Economic Reporting Review
By Dean Baker
October
11, 2005
In This Issue:
• Outstanding
Stories of the Week
• The
Federal Reserve Board
• The
National Debt
• The
Auto Industry
• The
Budget
• Harvard
Endowment Management
• Turkey
and the European Union
• Immigrant
Workers
• Construction
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Outstanding
Stories
of the Week
Home Builders' Stock Sales: Diversifying
or Bailing Out?
Julie Creswell
New
York Times, October 4, 2005,
Page C1
This article reports on recent
trends in stock holdings among insiders at the major builders. It reports that
the top executives of these companies have been selling off their holdings at a
very rapid pace over the last year.
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At the Very Top, a Surge in Income in '03
David Cay Johnston
New
York Times, October 5, 2005,
Page C4
This article reports on data from
the Internal Revenue Service showing that all of the real income growth in the
year from 2002 to 2003 was among the richest 20 percent of households. It also
shows 0.1 percent received a hugely disproportionate share of these gains.
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The
Federal Reserve Board
Bush Calls for Independent Fed Chairman
Nell Henderson
Washington
Post, October 5, 2005, Page
D1
Bush Keeps Open Mind On Choice To Run Fed
Edmund L. Andrews
New
York Times, October 5, 2005,
Page C1
These articles discuss President Bush's comments about the type of person he will nominate to succeed Alan Greenspan as chair of the Federal Reserve Board. At one point the Times article comments that the prospective nomination has stirred almost no ideological battles, unlike the contention around President Bush's nominees to the Supreme Court.
While this is an accurate statement, it largely reflects the extent to which financial interests have managed to dominate national politics in recent years. The Fed's decision on interest rate policy will have more impact on the plight of working and poor families than the disputes over tax policy, the minimum wage, welfare reform and most other measures that have occupied public attention. For example, if Alan Greenspan had accepted the conventional wisdom in the economics profession in the mid nineties, and raised interest rates enough so that the unemployment rate did not fall below 6.0 percent, 5 million workers would have been denied jobs in the late nineties. Also, wage growth would have been much slower for tens of millions of other workers. However, the financial sector has become so powerful that it has managed to virtually eliminate any public debate over Fed policy.
The Post article refers to the
desirability of having a politically independent Fed so that it can avoid acting
in ways that provide short-term political benefits at a long-term cost to the
economy. It gives the example of allowing the economy to grow, even at the price
of higher inflation, which can have an important long-term cost. While the Fed
may be well insolated from pressures to sustain high levels of unemployment,
according to Laurence Meyer, a former Fed governor, it is not similarly
insolated from political pressure from financial interests. At a Fed conference
discussing asset bubbles, Mr. Meyer claimed that it was not politically feasible
for the Fed to take steps to prick the stock market bubble. Therefore, it was
forced to sit by as the bubble created ever larger distortions and laid the
basis for the 2001 recession. Presumably the Fed was constrained by similar
political pressures in its dealings with the housing bubble.
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The
National Debt
More Than Ever, The U.S. Spends and Foreigners Lend
Floyd Norris
New
York Times, October 1, 2005,
Page B4
This article reports on the run-up in debt under the Bush administration, noting that in dollar terms it has been the fastest ever. It then comments that in percentage terms, the debt has actually risen somewhat less rapidly under President Bush than it did on average for his last five predecessors. However, this measure just uses the nominal value of the debt, not adjusting for either inflation or the growth of the economy.
The most appropriate measure is
the change in the ratio of gross debt to GDP. This ratio was actually falling in
most years until the Reagan presidency when it rose from 33.3 percent to 51.9
percent. It had risen further to 64.1 percent by the time President Clinton took
office, and then fell to 58 percent when he left office in 2001. It now stands
at just under 66 percent of GDP. The increase in the debt of 8 percentage points
of GDP in five years is large, but not quite as large as the rate of increase
under either President Reagan or the first President Bush.
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The
Auto Industry
Bankruptcy Seems Near At Delphi
Danny Hakim
New
York Times, October 5, 2005,
Page C1
Printed online with the title
"Delphi Ready to Seek Bankruptcy"
This article discusses the prospect that Delphi, the country's largest auto parts manufacturer, may soon declare bankruptcy. At one point it quotes an analyst at Merrill Lynch as saying that the auto industry has escaped the impact of globalization.
This is peculiar claim.
Employment in the industry has fallen by more than 20 percent in the last five
years alone. It has been feeling the effect of import competition since the
early eighties when there was a large round of layoffs, as well as contract
concessions from the United Auto Workers. The devastation to the auto sector,
which was largely attributable to increased import competition, has been widely
noted for more than 20 years.
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The
Budget
Emergency Spending As a Way of Life
Edmund L. Andrews
New
York Times, October 2, 2005,
Section 3, Page 4
This article discusses the
growing pattern of appropriating large blocks of funds as "emergency
spending," which include almost no restrictions on the how the money is
spent. The article refers to several large expenditures in this category such as
$50 billion for disaster relief associated with Hurricane Katrina and $248
billion over the last three years for the Iraq and Afghan wars. It would have
been helpful to express these sums as shares of the total budget. The disaster
appropriation is approximately 2.0 percent of the current budget, while the
appropriations of the wars in Iraq and Afghanistan are equal to approximately
3.2 percent of federal spending over the last three years.
