Economic Reporting Review
By Dean Baker
July 25, 2005
In This Issue:
• Outstanding
Stories of the Week
• Greenspan and
the Housing Bubble
• Housing
Marketl
• Social
Security
• Medicaid
• China's
Currency
• CAFTA
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Outstanding
Stories
of the Week
Hybrid Cars
Burning Gas in the Drive for Power
Matthew L. Wald
New
York Times,
July 17, 2005, Page A1
This article reports on the fact that most hybrids actually
do not get much better mileage than standard cars. Manufacturers are using the
electrical engines to improve performance rather than increase mileage, which is
the reason that these care qualify for large tax credits.
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Greenspan
and the Housing Bubble
Greenspan Heightens Warning on Risky Mortgages
Nell Henderson
Washington
Post,
July 21, 2005, Page D1
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Fed to Keep Rate Policy In Place
Edmund L. Andrews
New
York Times,
July 17, 2005, Page C1
It is also important to note that Greenspan has repeatedly said that the Fed
should not target asset bubbles. This is why Greenspan chose never to warn about
the tech bubble even as the NASDAQ was hitting 5000. Presumably, Greenspan has
not changed his views on how the Fed should deal (or not deal) with asset
bubbles, which means that he would not be warning of a housing bubble even if he
believed that there is one.
In this context, it is quite striking that he has chosen to warn of
“frothiness” in certain housing markets. He never issued comparable warnings
during the tech bubble.
The Post article includes a paragraph reporting the reasons given by
Greenspan for the persistence of low long-term interest rates, even as he has
been raising short-term interest rates. It is worth noting that he did not
mention the monetary policy of the Chinese and Japanese central banks. While
Greenspan has been intervening in the short-term market, the Chinese and
Japanese central banks have sought to counteract Greenspan’s actions by
directly intervening in the long-term market, buying up hundreds of billions of
dollars of ten-year treasury bonds over the last two years. Thus far, the
monetary policy of the Chinese and Japanese central banks has been far more
effective than Greenspan’s monetary policy, as demonstrated by the fact that
in spite of 9 interest rate hikes since June of last year that have brought the
Federal Funds rate from 1.0 to 3.25 percent, the 10-year Treasury rate has
actually fallen from 4.6 to 4.2 percent over the same period.
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Housing
Market
Housing Goes Frothy to Flat In Denver Area
Motoko Rich
New York Times, July 17, 2005, Page A1
As
a result of the recent run-up in house prices, a very large percentage of homes
sell at prices above this cap. If these homes experienced a larger run-up in
price than most, and may also be the first to see price declines as the market
weakens, the HPI would not pick up this information. In other words, if prices
have begun to fall in higher end homes, but not for the median home, this would
not show up in data from the HPI.
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Social
Security
Here’s a Social
Security Plan That’s Really Two Plans
Daniel Altman
New
York Times, July 17, 2005, Section 3 page 7
This
article lays out a proposal to divide Social Security into two separate systems:
one an expanded voluntary 401(k) system, and the second an income insurance
system for low-income families. The article asserts that this sort of two-tiered
system would be highly efficient and that most economists recognize this
fact.
In fact, the article does not cite a single economist who supports this
proposal. It is unlikely that many would, since this system would likely prove
both inefficient and inadequate to ensure most people a decent standard of
living in retirement.
It
is likely to be inefficient because the benefit in the insurance portion of the
system is means-tested. It can be extremely expensive to enforce a means test.
Individuals can find many ways to effectively hide income and assets. Currently,
the administrative costs of the Social Security system are just 0.6 percent of
what it pays out in benefits every year. A means-tested program would likely
have expenses that are twenty times as high. In addition, there would almost
certainly be public resentment at a program that would require people to open
their homes to government bureaucrats to ensure that they are not hiding assets.
The article also assumes that a small expansion of 401(k) plans, along the lines
proposed by President Bush, would address most workers savings needs. In fact,
the expansions proposed by Bush primarily allow higher income people to shelter
more savings from taxes. Since the vast majority of workers are already saving
far below the legal limits, these plans would not help them at all.
In short, there is no reason to believe that most people would save adequately,
on their own, even with an enhanced 401(k) system. This is the reason that
Social Security privatization proposals, like the one put forward by President
Bush, still mandate that workers save a fixed percentage of their wage
income.
The article also wrongly asserts that the reason that Social Security
pays a relatively low rate of return is that it provides both an insurance
function and a savings function. In fact, the main reason that Social Security
provides a relatively low rate of return is that current workers must pay the
benefits for current retirees. The only way to avoid this situation is to have a
large transition tax that would have a return of negative 100 percent.
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Medicaid
Officials’ Pitch For Drug Plan Meets Skeptics
Robert Pear
New
York Times, July 17, 2005, Page A1
This
article discusses the efforts by the Bush Administration to promote its new
Medicare prescription drug benefit. At one point the article asserts that the
Bush administration designed the plan “to inject market forces” into the
Medicare system. This is not clear. The most obvious way to have injected market
forces would have been to remove government-enforced patent monopolies on
prescription drugs. If drugs sold at free market prices, then seniors would have
little problem paying for them.
