Economic Reporting Review by Dean Baker
March 21, 2005


In This Issue:

•  Outstanding Stories of the Week

•  Social Security

• Bankruptcy Law
• Trade and Development

•  Mexico

• Germany

• Trade

• Saving


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Outstanding Stories of the Week
Social Security: On With the Show
Jim VandeHei and Peter Baker
Washington Post, March 12, 2005, Page A3

This article reports on how the Bush administration stage manages his Social Security forums around the country. According to the article, the guests are selected in advance to ensure that they will be supportive of President Bush's proposal. They also rehearse their comments to make sure that the sessions follow a pre-designed format.
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Social Security

Skepticism of Bush's Social Security Plan Is Growing
Jonathan Weisman
Washington Post, March 15, 2005, Page A1

This article reports on the lack of public support for President Bush's Social Security plan. It notes that the plan enjoys the least support from older workers. It then describes younger workers as the group "who have the most to gain" because they could accumulate the most in their accounts.

Actually younger workers are the ones who stand the most to lose, since cuts will be phased in to hit them hardest. Projections on the benefits from these accounts that use assumptions on stock returns that are consistent with the economic and profit growth projections in the Congressional Budget Office's analysis of Social Security, show that the private accounts will gain back little, if any, of these cuts (see the Accurate Benefit Calculator).
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'01 tax Cuts Were Justified, Greenspan Maintains
Nell Henderson
Washington Post, March 16, 2005, Page E3

Greenspan Defends His Support of Tax Cuts
Edmund L. Andrews
New York Times, March 16, 2005, Page B3

These articles report on testimony by Alan Greenspan in which he defended his advocacy of President Bush's tax cuts in 2001. At the time, Mr. Greenspan argued for the tax cuts, because he claimed to be worried that the surpluses were too large, and that the government would pay off the national debt too quickly without the tax cuts. Mr. Greenspan said that his view of projected surpluses at the time proved to be mistaken, but that most other economists shared his view.

It is worth noting that Mr. Greenspan claims to have been aware of the stock bubble at the time. Economists who recognized the existence of the stock bubble also knew that its collapse would lead to a recession and huge losses in the stock market, both of which would substantially reduce government tax revenue (e.g. see "Double Bubble: The Implications of the Over-Valuation of the Stock Market and the Dollar"). If Mr. Greenspan actually anticipated the collapse of the stock bubble, it is difficult to see how he would have also believed the projections of huge budget surpluses being made at the time.

It is also worth noting that Mr. Greenspan's current rationale for supporting private accounts in Social Security does not seem coherent. He claims to support these accounts because it will make it more difficult to spend Social Security surpluses. There is no obvious relationship between the size of the Social Security surplus and the deficit in the rest of the budget. The largest deficit in the post-war period occurred in 1982 (6.0 percent of GDP), a year in which there was no Social Security surplus. The Social Security surplus peaked (measured as a share of GDP) in 2001, a year in which the rest of the budget was almost in balance. In short, the government has run very large deficits even when there was no Social Security surplus and had balanced budgets, or near balanced budgets, when there was a very large Social Security surplus. There is no evidence whatsoever that the Social Security surplus has promoted larger deficits in the rest of the budget.

Furthermore, President Bush's plan is not projected to go into place until 2009. At that point, the projected annual surplus of Social Security tax revenue (which excludes the interest on the trust fund - which does not reduce the unified budget deficit) is projected to be just 0.7 percent of GDP. This surplus falls to zero in less than a decade, according to the Social Security trustees projections. Relative to the size of recent deficits, the impact of the decision of Congress whether or nor to spend these projected surpluses will be trivial.
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 On Texas Coast, a Laboratory for Private Accounts
Simon Romero
New York Times, March 18, 2005, Page A9

This article discusses the retirement prospects for workers in Galveston, Texas, who are covered by a county retirement plan outside of the Social Security system. The article should have mentioned that these workers should be expected to be faring much better than do workers under Social Security, since they are not sharing in the cost of paying Social Security benefits for the current generation of retirees. If the whole country opted out of Social Security in the same way as Galveston, then the government would be forced to either stop paying Social Security benefits or increase taxes and borrowing by a total of approximately $500 billion per year.

