Economic Reporting Review
 By Dean Baker
April 4, 2005

In This Issue:

•  Outstanding Story of the Week

•  Social Security

•  Brazil

•  The Business Agenda

•  Copyrights

•  European Unemployment


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Outstanding Story of the Week

Charter Schools Alter Map of Public Education
Sam Dillon
New York Times, March 27, 2005, Page A15

This article reports on the growth of charter schools in Dayton, Ohio. Currently, more than one fourth of the students in the public school system attend charter schools. As the article reports, the resulting diversion of funds from the traditional system is forcing it to make cutbacks in staffing and maintenance.

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Social Security

Schwarzenegger Prepares to Do Battle in Calif.
Dan Balz
Washington Post, March 28, 2005, Page A1

This article reports on the antagonistic political environment that surrounds Arnold Schwarzenegger, California's governor. At one point the article reports that Mr. Schwarzenegger is attempting acting in the spirit of President Bush's plans to privatize Social Security, by trying to replace the state's defined benefit pension system with a defined contribution system.

Actually, Mr. Schwarzenegger's efforts to eliminate the defined benefit pension system for California state employees is inconsistent with President Bush's stated rationale for privatizing Social Security. Social Security is a mandatory program - workers are required to contribute 6.2 percent of their pay to the system (their employer makes a similar contribution). President Bush argues that he will be giving workers more choice by allowing them to invest a portion of this money in individual accounts.

By contrast, every single state employee in California has chosen to work at a job where a defined benefit pension is part of the compensation package. In fact, they have actually explicitly bargained for a defined benefit pension in collective bargaining agreements. In other words, California's state workers have chosen to get a guaranteed benefit, which will give them more security in their retirement income than an account whose value fluctuates with the stock market.

This is an efficient outcome, since the risk of market timing for the state is minimal. It can always borrow to meet pension obligations during periods when the market is down. By contrast, workers cannot borrow against a future life. If they retire during a market downturn, they will have a lower standard of living in their retirement. Defined benefit pensions are a way in which the state can provide valuable insurance to its workers, at virtually no cost.

At one point the article refers to critics of Governor Schwarzenegger who blame him for lacking the courage to raise taxes. It is worth noting that he also lacks the courage to suggest specific spending cuts. His preferred solutions appear to be across the board cuts in spending, rather than identifying programs that he views as wasteful.

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Social Security Plan Meets Doubt in Iowa
Jim VandeHei
Washington Post, March 31, 2005, Page A4

This article reports on the status of President Bush's efforts to promote his plan for Social Security privatization. At one point the article asserts that "a broad consensus is developing that Bush has succeeded in illuminating the financial and demographic pressures gripping Social Security,"

This assertion is questionable. The projections from the Social Security trustees and the Congressional Budget Office show that Social Security will be fully solvent for 36 and 47 years into the future, respectively, with no changes whatsoever. They also show that the changes needed to make the program fully solvent throughout its 75-year planning period are smaller than the changes that were made in every decade from the forties through the eighties.

In order to promote his privatization plan, President Bush has sought to convince the public that Social Security is facing an imminent crisis. It seems implausible that his efforts have given the public a truer picture of the program's fundamental strengths.

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Brazil

Brazil: Higher Inflation Forecast
Todd Benson
New York Times, March 30, 2005, Page C4
This article is not available online

This article reports on a new inflation forecast from Brazil's central bank. At one point the article refers to concerns that the projection of higher inflation may "force" Brazil's central bank to raise its interest rates.

Inflation, like unemployment, is a factor that central banks must consider in setting interest rates; however, a higher inflation rate cannot force a central bank to raise interest rates any more than higher unemployment can force central banks to lower interest rates. If Brazil's central bank raises interest rates, then it will be a policy decision.

