Economic Reporting Review
By Dean Baker
September
12, 2005
In This Issue:
• Outstanding
Stories of the Week
• Hurricane
Katrina
• Energy
Prices
• Agricultural
Subsidies
• The
Budget
• Energy
Efficiency
• August
Employment Report
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Outstanding
Stories
of the Week
Wal-Mart Workers Are Finding a Voice Without a Union
Steven Greenhouse
New
York Times, September 3, 2005, Page A14
This article reports on efforts by several community
groups to organize "workers associations" for workers at Wal-Mart.
These associations are not formally unions, as recognized by the National Labor
Relations Board, but they give workers the opportunity to collectively bargain
for better wages and working condition.
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Money Flowed to Questionable Projects
Michael Grunwald
Washington
Post, September 8, 2005, Page A1
This article describes some of the politically favored
projects that received public money in Louisiana in recent years, even as
funding for flood prevention in the area was cutback.
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Hurricane
Katrina
Leader of Federal Effort Feels the Heat
Eric Lipton Scott Shane
New
York Times, September 3, 2005, Page A11
This article discusses the preparations for the hurricane
and the effectiveness of the response. At one point it claims that the budget
for the Federal Emergency Management Agency (FEMA) had grown under President
Bush from $4.6 billion in 2002 to $5.038 billion in the current fiscal year.
Actually, this is just a 9.5 percent nominal increase over this three year
period, only slightly more than the 8.0 percent rate of inflation, and far less
than the 18.7 percent rate of GDP growth over this period. Assuming that the
need for disaster preparation (like insurance) is roughly proportionate to the
size of the economy, the FEMA budget has been cut by almost 9 percent over the
last three years.
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Storm Is Devastating for Business in Gulf Area,
but its National Effect Remains Muted
David Leonhardt and Edmund L. Andrews
New
York Times, September 4, 2005, Page A21
This article discusses the impact of Hurricane Katrina on the U.S. economy. At one point it notes that both the Federal Reserve Board and the Bush Administration have fewer tools to deal with economic weakness than they did in 2001 because interest rates are already relatively low and the deficit is already fairly large. It is also important to note the expansion of the trade deficit and the accumulation of foreign debt over the last four years. Net foreign indebtedness has increased by close to $2 trillion over this period and the trade deficit is now more than 5.5 percent of GDP. If the government's actions cause foreign investors to stop putting so much money in U.S. financial assets, or the Chinese and Japanese central banks reverse their low interest rate/high dollar policy, then the dollar will plummet.
The dollar will have to fall by approximately 30 percent to bring the trade deficit down to a sustainable level. This would add close to 2 percentage points to the annual rate of inflation. Interest rates would presumably also rise by a comparable amount, which would have a large impact on housing and other interest sensitive sectors.
In assessing the impact of the hurricane, the article does
not mention the impact on inflation. Higher energy prices are virtually a
certain outcome of the hurricane. Economists usually believe that cost increases
are at least partially passed in price increases. This means that the inflation
rate will likely be pushed higher by the hurricane. Since the fed was already
concerned about inflation, the hurricane should increase the basis for such
concerns.
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GOP Agenda in Congress May Be at Risk
Jonathan Weisman
Washington
Post, September 4, 2005, Page A2
This article discusses the impact of the hurricane on the Republicans' congressional agenda. At one point, it quotes a Republican committee chairman as saying that one of the positive effects of the hurricane is that it will make it easier to get legislation allowing drilling in the Arctic National Wildlife Refuge, presumably because the country now recognizes the need for more oil.
It is worth noting that oil from the Refuge is projected
to add approximately 1.0 percent to world production during roughly ten years of
peak production (which will not be reached for 10 year after drilling is
authorized). The amount of oil that China imports each year will increase by
approximately the same amount over the next 18 months. In other words, the oil
from the Refuge will have almost no discernible impact on conditions in the U.S.
energy market.
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Long-Term Impact Depends on Consumers
Margaret Webb Pressler and Paul Blustein
Washington
Post, September 7, 2005, Page D1
This article assesses the long-term impact of Katrina on
the economy. It asserts that the ultimate impact will depend on the extent to
which it will lead to declines in consumer spending, which it indicates would
slow economic growth. While this is likely accurate, at least in the short-term,
it is worth noting that reductions in the budget deficit affect the economy in
the same way as cuts in consumption. News stories almost never indicate that a
smaller budget deficit is likely to slow economic growth and present this as a
cause of concern for readers.
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Energy
Prices
Europeans Find Gas Prices Taxing
John Ward Anderson
Washington
Post, September 3, 2005, Page A27
This article reports on the fact that Europeans have long paid far higher gas prices than in the United States because they tax gas at a far higher rate. At one point it cites unidentified "European analysts" as saying that it was too simplistic to say that the United States was just addicted to cheap gas. It then attributes the need for lower prices in the United to the size of the country.
It would have been helpful if the article identified the
"European analysts" who expressed this opinion, since there is a large
range of views on this issue. There is no obvious connection between the size of
a country and the distances that people must travel. The vast majority of the
gasoline consumed in the United States is for local travel, not cross country
trips. So, it is not clear why the size of the country should be a major factor
in determining gas prices. Furthermore, Europeans frequently travel across
national boundaries. This fact further reduces any possible relevance of the
size of the country to gasoline consumption.
