Economic Reporting Review
By Dean Baker
June 27, 2005
In This Issue:
• Outstanding
Stories of the Week
• Social
Security
• Trade and Developing
Countries
• The Euro
• Medicaid
• The
Budget
• The
Trade Deficit with China
• Wage
Insurance
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Outstanding
Stories
of the Week
Pay Abuses Common for Day
Laborers, Study Finds
Mary Beth Sheridan
Washington
Post, June 23, 2005, Page A1
This article reports on a new study of the working conditions
faced by day laborers. It reports that employers often ignore labor laws by
not paying workers overtime and often do not pay workers at all.
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Living With Social
Security: Small Dreams and Safety Nets
John Leland and Jodi Wilgoren
New
York Times, June 19, 2005, Page A1
This article examines the situation of several retirees who rely primarily
on Social Security for their income.
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The Road to Riches Is called K Street
Jeffrey H. Birnbaum
Washington
Post, June 22, 2005, Page A1
This article reports on the
growth in employment and in salaries over the last five years at the major
Washington lobbying firms.
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Social
Security
New Plan on Benefits Urges Use of
Surplus
David E. Rosenbaum and Robin Toner
New
York Times, June 23, 2005, Page A17
This article
reports on a proposal being developed by Republicans in Congress that would use
surplus Social Security tax revenue to create private accounts. The article
reports that the Republicans expect that the plan "will allay the fears of
the public that the money is being spent elsewhere."
It is not clear how the plan could possibly allay the public's fears that their Social Security taxes are being spent elsewhere, since it is mandating that their taxes get spent elsewhere. The private accounts would be created by money taken out of Social Security and would move forward by several years the date at which Social Security is first projected to face a shortfall.
The article notes that the current projections from the Social Security trustees show that benefits will first exceed annual tax revenues in 2017, which means that there would then be no money for these accounts under this plan. The article asserts that "the implicit view was that politicians would be under great political pressure to find some other means of paying for them."
The projected surplus falls
gradually as a percentage of payroll between now and 2017, so it is not clear at
what levels politicians might feel pressure to maintain funding. While the money
available for the accounts is projected to hit zero in 2017 under this plan, in
2013 it would be approximately 0.5 percent of payroll - or $100 a year for a
person earning $20,000. While it would be relatively cheap to fund an extremely
small private account of the sort provided for under this plan, it is difficult
to believe that there would be much political pressure to sustain such accounts.
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The '06 Vote Is Echoing In the Social Security War
Robin Toner and David E. Rosenbaum
New
York Times, June 24, 2005, Page A16
This article discusses the
implications of the debate over Social Security privatization for the 2006
election. In discussing the Republicans' most recent proposal, the article
asserts that it would serve a popular end by "stopping the use of the
Social Security surplus for other government programs."
This is not true. The plan mandates that the Social Security surplus be taken out of the Social Security trust fund and instead used to create private accounts. Under current law, Social Security's ability to pay benefits is not affected by what is done with the surplus - the program holds exactly the same amount of government bonds regardless of how or whether the surplus is spent. However, under the new Republican proposal the surplus would not be available for Social Security, moving forward the projected date at which the program first faces a shortfall.
The article also refers to
projections from Steve Goss, the chief actuary at the Social Security
Administration, of the size of individual accounts that would be created under
this plan. It is worth noting that Mr. Goss assumes that stock returns will
average 6.5 percent above the rate of inflation. Almost no private economist
agrees with this projection of stock returns, given the Social Security
trustees' economic growth assumptions. Most economists assume that stock returns
will be in a 4.5-5.0 percent range, which would lead to substantially smaller
accounts than projected by Mr. Goss.
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Trade
and Developing Countries
Trade and Aid to Poorest Seen as Crucial on Agenda for Richest Nations
Celia W. Dugger
New
York Times, June 19, 2005, Page A8
This article
discusses the prospects that the G-8 countries will propose aid and trade
packages that will provide substantial benefits to the developing world. At one
point the article asserts that "rich countries spent $280 billion last year
subsidizing farmers and agribusiness."
It is important to note that only about one-third of this money was in the form of government subsidies. The vast majority of this $280 billion estimate is a calculation of the additional costs that consumers in rich countries bear as a result of agricultural protection. Agriculture is not the only sector where protection raises costs to consumers. For example, in the United States alone, protection for pharmaceutical patents cost consumers approximately $140 billion last year. The subsidies provided to the entertainment and software industry costs consumers in the United States additional tens of billions of dollars last year.
The Times and other media outlets have devoted extensive news coverage to the subsidies for agriculture. However, they have devoted almost no attention to the much larger subsidies to the pharmaceutical, entertainment, and software industries. In fact, news reporting on these sectors almost always ignores the fact that they are benefiting from government subsidies.
The article also refers to World
Bank research showing that developing countries would gain $100 billion a year
from the elimination of all agricultural subsidies and trade barriers. Actually,
research from the World Bank and elsewhere shows that many developing countries
would be harmed by the elimination of all agricultural trade barriers and
subsidies. Many developing countries are net importers of agricultural products.
These countries would be harmed if they had to pay more for agricultural imports
as a result of the elimination of subsidies from rich countries.
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Central American Labor Pact Stirs Strong
Emotions
Krissah Williams and Paul Blustein
Washington
Post, June 20, 2005, Page A1
This article discusses
the potential impact of the Central America Free Trade Agreement (CAFTA) on
workers in the region. It repeatedly refers to the agreement as a "free
trade" pact and asserts that it will liberalize trade between the region
and the United States. This is inaccurate. While the pact would liberalize trade
in some items, it would also increase trade barriers in other areas, most
notably in the case of patent and copyright protection. It would be more
accurate to simple refer to CAFTA as a "trade" pact.
