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Outstanding Stories of the Week

Tax Break Bringing Businesses, and Fraud, to the Virgin Islands
Stephanie Strom and Lynnley Browning
New York Times, September 18, 2004, Page A1

This article discusses the abuse of the special tax status given the Virgin Islands. It reports on schemes through which businesses escape much of their tax liability by maintaining front operations in the Virgin Islands.

Housekeeper Advocates For Changes
Neil Irwin
Washington Post, September 20, 2004, Page E1

This article reports on the working conditions of housekeepers in major hotels in Washington. Housekeepers are among the workers negotiating a new contract who may end up going out on strike.

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Florida

After Being Bounced Around Florida Is Bouncing Back
Joseph B. Treaster
New York Times, September 18, 2004, Page B1

This article reports on Florida's economic prospects after being hit by three hurricanes. The article presents a largely positive picture, noting that there will be a boom in the construction industry, as people rebuild with funds from insurance and the federal government.

While there is likely to be a burst of growth associated with hurricane repairs and reconstruction, after this burst, Florida's economy is likely to feel a negative impact from these hurricanes. Many homeowners had substantial deductibles on their insurance policies - in some cases $5,000 or more. These deductibles will be a large hit for many families, and will likely lead to reduced consumption once they have completed necessary repairs.

In addition, having three hurricanes hit the state in less than a month may raise concerns about the risk of future hurricanes. This may reduce the flow of people moving to Florida for retirement. It is also likely to lead to higher insurance premiums across the state, which will be a drain on homeowners' income.

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Social Security

Social Security Poses Hurdle For President
Robin Toner and David Rosenbaum
New York Times, September 18, 2004, Page A1

This article discusses the obstacles to the mandated savings accounts that President Bush as supported as a partial replacement for Social Security. The article implies that there is an imminent crisis facing Social Security - contradicting all evidence on this issue, including some of the evidence cited in the article.

According to the Social Security trustees' report, the standard basis for Social Security projections, the program could pay all scheduled benefits for almost forty years with no changes whatsoever. The Congressional Budget Office recently did a study that showed the program could pay all scheduled benefits for nearly fifty years with no changes. These projections show the program to be in far better financial shape than it was in the forties, fifties, sixties, or seventies. The article presents no evidence to suggest that Social Security is facing any imminent crisis.

At one point, the article claims that the "theory" behind privatization is that higher returns from the stock market will make up for cuts in the size of the benefit received from Social Security. This is wrong. Stock returns can be predicted just like wage growth, life expectancies, and all the other variables that affect Social Security's finances. The only projections of stock returns that have been derived from the trustees' profit growth projections show that, given current price to earnings ratios (slightly more than 20 to 1), the returns on private accounts will be approximately the same as the return on the government bonds held by the Social Security trust fund. This means that there will be no extra money to make up for lost benefits. Proponents of privatization are presumably aware of this basic arithmetic fact, even if they still claim that private accounts can yield higher returns.

In Fla., Kerry's Focus Is On the Domestic Front
Dan Balz and David Snyder
Washington Post, September 23, 2004, Page A10

Kerry Maintains Domestic Focus, Turning to Social Security and Medicare
Richard W. Stevenson
New York Times, September 23, 2004, Page A23

These articles report on speeches by Senator Kerry in which he criticized President Bush's plan to privatize Social Security. The Post article asserts that Social Security is "threatened by the impending retirement of the baby boom generation." At one point the Times article comments that "Mr. Kerry has offered only a vague idea of how he would address the problems of Social Security."

According to the Social Security trustees report, the program would be able to pay all scheduled benefits, with no changes whatsoever, through the year 2042, thirty years after the end of a second Kerry administration. A recent study by the Congressional Budget Office projects the program will be fully solvent until 2052, forty years after the end of a second Kerry administration. Furthermore, the shortfall the program faces even after those dates are not qualitatively different from shortfalls faced in the decades of the fifties, sixties, seventies, and eighties.

The Post article does not indicate the basis for its assertion that Social Security is threatened by the retirement of the baby boom generation, the bulk of whom will be dead at the point when the program is first projected to face a shortfall. The Times articles does not indicate why it is important that Mr. Kerry have a solution for a distant and relatively mild problem.

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Trade

A Senate Race In Oklahoma Lifts the Right
Sheryl Gay Stolberg
New York Times, September 19, 2004, Page A1

This article reports on the Senate race in Oklahoma, where a conservative Republican is running for a vacant seat. At one point the article refers to Jim DeMint, another conservative who is running for the Senate in South Carolina. The article identifies Mr. DeMint as a being a strong supporter of "free trade."

Actually, Mr. DeMint is not a supporter of free trade. He has not opposed protectionist measures that maintain high wages for professionals like doctors and lawyers. Nor has he opposed protectionist measures like copyrights and patents. The article is apparently referring to Mr. DeMint's support for recent trade agreements like NAFTA and CAFTA, which are designed to place manufacturing workers in competition with low paid workers in the developing world, but in many other areas maintain or increase protectionist barriers.

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The Middle Class

As Income Gap Widens, Uncertainty Spreads
Griff Witte
Washington Post, September 20, 2004, Page A1

This informative article examines the declining standard of living experienced by large segments of the U.S. workforce. At one point it attributes this decline to an increasing polarization in the skills requirements of various jobs, noting that the economy is creating demand for low-skilled workers like fast-food workers and janitors and also high skilled workers like doctors and lawyers.

