Economic Reporting Review
 By Dean Baker
March 28, 2005

In This Issue:

•  Outstanding Stories of the Week

•  Social Security

•  Trade

•  France

•  Military Recruitment

•  Immigration


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Outstanding Stories of the Week

Trading Places: Real Estate Instead of Dot-Coms
Motoko Rich and David Leonhardt
New York Times, March 25, 2005, Page A1

This article examines the similarity between the current interest of speculators in the real estate market and the pattern of stock trading at the height of the Internet bubble in the last nineties.

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Retirement Accounts Questioned
Jonathan Weisman
Washington Post, March 19, 2005, Page E1

This article examines the assumptions that the Bush administration is using on the rates of return that workers will get in their individual retirement accounts. It reports the views of several experts that the returns will be far lower than the administration has projected, and that many workers will likely be worse off if they take an account, then if they don't, under President Bush's proposal. It is worth noting that the Social Security Administration has repeatedly refused to explain how it derives it projections for stock returns (based on dividend yields and capital gains) in spite of numerous requests from members of Congress and policy analysts.

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G.O.P. Courts Blacks and Hispanics on Social Security
Edmund L. Andrews
New York Times, March 20, 2005, Page A21

This article reports on President Bush’s efforts to gain support from blacks and Hispanics for his Social Security agenda. It presents evidence showing that these groups benefit disproportionately from the current system.

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What? They Never Heard of WorldCom?
Gretchen Morgenson
New York Times, March 20, 2005, Section 3, Page 1

This article discusses evidence that companies are using accounting tricks to exaggerate their earnings. It notes that the ratio of operating earnings to accounting earnings has been rising sharply in recent quarters.

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Social Security

In Texas, A Model For Bush Proposal
Michael A. Fletcher
Washington Post, March 19, 2005, Page A1

This article reports on the retirement system for government workers in Galveston, Texas, which is often held up as a model for a privatized Social Security system. In making comparisons between the Galveston system and the existing Social Security system it is important to note that the existing system is paying benefits for the current generation of retirees.

If the whole country were to effectively "opt out" of Social Security, as have the government employees in Galveston County, then 40 million Social Security beneficiaries would not be getting checks. In order to continue these benefit payments, it would be necessary to have a separate tax (which could take the form of borrowing, at present). The return on this tax is minus 100 percent. Anyone analyzing a privatized system would have to average the return on the money placed directly into the system and the minus 100 percent return on the tax necessary to maintain benefits for current retirees.

It would have been helpful to present information on the administrative costs of the Galveston system relative to Social Security. According to the Government Accountability Office, the administrative costs of the Galveston system are about 30 times as high as the administrative costs of the Social Security system.

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Act Now On Social Security, Bush Says
Michael A. Fletcher
Washington Post, March 19, 2005, Page A11

Stumping on Social Security, Bush Gets Motherly Help
Elisabeth Bumiller
New York Times, March 19, 2005, Page A8

These articles report on forums in Florida where President Bush promoted his Social Security agenda. Both articles report that President Bush's mother spoke at these forums and expressed concern about her grandchildren's Social Security benefits, if nothing is done.

It is worth noting that her grandchildren would receive higher benefits if no changes are ever made to the program than if the proposal from President Bush's Social Security commission (Plan 2) is implemented. The switch from wage indexation to price indexation that is at the heart of this proposal would reduce benefits far below the level that is projected to be payable under the current system, even if nothing is ever done.  

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How to Get Young People to Care About Old Age 
Damien Cave
New York Times, March 20, 2005, Section 4, Page 3

This article reports on the lack on interest that young people have shown in President Bush's plan to privatize Social Security. The article suggests that the lack of interest is due to the fact that young people have difficulty thinking about their old age.

While this may be true, their lack of interest may also be attributable to the fact that young people would likely face the largest benefit cuts from privatization. Plan 2, which was produced by President Bush's Social Security commission and modeled in the 2003 Economic Report of the President, phased in benefit cuts. While workers over age 55 were protected, workers in their twenties would see their benefits cut by close to 30 percent compared with the currently scheduled benefit. This prospect could explain young people's lack of support for President Bush's Social Security plan.

