You can sign up to receive ERR and other CEPR e-newsletters at the CEPR Listserve Signup Page. You can find the latest ERR at the Economic Reporting Review Main Page. All ERR prior to August 2000 can be found at Fair.org.

Links to both New York Times and Washington Post articles require registration. To sign up for these free services, go to the NY Times Sign-up Page and the Washington Post Registration Page.


Outstanding Stories of the Week

Soaring Interest Compounds Credit Card Pain for Millions
Reported by Patrick McGeehan, Lowell Bergman, Robin Stein and Marlena Telvick and written by Mr. McGeehan
New York Times, November 21, 2004, Page A1

This article reports on practices of credit card companies that often impose serious hardships on customers. For example, they often impose large late fees for even being a single day late with a payment. They can also raise the interest rate charged on outstanding balances at any time.

Borrowers Find System Open to Conflicts, Manipulation
Alec Klein
Washington Post, November 22, 2004, Page A1

This article is the first of a three part series, that provides a detailed examination of the importance of the three major credit rating agencies (Moody's, Standard & Poor's, and Fitch) and their manner of operation. The article notes how they often operate with incomplete or inaccurate information and often have apparent conflicts of interests that could affect their assessments

China Widens Economic Role in Latin America
 Larry Rohter
New York Times, November 20, 2004, Page A1

This article reports on a set of trade and investment agreements that China has recently signed with several Latin American agreements. With China's market growing rapidly and the U.S. import market projected to shrink over the next decade, China is rapidly surpassing the United States as the major economic power in the region.

Back to Top of Page


The Euro and the Dollar

Greenspan Sees No Rise Soon For the Dollar
 Mark Landler
New York Times, November 20, 2004, Page A1

This article discusses the recent fall of the dollar against the euro and other major currencies. At one point it reports on a speech by Federal Reserve Board Chairman Alan Greenspan in which he reportedly said that raising domestic saving by reducing the federal budget deficit would be a better way to bring down the current account deficit than through a decline in the dollar.

Actually, according to standard economic theory, reducing the federal budget deficit would bring down the current account deficit by reducing the value of the dollar. The basic argument is that a large budget deficit in the United States leads to higher interest rates, which in turn raises the value of the dollar. Apart from its effect on the dollar, there is no direct way in which the budget deficit affects the current account deficit.

At one point, the article quotes Thomas Mayer, the chief economist at Deutsche Bank as saying that there is nothing the European Central Bank (ECB) can do about the rise in the euro against the dollar. Ordinarily, a central bank would combat an unwanted rise in the value of its currency by lowering interest rates. The article provides no explanation as to why the ECB is not considering a rate reduction. A reduction in interest rates would seem to be especially appropriate at the moment since the higher euro is lowering import prices, reducing the limited inflationary pressures currently being experienced in the euro zone. If there is some reason that the ECB has ruled out a cut interest rates, the article should have mentioned it.

U.S. Promises To Cut Deficit To Help Dollar
 Reuters
New York Times, November 22, 2004, Page C2

This article reports by a speech by Treasury Secretary John Snow, in which he said that the United States would reduce its budget deficit to help support the dollar. It is worth noting that, according to standard economic theory, reducing the budget deficit should lower the dollar further, not increase its value.

According to standard theory, higher budget deficits lead to higher interest rates in the United States. Other things equal, higher interest rates will make it more attractive to hold dollar-denominated financial assets, such as U.S. government or corporate bonds. Since more investors will opt to hold dollar denominated assets, this will push up the value of the dollar, which worsens the current account deficit. This is the standard "twin deficits" view that purported to explain how the high budget deficits in the eighties lead to high trade deficits.

It is not clear how a lower budget deficit could possibly lead to a stronger dollar. If budget deficits get very large, then investors might flee U.S. financial assets because they will be worried about the ability of the government to pay its debt and a possible collapse of the U.S. economy. This sort of capital flight has been experienced by many developing counties.

However, this process clearly does not explain the present decline in the dollar. The current interest rate on ten-year government bonds is just 4.2 percent, only 1.2 percentage points above the rate of inflation. Historically, the interest rate of ten-year bonds has averaged more than 3.0 percentage points above the rate of inflation. If investors really feared the ability of the U.S. government to repay its debt, there is no way that they would be willing to hold long-term bonds for such a small real return. At least at the moment, investors have no concerns about the ability of the U.S. government to meet its debt obligations.

Back to Top of Page


Social Security

Republicans Finding Ways To Account For Overhaul
Jonathan Weisman
Washington Post, November 23, 2004, Page E1

This article reports on plans by Republican proponents of Social Security privatization to change the accounting rules for the budget, so that the borrowing necessary to finance the transition is not counted as part of the national debt. At one point the article describes the Social Security program as "ailing."

According to the Social Security trustees, the program can pay all scheduled benefits through the year 2042 with no changes whatsoever. A separate analysis by the non-partisan Congressional Budget Office projects that it can pay all benefits through the year 2052 with no changes. Both projections indicate that the program is in far better financial shape than has been true through most of its existence.

Back to Top of Page


Drug Safety

Idea of Drug Safety Office Is Already Hitting Snags
Sheryl Gay Stolberg
New York Times, November 25, 2004, Page A25

This article reports on the opposition to the creation of an independent office of drug safety in the Food and Drug Administration (FDA). In discussing the debate over these issues, it would have been appropriate to note the importance of the patent system in creating this problem. If drug companies did not stand to gain monopoly profits as a result of selling drugs at patent protected prices, then they would not have the same incentive to conceal or distort research findings, and obstruct independent efforts by the FDA to evaluate drug safety (see "Do New Drugs Always Have to Cost So Much?," New York Times, 11-14-04; Section 3, Page 5).

