Economic Reporting Review
By Dean Baker
November
28, 2005
In This Issue:
• Outstanding
Stories of the Week
• The
Trade Deficit
• Tax
Breaks for Artists
• Tax
Cuts
• Wages
in the Auto Industry
• Immigrants
and the US Labor Market
• Germany
• Copyrights
• State
Budgets
• European
Interest Rates
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Outstanding
Stories
of the Week
Republicans
in House Pass $50 Billion in Budget Cuts
Jonathan Weisman
Washington
Post, November 19, 2005, Page A6
This article reports on the budget package pushed through by House Republicans.
It examines the likely impact of the proposed budget cuts both on the overall
budget deficit and on the people who will be affected by them.
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The
Trade Deficit
U.S. Trade Deficit Hangs In a Delicate Imbalance
Paul Blustein
Washington
Post, November 19, 2005, Page A1
This article discusses the dynamics of the U.S. trade deficit. The article
attributes the trade deficit to the low savings rate in the United States, but
reports that it is sustained because are foreigners are willing to lend money to
the United States to support the imbalance.
This argument reverses the chain of causation. The fact that people in
the United States buy foreign goods rather than domestically produced goods is a
result of the fact that foreigners are investing in the United States and
thereby raising the value of the dollar. The higher value of the dollar makes
imports relatively less expensive than domestically produced goods, thereby
causing people to buy more imports, which translates into a large trade deficit.
If there were not a large inflow of foreign capital raising the value of the
dollar, there is no way that a low savings rate by itself would lead to a trade
deficit. According to standard economic theory, in the absence of an inflow of
foreign capital, a low savings rate would generally lead to a rise in interest
rates. This would in turn lead to a reduction in investment spending and
purchases of new cars and homes. The trade balance would be little affected by a
fall in the domestic savings rate, unless an inflow of foreign capital raised
the value of the dollar.
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Tax
Breaks for Artists
Senate
Bill Lets Artists Claim Price for Gifts
Robin Pogrebin
New York Times, November 23, 2005, Page
The artists, writers, or musicians who benefit from this bill would be able to
deduct the full value of their work from their taxable income, even though they
have never paid tax on the value of the work they created. This would be
equivalent to allowing automobile mechanics to deduct the full value of a repair
job done for a charitable organization from their taxable income, without ever
claiming any income from the job. (They currently cannot do this.) It may
desirable to implement a policy that both further subsidizes charities, and
favors creative and artistic workers, but it is important that the public
understand the nature of the subsidies that it is providing.
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Tax
Cuts
Congress
Rushes to Tie Up Loose Ends Before Break
Carl Hulse
New York Times, November 19, 2005, Page A11
This article
reports on the progress of several tax and spending bills that Congress is
trying to complete before the end of the year. At one point the article quotes
House Speaker Dennis Hastert on the desirability of approving the extension of a
tax break that applies a lower tax rate for dividends and capital gain income
than on wage income. According to the article, Hastert said that a lower tax
rate is necessary in order to "continue to create jobs."
It is worth noting that the rate of job creation since this tax break was
put into effect in 2003 has been fairly weak compared with the job growth of the
nineties. Furthermore, most of the jobs created in the last two years have been
due to consumption growth. This tax break is supposedly designed to boost
investment. Investment growth has actually been fairly weak for this point of a
recovery.
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Wages in the Auto Industry
Planned Closings Stun GM Employees
Amy Joyce
Washington
Post, November 22, 2005, Page D1
G.M. Set To Drop 5,000 More Jobs And Shut Plants
Micheline Maynard
New
York Times, November 22, 2005, Page A1
These articles report on General Motors plans to close several more plants and
trim its workforce by 30,000 workers over the next 3 years. Both articles report
that General Motors pays it workers an average of more $60 an hour in total
compensation.
It is inaccurate to present this figure as compensation for individual workers,
since many of the costs that General Motors includes in this calculation do not
go to employed workers, but instead are compensation to workers who have been
laid off. As a chart on the Post article shows, only $27.50 of this cost is
attributable to wages. If the rest of the $65 figure usually cited were actually
benefits accrued directly by the worker, it would imply that General Motors was
spending more than $70,000 per year on the health care and pension of each of
its workers. This is clearly an implausible figure.
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Immigrants
and the US Labor Market
Shortage of Immigrant Workers Alarms Growers in the West
Sonya Geis
Washington
Post, November 22, 2005, Page A3
This article reports on the complaints by farm owners in the West and several
politicians, that there is a "shortage" of immigrant workers. At one
point, it quotes Larry Nelson, the mayor of Yuma, California, that "there
are more jobs in America than we have workers."