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Cheney Joins the Social Security Campaign
Jim VandeHei
Washington Post, March 22, 2005, Page A5

This article reports on a speech where Vice President Dick Cheney promoted President Bush's Social Security agenda. At one point the article reports that Mr. Cheney raised the prospect that retirees will be faced with smaller benefits in the future if Social Security is not reformed.

Actually, there are no projections whatsoever that show future retirees ending up with lower benefits than current retirees, even if the program is not able to pay full scheduled benefits at some future point. For example, the Social Security trustees project that the payable benefit in 2050 will be approximately 10 percent higher on average than the benefits received by current retirees. The Congressional Budget Office projections show that the payable benefit in 2060 will be more than 50 percent higher than current benefits.

By contrast, Plan 2 put forward by President Bush's Social Security commission would substantially reduce benefits from the currently scheduled level. In fact, the benefit provided under this proposal would be considerably lower than the payable benefit if nothing is ever done to reform Social Security. In other words, President Bush's proposal is likely to lead to far larger benefit cuts than leaving Social Security alone.

Cheney is also quoted making predictions about future stock returns based on their past performance. The Social Security projections show the economy growing much more slowly in the future than in the past. This is the only reason that the program is projected to face a shortfall. If the projections of slow economic growth prove correct, then the returns on stock will be much lower in the future than in the past. Presumably, Mr. Cheney is aware of this fact.

The article includes a statement by Representative Bill Thomas, the chairman of the Ways and Means Committee, that "raising payroll taxes is of little utility in solving the long-term solvency problems." This is not true. The long-term solvency problem can easily be solved with an increase in the payroll tax - the Social Security trustees projections show that a tax increase that is approximately three quarters as large as the increase in the eighties would be sufficient to make the program fully solvent over its 75-year planning horizon. According to the CBO projections, a tax increase that is less than half as large as the one in the eighties would be sufficient to make the program full solvent over its planning horizon.  

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Bush Warns Democrats About Opposing Accounts
Michael Fletcher and Jim VandeHei
Washington Post , March 23, 2005, Page A3 

This article reports on talks by President Bush and Vice President Dick Cheney to promote the administration's Social Security agenda. At one point the article asserts that Social Security's "core problem" is that benefit payments are projected to surpass benefits by 2018.

This is wrong. The fact that annual benefit payments may surpass revenue is not a problem at all for Social Security. This is exactly the way the program was designed. In 1983, the Greenspan commission deliberately set the tax rate at a level above what was necessary to meet current benefits with the idea of building up a surplus to help defray the cost of the baby boomers retirement.

The whole point of running large surpluses to build up the trust fund - which will exceed $3.6 trillion (in today's dollars) by 2018 -- was to cover the projected annual shortfalls in subsequent years. Under the law, the shift from annual surpluses to annual deficits poses no problem at all for Social Security, as long as there is money in the trust fund. Many proponents of privatization have tried to highlight this date in an effort to create fear about Social Security's future, but unless Congress votes to default on the government bonds held by the trust fund, 2018 has no meaning whatsoever for Social Security.

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Bush Opens Door to Changes in His Plan
Anne E. Kornblut
New York Times, March 23, 2005, Page A13  

This article reports on the possibility that President Bush may change his Social Security proposal in various ways. At one point the article describes the Social Security system as "ailing." This is inaccurate. The most recent projections from the Social Security trustees show that the system can pay all benefits for the next 36 years with no changes whatsoever. The projections from the non-partisan Congressional Budget Office show that it can pay all benefits for 47 years. Both sets of projections imply that the system is in much sounder shape than it has been through most of its existence.  

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Vibrant Cities Find One Thing Missing: Children  
Timothy Egan
New York Times, March 24, 2005, Page A1

This article examines the situation facing some cities who are having problems attracting families with children. At one point it presents a quote from a writer, Phillip Longman, who raises the possibility that declining birth rates will reduce "human capital."

There is no plausible scenario in which lower birth rates will reduce human capital in any meaningful sense. At present only a minority of the U.S. population receives a college education and a very small minority gets a post-graduate education. The percentage of the world's population that receives an advanced education is tiny. It will be easy to get as many skilled workers as necessary by providing higher education to a larger portion of the population, even if the population were to decline substantially from current levels.