It is important to realize that skill differentials do not fully explain the wage differences between these groups of workers. Many less-skilled workers have enjoyed decent wages and middle-class life-styles. For example, workers in unionized grocery stores had generally had decent health care and pension benefits and earned enough to comfortably raise a family. With the decline of unionization in this sector, grocery workers are far less likely to enjoy a middle-class living standard.

Similarly, the high wages received by doctors and lawyers are in large part explained by the protection that they enjoy from international competition. In 1997, the United States imposed restrictive quotas on the number of foreign medical residents who could practice in the United States in order to prop up doctors' wages. Similarly, trade negotiations have never focused on standardizing legal procedures to facilitate international competition among lawyers, in the same way that they have sought to increase rules governing trade in manufactured goods. The protection against foreign competition enjoyed by highly educated professionals is one of the major factors explaining their high wages. Wages would be far more equal if they were forced to sell their labor in a competitive market.

At one point the article asserts that the middle class is thriving because real (inflation-adjusted) median family income had risen by $10,000 or 30.0 percent since 1967. This assertion implicitly assumes that the appropriate comparison is a world in which living standards did not rise at all. Since economies almost always grow, the relevant question is not whether income grew, but by how much. In the last 37 years, median family income has actually grown very slowly. (Actually growth began to slow precipitously after 1973.) In the twenty years from 1947 to 1967, real median family income rose by 75 percent. The slower income growth since 1973 has been attributable to slower productivity growth over the years from 1973 to 1995 and to growing inequality from 1980 up to the present. The last 37 years would look even worse if we were to take into account that some of the growth in median family income is due to an increase in hours worked.

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Economic Growth

Fed Keeps Nudging Up Key Rate
Nell Henderson
Washington Post, September 22, 2004, Page E1

Fed Raises Short-Term Rates for 3rd Times in 3 Months
Clifford Krauss Edmund L. Andrews
New York Times, September 22, 2004, Page C1
Printed online as, "Fed Raises a Key Rate a Quarter-Point as Widely Expected"

Expensive Gas and Nasty Weather Depress Retail Hopes
Tracie Rozhon
New York Times, September 22, 2004, Page C8

These articles discuss the economy's growth prospects for the rest of the year. The first two articles give the Federal Reserve Board assessment's that the economy will sustain strong growth averaging 3.5 percent the rest of the year. It is worth noting that the Fed has had a very poor record projecting growth in recent years. Until recently, it had been projecting that the economy would grow by 4.5 percent this year. Its newest projections imply that growth will average slightly less than 3.5 percent for the year.

The Fed also failed to predict the 2001 recession. In late fall of 2000, Alan Greenspan testified to Congress that the economy was just passing through a soft spot.

The projections for retail spending, which are the topic of the article by Rozhon, call into question the Fed's growth assessments. The article reports a range of projections for the Christmas shopping season, all of which imply very weak growth in retail sales for the rest of the year.

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Corporate Taxes

Study Finds Accelerating Decline in Corporate Taxes
Lynnley Browning
New York Times, September 23, 2004, Page C3

This article reports on a new study by the Institute on Taxation and Economic Policy that finds that the tax rate paid by many of the country's biggest corporations reached post-war lows in the last three years. At one point it asserts that "not all experts agreed with the study's findings." It then quotes William W. Beach, an economist at the Heritage Foundation, as saying that many small and mid-size businesses were "paying a lot in taxes."

This statement doesn't contradict the study's findings. The study examines average tax rates at the country's largest corporations. It does not assess whether small and mid-size corporations are paying "a lot" of taxes.

The article also notes the study's finding that investment by the corporations examined in the study had actually fallen over the last three years. It counters this comment with Mr. Beach's assessment that rates of capital investment are at historic highs.

These competing claims could be easily evaluated. The Commerce Department's National Income and Product Accounts (table 1.1.5) show that non-residential investment stood at 9.9 percent of GDP in 2003. This is down almost three percentage points from 12.6 percent investment share in 2000. In fact, the 2003 share is also well below the investment shares of most of the last three decades.

While some claims by experts are not easily assessed, in this case the validity of the competing claims could have been easily determined by looking at a simple chart. It would have been helpful to readers if this information was included in the article.

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Replacing Alan Greenspan

Winner of November Election Will Get to Pick Greenspan's Successor
Nell Henderson
Washington Post, September 21, 2004, Page E1

This article examines the top contenders to replace Alan Greenspan as chair of the Federal Reserve Board. At one point the article asserts that there is little debate over Fed policy regardless of party affiliation, claiming that "Fed officials of both parties are closely aligned these days in a consensus .. that the best way to foster economic growth and lower unemployment is to keep inflation very low."

This is not true. Janet Yellen, who was a Federal Reserve Board governor under President Clinton, and is currently president of the San Francisco District bank, has quite explicitly argued that moderate rates of inflation may help to keep unemployment down. Also, Alan Blinder, who was briefly Vice-Chairman of the Fed under President Clinton, has quite explicitly argued that the Fed should on occasion actively seek to boost employment through lower interest rates. Presumably, this can occasionally result in some uptick in inflation.

Near the beginning, the article cautions that most of its sources were unwilling to be quoted on the record, because they would have to deal with Greenspan's successor, whoever it turns out to be. The policies pursued by the Federal Reserve Board arguably have more influence on the public's well-being than the policies pursued by the President. The overwhelming majority of people affected by Fed policy - including those who are very knowledgeable about Fed policy -- will not have any personal relationship with the Chair that would compromise their ability to speak publicly. An article seriously examining candidates for Fed Chair and their likely policies should have moved beyond this tiny group of insiders and relied on a broader range of sources.