Economic Reporting Review
By Dean Baker
July 11, 2005
In This Issue:
• Outstanding
Stories of the Week
• Climate
Change and the Kyoto Agreement
• The
Budget
• Aid to Africa
• China
and Unocal
• Germany
• Prescription
Drugs and Trade
• State
Budgets
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Outstanding
Stories
of the Week
Iowa Cuts Added Costs In Title Insurance Policies
Joseph B. Treaster
New
York Times, July 6, 2005, Page C4
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Were the Good Old Days That Good?
Louis Uchitelle
New
York Times, July 3, 2005, Section 3, Page 1
This article examines trends in living
standards in the United Sates over the last sixty years. It points out that most
families experienced rapid increases in their standard of living in the first
thirty years following World War II. By contrast, the improvements in living
standards over the last thirty years have been much more modest as most of the
gains from higher productivity have gone to those at the top end of the income
distribution.
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Costs, Speed at Crux of Social
Security Debate
Jonathan Weisman
Washington
Post, July 7, 2005, Page D3
This article examines the administrative
costs that would be incurred if private accounts replace Social Security. It
notes the tradeoffs between low-cost accounts that would not be immediately
credited with individuals' contributions and higher cost accounts that
could be credited with every paycheck, like 401(k)s.
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Climate
Change and the Kyoto Agreement
Climate Plan Splits U.S. and
Europe
Juliet Eilperin
Washington
Post, July 2, 2005, Page A4
On Eve of Summit Talks, Leaders
and Protestors Prepare
Alan Cowell
New
York Times, July 5, 2005, Page A1
These articles report on
preparations for the G-8 summit that is scheduled to take place in Scotland this
week. Both articles refer to President's Bush's opposition to the Kyoto
agreement to restrict greenhouse gas emissions.
The Times article provides an interesting contrast when it reports President Bush's comments concerning the need to pursue the war on terrorism. It later quotes him as saying that taking steps to curb greenhouse gas emissions, along the lines proposed in the Kyoto agreement "would have wrecked our economy."
It is worth noting that,
according to standard economic models, the damage to the U.S. economy as a
result of the Iraq War is comparable to the losses that would result from the
Kyoto agreement. While the potential economic costs of the Kyoto agreement have
been given considerable attention in the media, the economic costs attributable
to the war have rarely been mentioned in the media.
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The
Budget
Economic Growth, Tax
Receipts Combine to Reduce Deficit
Jonathan Weisman
Washington
Post, July 2, 2005, Page D1
This article reports on
the fact that federal tax receipts in the current fiscal year have been higher
than projected. As a result, the deficit will be considerably lower than
projected. At one point it cites the assessment of the head of the Congressional
Budget Office, Douglas Holtz-Eakin, that the increase may be partially
attributable to increased capital gains revenue as a result of recent gains in
the stock market. It is worth noting that tax receipts can fluctuate
substantially due to growth in the stock market. The share of GDP going to
federal tax revenue increased by 2.4 percentage points from 1995 to 2000, even
though there were no substantial changes to the tax code. This increase was
primarily attributable to taxes paid on capital gains earned in the stock
bubble.
The article also includes a
comment from a Republican economist who claims that the Bush tax cuts will
generate almost enough growth to pay for themselves in higher tax revenue. It is
worth noting that economic growth was considerably more rapid in the Clinton
administration following his decision to raise taxes in 1993.
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Aid to
Africa
Among Ordinary Africans, G-8
Seems Out of Touch
Emily Wax
Washington
Post, July 3, 2005, Page A1
This article purports to
present the views of ordinary Africans about debt relief and aid to Africa. The
main source for the article is the owner of a coffee plantation in Kenya who is
a college graduate, like his siblings. Only a very small minority of wealthy
Africans go to college, so it is questionable whether such people should be
viewed as "ordinary."
The article goes to present complaints that subsidies by western countries to agriculture hurt African farmers. It is questionable how many ordinary Africans typically think about this sort of economic argument. The article also does not indicate how ordinary Africans would feel about paying the higher prices for food and clothes that would result if the west removed its subsidies for food and agricultural products.
At one point the article asserts that efforts to eliminate the debt of Sub-Saharan Africa are out of touch with the concerns of ordinary Africans, arguing that they are more concerned about ending corruption and "improving roads, courts, banking, and secondary education." Actually, the drive to end the debt is intended to make it possible for African countries to improve their roads, courts, banks, and secondary education, in addition to other needs. Most African countries have very little money for these purposes because they pay so much money to the west in debt service.
It is surprising that so few of the ordinary Africans interviewed in this article apparently understood that money is fungible - the less money that is paid for debt service, the more money is available to meet social needs. According to data published by the World Bank, the vast majority of the debt relief granted to 27 low-income countries between 1999 and 2003 went to programs benefiting the poor.
It is also interesting that none
of the ordinary Africans interviewed for this article expressed concerns about
efforts by western countries to make them pay more for medicine and recorded
music, DVDs, and software, through increasing patent and copyright protection
throughout Africa. This has been a major area of conflict in trade policy, and
in the case of patent protection for prescription drugs, an area in which the
policy promoted by western nations directly threatens tens of millions of lives.