In discussing returns, the article does not indicate clearly whether the returns are real or nominal. At one point, the article reports that the return of the Galveston plan has averaged 6.5 percent since its inception in 1981. If this is a nominal return, it would be approximately equal to the return on the government bonds held by the Social Security trust fund.

At one point, the article discusses the situation of a worker who describes himself as very pleased with the Galveston plan, who intends to retire at age 51, the minimum retirement age allowed under the system. Based on the numbers presented in the article and normal return projections, this worker would have accumulated enough to spend $14,800 a year for a retirement of 30 years, just under 20 percent of his pre-retirement wage as reported in the article. If he lived longer than 30 years in retirement, then he would be destitute. If this worker instead opted to buy an annuity at market prices, then he would be guaranteed a life-long stream of earnings of approximately $12,600, less than 17 percent of current wage.
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 Bankruptcy Law

Bankruptcy, the American Morality Tale
Leslie Eaton
New York Times, March 13, 2005, Section 4, Page 1

This article examines the importance of the new bankruptcy bill being debated by Congress. At one point, the article asserts that "at its broadest, the debate [over the bankruptcy bill] illustrates the clash between competing American values: the right to a fresh start versus the idea that people must be held responsible for their actions."

It is not clear that such values played any substantial role in this debate. The people voting on the bill are politicians, not political philosophers. They gain and hold office by appealing to powerful interest groups. In this case, the credit card industry, and other interests that stand to gain from tightening restrictions on bankruptcy, contributed tens of millions of dollars to the campaigns of politicians who supported this legislation. It is likely that this financial backing was more important in determining the outcome of the bill than the philosophies of members of Congress voting on the bill.

If it were simply a matter of philosophy, the bill would not have included a number of exemptions that will allow wealthy people to escape from being held responsible for their actions through various trust mechanisms or by purchasing expensive homes. Also, this concern for personal responsibility would not have required the bill to be applied to debts already incurred. By applying the new bankruptcy rules to debt already incurred, the bill effectively provides a huge windfall to holders of current debt, since they can now expect to collect a substantially higher percentage of this debt than would have been the case under the old bankruptcy law.

Insofar as there are issues of values at stake in the bill, the most obvious is the extent to which the government should intervene in the economy as the bill collector for private creditors. Historically, loans were usually attached to physical property, such as land, houses or cars. If a debtor failed to make his or her payments, title to this physical asset was turned over to the creditor. This is a simple step that involves the government only once in transferring possession of a deed.

However, debt collection that depends on future earnings capacity involves the government much more deeply in the economy. The government must monitor the debtor's earnings for as long as the debt is outstanding. In this way, the debt collection process is very similar to a tax and it will have similar negative economic consequences. It will discourage work among debtors and will provide substantial incentives for working off the books in order to avoid having wages seized.

In short, those who are philosophically opposed to greater government involvement in the economy would have been opposed to this bankruptcy bill. Those who believe that "people must be held responsible for their actions" could come down on either side. Responsible creditors don't make loans to people who cannot be expected to pay them back. In this case, creditors are asking for the government's help to act as a debt collector to save them from their bad judgment in making loans.
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Trade and Development

Dollar Fall Silences Africa's Garment Factories
Michael Wines
New York Times, March 12, 2005, Page A1

This article reports on the impact that the decline in the dollar and the removal of import quotas on Chinese textiles has had on the textile industry in Sub-Saharan Africa. According to the article, Africa's textile industry, which had been promoted as a path to development, has been devastated by these two developments.

Both of these changes - the decline in the dollar and the removal of quotas on Chinese textiles - were known well in advance. The dollar was, and is, hugely over-valued, as can be easily seen by the fact that the United States is running an unsustainable trade deficit. Any competent economist should have recognized this fact and realized that the value of the dollar would be considerably lower in the future than it was in the years from 1998 to 2002. Similarly, the removal of quotas on Chinese textiles was written into the multi-fiber agreement signed in the early nineties.

