Economic Reporting Review
By Dean Baker
August
29, 2005
In This Issue:
• Outstanding
Stories of the Week
• Kids
Saving Initiative
• British
Unions
• South
Korea
• Immigration
• The
Greenspan Legacy
• Germany
• Japan
• Productivity
Growth
• CAFTA
You can sign
up to receive ERR and other CEPR e-newsletters at the
CEPR Listserve Signup Page. You can find the latest ERR at the
Economic Reporting Review Main Page.
Outstanding
Stories
of the Week
Fuel Economy Plan Bypasses California to Help Out Detroit
Danny Hakim
New
York Times, August 25, 2005, Page C2
This article discusses how new auto mileage standards put
forward by the Bush administration may over-ride California's efforts to impose
more stringent standards. It also explains how the complex structure of the Bush
administration's regulations will make it easy for auto manufacturers to game
them, so that they have limited impact, as have existing regulations.
Back to Top
Medicare Law Prompts a Rush for Lobbyists
Robert Pear
New
York Times, August 23, 2005, Page A1
This article reports on the lobbying efforts by drug
industry, the insurance industry, and other major interest groups, to ensure
that they gain as much as possible from the Medicare prescription drug benefit.
Back to Top
Kids
Saving Initiative
Initiatives to Promote Savings From Childhood Catching On
Amy Goldstein
Washington
Post, August 20, 2005, Page A1
This article discusses a set of proposals that would use government money to set up savings accounts for small children. The article only includes views from proponents of these measures. It does not include the views of any critics. It also prints absurd claims about the potential returns from such measures without any comment.
While few people would object in principle to the idea of making savings accounts available for children to draw from later in life, this money must come from other programs. For example, a proposal to provide every new born child with a savings account of $500, one proposal discussed in the article, would cost more than $2 billion a year. This is approximately one-third the annual cost of Head Start. At a time when education and health care funding for young children is being cut back, it is not clear that giving small savings accounts to children, most of whom are middle class, is the best use of public money.
The article then goes on to cite a proposal by former
Treasury Secretary Paul O'Neill, which he claims will give every child $1
million by the time they reach age 65. The article then gives Mr. O'Neill's
estimate that it would cost $144 billion to reach this target. At rates of
return consistent with projected economic growth, it would take approximately
$150,000 per newborn child to reach this target. There are approximately 4
million children born each year, which means that this program would $600
billion per year or $6 trillion over the next decade. The article does not
explain how Mr. O'Neill came up with his cost estimate.
Back to Top
British
Unions
Weakened British Unions Step Up Fight Against Airlines and
their Suppliers
Heather Timmons
New
York Times, August 20, 2005, Page B3
This article reports on a strike directed against a catering service that contracts with British Airways. Because several unions supported the workers at the catering company, a large number of flights were cancelled or delayed. The article includes comments from two company spokespeople and a member of parliament hostile to the union's position. While it does include a representative of the striking workers, it would have been helpful to include a comment from a union official in an article that makes broad claims about the state of the labor movement in Britain and Europe.
At one point the article reports that only one in four workers in the Europe Union (EU) belongs to a union, commenting that this is a decline from 43 percent just two years ago. It is worth noting that the main reason for this decline was a change in the composition of the EU - several countries in Eastern Europe were just admitted to the EU - not a decline in unionization rates within the countries.
It is also worth noting that the union membership rate
understates the impact of unions on the economy. Many workers in Europe who are
not members of a union are covered by a union contract. A recent EU study
estimated that close to 70 percent of workers within the EU were covered by a
union contract (see "Industrial
Relations in the EU, Japan, and U.S.A., 2002").
Back to Top
South
Korea
South Korea, in Turnabout, Now Calls for More Babies
Norimitsu Onishi
New
York Times, August 21, 2005, Page A4
This article reports on concerns in South Korea over low birthrates. At one point it reports that low birthrates throughout East Asia are "threatening" the economic strength of the countries in the region. The article does not indicate the basis for this assertion. The main determinant of economic strength is per capita income. Other things equal, a smaller population will lead to a higher per capita income since it will reduce the stress on land and natural resources. This effect is likely to be especially important in a country like Japan, which has a very dense population in many areas.
If there is a decline in the size of the workforce, this
simply means that some of the less productive jobs disappear. For example, there
may no longer be workers to staff a late night shift at a convenience store or
to work as valets parking cars at a restaurant. The loss of such less productive
jobs is a normal part of the process of economic growth, not a sign of economic
weakness.
Back to Top
Immigration
U.S. to Beef Up Border Force
Darryl Fears
Washington
Post, August 24, 2005, Page A2
This article discusses plans by the Department of Homeland Security to step up its patrols of the U.S.-Mexican border. At one point the article discusses a bill proposed by Senators Kennedy and McCain, which would allow foreign workers to come to the United States on a temporary basis to "work jobs that U.S. citizens do not want."
Actually, there are no jobs that U.S. citizens do not want. There would be huge numbers of U.S. citizens willing to work as farm workers, custodians, restaurant kitchen staff, or other jobs frequently held by immigrants, if these jobs paid $60,000 a year and provided benefits. The reason that U.S. citizens do not want these jobs is because the pay is low. Instead of paying higher wages, employers find it much easier to bring in foreign workers from developing countries who find these jobs very attractive relative to the options available in their own countries.
Foreign workers in higher paying occupations (e.g.
newspaper reporters, economists, doctors, or lawyers) would also jump at the
opportunity to work in the United States at a small fraction of the wages
received by the U.S. workers. However, higher paid workers in the United States
have much more political power than the native born workers who compete with
immigrants for more menial jobs. As a result, there are substantial
protectionist barriers that make it very difficult for foreign workers from
entering these higher paying occupations in the United States.
