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Outstanding Stories of the Week

For Pension Plans Like United's, A Healthy Glow That's Paper Thin
Mary Williams Walsh
New York Times, November 6, 2004, Page P1

This article shows how many companies have been able to use a series of accounting gimmicks to allow their pension funds to appear fully funded, when in fact they were badly under-funded. Such gimmicks allowed United to have a pension fund that appeared fully funded until very recently. It now seems likely that the airline will unload its pension fund -- with more than $6 billion in unfunded liabilities -- on the Pension Benefit Guarantee Corporation.

Slowdown Forces Many to Wander for Work
Greg Schneider
Washington Post, November 9, 2004, Page A1

This article reports on the situation faced by tech workers since the collapse of the tech bubble. It reports that many have been unable to find permanent jobs and have been forced to continually relocate to stay employed.

For Railroads and the Safety Overseer, Close Ties
Walt Bogdanich
New York Times, November 7, 2004, Page A1

This article reports on the close personal and financial ties between major railroad companies and the regulators at the Federal Railroad Administration, which monitors compliance with safety regulations by the railroads.

Pennies That Aren't From Heaven
Gretchen Morgenson
New York Times, November 7, 2004, Section 3, Page 1

This article examines the practice of many companies of reporting earnings that beat analysts expectations by 1 cent. The article notes that this is usually evidence of earnings manipulation, and is often a signal of falling profits in the years ahead.

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Social Security

AARP Opposes Bush Plan to Replace Social Security With Private Accounts
Robert Pear
New York Times, November 12, 2004, Page A18

This article reports on the reaction of the AARP to President Bush's plan to cut Social Security benefits and give workers the option of having private accounts. At one point the article describes the fight over this proposal as "pitting President Bush's vision of an 'ownership society' against the Democrats determination to preserve a cornerstone of the New Deal."

It is not clear that this is the substance of the debate over President Bush's proposal. Concretely, President Bush is proposing large cuts in the guaranteed Social Security benefit that workers would receive under current law. For example, under the most widely cited proposal by President Bush's Social Security commission, a worker who is currently 20 years old would see his or her benefit cut by approximately 40 percent against what is scheduled in current law. They would have the opportunity to make a small portion of this cut back, using assumptions on stock returns that are consistent with profit growth projections.

It is reasonable to believe that opponents of Mr. Bush's proposals are concerned primarily about the large cuts in benefits that future retirees face, and that Mr. Bush's main motivation is to bring about the cuts outlined in his proposal. Proposed policy changes should be characterized by what such policies will do, rather than the motives claimed the by politicians advocating them

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Taxes

Big Tax Plans, Big Risks
Richard W. Stevenson 
New York Times, November 8, 2004, Page A1

This article discusses the possibility that President Bush will try to replace the current progressive income tax system with a flat tax or national sales tax. The article repeatedly asserts that such a switch would involve an ideological battle over the principle of progressive taxation. It presents no evidence whatsoever to support this position.

A switch to a flat tax or a national sales tax will mean increases in taxes on the middle class in order to reduce taxes for the rich. While this point is noted in the article (and not contradicted by any source cited), the article nonetheless asserts that opposition to such a switch is based on ideology.

The most obvious reason that people would oppose a flat tax or national sales tax is that they do not want to see a tax increase on middle-income taxpayers. Unless there is evidence to the contrary it is reasonable to assume that opposition to this tax switch is rooted in an interest in avoiding a tax increase on middle-income families.

The article also includes an assertion that opposition to a flat tax or national sales tax will put Democrats "in a bind" because it will leave them defending the Internal Revenue Service. Any tax will require an agency to be responsible for its collection. It is not clear that people would feel more positively disposed toward such an agency if it carried a different name.

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The Market and the Environment

G.O.P. Plans to Give Environmental Rules a Free- Market Tilt
Felicity Barringer and Michael Janofsky
New York Times, November 8, 2004, Page A14

This article discusses the Republican agenda for environmental regulation in the wake of the election results. None of the information in the article supports the assertion in the headline that the Republicans are moving towards more market oriented regulation. Rather, the main thrust of most of items discussed in the article is that the Republicans intend to weaken regulation, allowing more pollution and fewer restrictions on drilling and mining. This simply means weaker protection of the environment, not a "free-market tilt."

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Job Growth and Productivity

October Hiring Set Strong Pace of 337,000 Jobs
Eduardo Porter
New York Times, November 6, 2004, Page A1

This article reports on the Labor Department's release of employment data for October. At one point it notes that productivity growth in the third quarter was reported at 1.9 percent, the lowest rate in two years. It is worth noting that this figure is likely to be revised down by 0.1 to 0.2 percentage points based on data in this report, which showed more rapid job growth in August and September than had previously been reported. Since productivity is the ratio of output to hours worked, data showing that the number of hours worked in the third quarter is higher than previously reported will lead to a lower measure of productivity.

