDS Donations Slow, Cutting U.S. Contribution, Too
Donald G. McNeil Jr.
New York Times, August 19, 2004, Page A8

This article reports on the status of U.S. contributions to the Global AIDS Fund. The article reports that the Congressional appropriation for the current year is $547 million. This amount is equal to approximately 0.02 percent of total federal spending.