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Agricultural
Subsidies
Alarm Growing on Storm's Cost for Agriculture
Alexei Barrionuevo and Jeff Bailey
New
York Times, September 8, 2005, Page A1
U.N. Report Cites U.S. and Japan as the 'Least Generous
Donors'
Celia W. Dugger
New
York Times, September 8, 2005, Page A6
These articles both discuss the impact of U.S. agricultural subsidies on the developing world. Both articles include assertions that the removal of U.S. and European subsidies for agriculture is very important to the economies of developing countries.
There is no economic research that supports this claim. Rich country subsidies to agriculture have a mixed effect on developing countries in standard economic models. On the one hand, they can hurt them insofar as the products being subsidized compete with goods produced in developing countries. On the other hand, many developing countries are net importers of food and other agricultural products. Many of these countries would be harmed by a withdrawal of agricultural subsidies, since they will have to pay more for their imports of these products.
It is also important to note that other factors can have a large effect on prices, most obviously currency values. The fact that the dollar is over-valued by approximately 30 percent against other major currencies means that U.S. agricultural producers effectively face an export tariff of 30 percent when they sell their goods in the world market. Those who believe that U.S. agricultural subsidies do serious harm to developing countries must also believe that developing countries will be hugely damaged by the dollar adjusting to a sustainable level.
It is also worth noting that one of the main factors driving down the price of some agricultural commodities, such as cotton, over the last quarter century has been the reorientation of many developing countries to export oriented agriculture. This drive, which has been promoted by the World Bank and other development agencies, has led to a large increase in the supply of many products. This surge in supply has led to lower prices.
The main topic of the first article is the impact of Katrina in reducing U.S. exports. If U.S. agricultural subsides are in fact seriously harming developing countries, then it would have been appropriate to include some discussion of the gains that these countries will experience because of the exports obstructed by damage from Katrina.
Both articles do not distinguish between subsidies that take the form of payments from the government and subsidies that take the form of marketing restrictions that push up prices to consumers. The vast majority of the subsidies referred to in these articles are in the form of supply restrictions. This distinction would probably be important to many readers.
While supply restrictions do impose costs on consumers,
the Times never refers to these restrictions as "subsidies" in
other contexts, even though the implicit subsidies are often far larger. For
example, patent monopolies in the prescription drug market raise prices to U.S.
consumers by more than $140 billion a year above the free market price. However,
the Times has never referred to this transfer to the pharmaceutical
industry as a "subsidy." Similarly, copyright monopolies on software
transfer tens of billions of dollars to Microsoft and other software producers
every year, but such transfers are also not referred to as
"subsidies."
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The
Budget
Bush Requests $51.8 Billion More for Relief
Jonathan Weisman
Washington
Post, September 8, 2005, Page A1
This article discusses President Bush's proposal for additional hurricane relief and its impact on the budget. At one point, the article asserts that the budget deficit for 2006 will be well over $300 and in "near record territory" in 2006.
While the deficit may be in near record territory measured in nominal dollars, this is virtually meaningless. The economy grows most years in real terms and, due to inflation, almost always in nominal terms. This means that if nothing changed in the federal budget, it would be hitting a record every year measured in nominal dollars - just as tax collections and expenditures hit a record almost every year.
Virtually all economists would agree that the proper way to measure the deficit is relative to GDP. The unified budget deficit, which does not count money borrowed from Social Security in the deficit, was projected to be 2.4 percent of GDP before the impact of Katrina. If Katrina adds $100 billion to this deficit, the figure would rise to approximately 3.2 percent of GDP, far below the record of 6.0 percent hit in 1983.
If borrowing from Social Security is included in the
deficit, it would raise the total by approximately $190 billion or 1.5 percent
of GDP. A deficit of 4.7 percent of GDP would still be below the 1983 record, or
the levels of the early nineties.
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Energy
Efficiency
In Asia, Low Fuel Prices And Subsidies Lose Ground
Keith Bradsher
New
York Times, September 7, 2005, Page C5
This article reports on how several Asian countries are responding to rising world oil prices in setting the domestic price of gasoline. At one point the article asserts that China and India have "startling inefficiency" in their use of energy, claiming tat they consume five times as much energy as Japan to produce a dollar of GDP.
Actually, the problem is with the measurement of GDP. The
article is referring to a currency conversion measure of GDP, in which the GDP
of China and India is calculated in each country's currency, and then converted
into dollars at the official exchange rate. Most economists would use a
purchasing power parity measure of GDP, which attempts to apply the same set of
prices to goods and services produced everywhere in the world. By this measure,
China and India's GDP would be 4-5 times as large as with the currency
conversion measure. Using the correct measure of GDP neither country stands out
as being especially inefficient users of energy. In fact, both are more
efficient than the United States.
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August
Employment Report
Job Growth Stepped Up Its Pace In August
Edmund L. Andrews
New
York Times, September 3, 2005, Page B1
This article reports on the release of the August employment report by the Labor Department. The headline inaccurately represents the report and the content of the article. The report showed the economy adding 169,000 jobs in August, down from 242,000 jobs in July.
The Washington Post did not run a story on the
August employment report (not even a wire service brief). The monthly employment
report is the most important regular data release on the health of the economy
and the well-being of the country's workers. It always deserves some attention.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.