Economic Reporting Review
By Dean Baker
October
31, 2005
In This Issue:
• Outstanding
Stories of the Week
• Immigration
Policy and Brain Drain
• Bernanke
and Greenspan
• The
Budget
• Inflation
• The
Housing Bubble
• Oil
Prices
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Outstanding
Stories
of the Week
When
Even Health Insurance Is No Safeguard
John Leland
New
York Times, October 23, 2005, Page A1
This article reports on the situation of some families where a chronic illness
has led to catastrophic health expenses, in spite of the fact that they had
health insurance. The article points out that many treatments are not covered by
insurance, or are so expensive that even the co-payments can inflict a
devastating financial burden.
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Wal-Mart Memo Suggests Ways to Cut Employee
Benefit Costs
Steven Greenhouse and Michael Barbaro
New
York Times, October 26, 2005, Page C1
This article reports on an internal Wal-Mart memo that describes ways in which
it might save money on employee benefits. For example, the memo notes that
unhealthy people cost more to insure than healthy people. Therefore, it
recommends including some physical activity as part of every job, so that
unhealthy people will be less likely to work at Wal-Mart jobs.
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Behind Gold’s Glitter: Torn Lands and Pointed Questions
Jane Perlez and Kirk Johnson
New York Times, October 24, 2005, Page A1
This article discusses the economics of gold mining. It also reports on some of
the environmental and political considerations that have been raised in
reference to gold mining in developing countries.
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Immigration
Policy and Brain Drain
Developing Lands Hit Hardest by ‘Brain Drain’
Celia W. Dugger
New
York Times, October 25, 2005, Page A10
This article reports on
a new World Bank study that shows that many developing countries are harmed by
the loss of highly educated workers to rich countries. At one point the article
asserts that the United States and other rich countries have an immigration
policy that is intended to attract highly educated workers from the developing
workers.
This is not
true. While the United States allows in millions of less-skilled workers to work
as custodians, restaurant workers, and cab drivers, it sharply limits the number
of more highly skilled workers who can work in the country. These restrictions
take a variety of forms. Professional and licensing restrictions in occupations
like medicine and law make it very difficult for foreign educated workers to
fill these positions. These restrictions were quite consciously designed to
protect U.S. professionals who fear foreign competition.
Standard U.S. restrictions on immigrant workers also protect higher educated
workers more than less educated workers. While restaurants know that they can
hire as many undocumented workers as they want with impunity, a major
corporation like IBM or Microsoft would never hire large numbers of undocumented
software engineers in complete disregard of the law. This is because software
engineers have considerably more political power than restaurant workers. While
these companies may bring in immigrant workers on H1-B visas, and similar
programs, the number of highly-skilled workers who enter the country this way is
a tiny fraction of the number who would enter in a free market.
It is worth noting that it would be easy to design a policy that would ensure
that developing countries share in the benefits from freer trade in more highly
skilled professional services. If a tax were imposed on the earnings of these
workers in the United States, which would reimburse developing countries for the
expenses associated with educating these workers, then both rich countries and
poor countries would benefit.
Economists who support “free trade” would be pushing hard for such policies,
since they would take advantage of the comparative advantage that developing
countries enjoy in educating highly skilled workers. It is far cheaper to
educate doctors, lawyers, and economists in the developing world than in the
United States. The world economy would experience enormous gains if educated
workers in developing countries could freely work in the United States (vastly
reducing the cost of health care and other services provided by highly educated
professionals) and their home countries were compensated for educating these
workers. The political power of the professionals in the rich countries who
would have to accept lower pay in this scenario keeps rich country protectionist
barriers in place.
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Bernanke
and Greenspan
Nominee Forms Bonds
and Policy
Nell Henderson and Paul Blustein
Washington
Post, October 25, 2005, Page D1
Bush Names a
Top Advisor To Be Chairman of the Fed
Edmund L. Andrews
New
York Times, October 25, 2005, Page A1
Echoes of 1987
David Leonhardt
New
York Times, October 25, 2005, Page C1
These articles discuss President Bush’s decision to nominate Ben Bernanke to
replace Alan Greenspan as Federal Reserve Board chairman. At one point, in
assessing Greenspan’s record at the Fed, the Andrews article notes
Greenspan’s success in supporting the stock market after its 1987 crash. It is
worth noting that Greenspan has repeatedly said that the Fed is not responsible
for dealing with asset values in the context of his failure to take action
against either the stock market or housing bubble. If Greenspan was consistent
in this position, then he would not have acted to stem the stock market crash.
There is no obvious economic problem associated with a low-valued stock market.
In theory, a lower valued stock market would lead people to save more, which
would lower interest rates and increase investment. On the other side, the stock
and housing bubble have been the major causes of the record low savings rates of
the last decade, which has left the baby boom cohort poorly prepared for
retirement.
This article also refers to Greenspan’s claim in 1995 that the economy could
grow more rapidly than most economists believed because productivity had been
mis-measured. Actually, this claim was wrong. If productivity was being mis-measured
at the time, then output was also being mis-measured. (Productivity is equal to
output divided by hours. No one contended that there were any major problems in
measuring hours.) If productivity growth was being undercounted, then the
economy was already growing more rapidly than the government data showed.
