Economic Reporting Review
 By Dean Baker
April 25, 2005

In This Issue:

•  Outstanding Story of the Week

•  Social Security

•  The Budget

•  Norway

•  Debt Relief

•  The Economy


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Outstanding Story of the Week


While Shares Fell, Viacom Paid Three $160 Million
Geraldine Fabrikant
New York Times, April 16, 2005, Page B1

This article reports on how three of the top executives at Viacom managed to gain substantial compensation packages even as its stock price was falling sharply.

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In Real Estate Fever, More Signs of Sickness
Daniela Deane
Washington Post, April 17, 2005, Page A1

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This article reports on evidence that much of the United States, including the Washington area, is experiencing a bubble in real estate prices.  

Bush Social Security Plan Proves Tough Sell Among Working Poor
Jonathan Weisman
Washington Post, April 18, 2005, Page A1

This article reports on the lack of interest of many low-income workers in President Bush’s proposal to partially privatize Social Security. The article reports that most of these workers seem to prefer the security of a guaranteed benefit.

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Social Security


Bush Lauds Ohio’s Non-Social Security Plan
Michael A. Fletcher
Washington Post, April 16, 2005, Page A4

This article reports on a trip by President Bush to Ohio in which he held up the state’s public pension system, which takes almost twice as much of workers’ pay as Social Security, as an alternative to Social Security. 

At one point it refers to President Bush’s push for private accounts which it describes as “a buffer to protect people from the cuts that are almost certain to come because of Social Security’s funding problems.” Actually, both the Social Security trustees report and the Congressional Budget Office’s (CBO) analysis show that Social Security will have no funding problems for long into the future. The trustees report shows that the program can pay all benefits for the next 36 years with no changes whatsoever, and the CBO shows that it can pay all benefits with no changes for 47 years. 

Furthermore, even if the program eventually faces the projected shortfall, it is far from certain that there will be benefit cuts. In the past, the public has consistently supported tax increases to maintain benefit levels. The projections show that the tax increases that may eventually be needed are smaller than the tax increases imposed in prior decades. 

It is also not clear in what way private accounts can provide a “buffer” against benefit cuts. Using stock return projections that are consistent with the trustees economic growth projections, private accounts will on average give workers no better return than they would receive under the existing program, although they would add risk (see the CEPR Accurate Benefit Calculator [http://www.cepr.net/pages/sscalculator.htm]).

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Panel May Take Lead On Social Security
Jim VandeHei
Washington Post, April 17, 2005, Page A4

This article reports on the plans for the Senate Finance Committee to take the lead in developing a concrete proposal for privatizing Social Security. At one point the article described the projected shortfall in Social Security as $3.7 trillion over its 75-year planning horizon. Since few readers are familiar with 75 year economic projections it would be more helpful to refer to the shortfall as a share of income over this period. According to the Social Security trustees, the shortfall will be equal to 0.6 percent of GDP over this period. The Congressional Budget Office (CBO) estimates the Social Security shortfall as 0.4 percent of GDP. By comparison, the increase in the annual defense budget since 2000 is equal to 1.0 percent of GDP, 1.5 times as large as the Social Security shortfall projected by the trustees and 2.5 times as large as the shortfall projected by CBO.

The article also reports that President Bush plans to promote private accounts as a way to “ease the pain” from benefit increases. Actually, using projections of stock returns that are consistent with the Social Security trustees growth projections, the yield on private accounts, net of administrative expenses, will be approximately the same as the return on government bonds currently held by the trust fund. In other words, if honest projections of stock returns are used, private accounts will only add risk, not increase returns. 

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Bush Stumps for Personal Accounts
Jim VandeHei
Washington Post, April 19, 2005, Page A4

Bush, On Road, Says He Is Open to Ideas on Social Security
Elisabeth Bumiller
New York Times, April 19, 2005, Page A15

These articles report on a trip to South Carolina in which President Bush promoted his plan for Social Security privatization. At one point the Post article reports that President Bush claimed that under the current system workers could face taxes as high as 18 percent or "drastically" reduced benefits. 

Under the system proposed by his commission and modeled in the 2004 Economic Report of the President, workers would face drastically reduced benefits. By the end of the 75-year planning period, retirees would be facing a cut in the scheduled benefit of more than 50 percent. It would be appropriate to point out that President Bush's plan is subject to the same rules of arithmetic as Social Security; a higher ratio of retirees to workers raises the cost of any system.

