Economic Reporting Review
By Dean Baker
September
26, 2005
In This Issue:
• Outstanding
Stories of the Week
•
Germany
• The
I.M.F and the European Welfare State
• Hurricane
Katrina
• The
Federal Reserve Board and Inflation
• Gasoline
Taxes and Gas Prices
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
Whoops! There Goes Another Pension Plan
Mary Williams Walsh
New
York Times, September 18, 2005, Section 3, Page 1
This article discusses the pattern by which many major
companies have been able to return to profitability by declaring bankruptcy and
passing their pension liabilities off to the Pension Benefit Guarantee
Corporation. While this practice has proved very profitable for some of the
financiers that carried through the process, it has left the government with
tens of billions of dollars of additional liabilities.
Back to Top
Possible Conflicts for Doctors Are Seen on Medical
Devices
Reed Abelson
New
York Times, September 22, 2005, Page A1
This article discusses the possibility that doctors may be
influenced in their decisions on which medical devices to recommend for patients
by the large consulting fees that they often receive from the manufacturers of
these devices. It is worth noting that this is another case where the market
distortions created by patent monopolies are likely to lead to bad medical
outcomes. If medical devices were sold in a competitive market, where firms made
normal profits, they would have little incentive to attempt to bribe doctors
with consulting fees.
Back to Top
Germany
Divided Germany Votes, With Coalition Likely
Richard Bernstein
New
York Times, September 18, 2005, Page A12
Germans Are Conflicted on Eve of Vote
Craig Whitlock
Washington
Post, September 18, 2005, Page A24
These articles assess the likely outcome of the German election. At one point the Times article asserts that Germany's unemployment rate is "nearly 12 percent," while the Post article reports that the unemployment rate is 11.6 percent. These claims are not true. Germany's unemployment rate, using the same definition of unemployment as in the United States, is 9.3 percent.
By the official German measure, the unemployment rate in Germany is 11.6 percent. However, the official German measure of unemployment treats anyone who is working less than 15 hours a week, and desires full-time employment, as being unemployed. By contrast, the U.S. definition treats anyone who worked even a single hour in the reference period as being employed.
The standardized measure of Germany's unemployment rate is readily available on the website of the OECD. Since the distinction between the two measures of unemployment is widely known among people even remotely familiar with Germany's economy, there is no excuse for using the official German measure, especially without an explanation of the distinction between the two measures. An article the prior day did use the standardized measure of unemployment (see "A Bright Spot in Germany's Economy Seems to Be Fading," by Floyd Norris, 9-17-05;B3). It is also worth noting even this 9.3 percent rate is inflated by the continuing slump in the area that was formerly East Germany. The unemployment rate in the area that was formerly West Germany is close to 7.5 percent.
In addition to presenting a measure of unemployment that seriously exaggerates Germany's problems, both articles only present the economic views of critics of the German social welfare state. Neither mentions the impact of the contractionary policies of the European Central Bank (ECB). Virtually all economists agree that the United States would have a much higher unemployment rate today if Alan Greenspan had followed the same contractionary monetary policies as the ECB.
The Times article also presents the claim of one
economist that Germany's social welfare state is unsustainable, which is
intended to be a contrast to the U.S. model that is sustainable. It is worth
noting that Germany has a surplus on its current account, meaning that it is
on net lending to other countries. By contrast, the United States has a deficit
on its current account of close to $800 billion a year, approximately 6.7
percent of GDP. There are very few economists who think that a current account
deficit of this magnitude is sustainable for any substantial period of time. It would
have been helpful if these articles presented a broader and more informed range
of views on the state of Germany's economy.
Back to Top
Europe's Direction Is Unclear, Much as Germany's Is After
Vote
Craig Smith
New
York Times, September 20, 2005, Page A7
This article discusses the implication of the German elections for the rest of Europe. At one point the article asserts that "many Europeans had also hoped that a clear mandate for Mrs. Merkel's ambitious pro-business plans would add momentum to much needed economic restructuring on the Continent."
While many Europeans may have hoped that the German
elections would hasten cutbacks in the European welfare state elsewhere, many
Europeans consistently vote against politicians who advocate such cuts. It would
have been useful to include their views in this article. The article does not
explain how it determined that economic restructuring in Europe is "much
needed." This claim is strongly disputed among economists.
Back to Top
Siemens Plans to Cut 2,400 Jobs in Already Stagnant
Germany
Mark Landler
New
York Times, September 20, 2005, Page A10
This article reports on a recent round of layoffs in Germany. At one point it asserts that "economists and business people argue that the government needs to adopt policies that make it cheaper and more attractive to hire workers. It also needs to weaken the unions, they say, to make it easier to dismiss workers or renegotiate labor contracts."
While some economists argue that it is necessary to follow
these policies, some economists argue that it is necessary for the European
Central Bank to adopt more expansionary monetary policies in order to foster
growth in Germany. It is inaccurate to present the views of economists employed
by banks and manufacturers as representing the views of all economists, as this
article does.
Back to Top
The
I.M.F. and the European Welfare State
I.M.F. Warns of Imbalance In World Consumption
Edmund L. Andrews
New
York Times, September 22, 2005, Page C3
This article reports on the main items in the I.M.F.'s new World Economic Outlook (WEO). The article quotes Raghuram Rajan, the fund's director of research, as saying that "it is a failure of politics that people have not come to see that the more they want to retain the attractive European way of life, the more the way they work will have to change."
Mr. Rajan's statement appears to contradict almost every known economic theory. Economic growth (and in principle globalization) makes countries richer, not poorer. That means that it should be easier through time for Europeans to maintain their way of life, not harder as Mr. Rajan asserts. It would be interesting to see what economic theory Mr. Rajan uses to support his assertion.