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China and
Unocal
China Tells Congress To Back
Off Business
Peter S. Goodman
Washington
Post, July 5, 2005, Page A1
This article reports on the
Chinese government's criticism of the U.S. Congress over its efforts to block a
Chinese government-owned oil company from buying up Unocal. It lists sources of
tension between the United States, pointing out that many members of Congress
are angered by China's "manipulation" of the value of its currency, by
keeping it low relative to the dollar.
Later in the article, it argues that the main source of tension may be simply the amount of cash that the Chinese government has at its disposal. In fact, these two issues are the same. If the Chinese government raised the value of its currency relative to the dollar, its trade surplus with the United States would decline, and it would not have the same amount of money at its disposal.
In listing sources of tension
between the two countries, it is also worth noting that the actions of China's central
bank have had the effect of making Alan Greenspan's monetary policy
ineffective. In the last year, Greenspan has sought to slow the U.S. economy by
raising short-term interest rates from 1.0 percent to 3.25 percent. China's
central bank has acted to offset the impact of this tightening by directly
intervening in the long-term bond market. The interest rate on 10-year Treasury
bonds is actually lower today (approximately 4.1 percent) than it was when
Greenspan began raising rates (approximately 4.5 percent). Long-term interest
rates have far more impact on the economy than short-term interest rates.
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Germany
In Germany, the Jobless Work
to Keep Their Benefits
Kevin J. O'Brien
New
York Times, July 5, 2005, Page C3
This article discusses the
impact of a new German law that requires workers receiving unemployment benefits
to spend time working at menial jobs at extremely low pay. The article gives
both regional and national measures of the unemployment rate.
These measures are the official German measure of unemployment. Germany uses a different method for measuring unemployment than the United States. The German measure counts anyone who is involuntarily working less than 15 hours a week as being unemployed. These people would be counted as employed in the United States.
The article should have informed readers that the German measure of unemployment is different from the U.S. measure. Reporting the German measure without this clarification is comparable to presenting the temperature in Germany without pointing out that the measure of degrees is centigrade, not Fahrenheit.
The OECD produces a standardized
measure of unemployment for Germany with a methodology that is virtually
identical to the U.S. method. (The OECD measure shows an unemployment rate that
is approximately 2 percentage points lower than the official German measure.)
The OECD measure is readily available on its website. It would be a more
informative statistic for readers familiar with the U.S. measurement of
unemployment.
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Prescription
Drugs and Trade
Drug Lobby Got a Victory in
Trade Pact Vote
Stephanie Saul
New
York Times, July 2, 2005, Page B1
This informative article reports
on the potential benefits that the U.S. pharmaceutical industry will receive
from CAFTA. Specifically, it will require the governments of Central America to
grant U.S. drug companies monopolies on many drugs that are currently sold in a
competitive market. The article notes that higher drug prices will be a
significant cost to many people in Central America.
The article later quotes a law professor's comment that the treaty should lead to gains for agricultural and textile producers, but that these gains may not trickle down to the people paying higher drug prices. While this statement is true, it can be taken as implying that the treaty will lead to a net economic gain for the region. It is not clear that this is the case.
CAFTA will also impose higher
costs on Central American economies by requiring tighter patent protection in
other areas, such as computer software, and also tighter copyright protection.
These forms of protection will increase the price of the affected items by
several hundred percent above the free market price. There have been virtually
no efforts by economists to measure the economic losses that will result from
increasing patent and copyright protection in developing countries, but the
limited analysis available suggests that these costs are substantial. It is
entirely plausible that the economic losses from increased protection of
intellectual property will exceed any gains associated with increased access to
the U.S. market. This would mean that CAFTA provides no economic benefits that
could trickle down.
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State
Budgets
After Bleak Period, States'
Revenues Rise, Governors Report
Robert Pear
New
York Times, July 8, 2005, Page A20
This article examines new data
on revenue flows to state governments. It notes that 2005 tax revenue exceeded
projections in 42 of the 50 states. According to the article, total tax
collections were up by 4.7 percent in 2005. It then gives a breakdown of revenue
changes by major source, reporting that sales tax collections were up by 1.1
percent, while personal income taxes were 2.1 percent higher. The main force
behind the gain in tax revenue was an 8.8 percent increase in corporate income
taxes.
It is worth noting that this gain
in corporate taxes is likely to be temporary. This is partly due to the fact
that corporate profits are likely at or near a cyclical peak. More importantly,
many corporations are taking advantage of a one-time provision in the tax code
that allows them to repatriate foreign profits in 2005 at a tax rate that is far
lower than normal. As a result of this provision, corporations are showing much
higher book profits in the United States in 2005 than would otherwise be the
case, and they are paying taxes on these one-time profits at the state level.
However, this source of profit growth will disappear at the end of 2005, which
means that corporate tax collections are likely to fall in 2006 and in
subsequent years.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.