Economic Reporting Review
By Dean Baker
August 8, 2005
In This Issue:
• Outstanding
Stories of the Week
• 2nd
Quarter GDP
• Energy
and Transportation Bills
• The
Euro
• Germany
• June
Construction Data
• China
• Harvard
Investment Managers
• The
Economy and Presidential Politics
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Outstanding
Stories
of the Week
How Wall Street Wrecked United's Pensions
Mary Williams Walsh
New
York Times, July 31, 2005, Section 3, Page 1
This article reports on how pension fund managers earned
$125 million from managing United Airlines pension funds from 1999-2004, even as
their investment decisions consistently lost money. Largely as a result of these
decisions, the pension fund went bankrupt and was taken over by the Pension
Benefit Guarantee Corporation.
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As Their Use Soars, Heart Implants Raise Questions
Barry Meier
New
York Times, August 2, 2005, Page C1
This article discusses the growing use of defibrillators. It
reports that the price of defibrillators has remained very high and there have
been serious questions raised about the quality and value of the product. This
is the sort of market situation that standard economic analysis predicts would result from the
patent monopolies held by makers of medical devices.
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Mexicans at Home Abroad
Eduardo Porter and Elisabeth Malkin
New
York Times, August 4, 2005, Page C1
This article examines the situation of Mexican immigrants who
are currently working in the United States and the factors that will determine
whether they choose to retire here or return to Mexico.
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2nd
Quarter GDP
Pay Lags Behind Inflation
Nell Henderson
Washington
Post, July 30, 2005, Page D1
Suggestions of Strength In Economy
David Leonhardt
New
York Times, July 30, 2005, Page B1
These articles report on the release of data on GDP growth in the second quarter. Both articles note that inventories shrank in the quarter and reported that this should mean considerably more rapid growth in future quarters, as firms rebuild inventories. It is important to note that imports also shrank in the quarter, the first time since the first quarter of 2003. Imports currently account for approximately half of all goods sold in the United States, which means that approximately half of the effect of rebuilding inventories will show up in larger imports and a larger trade deficit.
It is also worth noting that the reported personal savings
rate fell to 0.2 percent in the quarter, the lowest rate on record. The GDP
reports also included revisions to prior years' data. One of these revisions
raised the rate of inflation shown by the personal consumption expenditure
deflator (excluding food and energy), the inflation measure favored by Alan
Greenspan, by 0.5 percentage points to 2.0 percent. This revision implies that
inflation is considerably higher than had previously been believed.
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Energy
and Transportation Bills
On Capital Hill, A Flurry of GOP Victories
Charles Babington and Justin Blum
Washington
Post, July 30, 2005, Page A1
After 2-Year Wait, Passage Comes Easily
Shailagh Murray
Washington
Post, July 30, 2005, Page A9
Senate Approves Bill Protecting Gun Businesses
Carl Hulse
New
York Times, July 30, 2005, Page A1
Lawmakers' Pet Projects (and Not Just for Roads) Find
Home in Transportation Bill
David E. Rosenbaum
New
York Times, July 30, 2005, Page A11
These articles report on the passage of a number of bills in Congress. The articles by Babington and Blum and Hulse both refer to the energy bill, which includes $14.5 billion in tax breaks and subsidies. It would be helpful to note that this expenditure occurs over a ten-year period. This amount is equal to 0.05 percent of projected spending over this period.
The article by Babington and Blum includes a comment from President Bush in which he asserts that the bill "will secure our energy future and reduce our dependence on foreign sources of oil." It would have been useful to note that there are no projections that show the bill having more than a trivial effect on U.S. use of foreign oil. All projections show that the United States will be substantially more dependent on foreign oil in ten years than it is today even with this bill.
The other articles discuss the transportation bill, which is projected to cost $286.5 billion (approximately 1.7 percent of projected spending) over the next 6 years. The articles also refer to a number of pork barrel items that influential members of Congress put into the bill. For example, Donald Young, the head of the House Transportation Committee, arranged to have $231 million appropriated to build a bridge to Anchorage ands another $3 million to produce a documentary on Alaska's infrastructure. Mike Pence, the head of the House Conservative Caucus, secured $3 million for a recreational trail in Richmond Indiana.
The cost of the bridge is equal to 0.0014 percent of
projected federal spending over this period. The documentary and the
recreational trail will each cost an amount equal to approximately 0.000018
percent of federal spending. Most readers have very little sense of the overall
size of the federal budget. It would therefore be helpful if these articles put
these expenditures in context. While these projects may well be wasteful
boondoggles, they constitute a tiny portion of the federal budget, even when
added together. This fact would be clearer if the appropriations were expressed
in a way that would be meaningful to a typical reader.
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Bills'
Passage Shows the Arena Where GOP Can Flex Its Muscle
Jim VandeHei and Charles Babington
Washington
Post, July 31, 2005, Page A4
This article discusses the success of the Republicans in getting several major bills approved by Congress before its summer recess. At one point it refers to the transportation bill just approved as "the most expensive" in history. Actually, relative to the size of the economy, it is almost exactly as large as the last transportation bill, which appropriated $204 billion for six years, beginning in fiscal 1999. Both bills provided less money relative to the size of the economy than appropriations in the fifties and sixties.