This is important to note, because Brazil's monetary policy is probably the most important single factor affecting its GDP growth and unemployment rate. Because of restrictive monetary policies, Brazil's per capita GDP growth has averaged just over 1.0 percent annually over the last 5 years, a very slow growth rate for a developing country.

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The Business Agenda

Business Sees Gain In GOP Takeover
Jim VandeHei
Washington Post, March 27, 2005, Page A1

This article discusses the agenda of business lobbyists now that Republicans control Congress. It describes this agenda as promoting "free market policies."

Actually, business lobbyists have no special interest in free market policies; they want policies that support the interests of business regardless of whether they involve more or less government intervention. The two recent policy successes cited in the article - malpractice reform and a new bankruptcy bill - actually will increase the government's involvement in the economy.

The malpractice reform bill will restrict the types of contracts that plaintiffs can sign with their lawyers. (The bill puts limits on legal fees and the types of situations in which lawyers can collect fees.) Those who favor free market policies would consider it wrong for the government to be telling people what sort of contracts they can sign with their lawyers.

The new bankruptcy law involves much more extensive government policing of the earnings of debtors, in order to assist creditors in collecting on bad debts. In principle, the government has no particular interest in helping either creditors or debtors. Successful lenders make profits by avoiding bad loans. In this case, creditors who have made bad loans are asking for the government's assistance in collecting this money. Proponents of free market policies would advocate that lenders who used poor judgment in making loans suffer the consequences of their actions.

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Copyrights

A Supreme Court Showdown for File Sharing
Saul Hansell and Jeff Leeds
New York Times, March 28, 2005, Page C1

This article reports on a lawsuit that is being heard by the Supreme Court that will determine whether technologies that can be used to make unauthorized reproductions of copyrighted material can be outlawed. The entertainment industry is arguing that makers of such technology can be held liable for lost profit due to such copying, even if the technology was not intended for this purpose.

It would have been useful to include some analysis of this issue from an economic standpoint. The entertainment industry wants this restriction in order to maintain a monopoly over the dissemination of creative work. This leads items such as music or movies to sell for high prices, when they could otherwise be transferred costlessly over the Internet. The higher prices that result from copyright monopolies lead to economic waste in the same way that tariffs or quotas on imported goods lead to economic waste, except the distortions associated with copyright protection are far larger (tariffs or quotas rarely raise the price of good by more than 15-20 percent). The economic costs associated with copyright protection will increase if the entertainment industry is able to obstruct the development of new technologies because they could impede copyright enforcement.

There are other more efficient means of supporting creative and artistic work (e.g. see "The Artistic Freedom Voucher: The Internet Age Alternative to Copyrights"). It would have been helpful if the article included some discussion of these economic issues.

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European Unemployment

France and Germany Dogged by Joblessness
Mark Landler
New York Times, April 1, 2005, Page C4

This article reports on the persistence of high unemployment in Germany and France. This discussion does not mention at all the role of the restrictive monetary policies of the European Central Bank (ECB).

The ECB has consistently maintained far more contractionary monetary policies than the Federal Reserve Board in the United States. For example, the Fed lowered its short-term interest rate to 1.0 percent in response to the downturn in 2001. The ECB never lowered its short-term rate below 2.0 percent. Nearly all economists agree that the Fed's sharp reduction in interest rates helped limit job loss and promote the modest job growth seen in the last year and a half. The failure of the ECB to lower interest rates to the same extent has almost certainly been a factor in the weak job growth in the euro zone.

At one point the article describes Germany as having a 12 percent unemployment rate. It is important to note that this unemployment rate refers to the German government's definition of unemployment, which includes anyone working less than 15 hours a week as being unemployed. Using the OECD standardized definition of unemployment (which is virtually identical to the U.S. definition), the unemployment rate in Germany is approximately 9.5 percent. Also, this unemployment is concentrated in the former East Germany, where the unemployment rate is close to 20 percent. In the area of the country that was formerly West Germany, the average unemployment rate would be under 8.0 percent using the OECD definition.

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