The article also includes President Bush's assertion that investing Social Security money in the stock market will raise returns. Given the projected slowdown in economic growth, this is not true. On average, the returns from private accounts will be approximately equal to the returns on the government bonds currently held by the Social Security trust fund. 

Both articles report Bush's claims that there is evidence that shows it is necessary to act quickly to fix Social Security. Actually, the projections from both the Social Security trustees and the Congressional Budget Office show that there is very little cost to waiting to see if the projected shortfalls appear likely to develop. 

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Down Market Casts a Pall On Social Security Plan
Richard W. Stevenson
New York Times, April 21, 2005, Page A17

This article reports on the impact that the recent decline in the stock market is having on support for President Bush’s Social Security privatization plan. At one point the article reports President Bush’s assertion that each year we wait the shortfall in Social Security increases by $600 billion. 

It would be helpful to note that the bulk of this increase is simply due to the fact that we are measuring the projected shortfall in dollars that are worth less each year, due to inflation. (2005 dollars are worth less than 2004 dollars.) This is not an honest comparison, and it is inconceivable that President Bush’s economic advisors are not aware of this fact. (By this measure, the deficit created by President Bush’s tax cut increases by over $1 trillion a year.)

The more meaningful way to express the shortfall is relative to the size of the economy. The most recent projections for the Social Security trustees show the shortfall to be equal to 0.6 percent of GDP over the program’s 75-year planning period. The Congressional Budget Office’s projections show the shortfall as being equal to 0.4 percent of GDP. 

Polls consistently show that the public is hugely misinformed about the nature of the Social Security shortfall. For example, a recent New York Times poll showed that two-thirds of people under age 45 did not think the program would be able to pay them retirement benefits – a situation that is impossible barring an economic collapse. This would not be the case if the media had done a better job in reporting on Social Security’s finances. 

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The Budget

Congress’s Willingness To Tackle Deficit in Doubt
Jonathan Weisman
Washington Post, April 16, 2005, Page A6

This article discusses the likelihood that Congress will take substantial steps to reduce the deficit in the wake of its decision to vote down President Bush’s proposed cuts in Medicaid and its vote in favor of abolishing the estate tax.  It would be helpful to readers if the tax and spending amounts noted in the article were placed in some context. For example, the proposed $20 billion in Medicaid spending cuts is equal to approximately 0.8 percent of projected federal spending for the year. The projected $290 billion 10 year cost of the repeal of the estate tax is equal to approximately 1.0 percent of projected revenue over this period. 

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Greenspan Urges Congress to Rein In Federal Budgets
Edmund L. Andrews
New York Times, April 22, 2005, Page 

This article reports on Alan Greenspan’s testimony before the Senate Budget Committee. At one point it refers to Mr. Greenspan’s defense of his support of President Bush’s tax cuts in 2001. At the time, Greenspan supported the tax cuts because he claimed that he was worried that the government might pay off the national debt too quickly because the budget surpluses were too large. While the large surpluses quickly turned into large deficits, Mr. Greenspan said that he could not have anticipated this change at the time.

Actually, Mr. Greenspan certainly should have anticipated the switch from surpluses to deficits. He was aware of the stock bubble as shown by transcripts of the open market committee meetings at the time. This means that he should have anticipated that the bubble would burst, presumably at some point in the not distant future. 

The collapse of the stock bubble would imply both that the government would not get the capital gains tax revenue that was being projected at the time and that the economy would experience a recession. A recession would lead to a further loss of tax revenue as workers lost jobs; and it would also lead to greater spending, as demand for unemployment benefits and other transfer payments increased. 

Economists who recognized the bubble warned at the time that the large projected surpluses would never be realized (e.g. see “Double Bubble: The Over-Valuation of the Stock Market and the Dollar,” [http://www.cepr.net/columns/baker/double_bubble.htm]). Presumably Mr. Greenspan was aware of this fact as well. 

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Norway

We’re Rich, You’re Not. End of Story
Bruce Bawer
New York Times, April 17, 2005, Section 4 page 5

This article discusses the standard of living in Norway. The article reports that Norwegians believe that they have the highest standard of living in the world, even though the author’s observations suggest that this is not true. The article goes on to claim that Europe has far lower living standards on average than the United States, describing the belief in high European living standards as a “European daydream.” 