The article by Leonhardt refers to a dispute between Yale economist Robert
Shiller and Ben Bernanke. Shiller had criticized the Fed for not taking action
to reduce stock values, which he felt were excessive in 1997. It reports that
Bernanke pointed out in 2002 that the market had already risen above its 1997
value, implying that Shiller must think that the fed should try to push it
lower.
In December of 2002, the S&P 500 averaged 900, slightly above its 1997
average value of 873. However, the economy and trend profits were approximately
30 percent higher in 2002 than in 1997. This means that the price-to-earnings
ratio was approximately 30 percent lower in 2002. Simply comparing the value of
the stock indexes, without referring to the underlying profits is
meaningless.
The Post article discusses Bernanke’s warnings that the economy could
have slipped into deflation in 2002 and then asserts that deflation can spiral
into depression. While a bad economic downturn can turn into a depression, there
is no necessary link between a falling price level and a depression. The price
level is an abstraction that the Bureau of Labor Statistics and the Commerce
Department put together after quality- adjusting prices and then aggregating
across all categories of goods and services.
At any point in time, there are always a large number of sectors in which prices
are falling, without any obvious negative consequences. (Computer prices have
been falling for the last thirty years.) In other sectors, like cars, sticker
prices can rise even while quality-adjusted prices fall. There is no obvious
problem if the balance shifts so that the sectors reporting declining prices
outweigh the sectors reporting higher prices. While some countries have
experienced depressions with falling prices, in other countries depressions have
been associated with runaway inflation. On the other side, there have been
countries that have experienced healthy growth even as the price level has
fallen, with Japan’s performance over the last year being the most recent
example. (Japan’s economy grew 4.5 percent in 2004.)
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The
Budget
Republicans
Ask Oil Industry For Help With Fuel Prices
Carl Hulse
New
York Times, October 26, 2005, Page A20
This
article discusses Republican efforts to persuade the oil industry to increase
its investment in drilling for oil. It also reports on their efforts to cut the
budget to partly offset the cost of the recovery from Hurricane Katrina.
At
several points the article refers to dollar sums of cuts, without providing any
context, including the number of years’ of spending to which the cuts would be
applied. For example, at one point it refers to efforts by Senate Republicans to
find $125 billion in savings. It is not clear over what time frame these savings
would be realized. The article would be more informative to readers if it
reported the proposed cuts as a percentage of the affected programs over the
relevant time period.
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Inflation
If Your
Don’t Eat or Drive, Inflation’s No Problem
Daniel Gross
New
York Times, October 23, 2005, Section 3, Page 3
This
article discusses the large gap between the high inflation rate shown by the
overall CPI, compared with the relatively low rate shown in the core index,
which excludes gas and food prices. Actually, the core index has been showing
somewhat more rapid inflation in recent months as well, but the uptick has been
concealed by unusually low inflation in the shelter component (rent and hotels).
Without the shelter component, core inflation rose at a 2.2 percent annual rate
over the last quarter.
A
glut of rental housing is keeping rents down and will continue to do so. (The
glut is attributable to the building boom that has resulted from bubble-inflated
housing prices.) But, the sharp downturn in hotel prices over the last quarter
is a fluke in this erratic component which will be reversed in future months. It
is important to note that most people never pay the “rent” which accounts
for almost 40 percent of the core CPI, since it is imputed rent on
owner-occupied housing.
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The
Housing Bubble
Slippery
Devil, That Real Estate ‘Bubble’
Motoko Rich and David Leonhardt
New
York Times, October 23, 2005, Section 4, Page 3
It
actually is not clear that this is true. While many people can make this
decision, many homes are sold out of necessity, due to death or illness, family
breakup, or job changes. Sales of existing homes currently exceed 7 million a
year. Even if this rate were cut in half, there would still be 3.5 million homes
a year placed on the market. If buyers were reluctant to pay bubble-inflated
prices, then the prices on these homes could fall quickly.
It is also worth noting that most economists think that thin markets, like the
housing market, are more volatile than
thick markets like the stock market. This is the reason that most economists
give for opposing transactions taxes on stocks and other financial assets. They
argue that anything that reduced the volume of trading in these markets would
make them more volatile. If they are consistent, then the economists who oppose
financial transactions taxes must believe that the housing market is more
volatile than the stock market.
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Oil Prices
Oil
Doesn’t Want Focus on Big Profits
Frank Ahrens
Washington
Post, October 26, 2005, Page D1
This article reports on
the oil industry’s public relations campaign to try to prevent the public from
being angered over high oil prices. The article notes the substantial sums that
the industry is spending to get its arguments to the public and then largely
repeats these arguments, with few alternative perspectives.
At one point it reports an industry spokesman’s
claim that oil supplies are falling by 5 to 10 percent annually. This is not
true. World oil production has been consistently increasing. The article also
reports the spokesman’s complaint that restrictions on drilling in places like
the Arctic Wildlife Refuge have contributed to shortages. If drilling had been
allowed in the refuge, it would only increase world production about 1 percent.
If mileage standards for U.S. cars had been increased by 2 miles a gallon, it
would have had far more effect on world oil markets.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.