Economic Reporting Review
By Dean Baker
November
7, 2005
In This Issue:
• Outstanding
Stories of the Week
• Tax
Reform
• Delphi
Pension and Health Care Obligations
• 3rd
Quarter GDP
• Health
Care Costs
• Oil
Drilling in the Arctic Wildlife Refuge
• Productivity
Growth
• Trade
• The
Budget
• Germany
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Outstanding
Stories
of the Week
The End of Pensions
Roger Lowenstein
New York Times, October 30, 2005, Magazine, Page 56
This
article reports on the decline of traditional defined benefit plans and the
inadequacy of the defined contribution plans that have risen in their place.
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Rhetoric Meets reality in the Budget Season
Jonathan Weisman
Washington Post, November 1, 2005, Page A23
This article discusses the budget cuts to Medicaid and other entitlement
programs proposed by the Republicans. It points out that the proposed cuts are
small relative to the total budget and even relative to spending in these
programs, but nonetheless could have a substantial impact on the people who will
be affected.
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Tax
Reform
Panel Recommends Tax Overhaul
Jeffrey H. Birnbaum
Washington Post, November 2, 2005, Page A1
Printed
online with the title “Commission Recommends Overhaul of Federal Income
Tax”
Panel Urges Big Cut in Mortgage Deduction
David E. Rosenbuam
New York Times, November 2, 2005, Page A24
These articles report on the proposals put forward by President Bush's tax
reform commission. Both articles report the commission's claim that under their
plan most taxpayers would be able to file their taxes on a post-card-size sheet
of paper. Actually, the vast majority of taxpayers in the United States take the
standard deduction, which means that they could in principle already file their
tax return on a post-card-size sheet of paper.
The articles note the commission's plan to change the current tax break for 401(k)-type savings plans from one in which the tax break occurs when the money is saved, as is generally the case now, to one in which the tax break is taken when workers withdraw the money. Under the commission's proposal, these withdrawals would be tax free, which means that all the money earned by investments would go untaxed.
This shift would be very costly to many middle-income workers. In most cases these workers are in a higher tax bracket in their working years than they will be during their retirement. Typically, they will face a marginal tax rate of 25 percent or even 33 percent during their working years. In retirement, since their income is much lower, their tax rate is likely to fall to 15 percent or possibly even 10 percent. For this reason, it is very beneficial to get the tax break on savings at the point where the money is saved. Higher income people will likely be in the top tax bracket in both the working years and retirement, so they may benefit from switching the tax break to the point at which the money is withdrawn.
These articles report that the commission projects that their proposals will
not change, on net, the amount of money collected in taxes. This calculation
does not take account of efforts that taxpayers may use to game the system. The
commission's proposals create large differences between the tax rates on wage
income and capital income. This gives taxpayers substantial incentives to try to
hide wage income as capital income. Many high-income taxpayers are likely to
find mechanisms to take advantage of this gap, thereby reducing tax collections
far below the levels assumed by the commission.
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Delphi
Pension and Health Care Obligations
At Delphi, Managing Change
Sholnn Freeman
Washington Post, October 29, 2005, Page D1
This article reports on Delphi's plans to cut the pay, pension, and health care benefits for its blue-collar work force. It presents the claims of Robert S. Miller, Delphi's CEO, that the company has made promises that it cannot keep.
It is important to note that General Motors, not Delphi made these promises. Delphi was a division of General Motors until 1999 when it was spun off as an independent company. Up until that point, the workers signed contracts with the understanding that they would be guaranteed by the resources of General Motors. This meant that they would get their promised health care and retirement benefits, unless General Motors went bankrupt.
It is also worth noting that the shortfall in the pension plan is in large part due to the incompetent oversight of the Pension Benefit Guarantee Corporation (PBGC), the agency that supervises and partially guarantees defined benefit pensions. The PBGC somehow failed to recognize the stock market bubble, and therefore did not recognize the extent to which many pensions were under-funded. Therefore it let companies pay out dividends to shareholders when it should have required that they make additional payments to pension funds.
The article also discusses at length how Delphi and other U.S. corporations cannot afford to pay high wages and benefits to blue collar workers, when people can be found to do the same jobs for $1 to $2 an hour in the developing world. Insofar as this is the case it is due to the conscious policy of the U.S. government to put manufacturing workers in competition with manufacturing workers in developing countries.
It is also possible to find journalists, doctors, lawyers, and economists in
developing countries who will work for a small fraction of the wages that these
occupations receive in the United States. However, the laws have been structured
to provide these highly paid professionals with protection so that they
generally do not have to compete against professionals in developing countries.
The fact that highly paid professionals can still draw good salaries, but blue
collar workers cannot, is the result of government policies designed to benefit
these professionals, not the natural course of economic development.
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3rd
Quarter GDP
Hurricanes Didn't Stop Economy From Growing
Nell Henderson
Washington Post, October 29, 2005, Page D1
Economic
Growth Accelerated in 3rd Quarter
Vikas Bajaj
New York Times, October 29, 2005, Page B2
These articles report on the Commerce Department's release of 3rd quarter GDP data. Investment grew at just a 6.2 percent annual rate in the quarter. This is the third consecutive quarter that investment growth has been in the single digits. This is noteworthy because everyone recognizes that consumption growth will have to slow in the near future.
At present, consumption exceeds disposable income, with the saving rate
having turned negative. This means that the households are on average borrowing
more than they are saving. This situation cannot persist for long, and when
consumption starts to lag income growth, it will be necessary to have very
strong investment growth to sustain demand. If investment growth stays near its
current rate, then a falloff in consumption will almost certainly lead to rising
unemployment and most likely a recession. The low rate of investment growth was
not mentioned in either article.