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The Dollar and Stock Prices

Dollar Hits Low Against the Euro
Paul Blustein
Washington Post, November 6, 2004, Page E1

Dollar Skids, Despite Stock Rally and a Strong Jobs Report
Jonathan Fuerbringer
New York Times, November 6, 2004, Page B1

These article reports on the dollar's fall to a new record low against the euro. At one point the Times article asserts that "a further decline in the dollar may be a drag on stocks by discouraging foreigners from buying equities in the United States." Actually, the opposite should be true. As long as foreigners fear that the dollar may decline, they have reason not to buy stock in the United States, since a fall in the dollar would lower their returns. However, once the dollar has fallen substantially, they have less reason to believe that it will fall further, so U.S. stocks should be more attractive. In other words, foreign investors fear a falling dollar, not a dollar that is low in value.

The Post presents a warning from former Treasury Secretary Lawrence Summers that a sharp decline in the dollar could lead to higher interest rates and a recession. It would have been worth noting that Mr. Summers helped lay the basis for this scenario by actively promoting a high dollar during his tenure as Treasury Secretary. The over-valued dollar has led to a large and unsustainable trade deficit. The only way for this deficit to be corrected is with a sharp decline in the dollar and/or a recession.

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The Economy and Interest Rates

Federal Reserve Bumps Up Key Rate
Nell Henderson
Washington Post, November 11, 2004, Page E1

This article reports on the Federal Reserve Board's decision to raise interest rates by one quarter percentage point to 2.0 percent. At one point it lists a number of factors that are likely to affect the economy's strength in the months ahead. There were two very important factors not included on this list.

First, there has been an investment tax credit in place for the years 2002-2004 that expires in two months. This means that firms have a strong incentive to invest now rather than in 2005. As a result, many firms have probably moved their investment plans forward, which means that there could be a substantial falloff in investment at the beginning of 2005.

The second important factor is that the U.S. savings rate, measured as a share of disposable income, is currently at an all-time low of 0.4 percent. The savings rate is typically close to 8.0 percent. With most of the baby boom cohort still in their peak earning years, the savings rate should be somewhat higher than normal. If the savings rate begin to move back to more normal levels it would lead to a falloff in consumption and therefore a downturn in demand.

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Patents

After Criticism, FDA Will Strengthen Drug Safety Checks
Marc Kaufman and Brooke A. Masters
Washington Post, November 6, 2004, Page A12

F.D.A.'s Drug Safety System Will Get Outside review
Gardiner Harris
New York Times, November 6, 2004, Page A9

This article discusses the problems with the Food and Drug Administration's (FDA) drug review process. Specifically, both articles note concerns that powerful drug companies have been able to influence the process to get favorable treatment for their drugs.

It would have been appropriate to note the way in which government-enforced patent monopolies contribute to this problem. The fact that patent protection allows firms to earn monopoly profits on their drugs gives them an extraordinary incentive to interfere with the review process. This interference can take the form of lobbying and harassing FDA officials and offering various forms of payments to the scientists who are expert consultants on reviews. The drug companies would have far less incentive to engage in this sort of behavior if new drugs were sold in a competitive market without government-enforced patent monopolies.

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The Federal Aviation Authority

F.A.A. Faced With Aging of Computers and Staff
Matthew L. Wald
New York Times, November 9, 2004, Page A12

This article reports on the problems facing the Federal Aviation Administration (FAA) due to old computers and a staff of air traffic controllers that is approaching retirement age. At one point the article reports that the FAA may not have the revenue needed to finance the air traffic control system in part because airlines are shifting to smaller planes. Since the tax that supports the FAA is applied on a per passenger basis, the use of smaller planes means that there is less revenue for each plane the FAA must guide.

The obvious solution to this problem is to apply the tax on a per plane basis, since the expense to the FAA is largely the same, regardless of the size of the plane. It would have been helpful to have included the view of an economist who could have made this point.

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Germany

In Berlin Wall's Dust, Germany Flounders
Craig Whitlock
Washington Post, November 9, 2004, Page A11

This article discusses the current economic and political situation in Germany. At one point it reports that one in ten Germany workers is unemployed. Actually the unemployment rate is closer to one in eleven using the U.S. measure of unemployment.

Under Germany's measure of unemployment, many part-time workers are counted as unemployed. In contrast, in the United States any worker who works at least one hour a week is counted as being employed. It is also important to note that the unemployment rate in the former East Germany is still close to 20 percent. The unemployment rate (by the U.S. measure) in former west Germany is less than 7 percent, not hugely higher than the rate in the United States.

The article also includes an assessment of a proposal by German Chancellor Gerhard Schroeder to reduce the number of national holidays by one. According to the article, this loss of leisure time would raise the GDP growth rate by 0.1 percent. It is difficult to see why the loss of a holiday would raise the growth rate. The obvious effect of one additional day of work per year would be a one-time increase in GDP of approximately 0.4 percent (assuming an average work year of 225 days). After the initial increase, there is no reason that the future growth rate would be affected. Of course, since this increased output comes at the expense of leisure time, there is no obvious economic gain associated with this policy.