Back to Top of Page


Environmental Restrictions and Property Rights

Property Rights Law May Alter Oregon Landscape
Felicity Barringer
New York Times, November 26, 2004, Page A1

This article reports on a referendum approved by Oregon's voters that requires the government to compensate property owners, if it can be shown that environmental restrictions reduced the value of their property. The article does not indicate how it would be determined under the law whether environmental measures damaged property values.

The article only discusses ways in which such restrictions reduce property values, for example by limiting the ability of property owners to subdivide land for suburban housing. However, environmental restrictions also increase the value of land, for example by preventing highly polluting slaughterhouses from being operated in residential areas.

The environmental restriction that appears to have caused the most anger among property owners - a law restricting suburban development to a ring around Portland's city limits - has likely contributed to making Portland a more attractive city, and therefore contributed to the growth of the region. If the law does not take the beneficial effects of regulations into account in assessing damages, it means that property owners are insisting that the state compensate them for any costs associated with restrictions, while allowing the property owners to pocket all the benefits. This implies a substantial transfer from the state as a whole to a subgroup of property owners.


Back to Top of Page


Germany

Demographic Time Bomb Threatens Pensions in Europe
Alan Cowell
New York Times, November 26, 2004, Page A3

This article reports on future of European pension systems. Many of the assertions in the article are inaccurate or contradictory.

For example, it refers to the "baby boom generation" in Europe. Actually, there is no baby boom generation in Europe. There was no surge in the birth rate in Europe comparable to the surge in the United States over the years 1946 to 1964. For this reason, Europe's public pension systems will actually see a much more gradual increase in spending than the U.S. system. In addition, since European countries provide health care for their whole population, and not just those over age 65, and health care costs less than half as much per person in Europe, European governments will not face the burden of suddenly paying health care costs for a large number of people turning age 65.

The article also cites projections that the ratio of workers to retirees will fall. It also notes that many European countries currently have high unemployment rates. The first problem is one of not having enough workers, while the second problem suggests that there are too many workers. Both problems cannot exist at the same time. If the aging of the population leads to shortages of workers, then the high levels of unemployment in countries like France, Italy, and Germany, indicate that the shortage can be alleviated for a long period of time by drawing from the currently unemployed population. Over the longer term, projected rates of productivity growth imply that both workers and retirees will enjoy higher living standards, even as the ratio of workers to retirees falls -- as has been true in the past.


Back to Top of Page

Coal and Global Warming

Fuel of the Future? Some Say Coal
Simon Romero
New York Times, November 20, 2004, Page B1

This article examines the prospects of coal as a fuel to meet growing electricity demand. While it notes some of the environmental hazards of coal, it never mentions its impact on global warming. Per unit of energy, coal emits far more greenhouse gases than any other major energy source.


Back to Top of Page

The Budget

Accord Is Near on $388 Billion in Federal Spending Bill
Dan Morgan
Washington Post, November 20, 2004, Page A4

This article reports on negotiations over a major budget bill. At one point the article notes that bill targets all covered appropriations with 0.75 percent cut. Since inflation is equal to approximately 3.0 percent, this implies a real cut in spending of 3.75 percent.

Congress Agrees on Tight Budget for U.S.
Dan Morgan and Helen Dewar
Washington Post, November 21, 2004, Page A1

Spending Bill in Hand, Congress, Departs
Carl Hulse and Sheryl Gay Stolberg
New York Times, November 21, 2004, Page A18

Call it Pork or Necessity, but Alaska Comes Out Far Above the Rest in Spending
David E. Rosenbaum
New York Times, November 21, 2004, Page A20

Lawmakers' Favored Projects From Home States Lay Deep Inside $388 Billion Spending
Bill Robert Pear
New York Times, November 24, 2004, Page A19

These articles report on Congressional approval of a spending bill that will provide funding for most of the domestic discretionary portion of the budget. The articles report on spending for a number of programs, but express the sums in dollar terms. It would be more informative to readers if the expenditures were expressed as a share of the total budget, since few readers are sufficiently familiar with the budget to know the importance of a specific dollar amount.

This problem is especially serious in instances in which budget items cover several years. For example a chart accompanying the Hulse and Stolberg article refers to a $137 million cut in corporate taxes, without noting that this cut covers a ten-year period. This cut accounts for approximately 0.5 percent of projected revenue over this period. The chart also includes a reference to a $256 billion transportation bill without pointing out that this appropriation covers a five-year period. It is equal to approximately 2.0 percent of projected spending over this period.

All four articles comment at length about a series of earmarked appropriations that were highlighted by several groups combating government waste. It would be especially helpful to note the share of the budget devoted to these items. For example, the $1 million earmark for developing technology to convert animal waste to energy is equal to 0.0004 percent of total spending. The $150,000 for fencing at a Kentucky airport is equal to 0.00006 percent of spending. And the $25,000 for the study of mariachi music is equal to 0.00001 percent of federal spending. While it is appropriate to call attention to pork barrel spending, it is important that readers not be wrongly led to believe that such spending is major factor in government deficits.


Back to Top of Page

Trade

Bush, in Colombia, Promises More Aid
David E. Sanger and Juan Forero
New York Times, November 23, 2004, Page A3

This article reports on a visit by President Bush to Columbia. At one point it reports that Columbia is negotiating a "free trade" agreement with the United States. In fact, this agreement will not move towards freer trade in all areas. The United States is seeking to increase some protectionist barriers in this agreement, most importantly by strengthening patent and copyright protections. It would be more accurate to simply refer to the deal as a "trade" agreement, or even a commercial agreement, since some of the most economically important provisions, e.g. concerning investment and intellectual property, impact much more than trade.