This is not the first time that the I.M.F has sought to push European countries to rollback their welfare state with little evidence to support their claims. The 2003 edition of the WEO also made extravagant claims for the benefits to Europe in the form of lower unemployment that would result from adopting measures that would make its economy more like the U.S. economy. A closer examination of their evidence, showed that the data really did not support their claims (see "Labor Market Protections and Unemployment: Does the IMF Have a Case?").
The article also cites complaints by the IMF that Europe's
domestic demand is too low. The complaint that domestic demand is too low means
that savings is too high. The World Bank is actively promoting Social Security
privatization in Europe, a main purpose of which is to increase saving. In other
words, the Social Security privatization agenda being promoted by the World Bank
(and many prominent economists) would actually worsen the main problem of excess
savings identified by the IMF. It would be worth noting the apparent confusion
in the IMF/World Bank, since they cannot seem to decide whether it would be
better for Europe to save less or save more.
Back to Top
Hurricane
Katrina
Bush Proposes Private School Vouchers
Nick Anderson
Washington
Post, September 17, 2005, Page A12
Published online with "Bush Proposes Private School
Relief Plan"
Plan Will Pay 90% of Costs For Students Hit by Storm
Michael Janofsky
New
York Times, September 17, 2005, Page A10
These articles report on a proposal by President Bush to provide federal aid to pay for school for children displaced by Hurricane Katrina. According to the Times article, the plan would provide $1.9 billion in aid for approximately 372,000 school children, an average of $5,100 a student. However, President Bush proposed paying up to $7,500 towards the tuition of children placed in private schools.
In other words, President Bush's proposal would effectively pay more money to educate children whose parents could afford to send them to private schools, than it would pay to educate children in public schools. In addition, by subsidizing the costs of private schools, President Bush's plan will provide a strong incentive for more affluent parents to remove their children from public schools.
It is worth noting that the Bush administration put
forward this proposal, which will disproportionately benefit white and upper
middle class children, at the same time that he was attending a church service
with a congregation composed largely of lower income African Americans (see
"Bush
Says Spending Cuts Will Be Needed," Washington Post,
September 17, 2005; A1). At the service President Bush spoke about how the
country needed to address the legacy of racism and inequality and to eliminate
poverty.
Back to Top
Bush Says Spending Cuts Will Be Needed
Michael A. Fletcher and Jonathan Weisman
Washington
Post, September 17, 2005, Page A1
This article reports on President Bush's plans for the reconstruction of the Gulf Coast and his intention to pay for it with spending cuts. At one point the article describes President Bush's proposals as "unprecedented effort to attack poverty in the region." It is not clear at this point that President Bush's efforts to address poverty will be very large, nor that they are any larger than prior efforts, such as the Great Society programs of the sixties.
The items listed as part of the anti-poverty effort are
not necessarily helpful to the poor, nor very large. For example, President Bush
has proposed a new round of tax breaks for small businesses in the area. While
this will benefit small business owners, the vast majority of whom are not poor,
it is not clear that the poor will be helped because these people pay less money
in taxes. The President has a vaguely developed proposal for urban homesteading,
but most poor people may lack the resources to benefit from this measure, even
if they do win a lottery assigning them a parcel of land. The third proposal is
a $5,000 grant for job training. While this one-time grant would prove helpful
to low income families, it is unlikely to boost many out of poverty, especially
if it is paid for by cuts in Medicaid or other programs that benefit the poor.
In short, there is little evidence presented in this article of anything that
could be described as a large scale plan to reduce poverty in the region.
Back to Top
The
Federal Reserve Board and Inflation
Interest Rate Hike Appears Likely
Nell Henderson
Washington
Post, September 17, 2005, Page D1
This article discusses the Fed's likely future strategy on interest rates. At one point, the article notes the possibility that the Federal Reserve Board may "have to raise the rate" because of large hurricane reconstruction spending. The Fed never "has" to raise rates. The decision to raise rates is a policy choice. If the Fed chooses to raise rates, then it is presumably due to the fact that the members of the open market committee believe that the damage to the economy would be greater from not raising rates than from raising them, but this will still be a policy decision, not something forced on the Fed by outside events.
The article also includes a comment from a Fed official
dismissing the impact of higher energy prices, since gasoline accounts for only 3
percent of consumer spending. Actually energy spending more generally (e.g. home
heating oil and natural gas) account for 5 percent of spending. If the cost of
energy rises by 50 percent, then this drains an amount equal to 2.5 percent of
income from consumers' pockets. This increase is far larger than the growth in
aggregate real wages over the last year.
Back to Top
Gasoline
Prices and Gas Prices
Lawmakers In Many States Look To Suspend Gas Taxes
Anne Berryman
New
York Times, September 18, 2005, Page A21
This article reports on a number of proposals across the country that would temporarily suspend gasoline taxes in the wake of the recent sharp run-up in energy price. The article only mentions in passing the possibility that a reduction in taxes will not necessarily be passed on to consumers. In fact, it is quite likely that the major impact of a tax reduction will be to raise profits for the oil industry.
In the short-term, there is very little that can be done
to change the supply of gasoline. This means that the price to the consumer must
rise enough to keep demand in step with supply. If the gas tax is reduced, there
is still the same amount of gasoline available. Therefore if the reduction in
gas prices were passed on to consumers, there would be a shortage of gasoline.
This means that gas prices are likely to be little changed by the elimination of
the gas tax, but the oil industry will earn higher profits.
Back to Top
Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.