Appropriations in most categories grow more or less in
step with the size of the economy. This means that in most years, spending in
most areas of the budget will be setting new records. It is more meaningful to
compare the shares of the economy devoted to specific areas of spending through
time.
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The
Euro
Willem F. Duisenberg, First European Bank President,
Dies at 70
Mark Landler
New
York Times, August 1, 2005, Page A13
This article reports on the death of Willem Duisenberg, the first President of the European Central Bank. At one point it discusses his refusal to lower interest rates in 2001, when the euro zone region was suffering from high unemployment and was mired in a recession. It then notes that the euro later rebounded in value and hit a record high against the dollar, implying that this somehow vindicated the decision not to lower interest rates.
In fact, the rationale for lowering interest rates was
increasing output and employment, not raising the value of the euro. While there
are some benefits from having a higher valued currency (imports are cheaper),
these can easily be outweighed by higher unemployment and reduced output. The
latter issues,
not the value of the euro were the main concern of those advocating lower interest
rates.
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Germany
New Leftist Coalition Shuffles Political Deck in Germany
Richard Bernstein
New
York Times, August 1, 2005, Page A3
This article reports on the formation of new political party in Germany, the Left Party, committed to improving the wages and living conditions of typical workers. The article devotes considerably more space to presenting the views of critics of the party than the views of party leaders. This is unfortunate, since the critics are the mainstream of the German political establishment (as the article notes) and have their views presented in the media all the time.
The article asserts that the mainstream is disturbed by the new party because of what "they see as its reliance on false economic premises, its soak-the rich oratory." While the political establishment may claim that they believe that it is false to argue that working people can benefit from policies that are more directly designed to advance their needs, this does not mean that that the mainstream actually holds this view. It is possible that these politicians claim that policies designed to help workers will actually hurt them, because they want to gain political support for policies intended to redistribute income upwards.
At one point the article asserts that Germany is in a
crisis. It does not identify the nature of the crisis to which it refers. There
is no crisis apparent in Germany's economic data. For example, unlike the United
States, Germany has not been identified by the IMF as having an unsustainable
current account deficit. It also does not have a housing bubble.
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June
Construction Data
Manufacturing In July Stronger Than Expected
Associated Press
New
York Times, August 2, 2005, Page C2
This article reports on the release of new economic data
including the Commerce Department's release of June construction data. The June
data showed a decline in the nominal value of residential construction for the
month, as well as a downward revision in the May data. It is worth noting that
these numbers are considerably lower than the numbers included in the advance
report on GDP. The new data would lead to a downward revision in the growth rate
reported for the 2nd quarter of approximately 0.5 percentage points to 3.0
percent.
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China
China Retreats Now, but It Will Be Back
Keith Bradsher
New
York Times, August 3, 2005, Page A1
This article discusses the impact on China of the failure of a takeover bid of Unocal, a major U.S. oil company. At one point the article cites a Chinese academic assertion that the Chinese central bank would continue to manage its reserves with the intention of maximizing returns.
It is difficult to believe that maximizing returns has
been a major consideration in the central bank's decision on reserve holdings. If
so, then it has done very poorly. It has held hundreds of billions of dollars
that have lost 20 percent of their value against the euro. It has also held
long-term U.S. government bonds that pay a very low return and suffered large
capital losses. While these holding make sense if the central bank's goals was
to sustain the U.S. economy, and thereby sustain U.S. demand for Chinese
exports, they do not make much sense as a way to maximize the return on their
reserves.
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Harvard
Investment Managers
Doesn't Anyone Want to Manage Harvard's Money?
Riva D. Atlas and Stephanie Strom
New
York Times, August 5, 2005, Page C1
This article reports on the problem that Harvard has faced in finding a new investment manager for its endowment. The article reports that the fees paid for the prior managers, which reached $25 million a year, had become controversial. However, such fees are still far below the salaries that hedge fund managers can earn elsewhere, which often run into the hundreds of millions per year.
The article effectively assumes that Harvard would want its endowment to be managed like a hedge fund. It is not clear that this is the case. Hedge funds are often quite risky. For example, the poor investments by the Long-Term Capital Hedge Fund, which was managed in part by 2 Nobel Prize winning economists, led to Fund's liquidation, and required intervention by the Federal Reserve Board to prevent serious damage to the U.S. banking system.
The Long-Term Capital Hedge Fund did provide outstanding
returns to its investors prior to its collapse (its performance was widely
touted in the business press). However, Harvard presumably would not want to
risk its endowment, and creating a web of commitments that could endanger the
banking system, simply to get a few years of above-normal returns.
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The
Economy and Presidential Politics
Writing Agenda A Major Test of Clinton's Skill At
Navigation
Dan Balz
Washington
Post, August 3, 2005, Page A7
This article examines Senator Hillary Clinton's presidential prospects in 2008. At one point the article asserts that she should listen to the views expressed by several centrist rivals if she hopes to have the answers "to win back independent voters and appeal more successfully to those in towns and exurban neighborhoods."
The article then presents a quote from Virginia Governor Mark Warner, in which he notes that Democrats have talked about "education, health care, the economy, fiscal responsibility, and national security" and then asserts that old ideas are obsolete and "we need leaders who can see farther down the road."
If Mr. Warner said anything substantive on these issues,
it should have been mentioned in the article. If the point of the quote in the
article was that Mr. Warner and the other centrists cited have no substantive
agenda, that point should have been made more clearly.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.