Economic Reporting Review
By Dean Baker
December
19, 2005
Please note Dean Baker will be on vacation until January 3, 2006. The next ERR issue will be published a week later.
In This Issue:
• Outstanding
Stories of the Week
• Trade
• The
Trade Deficit
• Climate
Change
• Mexico
• Taxes
• Russia
and Intellectual Property
• Immigration
• Drugs
and the Developing World
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Outstanding
Stories
of the Week
Federal
Loans to Homeowners Along Gulf Lag
Leslie
Eaton and Ron Nixon
New
York Times, December 15, 2005, Page A1
This
article reports on the high rejection rate for low-interest government loans
among victims of Hurricane Katrina. The article includes a careful analysis of
the rejection rates by neighborhood, showing that the rejection rate is far
higher in predominantly African American neighborhoods than in neighborhoods
that are wealthier and mostly white.
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Trade
Elections
Could Tilt Latin America Further to the Left
Juan
Forero
New
York Times, December 10, 2005, Page A3
This article reports on the growing popularity of leftwing political candidates in Latin America. At several points the article contrasts these candidates with more conservative politicians who it s describes as supporting "free trade" or unfettered trade."
This
is not accurate. The conservative politicians cited in the article all support
many types of protectionist barriers. In fact, in some areas, most notably
patent and copyright protection, the conservative candidates are stronger
supporters of protectionism than their leftwing counterparts. The most accurate
way to distinguish the conservative from the leftwing candidates is that the
conservatives support the U.S. government's trade agenda in the region, while
the leftwing candidates largely oppose it.
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No Sign
of Progress on Farm Issue as World Trade Meeting Opens
Keith
Bradsher
New
York Times, December 14, 2005, Page C1
This article discusses the progress of negotiations on agricultural barriers at the W.T.O. meetings in Hong Kong. At one point the article reports on the Efforts by West African countries to get the United States to reduce its subsidies on cotton production.
In principle, the elimination or reduction of U.S. cotton subsidies will lower the prices received by U.S. farmers, thereby reducing U.S. production. This should in principle lead to higher world prices for cotton, which should benefit cotton producers in West Africa and elsewhere.
However, it is important to note that the United States is now running a trade deficit that is close to 7.0 percent of GDP, a level that all economists recognize as unsustainable. The mechanism for correcting a trade deficit is a fall in the value of the dollar relative to other currencies. When the dollar falls, the price of U.S. exports, like cotton, will become cheaper in world markets.
Since
it is virtually certain that the dollar will fall substantially against other
currencies in the near future, the price of U.S. cotton exports is virtually
certain to decline. This means that any benefits that cotton exporters in West
Africa and elsewhere might get from a reduction in U.S. cotton subsidies would
be temporary. When the dollar adjusts to a sustainable level they will face
world prices comparable to those they face today. If these countries make
economic plans based on the assumption that cotton prices will be much higher in
the future if the U.S. eliminates its subsidies, then they are likely to suffer
severe hardships when world cotton prices fall due to a decline in the value of
the dollar.
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Vows of
New Aid to the Poor Leave the Poor Unimpressed
Keith
Bradsher
New
York Times, December 15, 2005, Page C3
This
article reports pledges by rich countries to increase their aid to developing
countries. At one point it reports that the Bush administration is proposing to
increase its annual appropriation for trade adjustment assistance from $1.3
billion $2.7 billion by 2010. The projected aid level is equal to 0.09 percent
of projected spending in 2010. Polling data regularly show that the public
hugely overestimates the importance of foreign aid in the budget. For this
reason it would be especially helpful to express aid amounts in terms that would
be meaningful to most readers.
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The
Trade Deficit
Trade Gap
Ballooned In October
Paul
Blustein
Washington
Post, December 15, 2005, Page D1
This article reports on the release by the Commerce Department of data showing that the trade deficit for October was $68.9 billion, a new record. The U.S. trade deficit is now approaching 7 percent of GDP, more than the double its peak level in the eighties.
At one point the article quotes an economist's assertion that the U.S. will be dependent on foreign capital as long as it is running a large trade deficit. Actually, the causation runs in the opposite direction. Large inflows of foreign capital sustain the over-valuation of the dollar. This over-valuation of the dollar makes imported goods cheaper than they would otherwise be, leading to more imports, and makes our exports more expensive to people living in foreign countries. If the inflows of foreign capital were reduced, the dollar would decline, and the trade deficit would fall back towards a sustainable level. There is no other plausible mechanism to bring down the trade deficit.
The
trade deficit will have a large impact on future living standards, since it
increases the portion of national output that will be paid to foreigners in the
future. In fact, the impact of the current trade deficit on living standards
will be much larger than the impact of the federal budget deficit. For this
reason, the news that the trade deficit was unexpectedly large in October should
have been given more prominence in the paper.
