Economic Reporting Review
 By Dean Baker
August 22, 2005


In This Issue:

•  Outstanding Stories of the Week
•  The Budget
•  Gas Prices and the Economy
 •  Russia
•  Social Security
•  Movie Subsidies
•  Airlines
•  Brazil
•  El Salvador   
•  France


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Outstanding Stories of the Week
Doctors’ Links With Investors Raise Concerns
Stephanie Saul and Jenny Anderson
New York Times, August 16, 2005, Page A1


This article reports on a growing trend among doctors performing clinical trials, in which they get paid to discuss their progress with investors. The article points out the potential risks for both the integrity of the medical research and the possibility for insider trading by investors. 

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Death Tax? Double Tax? For Most, It’s No Tax
Edmund L. Andrews
New York Times, August 14, 2005, Page, Section 3, Page 4 

This article discusses some of the issues raised in connection with the proposed repeal of the estate tax. It points out that in many instances the money in the estates of wealthy individuals has never been taxed, because it was in the form of unrealized capital gains in a business, stock, or real estate. 

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In Health Care, a Race Gap Persists
Rob Stein
Washington Post, August 18, 2005, Page A1


This article reports on several new studies that show that a racial gap in health outcomes and treatment persists. The studies found that there has been relatively little progress in reducing racial disparities in many categories of treatment and in some categories, the disparities have actually increased. 

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Break on Foreign-Profit Tax Means Billions to U.S. Firms
Jonathan Weisman
Washington Post, August 19, 2005, Page D1


This article examines the extent to which U.S. firms are taking advantage of a special one-year tax holiday that allows firms to repatriate foreign profits at a tax rate of just 5.25 percent. The tax holiday was supposed to lead to a surge in investment, but the article reports that it is having very little impact on firms’ investment decisions. 
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The Budget


Deficit Forecast Lowered for 2005
Nell Henderson
Washington Post, August 16, 2005, Page D1


Surge in Corporate Taxes Is expected to Reduce Deficit
Robert Pear
New York Times, August 16, 2005, Page A16


These articles report on a new set of budget projections from the Congressional Budget Office (CBO) that show the deficit will be somewhat lower in 2005 than previously predicted. It would have been helpful to readers if the deficit numbers were reported as a share of GDP, since almost no readers are able to understand the significance of a $331 billion deficit (the new projection for 2005). It is only the size of the deficit relative to GDP that matters for the economy, not the nominal size of the deficit. (By analogy, for most people a $1 million debt would be a big deal. However, for Bill Gates a $1 million dollar debt is trivial. The important issue is the size of the debt relative to one’s wealth or income.) 

This distinction is important because politicians try to manipulate these numbers for their political ends. For example, the Times article quotes Representative John M. Spratt Jr. as describing the deficits of 2003 and 2004 as the “worst in history.” While this is true if the deficit is measured in nominal dollars, it is not true if the deficit is measured relative to the size of the economy. The deficits of those years (including borrowing from Social Security) were 5.0 and ,9 percent of GDP, respectively. By contrast, the deficit was 6.0 percent of GDP in 1983 and close to 5.0 percent in 1991 and 1992. Measured as a share of GDP, the deficits in these earlier years would be larger, whether or not Social Security borrowing is included.

At one point the Times article reports that spending on Social Security, Medicare and Medicaid will double in the coming decade. Actually, most of the projected increase in spending in these three programs is attributable to rising private sector health care costs that are projected to push up Medicare and Medicaid spending. After adjusting for inflation, Social Security spending is projected to increase by approximately one-third over the next decade. 

The Post article asserts that the CBO projection of a $331 billion deficit “relies on spending $173 billion in surplus Social Security tax revenue.” Actually, this measure relies on counting this borrowed money as revenue for the general budget. Anyone who chooses to use a deficit number that does not count money borrowed from Social Security is free to do so. Most reporters (or their editors) have chosen to include the money borrowed from Social Security as revenue for the government, thereby reporting a substantially smaller deficit than the actual amount that is being borrowed to finance the general budget. 

One of the main factors lowering the budget deficit for 2005 was a special tax clause that allowed firms to repatriate foreign earnings in 2005 at an exceptionally low tax rate. Many firms have chosen to take advantage of this tax break, which has led to a one-time surge in corporate tax revenue, which will not be repeated in future years. 

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Gas Prices and the Economy

Consumer Prices Increase, Outstrip Wages
Nell Henderson
Washington Post, August 17, 2005, Page D1


This informative article assesses the impact of higher gas prices at the economy. At one point it quotes an economist who asserts that higher gas prices are helping to keep down the core rate of inflation by reducing overall demand and thereby imposing downward pressure on prices. While higher gas prices take money out of consumers’ pockets, it is also likely that higher gas prices will lead to more upward pressure on wages, as workers try to compensate for higher prices. More rapid wage growth will lead to higher prices, thereby increasing inflation.

Thus far in the recovery, the labor market has been so weak that workers have been forced to largely absorb the increase in energy costs, and see their real wages decline. Presumably, at some point in this business cycle, the labor market will be tight enough that workers will at least be able to push up their wages enough to keep pace with inflation.
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Russia

Pervasive Corruption in Russia Is ‘Just Called Business’
Steven Lee Myers
New York Times, August 13, 2005, Page A3

This article reports on the growth of government corruption in Russia during the Putin presidency. It implies that corruption is now qualitatively worse in Russia than it had been in the past.

The article presents no evidence that would support this view. During the tenure of the previous president, Boris Yeltsin, a vast amount of government owned industry passed into private hands at a fraction of its market value. It is widely recognized that the individuals who purchased these assets at below market prices, and became billionaires in the process, did so as a result of their government connections. Nothing described in this article suggests that corruption in the Putin administration has approached the levels reached in the Yeltsin years.

