Economic Reporting Review
By Dean Baker
October
3, 2005
In This Issue:
• Outstanding
Stories of the Week
• The
Chinese Yuan
• Debt
Relief
• Energy
Production and the Price of Oil
• Housing
Sales and Prices
• Greenspan
on the Economy
• The
IMF and Protectionism
• Italy
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Outstanding
Stories
of the Week
Many Contracts For Storm Work Raise
Questions
Eric Lipton and Ron Nixon
New
York Times, September 26, 2005, Page A1
This article reports on a
number of no bid contracts, issued as part of the Hurricane Katrina recovery
effort, where the government appears to have overpaid politically connected
contractors.
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Implant Program For Heart Device Was a Sales Spur
Barry Meier
New York Times, September 26, 2005, Page A1
This article examines the practices of Guidant Corporation in marketing a heart
implant that it manufactures. According to the company, the article paid doctors
$1000 to use the device in their patients and monitor their progress. The
article reports that the company devised this as a marketing strategy, which was
apparently hugely successful in boosting sales.
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The
Chinese Yuan
China Loosens Limits on Trading Against Other
Currencies but Keeps Rein on Dollar
Keith Bradsher
New
York Times,
September 24, 2005, Page B6
This article reports on a change in China’s central bank
policy under which it will supposedly allow its currency to fluctuate more
against currencies other than the dollar, although it does not plan to change
its link to the dollar. It really is not possible to maintain a rigid link to
two floating currencies, which this article implies was the pre-existing
policy.
Suppose that the euro is equal to 1.25 dollars and that the exchange rates
honored by the Chinese central bank are 8 yuan to the dollar and 10 yuan to the
euro. Imagine the dollar then rose relative to the euro, so that just 1.2 dollars were equal to the euro. If the Chinese central bank
held its exchange rates constant, then it would be possible for someone to trade
1 euro for 10 yuan. At the official exchange rate, someone could buy 1.25
dollars with 10 yuan. That would mean that someone could still effectively
exchange 1 euro for 1.25 dollars through China’s central bank, even though the
market rate had fallen to 1.2 dollars to the euro.
While the yuan
is not a freely traded currency, it would be very difficult to sustain an
exchange rate between currencies that is substantially different from the market
rate since the incentives to exploit these differences would be enormous.
Therefore, China’s central bank really had little choice but to adopt the sort
of policy described in this article, if it ever in fact had a different policy.
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Debt
Relief
IMF, World Bank Advance Debt-Relief Pact
Paul Blustein
Washington
Post,
September 25, 2005, Page A11
This article reports on the debate over providing debt relief to a
group of poor very heavily indebted countries. At one point the article notes
the objection of the Netherlands, that allowing debt relief will reduce the
resources of the World Bank, leaving it with less money to lend to poor
countries. It is worth noting, that without debt relief, the additional money
that the World Bank would receive would be coming entirely from the poorest
countries in the world. In other words, according to the article, the
Netherlands officials must be arguing that it is important for the poorest
countries to provide money to the World Bank so that it would have more money to
lend to poor countries.
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Energy
Production and the Price of Oil
To Conserve Gas, President Calls for Less
Driving
David Leonhardt, Jad Maouawad and David E. Sanger
New
York Times,
September 27, 2005, Page A1
It is worth noting that oil and natural gas are sold in a world market. New
finds of oil and gas in the United States will only bring savings to consumers
insofar as they reduce the world price of these products. In the case of oil,
the projection for the peak yield from drilling in the Artic Wildlife Refuge
(the major protected zone at present) is approximately 1 million barrels a day.
This will be equal to just over 1 percent of the projected world supply in 10-15
years, the soonest that it could be brought on-line. An increase in supply of
this magnitude would imply a reduction in oil prices of less than 3 percent for
the 10 years or so that peak production could be sustained.
The article does not include any evidence that Mr. Walker may have to support
his contention, but it seems likely that the potential savings he claimed from
increased oil and gas drilling considerably exceeds the range of plausible
estimates.
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Housing
Sales and Prices
Concerns Raised as Home Sales, Prices Rise
Again
Nell Henderson
Washington
Post,
September 27, 2005, Page D1
Most
Homeowners Not Overly in Debt, Fed Chief Says
Edmund L. Andrews
New
York Times, September 27, 2005, Page C1
These
articles both discuss the release of data on existing home sales in August. Both
articles noted that the August sales figures were considerably higher than had
generally been expected. It is worth noting that existing home sales are
reported based on the date when a closing is registered. Typically, there is a
gap of 6 to 8 weeks between the signing of a contract on a house and the closing
on that contract. This means that the August sales data is providing more
information about the state of the housing market in June and July than in
August.
The article by Henderson includes comments from David A. Lereah, the chief
economist at the National Realtors Association. Mr. Lereah noted the
extraordinary run-up in home prices in recent years, but argued that it is
likely to continue due to population growth and tight housing inventories.
While the U.S. population is growing, it is actually growing at a very slow
rate, in fact, the slowest in the history of the country. This is the basis for
the concern over the widely publicized Social Security shortfall. If the
population were projected to continue to grow as fast as it had in prior
decades, then the Social Security system would be fully solvent forever.
The tightness of inventories is also hugely responsive to changes in demand.
(Inventories are typically measured as the months of demand they will fill). If
the demand for new or existing homes fell back to its mid-nineties levels,
inventories would be at near record levels.