It is actually not necessary to speculate on relative living standards based on personal observations. Much effort has been devoted by economists to making international comparisons. The most authoritative source for such comparisons is the Penn World Tables [http://pwt.econ.upenn.edu/php_site/pwt61_form.php]. These tables show that Norway’s per capita income in 2000 was roughly 10 percent lower than in the United States, with Norway’s per capita GDP estimated at $32,100, compared to $35,600 for the United States. The estimated per capita GDP for most other west European countries is in the mid to high $20s. 

Most of the gap between the per capita GDP in the United States and Europe is explained by shorter work-years in Europe. Europeans typically get 5-6 weeks vacation a year. In many countries the standard work week is less than 40 hours, in some as little as 35 hours. This reflects the decision of Europeans to take more of the gains from productivity growth in leisure than in higher income.  

It is also important to recognize that European countries have much more equal distributions of income than the United States. This means that if average per capita incomes are similar between Europe and the United States, then the typical European will enjoy a much higher living standard, since not as much income in Europe is concentrated at the top of distribution.

Economists generally do not place much value on the sort of personal observations that provide the basis for this article because they end up being very idiosyncratic. For example, one of the examples of the ways in which Norwegians supposedly have a low standard of living is the fact that they have to pay the equivalent of $15 for a shot of gin in a bar. The high price of alcohol in Norway is not attributable to poverty, but rather a decision by the government to impose very high taxes on alcohol in order to combat alcoholism. The reporter probably could have learned this fact if he had asked someone in the bar, since most people in Norway speaks English. 

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Debt Relief

Deal to Ease Poor Nations’ Debt Eludes Rich Nations
Celia W. Dugger
New York Times, April 17, 2005, Page A6

This article reports on a dispute among rich nations on how best to structure debt relief for poor countries. At one point the article notes that the United States would like most future aid from the World Bank to the poorest countries to be in form of grants, while the European countries prefer loans. 

The article reports that if the Bank made grants instead of loans, then it would have less money in the future to provide aid to poor countries. While this is true, it is important to note that the money for loan repayment is coming from poor countries. Converting loans to grants will not reduce the money available to poor countries in the future, it will simply reduce the amount being distributed by the World Bank. The loan repayments are effectively a tax on poor countries, some of the proceeds of which will be used to make new loans to poor countries. 


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The Economy

Economic Worries Aren’t Resonating on Hill
Jonathan Weisman
Washington Post, April 21, 2005, Page A1

This article reports on the lack of reaction in Congress to recent evidence of a weakening economy. At one point it reports that “few economists would say the economy is at risk of slipping back into recession.”  It is worth noting that in the fall of 2000, not one of the “Blue Chip” top 50 forecasters predicting that the recession the following year. Even the most pessimistic of this group projected growth well over 2.0 percent.

Economists almost never predict recessions, so that the fact that few are predicting one now indicates little about the probability that the economy will actually fall into recession. 

Finding Consensus On Global Economy
Paul Blustein
Washington Post, April 18, 2005, Page A1

This article reports on the prospects for economic growth in the near future. It does not mention the housing bubble, the collapse of which may lead to a severe downturn in the United States, the United Kingdom, and several other countries with inflated housing markets. (It is worth noting that almost all discussions of the world economy in 2000 failed to note the stock market bubble in the United States, the largest financial bubble in the history of the world.)

At one point the article reports that several European countries are putting off plans to weaken welfare state protections for their workers. It comments that this is “arousing despair among economists who believe the continent will achieve dynamic growth only by lifting the heavy hand of government from labor, product, and capital markets.” It is worth noting that these economists have little evidence to support this position (see “Unemployment and Labor Market Institutions: The Failure of the Empirical Case for Deregulation,” [http://www.newschool.edu/cepa/papers/archive/cepa200404.pdf]). 

It is also worth noting that prominent economists, such as Nobel prize winner Robert Solow and Richard Freeman, the head of the NBER labor economics division, have argued that weak economic growth in Europe can be blamed as much on the contractionary policies pursued by the European Central Bank, as on labor market regulation.  

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