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China's
Currency
China’s
Currency May Float a Little
Peter S. Goodman
Washington
Post,
July 19, 2005, Page D1
This article discusses the possibility
that China may raise the value of its currency against the dollar. At one point
it asserts that “most economists say the value of the yuan bears little
connection to American jobs and wages because much of China’s export growth is
in goods that have not been made in large quantities in the United States for
years, such as textiles, toys, furniture and home appliances.”
According to data from the Bureau of Labor Statistics, in June there were
660,000 people employed in the United States producing either textiles or
apparel and 560,000 producing furniture. The comparable figures for June of 1995
were 1,510,000 jobs in textiles and apparel, and 605,000 jobs in furniture.
While it is not likely that many of these jobs would be returned to the United
States even if China substantially raised the value of its currency, the rate of
job loss would almost certainly slow.
It is also important to note that many economists see a rise in China’s
currency leading to a rise in the currencies of other countries. Many other
countries have deliberately held down the value of their currencies in order not
to lose out to China. Therefore, if China raises the value of its currency,
countries such as Thailand, Malaysia, and South Korea might follow suit.
(Malaysia and Singapore announced they were removing their peg to the dollar
immediately after China revalued its currency.) This would result in an
improvement in the U.S. trade situation with these countries as well, and thus
even more impact on U.S jobs and wages.
The article presents no evidence to support its assertion that “most
economists” don’t believe that the value of China’s currency will affect
jobs and wages in the United States. It would be interesting to report what
factors the economists referred to in this article think actually do affect jobs
and wages. The value of the Chinese currency relative to the dollar determines
the price of Chinese goods relative to U.S. goods and therefore has a large
impact on jobs and wages in any industry where China’s production competes
with U.S. production. Any economist who does not believe that relative prices
affect jobs and wages in the United States has views very much at odds with
standard economic theory.
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China’s
Currency Change May Ultimately Mean Little
Paul Blustein
Washington
Post,
July 22, 2005, Page D1
This article discusses the implications of
the revaluation of China’s currency against the dollar. It concludes with an
assertion by an unnamed U.S. official that a fall in the dollar is only a small
part of the process of bringing the U.S. trade deficit down to a manageable
level.
The main determinants of the U.S. trade deficit are the size of the U.S. economy
and relative prices of foreign and domestically produced goods. The latter is
determined primarily by the value of the dollar, with all other factors being
relatively minor. Anyone who does not believe that the U.S. trade deficit will
not be corrected primarily through an adjustment in currency values must believe
that the correction will occur primarily through a fall in output, in other
words a steep recession. If a top U.S. official believes that the U.S. should
have a severe recession to reduce the trade deficit, then this should have been
mentioned more prominently in this news article.
It is also not clear why an administration official speaking on general economic
issues should have been doing so anonymously. This fact warrants a separate news
story.
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Chinese to Stop
Tying Currency Only To Dollar
David Barboza and Joseph Kahn
New
York Times, July 22, 2005, Page A1
Saying Goodbye to
Mr. Greenspan
Printed online as "China's
Opaque Currency Problem"
Keith Bradsher
New
York Times,
July 22, 2005, Page C1
U.S. Calls
Revaluation a Good Start
Edmund L. Andrews
New
York Times,
July 22, 2005, Page C1
These articles
discuss China’s decision to revalue its currency. At one point the article by
Barboza and Kahn refers to the flow of capital from China to the United States,
which it asserts has kept interest rates low. It is worth noting that this flow
of capital has kept interest rates low because China’s central bank has made a
conscious decision to try to keep U.S. interest rates low, and thereby to
counteract Alan Greenspan’s monetary policy.
Over the last year, Greenspan has been trying to raise interest rates in order
to slow the economy (and possibly to prick the housing bubble). His mechanism
has been to increase the short-term federal funds rate from 1.0 percent to 3.25
percent. The Chinese (and Japanese)
central bank has effectively countered this action by buying up long-term
government bonds. As a result, mortgages interest rates and other long-term
interest rates are lower today than they were when Greenspan first began raising
rates.
The article by Bradsher warns that the rise in the value of the Chinese currency
could lead to a huge inflow of speculative capital, which could touch off
inflation, and thereby make the Chinese long for the good old days when their
currency was fixed against the dollar. Actually, a rapid inflow of capital would
cause the currency to rise even more, which would make imports considerably
cheaper. This would tend to counteract any inflationary pressures and would also
lead to improving living standards for most Chinese.
At one point the article by Andrews comments that even some “ardent free
traders” supported taking action against China, if it did not raise the value
of its currency. The people being referred to are not in fact ardent free
traders. While they do support removing barriers to trade in manufactured foods,
which has the effect of lowering wages for less educated workers, they are in
fact ardent supporters of protectionist measures that prevent highly educated
people, like doctors and lawyers from having to face foreign competition. They
are also ardent supporters of protectionist measures like patents and
copyrights.
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CAFTA
Bush
Sells Trade Pact in Hostile Territory
Elisabeth Bumiller and Edmund L. Andrews
New
York Times,
July 16, 2005, Page B13
This
article reports on President Bush’s efforts to increase support for CAFTA in
North Carolina. The article cites the president’s assertion that the agreement
will lead to job growth by increasing textile exports to Central America.
It would have been worth noting that the main reason that textile exports would
increase is that U.S. apparel manufacturers would be more likely to set up
factories in Central America. If textiles that are currently being produced for
domestic manufacturers are instead produced for manufacturers in Central
America, it does not increase employment in the textile industry.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.