The article also implies that CAFTA is likely to be associated with more rapid growth in Central America. This is far from clear. Per capita growth in Mexico has averaged just 1.2 percent annually since NAFTA went into effect. There is no obvious reason to believe that CAFTA will be more successful in promoting growth in Central America than NAFTA was in promoting growth in Mexico.
It is also important to note that
the U.S. import market is likely to be shrinking rapidly over the next decade.
The U.S. trade deficit is universally recognized as being unsustainable. This
means that imports will almost certainly have to shrink to bring the deficit
down to a sustainable level (see "Fool's
Gold: Projections of the U.S. Import Market"). Since CAFTA will impose
costly protectionist restrictions on the countries of Central America in the
form of stronger patent and copyright protection, in exchange for increased
access to a rapidly shrinking U.S. import market, there is little reason to
believe that it will lead to more rapid growth in Central America.
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The Euro
The World: Lira Nostalgia; Kicking the Euro When Europe is Down
Roger Cohen
New
York Times, June 19, 2005, Section 4, Page 4
This article
discusses the prospects for the euro after the decision of French and Dutch
voters to reject the proposed European constitution. The article centers on an
Italian minister's comments that it would be desirable to bring back the lira.
The article goes on to note that Italy had routinely devalued the lira to
maintain its competitiveness, an option that is no longer available to the
country now that it is locked into the euro.
The article notes that this tactic had proven successful in sustaining high levels of growth for most of the post-war period, but then denounces this growth as "artificial." There is no obvious basis for describing such growth as artificial. Italy used this monetary policy to improve living standards and make itself one of the richest countries in the world.
The article then comments that
Italians are "harking back to a time when global competition could be
finessed with soft money." There is absolutely no economic theory that
suggests that there is anything about the present era that would make
devaluation a less successful strategy today than it was twenty or thirty years
ago. Certainly this article does not present any evidence to indicate that
devaluation would be less successful today.
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Medicaid
Gee,
Fixing Welfare Seemed Like a Snap
Gardiner Harris
New
York Times, June 19, 2005, Section 4, Page 3
This article reports on the obstacles facing an effort to reform Medicaid.
At one point it refers to projections for rapidly rising costs in the future. It
is worth noting that these projections assume that private sector health care
costs will rise at an explosive rate that will lead to rapid increases in the
number of uninsured and rising costs for those who maintain their insurance. If
these health care cost projections prove correct, then the country will face an
extremely serious health care crisis regardless of what it does with the
Medicaid program. On the other hand, if the problem of explosive costs in the
private health care sector is fixed, then the cost of Medicaid will not pose a
serious problem.
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The
Budget
House
Backs Withholding Dues to Spur U.N. Changes
Mike Allen and Colum Lynch
Washington
Post, June 18, 2005, Page A1
House
Votes to Set Conditions on U.N. to Avoid Cut in Dues
Anne E. Kornblut
New
York Times, June 18, 2005, Page A5
House
Passes $409 Billion in Defense Spending
Reuters
Washington
Post, June 21, 2005, Page A8
$408.9
Billion for Military Passes House After a Dispute
Anne E. Kornblut
New
York Times, June 21, 2005, Page A18
These articles report on a dispute over the United States annual dues to
the United Nations of $438 million and the latest defense appropriation bill of
$408.9 billion (which does not include the costs of the wars in Afghanistan and
Iraq). It would be helpful to readers if these sums were expressed as a share
of the total budget, since few readers would be able to assess the significance
of these dollar sums. The level of U.N. dues is equal to approximately 0.017
percent of projected spending for 2006. The military budget is equal 16.3
percent of projected spending.
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The
Trade Deficit With China
Capital Nearly Speechless on Big China Bid
Edmund L. Andrews
New
York Times, June 24, 2005, Page C1
This article reports
on the limited reaction in Congress to the proposal by a Chinese government
owned oil company to buy Unocal. At one point the article cites statements by
Alan Greenspan that he knows of no empirical evidence suggesting that
manufacturing jobs in the U.S. would be saved if China raised the value of its
currency.
It is not clear what sort of
empirical evidence Mr. Greenspan is looking for, but economists usually believe
that the quantity of goods demanded falls when their price rises. If the Chinese
currency rises in value relative to the dollar, then the cost of Chinese imports
will rise relative to the cost of goods produced in the United States.
Economists usually would expect this to lead to the purchase of fewer imported
goods from China and more domestically produced goods, thereby saving U.S. jobs
in manufacturing. This effect would be enhanced insofar as other major trading
parntners would feel more comfortable allowing their currencies to increase in
value once China had done so. It is not clear how Mr. Greenspan's views differ
from this standard economic analysis.
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Wage
Insurance
Cutting Here, But
Hiring Over There
Steve Lohr
New
York Times, June 24, 2005, Page C1
This article reports on the fact that IBM is laying off 13,000 workers in Europe and the United States, while it is hiring approximately the same number in India. At one point the article discusses the feasibility of wage insurance - using a portion of the savings to prop up the wages of the workers who loss their jobs - as a way to offset the impact that trade and offshoring have on wages. The article cites estimates from a consulting firm, McKinsey Global Institute, to imply that such a step would be quite feasible.
Actually, the vast majority of
the wage impact of trade or offshoring is not on the workers who directly lose
their jobs, but rather on other workers who work in the same sectors. Trade has
played a substantial role in reducing the wages of non-college educated workers
relative to college educated workers, by reducing demand for their services. It
would be extremely expensive to fully offset the impact of trade on the wages of
this segment of the labor market.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.