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GOP Divided Over Range and Severity of
Spending Cuts
Jonathan Weisman
Washington
Post, October 6, 2005, Page
A7
This article reports on various Republican proposals to reduce spending in order to partially cover the costs of the Hurricane Katrina recovery effort. At one point the article refers to a proposal to impose a 2 percent cut in all discretionary spending, which would save roughly $16 billion this year. The article does not indicate whether this cut would be only in place for a single year, with spending bouncing back to its baseline levels next year, or whether it would be permanent. If it would be a permanent reduction in baseline spending, then the cuts would total approximately $160 billion over the decade.
The article also refers to plans
to cut $35 billion from social welfare and health care spending over the next
five years. It would be helpful to note that the proposed cuts are equal to
approximately 1.1 percent of the projected spending in these areas over this
period. The cuts are equal to 0.26 percent of total spending over this period.
The Republican proposals call for changing the format of some programs from
entitlements to block grants. This can provide a basis for much larger cuts in
future years. Such a change is likely to be far more significant than the amount
of money at stake over the next five years.
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Harvard
Endowment Management
Harvard Reports 19% Rise As Investment Chief Leaves
Alan Finder and Karen W. Anderson
New
York Times, October 1, 2005,
Page A13
This article reports on the return that Harvard earned on its endowment in its most recent fiscal year. The article notes that the return was considerably higher than the return earned by most other endowments and investment funds. It also reports that Harvard's fund manager is leaving, apparently at least in part over criticism of his high salary.
In pointing out the relatively high return that Harvard received on its fund, the article appears to imply that return is the sole measure of performance. Investment analysts would also consider the risk associated with such returns. It is possible to have very high returns on average by pursuing very risky investment strategies. For example, the Long-Term Capital Hedge Fund offered its investors a very high rate of return until 1998, when its bad investments forced it out of business, and according to Alan Greenspan threatened the health of the banking system.
While there is no easy way to
fully assess the risk associated with a specific investment strategy, one that
provides a higher return in any given year or even on average is not necessarily
the most desirable strategy. It would have been desirable to include the
comments of an analyst who could have assessed the risk associated with the
strategy being followed by Harvard's investment managers.
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Turkey and
the European Union
European Union Formally Opens Talks on Turkey's
Joining
Craig S. Smith
New
York Times, October 4, 2005,
Page A9
This article reports on the debate in the European Union (EU) over admitting Turkey as a member. The article does not discuss the likely impact of admitting Turkey on the budget of the EU. The EU has a policy of taxing relatively wealthy countries to benefit relatively poor ones.
Turkey is a large country that is
far poorer than any country currently in the EU. This means that if current
formulas are left in place, its admission to the EU will require a substantial
divergence of money from relatively wealthy countries. It would also mean that
regions that are currently relatively poor in the EU (like Greece or former East
Germany) would lose most or all of their subsidies. The amount of money at stake
in this fund is approximately 10 times as large a share of the EU's economy as
the annual foreign aid appropriation in the United States. Given the political
passions that have often been raised over foreign aid in the U.S., it would have
been appropriate to include some discussion of this effect of Turkey's joining
the EU.
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Immigrant
Workers
Immigrant Wives' Visa Status Keeps Them Out of
Workplace
S. Mitra Kalita
Washington
Post, October 3, 2005, Page
A1
This informative article discusses the situation of spouses of skilled workers who come to the United States with H-1B visas. The article points out that many of the spouses of workers admitted with H-1B visas (a special program allowing workers with skills in high demand) are also highly skilled. The article points out that these spouses cannot legally work in their fields.
It is worth noting the strong protectionist component in enforcement of immigration law. The spouses of people arriving with H1-B visas would have no problem working if they were willing to work as custodians, nannies, or in other relatively low-paying occupations. This is due to the fact that the domestic labor force that might otherwise take these jobs has very little political power, and therefore is not able to restrict the degree of competition from immigrant workers. However, more highly skilled workers are able to restrict competition so that a firm that made a practice of ignoring immigration laws in the hiring of computer programmers or accountants would almost certainly face serious legal sanctions.
For this reason, the title of the
article is inaccurate. Wives are not literally kept out of the workplace, rather
they are only prevented from working in relatively high paying jobs.
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Construction
Manufacturing Sector Keeps Growing
Associated Press
New
York Times, October 4, 2005,
Page C4
This article reports on data on manufacturing for September and construction for August. It reports that construction spending set a record in August due to a "renewed boom in housing."
While construction did increase
from relatively low levels reported for June and July, it was just 0.2 percent
higher in nominal dollars than it was in May. Since inflation in the
construction sector has probably been close to 0.9 percent over this period (a
3.6 percent annual rate), the real value of construction is actually lower today
than it was three months ago. The nominal value of private residential
construction was 0.2 percent below its May level, which means the real value of
residential construction in August was approximately 1.1 percent lower than its
May level.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.