In a market economy this situation is resolved by a rise in the price of the
good or factor of production (in this case labor). The problem in this situation
is that the growers apparently are unwilling to pay the market-clearing wage. It
is natural that employers would like to get workers at lower wages, just as they
would like to get materials at lower prices. What is extraordinary is that these
growers apparently believe that the government should intervene to keep wages
from rising. That should have been the focus of this article.
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Germany
Germany Passes Torch to New Generation
Richard Bernstein
New
York Times, November 22, 2005, Page A3
Merkel , at Last, Takes Germany's Helm
Shannon Smiley
Washington
Post, November 23, 2005, Page A14
Merkel Takes Office in Germany and Announces Coalition Cabinet
Richard Bernstein
New
York Times, November 23, 2005, Page A3
These articles discuss the economic situation in Germany as a new government
takes power. Both the Post article and the November 23rd Times article report
that Germany's unemployment rate is over 10 percent. This figure refers to the
official German government measure of unemployment. Unlike the U.S. measure, the
German measure counts workers who are involuntarily working part-time as being
unemployed. The standardized unemployment measure used by the OECD (which is
virtually identical to the U.S. measure) shows that Germany's unemployment rate
is 9.3 percent. In the area that was formerly West Germany, it is slightly over
7.0 percent.
The November 23rd Times article describes the German economy as being in a
crisis, and in need of reform. The article does not provide the basis for this
assessment. Unlike the United States, Germany's economy is sufficiently
competitive that it is running a trade surplus with the rest of the world. By
contrast, the United States is running a large trade deficit that almost all
economist recognize to be unsustainable. At least by this very visible measure,
the United States economy can be more accurately described to be in a crisis
than the Germany economy.
At one point the November 22rd Times article describes the key decision facing
the German public as "how much of the country's elaborate welfare system to
give up for the sake of competitiveness." It is not clear that reducing the
size of Germany's welfare state will increase its competitiveness. Countries
with more extensive welfare states, most notably the Scandinavian countries,
have healthy economies and low unemployment rates. There are also many
industrialized countries with weaker welfare states, such as Italy and Greece,
whose economies are performing poorly. Therefore, there is little reason to
believe that reductions in the size of Germany's welfare state will necessarily
lead to improved economic performance.
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Copyrights
Putting the Napster Genie Back in the Bottle
Saul Hansell
New
York Times, November 20, 2005, Section 3, Page 1
This article reports on the current business plans of Shawn Fanning, the
inventor of Napster, for a paid peer-to-peer file sharing network. It would have
been useful to include some economic analysis in this article. The article
reports on the enormous effort and expense that the entertainment industry is
incurring to ensure that copyrighted material is not freely transferred. It
would be far more efficient to develop an alternative mechanism to support music
production and then allow all material to be transferred freely at its marginal
cost, which is zero with the Internet (e.g. see "The Artistic Freedom
Voucher: An Internet Age Alternative to Copyright" [http://www.cepr.net/publications/ip_2003_11.pdf]).
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State
Budgets
States’
Coffers Swelling Again After Struggles
John M. Broder
New
York Times, November 25, 2005, Page A1
This article reports on higher than projected growth in state revenue, which is
leading to a substantial improvement in their budget situations. The article
gives several examples of improved budget numbers by reporting the sizes of
surpluses or the decline in deficits.
Since very few readers are likely to be familiar with the size of these state
budgets, would be far more helpful to report the numbers as percentages. For
example, it reports that California’s projected surplus increased from $1.3
billion to $5.2 billion. This shift is equal to approximately 4.5 percent of
California’s budget. The article reports that New York State’s budget
situation has improved from a projected deficit $4.2 billion to a surplus of $1
billion. This shift is equal to approximately 5.2 percent of the state’s
budget.
It is worth noting that much of this gain is likely
attributable to income taxes on capital gains. These tax collections are highly
erratic, since they depend on stock market fluctuations. One of the reasons that
many states faced serious budget shortfalls earlier in the decade was that they
assumed that the tax revenue based on the extraordinary capital gains incurred
during the stock market bubble would persist. When the bubble burst, this
important source of tax revenue disappeared.
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European
Interest Rates
Rate Rise Is
Opposed In Europe
Mark Landler
New
York Times, November 25, 2005, Page C1
This article reports on opposition among business leaders to an interest
rate hike by the European Central Bank (ECB). It would have been useful if the
article had also presented the views of other segments of society, most
obviously labor unions. Many labor unions in Europe have long been critical of
the restrictive monetary policy of the ECB, arguing that it is a major cause of
high European unemployment. It would be appropriate to occasionally present
their views, especially since unions represent a very large segment of the
population in the euro zone nations.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.