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Medicare Outlook Called Direr Than Social Security's
David E. Rosenbaum
New York Times, March 24, 2005, Page A15
Published online with title "Report Says Medicare is in Poor Fiscal Shape"

This article reports on the release of the 2005 trustees reports for Social Security and Medicare. The article notes that the new reports show that Medicare's finances are in far worse shape than Social Security's. It would have been useful to note that this is due to excessive cost inflation in the U.S. health care system. The United States pays more than twice as much per person for health care as the average for other rich countries, yet has worse health outcomes. If the U.S. health care system were more like those in other countries, Medicare's costs would not pose a serious problem.

The article notes that that the new Social Security report moved the date of the projected depletion of the trust fund forward by a year to 2041. It is important to note that this was entirely due to the current weakness of the economy - specifically weaker than expected employment and wage growth.

The article also reports that annual benefit payments are projected to exceed annual revenue in 2017, which it says will require the government to borrow money to make up the shortfall. This is not entirely accurate. The government is currently borrowing about $80 billion a year in surplus payroll taxes from Social Security. This number is projected to gradually fall to zero over the next twelve years and turn negative in 2017. Each year, the federal government will have to make up for the loss of some of this surplus - there is no particular importance to the year 2017 - it is just one year in this process (see "Defaulting on the Social Security Trust Fund: What It would Mean and How It Would Be Done"). It is also wrong to say the government will be forced to borrow in 2017. It will simply be replacing bonds held by the Social Security trust fund with bonds held by the general public.

At one point the article includes a claim by Allan B. Hubbard, the head of President Bush's National Economic Council, that Bush's plan would leave the disability program alone. Whatever the President's intention, the plan creates a structure that would almost certainly make the disability program politically and economically untenable in its current form. (Most people would see themselves paying large taxes for a program for which they get no direct benefit.) 

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Trade

Fraying of a Latin Textile Industry  
Ginger Thompson  
New York Times, March 25, 2005, Page C1 

This article reports on the collapse of the textile industry in El Salvador in the wake of the removal of import quotas on China's textiles. As the article notes, the removal of these quotas was planned for more than a decade. It would have been useful to discuss the role of development experts, who encouraged El Salvador and other countries to become dependent on the textile industry, even though it was obvious that their export market would be sharply curtailed in the near future by removal of quotas on China and the decline in the size of the U.S. import market.

This is the second article the Times has run in recent weeks on the devastation of a developing country's textile industry ("Dollar Fall Silences Africa's Garment Factories," New York Times, March 12, 2005, Page A1). Both articles have largely ignored the experts who gave such poor advice. It is important to point out that these countries were the not the victims of bad luck, but rather incompetent economic advisors.

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France

France eases Law Restricting Workweek to 35 Hours  
Erika Lorentzsen  
Washington Post, March 23, 2005, Page A12  

This article discusses plans by the French government to reverse a law that mandated a 35-hour workweek. At one point the article reports that France has a 10 percent unemployment rate and its economy has stagnated. It is important to note that France also had 10 percent unemployment rate and a stagnant economy prior to the implementation of the 35-hour workweek.  

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Military Recruitment

Army Still Behind in Recruiting
Ann Scott Tyson
Washington Post, March 24, 2005, Page A17

This article reports on the fact that the Army is falling behind its recruiting goals. It attributes this shortfall partly to the war with Iraq and partly to low unemployment. Actually, low unemployment is not likely to be a factor. While the unemployment rate is relatively low, this is primarily due to the fact that so many people have given up looking for jobs. Employment for young workers is actually lower today than it was in 2000.

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Immigration

Conservatives Split in Debate on Curbing Illegal Immigration
Shailagh Murray
Washington Post, March 25, 2005, Page A2

This article discusses the debate among conservatives on immigration policy. At one point the article asserts that the United States has a growing dependency on illegal labor because "more jobs, especially at lower skill levels, go unfilled."

In a market economy, the reason that a job goes unfilled is that the employer is not willing to pay the market wage for the work. In this case, employers are hoping to use their political power to change the nature of the market (by bringing in more workers), so that they will not have to pay the market-clearing wage.

There would be a shortage of high skilled workers also, if high-skilled jobs paid very low wages. However, high-skilled workers have sufficient political power to limit competition from foreign workers; therefore employers are forced to pay them high wages.

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