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Outstanding Stories of the Week

A Coming Nightmare of Homeownership?
Gretchen Morgenson
New York Times, October 3, 2004, Section 3, Page 1

This article examines the prospect that Fannie Mae and Freddie Mac may run into serious financial problems if there is a downturn in the housing market. This in turn could jeopardize the functioning of the secondary mortgage market, thereby crippling the housing industry.

Financing Gap Is Widening For Rich and Poor Schools
Greg Winter
New York Times, October 6, 2004, Page A15

This article reports on a new study by the group Education Trust, which found that the per pupil financing gap between rich and poor school districts has been growing in recent years.

Lead Levels in Water Misrepresented Across U.S.
Carol D. Leonning, Jo Becker, and David Nakurma
Washington Post, October 5, 2004, Page A1

This article reports on evidence that many cities across the country have been provided authorities and the public with false data on lead levels in their drinking water. This has concealed the fact that lead levels in many cities exceed regulatory limits.


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Job Creation

Which Version of Jobs Data Do You Want
Jonathan Fuerbringer
New York Times, October 2, 2004, Section 3, Page 8

This article reports on the gap between the Labor Department's survey of establishments, which shows a loss of more than 900,000 jobs during the Bush administration, and its household survey, which shows an increase in the number of employed persons of more than 2 million. The article implies that the difference between these surveys creates confusion about the true employment situation. For example, at one point it comments that "it's hard for them [economists] to figure what to make of the much different job picture that the current population survey is presenting."

This is not true. Virtually all credible economists recognize the establishment survey as the better measure of employment. The household survey is designed to measure the percentage of the workforce that is employed or unemployed. It is not designed to measure the total number of people working. It is comparable to a public opinion survey - such surveys can tell us the percentage of the electorate that will vote for Bush and Kerry, but they cannot tell us the number of people who will actually turn out to vote for either Bush or Kerry.

The inaccuracy of the household survey as a measure of job growth is well known to economists. The household survey understated job growth by more than 4 million between 1994 and the end of 1999.

Furthermore, the job growth data in the establishment survey follows closely the pattern of payroll tax collections over the last four years. Payroll tax (Social Security and Medicare taxes) collections provide a completely independent source of data that directly covers almost the entire working population.

Given the universally recognized superiority of the establishment survey as a measure of job growth, and the corroboration of its job growth data by payroll tax collections, there is absolutely no basis for implying that the household survey provides a credible alternative perspective on job growth. While a small number of economists allied with the Bush administration have made this argument, these claims have the same standing as claims by scientists employed by the tobacco industry that cigarette smoking is not harmful. While powerful interest groups will always be able to pay "experts" to support their positions, such positions do not deserve to be treated as credible, if there is no evidence to support them.


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The Economy

The American Dream Is at Risk, Kerry Says
Jim VandeHei
Washington Post, October 3, 2004, Page A8

This article reports on a campaign speech by Democratic presidential nominee John Kerry. At one point the article contrasts the debate over the economy with the situation in Iraq, asserting that "unlike the debate over Iraq … Bush enters the fray over the economy armed with several upbeat statistics."

It is far from clear that the economic situation provides a better picture for President Bush than the situation in Iraq. President Bush is the first president to actually lose jobs during his term in office - normally the economy would be expected to generate 7 to 8 million jobs over a four year period. Real wages have been falling in the last year, while poverty and the number of uninsured has been growing. While there are some positive statistics, it would be difficult to imagine a situation in which this was not the case. Of course, President Bush can point to the removal of Saddam Hussein as a success of his Iraq policy, so that has not been a total failure either.

Misleading Assertions Cover Iraq War and Voting Record
Glenn Kessler and Jim VandeHei
Washington Post, October 6, 2004, Page A15

This article reports on some of the inaccurate or misleading statements by the candidates in the vice-presidential debate the prior night. One of the claims that the article corrects is the assertion by Senator John Edwards that the economy had lost 1.6 million private sector jobs under the Bush administration. The article asserts that "the actual number is close 900,000."

In fact, Senator Edwards statement is exactly right. According to the Bureau of Labor Statistics survey of establishments, the number of private sector jobs fell by 1,650,000 during the Bush years, going from 111,560,000 jobs in January of 2001 to 109,910,000 jobs as of August of 2004, the most recently available data at the time of the debate. The 900,000-job loss noted in the article refers to total jobs, which includes government employment. It is common for economists to focus on trends in the private sector alone, as Senator Edwards did in the debate.

The article also challenged Mr. Edwards assertion that due to the Bush administration's tax cuts, millionaires sitting by their pools will pay taxes at a lower rate than the soldiers in Iraq. The article comments that most of the soldiers in Iraq will pay taxes at a 15 percent rate, the same rate as millionaires now pay on stock dividends, but that the effective rate is lowered by deductions for mortgage interest and other items.

Again, Mr. Edwards' statement is essentially accurate. While most soldiers pay tax at a 15 percent rate, a substantial minority (especially among those with a working spouse) pay tax at a 25 percent rate. Furthermore, it is common to refer to the marginal tax rate, not the average, in which case deductions are irrelevant. (The vast majority of taxpayers in the 15 percent bracket take the standard deduction in any case.)