If any country in Africa designed development policies without taking these two factors into account, then the people who were designing its policies and giving the country advice were incredibly incompetent. The proper focus of this article should have been on the individuals and institutions who gave such inappropriate development advice and what has happened to them as a result of this failure. In the past, economic advisors who have promoted ill-conceived policies have generally not suffered any consequences as a result of their incompetence.
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Commission on Poverty Seeks a Doubling of Aid
Celia W. Dugger
New York Times, March 12, 2005, Page A3

This article reports on the recommendations of a commission studying development in Sub-Saharan Africa. At one point, it refers to agricultural subsidies in Europe and the United States, which it describes as giving their farmers and "unfair" advantage over African farmers. Whatever the fairness of this policy, its implications for African development are ambiguous, as many studies have shown. While the price of some African agricultural products may be somewhat lower in the world market as a result of these subsidies (as would be the case if U.S. and European agriculture became more efficient), the subsidies make many items cheaper for consumers. For many African countries, the gains to consumers will exceed any loses to farmers.
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Mexico

 The Explosive Mix in Mexico's Politics
James C. McKinley Jr.
New York Times, March 16, 2005, Page A4

This article discusses the prospect that Mexico City's mayor, Manuel Lopez Obrador, could become elected president of Mexico next year. At one point the article raises the prospect that Mr. Lopez might reverse the neo-liberal economic policies that Mexico has pursued over the last fifteen years.

The article describes this economic path as "precious." It is worth noting that these economic policies have lead to virtual stagnation, with per capita GDP growth in Mexico averaging less than 1.0 percent annually over this period. By contrast, in the sixties and seventies, Mexico's per capita GDP growth averaged more than 4 percent annually.
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Germany

As Election Looms, Schroder Seeks Tax Cut and New Spending
Richard Bernstein
New York Times, March 18, 2005, Page A3

This article reports on German Chancellor Gerhard Schroder's plans for corporate tax cuts, along with some additional spending on infrastructure. At one point the article reports that Germany has a 12.6 percent unemployment rate. This statement is based on Germany's measure of unemployment, which counts people working less than 15 hours a week as unemployed. By the U.S. measure of unemployment, unemployment in Germany is approximately 9.5 percent.
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Trade

Trade Gap Widens on Record Imports
Elizabeth Becker
New York Times, March 12, 2005, Page B1

This article reports on the Commerce Department's release of trade data for January, which show the trade deficit running at close to a $700 billion annual rate, or 6 percent of GDP. At one point the article quotes Treasury Secretary Jack Snow's comment that the real problem is that our trading partners need to increase their annual growth rate by 2 percentage points.

While it is not likely that Europe and Japan will increase their growth rates by 2 percentage points, even if they did, it would probably only reduce the U.S. trade deficit by about $50 billion. The real problem is simply that U.S. goods are uncompetitive, given the current value of the dollar.

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Saving

Savings: Lots of Talk, But Few Dollars
Edmund L. Andrews
New York Times, March 13, 2005, Section 3, Page 6

This article discusses the failure of various policies to promote savings. The article neglects to mention the impact of the stock and housing bubbles. There is a large body of research that shows that wealth in the stock market reduces personal savings by 3 to 4 cents on the dollar and that housing wealth reduces savings by 4 to 6 cents on the dollar.

At the peak of the stock bubble in 2000, there was close to $8 trillion in bubble wealth in the stock market. This would be expected to reduce personal savings by between $240 and $320 billion a year. At present, there is more than $4 trillion in bubble wealth in the housing market. This would be expected to reduce personal savings by between $160 and $240 billion a year. Any discussion of the low savings rate in recent years should have noted these bubbles, which are a major cause of the problem.

The article includes a chart that shows savings measured in constant dollars from 1975 to the present. It would have been more helpful to show savings measured as a share of GDP, the economy is more than 150 percent larger in real terms today than it was in 1975.

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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.