Economic Reporting Review
By Dean Baker
July 5, 2005
In This Issue:
• Outstanding
Stories of the Week
• The
Central American Free Trade Agreement
• China and the
Fed
• China
• Immigration
and Wages
• Labor
Protections in Germany
• Copyrights
• Medicaid
• Aid
To Africa
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Outstanding
Stories
of the Week
For Many Top Executives, It’s Ask and You Shall Receive
David S. Hilzenrath
Washington
Post, June 27, 2005, Page A1
This article reports on
how many top executives are often able to get additional bonuses or various
other forms of compensation from their companies, for items that have no obvious
basis in the quality of their performance.
G.M. Tops List as Study
Questions Pension Accounting
Mary Williams Walsh
New
York Times,
June 30, 2005, Page C4
Back to Top
The
Central America Free Trade Agreement
Group
of Democrats Back Pact on Central American Trade
Eduardo Porter
New
York Times, June 25, 2005, Page B2
This article reports on
advertisement in support of the Central America Free Trade Agreement (CAFTA)
which was signed by a number of prominent Democrats. According to the article,
the ad claims that CAFTA would reduce the United States trade deficit.
It is worth noting that many
of the Democrats who signed the ad were high level officials in the Clinton
administration, some of whom worked on the Clinton administration’s trade
policy. Several officials in the Clinton administration have acknowledged
that they made inaccurate claims about NAFTA, specifically that it would lead to
a large trade surplus with Mexico and generate hundreds of thousands of jobs, in
order to get the pact approved by Congress.
The article refers to the
effects of CAFTA in cutting trade barriers the Central American nations and the
United States. Its effects in raising barriers, specifically by increasing the
level of patent and copyright protection in Central America, will probably have
more economic impact that the portions of the agreement that liberalize trade.
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Trade Pacts To the South Losing Appeal
Juan Forero
New
York Times, June 30, 2005, Page C1
This article reports on the
dwindling political support in Latin America for a trade pact with the United
States. The article repeatedly refers to a prospective agreement as a “free
trade” pact. This is inaccurate since such an agreement would increase
protections in some areas, most notably in the case of patents and copyrights.
The prospect of increased protectionism is actually noted in the article when it
discusses the potential impact of a trade agreement on drug prices in Bolivia,
“a free trade deal would extend patent protections on old American
products.” It would be more accurate to simply refer to the pact as a “trade
deal.”
Back to Top
China and
the Fed
The Hidden Benefits of
China’s Shopping Spree
Andrew Ross Sorkin
New York Times, June 26,
2005, Section 3, page 5
This article discusses
the issues that the Bush administration will have to consider in assessing a bid
by a Chinese state owned oil company to take over Unocal. At one point the
article lists the benefits that the United States has received from its economic
relationship with China. One of the items on the list is the fact that “China
has helped prop up the nation by buying Treasury bonds en masse.”
While the decision of the
Chinese government to buy hundreds of billions of dollars of U.S. treasury bonds
over the last few years has helped to keep long-term interest rates down in the
United States, which in turn has helped sustain economic growth, this goes
directly against what Alan Greenspan has sought to accomplish through the
Fed’s monetary policy. Greenspan has been raising short-term interest rates in
the hope that higher short-term interest rates would lead to higher long-term
interest rates, which would slow economic growth. By directly intervening in the
long-term market by buying treasury bonds, the Chinese central bank has
undermined Greenspan’s efforts. If the actions of the Chinese government were
good for the U.S. economy, then Greenspan’s policy must have been bad.
Low Rates Could Be Around
For a Long Time
Edmund L. Andrews
New
York Times, June 27, 2005, Page C1
This article discusses the
possibility that long-term interest rates will remain low for a long period of
time. It raises the alternative possibilities that long-term interest rates are
low because investors expect low rates of inflation or that they expect slow
growth. It is worth noting that the interest rate of inflation-indexed treasury
bonds is approximately 1.7 percent. This is extremely low. In the late nineties,
the interest rate on these bonds hovered around 3.5 percent. In principle, this
interest rate should not be affected by inflationary expectations, since
investors are compensated for the impact of whatever inflation actually occurs.
It is also worth noting that
slow growth will not necessarily guarantee low inflation. If slower growth is
also accompanied by a fall in the value of the dollar, then the United States
could experience both slow growth and rising inflation, since a fall in the
dollar will lead to rising import prices.
It is important to note this
effect in assessing the world-wide decline in long-term interest rates. Most
European countries currently have balance of trade surpluses; therefore there is
no reason to expect that their currencies will decline in the future, leading to
rising inflation. On the other hand, the United States is running a trade
deficit that is universally recognized to be unsustainable. The deficit can only
be corrected by a decline in the value of the dollar, which will be associated
with higher inflation. Given the difference in future inflation rates implied by
the current trade situation, it is far more surprising that the United States
has low interest rates than European countries.
Back to Top
China
China’s Economy
Rising at Pace To Rival U.S.
Keith Bradsher
New
York Times, June 28, 2005, Page A1
This article assesses China’s
long-term growth prospects. At one point it notes that China’s labor force is
expected to shrink from 842 million to 813 million over the period from 2015 to
2030. It implies that this shrinkage will put China at a disadvantage compared
to India, which is projecting to still have a growing labor force at this
time.
Actually, the reduction in
the size of China’s labor force (and slower population growth) is likely to be
hugely to its benefit. Both China and India will still be relatively poor
countries in 2015, with a low ratio of capital to labor. The fact China will
have a shrinking labor force, while India’s will still be growing, should mean
that the ratio of capital to labor is rising much more rapidly in China than
India. This would mean that productivity and wages are presumably growing more
rapidly as well.