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Bush on the Economy

President Has Aggressively Pursued "Pro-Growth Policies" Nurtured in the Texas Oil Fields
Richard W. Stevenson
New York Times, October 8, 2004, Page A18

This article discusses President Bush's approach to economic policy. At one point the article asserts that President Bush sought to reduce the role of government with his plans to partially privatize Social Security. This is not clear.

The president never endorsed a specific proposal. His commission produced several different proposals, all of which would have left the bulk of the program in place. In addition, the Bush plan would have created a new government bureaucracy that would oversee the government-mandated savings accounts that would replace a portion of the current Social Security program. This new bureaucracy would both act to ensure that workers and firms made the mandated contributions and also monitor the investments made by the accounts, to ensure that they met certain standards. It is not clear that this would reduce the role of government as compared with the current Social Security system.


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China

China at G-7 Meeting for First Time
Paul Blustein
Washington Post, October 2, 2004, Page E1

China Promises Currency Shift but Gives No Date
Elizabeth Becker
New York Times, October 2, 2004, Page B1

These articles discuss China’s role as a participant at the G-7 meeting of finance ministers. At one point, the Post article describes China as the world's seventh largest economy, and reports that its per capita income places it just above El Salvador. This assessment is based on a currency conversion measure of GDP - converting the GDP into dollars using the current exchange rate.

Economists typically use a purchasing power parity measure of GDP for this purchase. This measure prices all goods and services at the same price, regardless of the country in which they are produced. By this measure, China's per capita GDP places it near the top countries in Latin America. Its total GDP is by far the second largest in the world, at more than 60 percent of U.S. GDP. If China's economy was in fact the seventh largest economy in the world (an honor that belongs to the United Kingdom), it would not be such a large concern at the G-7 meetings.

The Times article includes a discussion of the possibility that China will re-value its currency, which would have the effect of making its exports more expensive to the rest of the world and making imports cheaper for people in China. The article presents the assessment of one China expert that this policy would cause hardship to China's poor, since it would reduce employment in China's factories.

There is no obvious reason that this would be the case. If China re-valued its currency, the availability of lower-priced imports would improve living standards in general. In addition, the hundreds of billions of dollars that China's central bank is currently spending in international currency markets to keep the value of its currency down, could instead be spent domestically. This money could be used to build up infrastructure or pay for an improved education and health care system. Such spending would both create employment and improve living standards.


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Trade

Farm Revolution Stops at Subsidies
Dan Morgan
Washington Post, October 3, 2004, Page A3

This article reports on the current status of federal farm subsidy programs. It includes a series of statements related to farm subsidies and the market that are inaccurate.

For example, it comments that the Republican takeover of Congress in 1994 led to a drive "toward unfettered markets." Actually, the Republican Congress has repeatedly sought increased government intervention when it benefited their allies. Such interventions have included enhanced copyright and patent protection, both domestically and internationally, greater restrictions on the entrance of foreign doctors in the United States, and government controls on the types of contracts that plaintiffs could sign with their lawyers. While Republicans have often used the rhetoric of a "free market" to advance their agenda, they have clearly not pursued free market policies.

The article also includes the assertion that "farm subsidies are America's largest corporate welfare program." This is clearly not true. The government pays approximately $20 billion a year in subsidies to farmers. Its supply restrictions may increase farmer's income by two or three times as much. However, the patent monopolies that it grants to the drug industry raise drug prices by more than $140 billion a year. Therefore the drug industry ranks higher as a recipient of corporate welfare.

Bush Enacts Fourth Tax Cut
Jim VandeHei
Washington Post, October 5, 2004, Page A8

This article reports on President Bush's signing of a new tax cut bill. At one point it discusses Bush and Kerry's positions on trade and says both like to portray themselves as free traders.

It is worth noting that both Mr. Bush and Mr. Kerry are ardent opponents of free trade. Both support professional restrictions and quotas that protect highly paid professionals like doctors and lawyers from foreign competition. They also support maintaining and increasing patent and copyright protection that raise the price of prescription drugs and recorded music and video material far above the competitive market price.

In general, Bush and Kerry only favor trade liberalization in areas where it puts downward pressure on the wages of less skilled workers, most importantly in the trade of manufactured goods. It is inaccurate to call them free-traders based on this very limited support for trade liberalization.


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Corporate Tax Cut Bill

Tax-Cut Bill Draws White House Doubts
Jonathan Weisman and Marc Kaufman
Washington Post, October 5, 2004, Page A4

Initiative by Bush On the Income Tax has Innate Conflicts
Edmund L. Andrews
New York Times, October 6, 2004, Page C1

These articles discuss various tax provisions, focusing in particular on a change in the corporate tax code being debated by Congress. This proposed change would reduce corporate tax liability by approximately $145 billion over the next decade. It would be helpful if this figure were expressed as a share of projected revenue over this period (0.5 percent) or baseline corporate tax revenue (5.6 percent), since few readers have the ability to discern the significance of this figure.

The Times article also includes a reference to the alternative minimum tax (AMT), noting that the current structure of the tax will lead to a large increase in taxes for middle income families, unless the tax is adjusted for the effects of inflation. The article then points out that such an inflation adjustment would be expensive.

The inflation adjustment is only expensive if one envisions a counter-factual in which taxes are raised substantially on the segment of middle-income families affected by the AMT. If the counter-factual assumes that taxes on this group are not raised, then there is no cost associated with preventing this tax increase from occurring.