Back to Top
The
Greenspan Legacy
Rocky Mountain High Finance
Nell Henderson
Washington
Post, August 25, 2005, Page E1
The Doctrine Was Not to Have One
Edmund L. Andrews
New
York Times, August 26, 2005, Page C1
These articles discuss the Federal Reserve Board's annual meeting at Jackson Hole, Wyoming. This year's meeting is structured as a tribute to Alan Greenspan, who will be leaving his position as Chairman of the Federal Reserve Board at the end of the year.
The Times article refers to Greenspan's decision in 1995-96 to lower interest rates and allow the unemployment rate to fall, even though it was already below the level that most economists felt would lead to accelerating inflation (the NAIRU). Greenspan justified his position by saying that the economy could grow faster than most economists recognized, because there had been an uptick in productivity that was not being picked up in the official data. While the article implies that he was shown right, actually Greenspan was proven wrong on this point.
First, as logical matter, Greenspan's argument did not make sense. Productivity growth is defined as output growth divided by growth in hours worked. There were no major issues raised about the measurement of hours, so if productivity growth was being undercounted, then output growth was being undercounted by roughly the same amount, and the economy was already growing faster than most people realized. This means that the possibility that productivity was being mis-measured could not be a basis for allowing a more rapid growth rate.
The real issue in this debate was how fast the economy could grow without causing the unemployment rate to fall further. (The NAIRU theory relates the unemployment rate to inflation, not growth to inflation, so the concern of both Greenspan and his opponents was to not let the economy grow so fast that it would actually lower the unemployment rate further.) Due to the economy's rapid growth in the next four years, the unemployment rate fell much further, averaging just 4.0 percent in 2000. In this sense, Greenspan was wrong. More rapid growth did lead to a lower rate of unemployment; however, it turned out not to lead to any acceleration in the rate of inflation.
At one point, the Post article notes that Greenspan will be reunited with the rest of the group that Time magazine dubbed the "Committee to Save the World (CSW)," former Treasury secretaries Robert Rubin and Lawrence Summers at the conference. Time gave the group this title because of the bailout packages that they designed in the wake of the Mexican financial crisis, the East Asian financial crisis and the Russian financial crisis.
It is worth noting that many economists now blame many of the CSW policies for the crises they tried to stop. For example, most economists believe that the elimination of capital controls, a policy eagerly promoted by the Clinton administration, played an important role in the East Asian financial crisis.
Also, the Clinton administration encouraged countries to
maintained fixed values of their currency against the dollar. The efforts to
sustain an over-valued currency led to enormous suffering in many countries. The
CSW struggled with Russia to find ways to sustain its currency peg, insisting
that it raise its interest rates to ever higher levels. In the summer of 1998,
Russia's government broke with the CSW and abandoned the fixed exchange rate.
The country had a short-term financial crisis, but its economy began growing
again by the end of the year and has now enjoyed six and a half years of solid
growth.
Back to Top
Germany
Yes, He's Swiss, But He's Not Neutral
Mark Landler
New
York Times, August 26, 2005, Page C1
Published online with title "Yes, He's Swiss,
but Not Neutral"
This article discusses the role that Josef Ackermann, the
head of Deutsche Bank, is playing in German politics and business. At one point
it describes Germany's economy as uncompetitive. The article does not indicate
the basis for this assessment. Unlike the United States, which has an enormous
trade deficit, Germany is able to sell more goods abroad than it buys. By this
market-based measure, Germany is far more competitive than the United States.
Back to Top
Japan
Japan's Spending Habit Roils Plan to Sell Big
Bank
James Brooke
New
York Times, August 23, 2005, Page C5
This article discusses the political dispute surrounding the proposed privatization of Japan's massive postal bank, which has funded a vast amount of public works over the last fifty years. At one point the article warns that Japan might "continue as a semi-socialist economy where bureaucrats and politicians make multibillion-dollar investments with little regard to the country's health."
It is worth noting that Japan has enjoyed the most rapid
per capita GDP growth of any country in the history of the world over the last
half century. If this description of the country's economy is accurate, then
Japan's economic performance is truly amazing.
Back to Top
Productivity
Growth
Productivity Is Up. Or Down. Pick Your
Statistic
Daniel Gross
New
York Times, August 21, 2005, Section 3, Page 5
This article discusses the gap between productivity growth as measured on the output side in the nonfarm business sector, which has been slowing, and productivity growth in the non-financial corporate sector which has remained very strong. The article presents this discrepancy as a mystery. Actually, it can be explained fairly easily.
Capital gains income (such as increases in stock or house
prices) is not supposed to be included in GDP. However, it often ends up
appearing in income-side measures of GDP as labor income, when a portion of
wages is attributable to stock options. During a period of rising stock prices,
like the late nineties or last year, the amount of capital gains income showing
up as labor compensation increases. This explains why the income-side measure of
productivity in the non-financial corporate sector is now increasing more
rapidly than the output-side measure used for the non-farm business sector.
Back to Top
CAFTA
U.S. Trade Pact Divides the Central Americans,
With Farmers and Others Fearful
James C. McKinley Jr.
New
York Times, August 21, 2005, Page A10
This article discusses attitudes in Central America
towards the Central America Free Trade Agreement, which has not yet been
ratified by most of parliaments in the region. The article discusses some of the
economic ramifications of the agreement. It neglects to mention the fact that
the size of the United States import market is virtually certain to shrink by
several hundred billion dollars over the next decade as the Japanese and Chinese
central banks cut back their subsidies for U.S. imports and the dollar
depreciates (see "Fools'
Gold: Projections of the U.S. Import Market"). This means that
access to the U.S. market will be worth considerably less in the future than at
present.
Back to Top
Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.