In addition, both China and
India are already densely populated countries. The population density will
create more strain on resources as the population gets richer. The fact that
China is restraining its population control means that it will be much better
positioned to manage its resources and limit pollution than India.
Back to Top
Behind China’s Bid for
Unocal: A Costly Quest For Energy Control
Joseph Kahn
New
York Times, June 27, 2005, Page C1
This article discusses the efforts of a Chinese government owned oil company to
buy Unocal. At one point the article describes the Chinese economy as very
energy inefficient, asserting that it uses three times as much energy per dollar
of GDP as the United States.
Actually, this calculation
uses the wrong measure of GDP. It relies on a currency conversion measure of
GDP, which depends on the exchange rate between the dollar and the Chinese
currency. The more meaningful measure of output is a purchasing power parity
measure. By this measure, China’s GDP is approximately four times as large as
by the currency conversion measure, making China’s economy somewhat more
energy efficient than the U.S. economy.
Back to Top
China’s Economic Brawn
Unsettles Japan
James Brook
New
York Times, June 27, 2005, Page C1
This article reports on concerns
in Japan about the growing economic power of China. It understates the current
size of China’s economy and overstates its projected growth because it uses a
currency conversion measure of GDP. Using a purchasing power parity measure of
GDP, China’s economy is already more than 50 percent larger than Japan’s.
While the article asserts that China’s economy will grow 30 times larger by
2050, on a purchasing power parity basis it is projected to be approximately 9
times as large in 2050 as it is today.
Back to Top
Immigration
and Wages
Unlikely Hero in
Europe’s Spat: The Beckoning ‘Polish Plumber’
Elaine Sciolini
New
York Times, June 26, 2005, Page A1
This article discusses the
concerns that have been raised in many West European countries over “Polish
plumbers,” the prospect that low paid workers from the East European countries
newly admitted to the European Union, may take jobs from higher paid workers in
West Europe. The article presents a number of anecdotes that imply that such a
concern is baseless.
It would have been useful to
include the views of an economist. In economic theory, increased supply is
usually believed to lower the price. Typically, an increase in the supply of
specific types of labor (e.g. plumbers, construction workers, or dishwashers)
would be expected to lower the price of that labor. It would have been helpful
if the article included an explanation of why the normal rules of economics
would not apply in the case of “Polish plumbers.”
Back to Top
Labor
Protections in Germany
Not So Sweet for
Europe: Germany Is No Sugar Daddy Now
Mark Landler
New
York Times, June 26, 2005, Section 4, page 5
This article discussed
Germany’s current role in the Europe Union (EU). It reports on its reluctance
to pay more money to the EU’s budget as a result of its own economic
difficulties. The article concludes by asking “how much Germans are willing to
tolerate in order to shake their country out of lethargy,” referring to the
dismantling of welfare state protections.
The evidence that dismantling
welfare state protections will lead to more rapid economic growth is actually
quite weak. The more obvious cause of weak economic growth is the restrictive
monetary policy being run by the European Central Bank (ECB). Virtually all
economists agree that the United States would have had slower growth and higher
unemployment if the Fed’s policies were as restrictive as those of the ECB.
This article includes no discussion of the ECB and monetary policy.
Back to Top
Copyrights
Justices Reinstate
Suits on Internet File Sharing
Linda Greenhouse and Lorne Manly
New
York Times, June 28, 2005, Page A1
This article reports on a
Supreme Court decision that allows makers of software and other technologies
that can be used to make unauthorized reproductions of copyrighted material to
be sued by the holders of copyrights. It would have been useful if the article
included some economic analysis of the impact of this decision.
The decision could impose
substantial economic costs for two reasons. First it could slow the development
of new software and technology since software developers and inventors will now
have to worry about being sued by the entertainment industry. Second, it could
lead to ever higher enforcement costs associated with copyright protection, as
courts have to sort out the extent to which various types of software and
hardware have non-infringing uses compared to infringing uses. These enforcement
costs are in addition to economic inefficiency associated with charging
consumers for music, movies, and software that could otherwise be transferred at
zero marginal cost. The deadweight loss associated with copyright protection is
already an order of magnitude larger than the efficiency gains associated with
trade agreements like NAFTA or the Uruguay Round of the WTO.
Back to Top
Medicaid
In Effort to Pare
Medicaid Rolls, Long-Term Care is the Focus
Jane Gross
New
York Times, June 27, 2005, Page A1
This article discusses various
proposals to limit the growth in Medicaid costs. At one point the article
asserts that Medicaid costs are being driven by the same force as Social
Security costs, an increasing population of elderly. This is not true. The main
factor driving Medicaid costs is rising per person health care costs. The
increase in per person costs (in excess of the overall inflation rate) accounts
for approximately 60 percent of the projected real growth in Medicaid
costs.
Back to Top
Aid to Africa
Bush Proposes New
Spending to Assist Poor Africans
Richard W. Stevenson
New
York Times, July 1, 2005, Page A3
This article reports on
President Bush’s plans for several new aid initiatives for Africa. It would
have been helpful if the proposed levels of spending on these initiatives were
placed in some context so that readers would have a better sense of their likely
impact and cost.
President Bush proposed to
spend an additional $1.2 billion over the next five years eradicating malaria,
$400 million on education, and $55 million combating sexual abuse. These figures
are equal to 0.009 percent, 0.003 percent, and 0.0004 percent of projected
federal spending, respectively, over this period. Alternatively, measured on a
per capita basis in Africa, the sums can be described as 40 cents per person per
year, 15 cents per person per year, and 2 cents per person per year.
Back to Top
Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.