New-Home Sales Fell 9.9% In August
Martin Crutzinger
Washington
Post,
September 28, 2005, Page D2
New Homes Sales Fall as Consumer Confidence Hits 2-Year Low
Vikas Bajaj
New
York Times,
September 28, 2005, Page C5
These articles report on a 9.9 percent reported decline in new homes sales in
August. Both articles note that this was an extraordinarily large decline.
It is worth noting that the August decline followed an unusually large rise of
5.3 percent in July. The July data were especially unusual since it showed that
sales rose by 22.9 percent in the west. It is unlikely that there really was an
increase of 22.9 percent in home sales in the west in July; most likely this was
attributable to an error in reporting. In August, home sales in the west fell by
17.9 percent, bringing them almost exactly even with their June level. In short,
there was probably no sharp rise in home sales in July and so sharp falloff in
August, there was simply a fluke in reporting that caused the reported July
sales to be much higher than actual sales in the month.
Back to Top
Greenspan
on the Economy
Greenspan Credits Economy’s Flexibility
Nell Henderson
Washington
Post,
September 28, 2005, Page D3
This
article reports on a speech by Alan Greenspan in which he argued that the United
States economy is well prepared to deal with shocks because it is so flexible.
He praised what he described as the lowering of trade barriers over the last two
decades. Greenspan also touted the fact that the 2001 recession was the mildest
recession since World War II.
It is actually not clear that the United States has on net reduced barriers to
trade over the last two decades. It has substantially reduced trade barriers in
manufactured goods, thereby putting manufacturing workers in direct competition
with low paid workers in the developing world. However, it has substantially
increased trade barriers in other areas, most notably by increasing the length
and scope of patent and copyright protections. The United States has also
maintained or increased the protections for highly paid professionals, like
doctors and lawyers.
In principle, the economic distortions that result from protecting these
professionals would be far larger than the distortions from protecting a worker
in manufacturing. Doctors in the United States earn an average of $200,000 a
year (net of malpractice fees); this is approximately $100,000 more than doctors
earn on average in west Europe. By comparison, a textile worker earns an average
of $20,000 a year. While this is considerably more than what textile workers
receive in developing counties, the gaps are not nearly as large as the gap
between the pay of doctors in the United States and doctors in west
Europe.
Anyone who is actually concerned about the economic distortions created by trade
barriers should be much more troubled by the distortions created by protections
for doctors and other professionals than barriers to trade in manufactured
goods. It is worth noting that protectionist barriers for highly paid
professionals shift the distribution of income upward, whereas protectionist
barriers for manufactured products would lead to a more equal distribution of
income.
It is also worth noting that the recovery from the
2001 recession has been by far the weakest of the post-war period. While Mr.
Greenspan is correct in saying the recession was milder than any prior post-war
recession, because the recovery was so much weaker than any prior recovery, the
country had its longest period of negative job growth since the great
depression. The economy still has not gotten back to the same rates of
employment that it had prior to the recession. In terms of its impact on the
ability of workers to get jobs and secure higher wages, given the weakness of
the subsequent recovery, the 2001 downturn was the most severe of the post-war
period.
Back to Top
The IMF
and Protectionism
IMF Chief Pressured On Trade Imbalances
Paul Blustein
Washington
Post,
September 29, 2005, Page D1
This
article reports on pressure being put on the IMF to play a more active role in
resolving global trade imbalances. According to the article the Bush
administration has been trying to get the IMF to pressure China to revalue its
currency.
It is worth noting that if the Bush administration felt strongly that China’s
currency should be revalued, it could effectively bring this about immediately
by announcing that it would redeem the currency in dollars at a higher exchange
rate than is being offered by the Chinese central bank. For example, the U.S.
Treasury could announce that it will buy yuan at the rate of 6 to a dollar,
compared to the official rate of 8 yuan to a dollar. If the Treasury committed
itself to this policy, it would be very difficult for the Chinese government to
maintain its exchange rate.
The article also reports that “many economists” fear that current trade
imbalances could lead to a “protectionist backlash.” There seems very little
concern among economists about protectionism in general, since they are rarely
troubled by the protectionist barriers that sustain high salaries for doctors or
lawyers, or patent and copyright protection that raise the price of protected
items by several hundred percent above the competitive market price. The concern
of economists seems to be focused exclusively on protectionist barriers that
might improve the bargaining situation of workers at the middle and the bottom
of the wage distribution.
The article also describes the managing director of the IMF as the “chief
steward of the global economy.” The basis for this description is not clear.
The IMF was originally established to support the system of fixed exchange rates
put in place after World War II. In the last three decades it has acted
primarily as the leader of a creditors’ cartel that has sought to ensure that
the interests of creditors are fully protected when countries face financial
crises. There is nothing in the IMF’s charter nor in its conduct that would
suggest that its managing director has responsibility for maintaining the health
of the global economy.
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Italy
A Normal Political Crisis in an Abnormal Country
Ian Fisher
New
York Times,
September 29, 2005, Page A4
This article discusses the current political crisis in Italy. At one point
it describes Italy’s current malaise and lists signs that include “an aging
population.” Actually, the immediate causes of an aging population are better
health care and higher living standards that allow people to live longer. Most
economists consider these to be positive developments, not evidence of
malaise.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.