In fact, some of the evidence in the article suggests that corruption is decreasing, not increasing. Not increasing. For example, the article presents the results of a poll that showed that the percentage of people who paid a bribe in a situation where it may have been to their benefit fell from 75 percent in 2001 to 53 percent in 2005. It also shows that the estimates of the bribes paid to traffic police have been cut in half during this period. 

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Social Security

Happy 70th Birthday, Social Security
Jonathan Weisman
Washington Post, August 14, 2005, Page A5


This article discusses the prospects of various proposals to restructure Social Security on the 70th anniversary of the signing of the bill that created Social Security. At one point it refers to 2041, which it describes as the date when the Social Security actuaries project that the program will first face a shortfall. Actually, this is the date projected by the Social Security trustees, four out six of whom are political appointees of President Bush. 

The trustees projections are considerably more pessimistic than the projections of the non-partisan Congressional Budget Office (CBO). CBO projects that the program can pay all benefits through the year 2052 if no changes are made. The trustees projections rely on some peculiar assumptions. For example, they assume that productivity will grow at a rate considerably slower than that assumed by CBO, or by President Bush’s Office of Management and Budget in their budget projections. The trustees also assume that immigration will be considerably slower in the decades when the retirement of the baby boom cohort is creating a labor shortage than it was in the nineties.

At one point the article describes a Republican proposal as “dedicating Social Security taxes to Social Security.” All Social Security taxes are already dedicated to Social Security. Under the law, every penny in Social Security taxes is either used to pay current benefits or to buy U.S. government bonds. The bonds will be used to help defray Social Security expenses in the future when the baby boom cohort retirees. Therefore, unless Congress votes to default on the bonds held by the Social Security trust fund, all money that is paid in Social Security taxes will be used for Social Security.

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Movie Subsidies

California Considers Tax Breaks For Filming 
David M. Halbfinger
New York Times, August 18, 2005, Page B1

This article reports on a proposal being considered by the California legislature that would give a refundable tax credit to movie companies that film in California. The article reports that the credit will not subsidize the high salaries of movie stars, because it can only be applied against the first $25,000 of salary. It also reports that overhead and distribution expenses will not count for collecting the tax credit, thereby ensuring that the credit will go to job creation.

Neither of these claims is true. Even with very optimistic assumptions about the credit’s impact, the vast majority of the subsidies will go to movie companies that would have filmed in California anyhow. The credit will be additional money that the movie companies can use as they like. This includes increasing the salaries of top stars or for increased expenditures for distribution, or simply for higher profits. Restricting the categories of expenses that are used to calculate the tax credit will have a minimal effect on the distribution of gains from the tax credit.  

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Airlines

Circling a Decision
Micheline Maynard and Jeremy W. Peters
New York Times, August 18, 2005, Page C1

This article discusses Northwest Airlines prospects and the likelihood that it will file for bankruptcy. The article is accompanied by a large chart showing trends among major airlines in costs per passenger mile. This is not necessarily a good comparison, because some airlines fly a much higher percentage of short-distance flights than others. It would be expected that these airlines have higher costs, but their revenue would also be correspondingly higher on a per mile basis. (It does not cost ten times as much to fly from New York to Los Angeles as from New York to Washington, D.C, even though the distance is more than ten times as great.) 

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Brazil

Brazils’ Opposition Shelters President From Scandal, for Now
Larry Rohter
New York Times, August 14, 2005, Page A3

This article reports on how the political opposition in Brazil appears anxious to keep the president, Luiz Inacio Lula da Silva, in power, despite the fact that he has been implicated in a major scandal involving illegal campaign financing and alleged bribery.. At one point it describes Brazil’s economy as “robust” and later refers to record exports, and falling interest rates.

Actually, Brazil’s economy is currently growing at less than a 3.0 percent annual rate. This is a very slow growth rate for a developing country, especially since Brazil is still recovering from the effects of a recession earlier in the decade. Most countries have record exports most years, because their economy is growing and the trade share of output is growing. Therefore having record exports reveals little about a country’s economic success – it’s comparable to saying that a person is older today than he has ever been before. Brazil’s short-term interest rate is still at 19.75 percent. With an inflation rate near 7.0 percent, this is still an extremely high interest rate by any standard, even though it had been even higher (in nominal terms) in 2002-2003.

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 El Salvador

El Salvador’s Hunger Shows at Tuna Plant
Krissah Williams
Washington Post, August 16, 2005, Page D1

This article reports on the hopes of some Salvadorans that CAFTA will increase the country’s growth rate. It would have been appropriate to note that the U.S. import market is virtually certain to contract sharply over the next decade, since it is unlikely that Japan and China’s central banks will continue to finance large U.S. trade deficits throughout the decade (see “Fools’ Gold: Projections of the U.S. Import Market,” ). This means that El Salvador will only be able to increase its exports to the U.S. if it can take away market share from countries like China and Mexico. 

The article also does not mention the damage to El Salvador’s economy that will result from paying higher prices for drugs and other items subject to patent or copyright protection. Research from the World Bank suggests that this damage could be substantial. 

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France

French Economy Grew Only 0.1% in Last Quarter
Associated Press
New York Times, August 13, 2005, Page B2

This article reports on a new data showing that the French economy grew at just a 0.4 percent annual rate in the second quarter. The article expresses this as 0.1 percent, the quarterly rate of growth. (It also expresses France’s first quarter growth as a quarterly rate.) It is standard in the United States to express GDP growth as an annual rate. It would be helpful to readers if the article simply reported French growth at an annualized rate. 
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.