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Health
Care Costs
Everyday High Health Costs
Reed Abelson
New York Times, October 29, 2005, Page B1
Printed online with the title "Wal-Mart's Health Care Struggle Is
Corporate America's, Too"
This article discusses Wal-Mart's struggle to contain its health care
costs. It notes that many of the problems faced by Wal-Mart are shared by all
employers. It would have been worth noting that these problems are largely
unique to the United States. Due to the extraordinary inefficiency of the U.S.
health care system, people in the United States pay more than twice as much per
person as the average for other wealthy countries, yet the United States ranks
at the bottom in life expectancy. It would have been helpful to include some
discussion of the relative inefficiency of the U.S. health care system in an
article taking a broad look at health care.
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Oil
Drilling in the Arctic Wildlife Refuge
Artic Drilling Push Is Seen As
Threat to Budget Bill
Robert Pear
New York Times, November 3, 2005, Page A22
This article reports on the debate over opening the Arctic National
Wildlife Refuge to oil drilling. At one point it reports an assertion by Alaska
Senator Ted Stevens that drilling in the refuge will create 1.3 million jobs.
There is no economic analysis that supports this claim. Standard models indicate
that the potential job gains would be less than one twentieth as large (see
"Hot Air Over the Arctic: An Assessment of the WEFA Study of the Economic
Impact of Oil Drilling in the Arctic National Wildlife Refuge").
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Productivity
Growth
Productivity Growth Nearly
Doubled in the Third Quarter
Vikas Bajaj
New York Times, November 4, 2005, Page C13
This article reports on the Labor Department's release of data on third quarter productivity growth. The articles notes that the data show that productivity growth in the non-farm business sector increased at a 4.1 percent annual rate in the quarter, up from a 2.1 percent annual rate in the second quarter.
It is worth noting that the main reason for the jump in growth is that reported hours worked increased at just a 0.1 percent annual rate in the quarter. This figure is striking because hours worked for non-supervisory employees were reported as increasing at a 2.0 percent annual rate. Since non-supervisory employees account for close to 80 percent of the workers in the non-farm sector, these numbers imply that there must have been a sharp falloff in the numbers of hours of work reported for supervisory workers and the self-employed.
Hours worked for supervisory workers and the self-employed are poorly
measured and therefore very erratic. It is unlikely that the hours of these
workers actually fell sharply when hours of non-supervisory workers were rising
at a healthy pace. Most likely the decline was simply to an error in
measurement, which will likely be reduced in the next quarter's data. This means
that the 4th quarter is likely to show a sharp jump in hours worked and a
considerably slower rate of productivity growth.
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Trade
E.U. Offer Deflates Trade Talks
Bush
at Hemisphere Talks: Trade Fight Awaits
Elisabeth Bumiller and Larry Rohter
New York Times, November 4, 2005, Page A8
Printed online with
the title "Bush Faces a Fight at Free Trade Talks in Argentina"
These articles discuss the prospects for future trade agreements. The Post article reports on the negotiations preceding the Hong Kong meeting of the World Trade Organization (WTO). The article asserts that main goal of this round of the WTO is ensuring that developing countries get more of the gains from trade. The wealthy countries claim that this is the main goal of this round of the WTO, but that does not mean this is actually the case. In the eighties, President Reagan dubbed the MX missile, the "peacemaker." This claim does not mean that the purpose of the missile was actually to maintain peace. In the same vein, the assertion that the purpose of the round is to promote development does not mean that this is actually the purpose.
The
Times article reports on negotiations over a "Free Trade of the
Americas Agreement." The article repeatedly asserts that the United States
is seeking to promote "free trade." This is not true. A major goal of
the United States in these negotiations is to increase protectionist barriers in
the hemisphere in the form of patent and copyright protection. These forms of
protectionism raise the price of affected goods by several hundred percent above
the free market price, thereby creating economic distortions and leading to
outflows of money from relatively poor Latin American countries to the United
States.
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The
Budget
This article discusses proposals to cut Medicaid and Medicare. The headline describes the proposed cuts as "big." According to the article, the cuts in Medicaid would reduce expenditures by approximately $7 billion over the next five years, approximately 0.4 percent of projected spending over this period. The cuts would take the form of higher co-pays by beneficiaries for drugs and doctor visits, raising the standard fee from $3 to $5. This increase in co-payments could easily take several hundred dollars annually from the pockets of low-income households in which one or more members have serious health problems.
The
form of the proposed cut to Medicaid is probably of greater significance than
the size of the cut. The article does not provide sufficient information about
the proposed cuts to Medicare to determine their significance.
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Germany
German
Socialist to Quit; Coalition in Doubt
Mark
Landler
New
York Times, November 1, 2005, Page A8
This article reports on the decision of one of the top leaders of the German Social Democratic party to resign, after his choice for an appointment was rejected by the party. At one point the article asserts that there is a "urgent need to streamline Germany's economy."
The
article does not explain the basis for this assertion. While Germany's economy
has serious problems that don't stand out as being especially severe compared to
other countries like the United States. For example, while Germany has a modest
current account surplus, the United States has a current account deficit that is
approaching 7.0 percent of GDP. Virtually all economists agree that a deficit of
this magnitude cannot be sustained for long. The United States will also face a
much larger rise in the ratio of retirees to workers than in Germany, because of
the huge baby boom cohort. In addition, the U.S. health care system costs more
than 50 percent more per person than the German system, even though Germans
enjoy longer life expectancies. Given these facts, it is not clear why Germany's
economy should be viewed as being in such desperate need of reform.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.