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Climate
Change
U.S. Joins
Informal Talks on Warming
Juliet
Eilperin
Washington
Post, December 10, 2005, Page A1
This article reports on the negotiations in Montreal over plans to reduce greenhouse gas emissions. At one point, the article reports that the Bush administration is opposed to mandated limits on greenhouse gas emissions. It asserts that it instead believes that "market forces" are the best way to address the problem.
It would have been helpful if the article indicated what the Bush administration meant by this statement. There is no obvious way that market forces, as the market is currently constituted, would lead to a reduction in greenhouse gas emissions. As it stands, the statement attributable to the Bush administration is equivalent to saying that it opposes taxes to pay for U.S. defense, but instead would rely on market forces. Just as market forces would not lead the public to pay for defense in any obvious way, there is no obvious way in which market forces would lead to a reduction in greenhouse gas emissions.
At
one point the article describes the American Council for Capital Formation as
"free-market." It can more accurately be described as pro-business.
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Mexico
In Mexico,
Junkyard Dogfight for Presidency
Sylvia
Moreno
Washington
Post, December 10, 2005, Page A13
This article reports on the campaign for Mexico's presidency. At one point it refers to President Fox's plans for tax, labor and energy law reforms. It asserts that "experts say" these reforms are essential for bringing economic growth.
It
would have been helpful if the article identified the experts to whom it refers.
Not all experts hold the same view on this issue and there is no obvious reason
that the experts on one side of this debate should be given anonymity.
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Taxes
Congress Seeks To
Reconcile Divergent Bills
Jonathan
Weisman
Washington
Post, December 10, 2005, Page A5
This article reports on the status of two major tax and spending bills being considered by Congress. At one point the article quotes House Speaker Dennis Hastert on the need to keep a tax cut for dividends and capital gains, "more people are working today than ever before."
This
statement is almost always true. Except when it is in a recession, the economy
grows and adds jobs. Saying the economy has more jobs today than ever before is
comparable to saying that an eight year-old boy is taller than he has ever been
before. Presumably, if Mr. Hastert thought he could make a better case for the
health of the economy he would have not made such a trivial claim.
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Senate
Leader Predicts No Action This Year on Relief From the Alternative Minimum Tax
Carl
Hulse
Published online with the title "Cut in Minimum Tax Not Likely, Lawmaker
Says"
New
York Times, December 14, 2005, Page A31
This article reports on congressional efforts to adjust the alternative minimum tax (AMT) so that it does not affect a large number of middle-income taxpayers. This article, along with many other articles, report on these adjustments as being very costly.
In
fact, Congress approved the Bush tax cuts with at least the implicit
understanding that these adjustments would take place. (No one advertised that
they intended to exclude many middle income taxpayers from the benefit of these
tax cuts, which would be the implication of not adjusting the AMT.) The reality
is that Congress deliberately concealed the true cost of these tax cuts by not
including the necessary adjustments in the AMT in the cost of the bill. What the
public is seeing at the moment is really Congress grappling with the full cost
of its tax cuts rather than an effort to find a way to pay for adjustments in
the AMT.
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Russia
and Intellectual Property
U.S. Hopeful
About Russia's Tougher Stance on Software Piracy
Peter
Finn
Washington
Post, December 11, 2005, Page A26
This article discusses Russia's plans to be stricter in its enforcement of foreign patent and copyrights on software. The article reports the assertion of the International Intellectual Property Association that Russia's non-enforcement of copyrights is costing the software and entertainment industries $1.7 billion annually in lost royalties.
Russia's
GDP is currently about $500 billion. This means that the lost royalties claimed
by the entertainment industry are equal to approximate 0.3 percent of Russia's
GDP, the equivalent of $40 billion a year in the United States. If Russia were
forced to increase payments to foreigners by this amount, it would have a
substantial negative effect on its economy.
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Immigration
House to Take Up
Stricter Immigration Measure
Jonathan
Weisman
Washington
Post, December 11, 2005, Page A8
This article reports on the progress in Congress of legislation restricting immigration. At one point it reports the view of Ken Mehlman, the Republican Party chairman that enforcement must begin at the border. In fact, most analyses have found that most undocumented immigrants working in the United States entered the country legally, and then overstayed their visas.
The
article also reports complaints that immigrants impose a drain on government
budgets by using public schools and hospitals, but not paying taxes. In fact,
many undocumented workers pay taxes from which they do not benefit. Most
importantly, many provide false Social Security numbers, which means that they
pay taxes to the government, but will never receive any benefit. Several studies
have shown that on net, the taxes paid by these workers exceed the benefits they
receive, although there are some state and local governments where the cost of
services provided to illegal immigrants exceeds the taxes collected.
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Drugs
and the Developing World
Trade Talks Now
Expected to Focus on Exports of Poorest Nations
Keith
Bradsher
New
York Times, December 12, 2005, Page C1
This article reports on the status of the W.T.O. talks in Hong Kong. At one point the article refers to an agreement under which developing countries would be able to import generic versions of brand drugs from rich countries. The article reports that the agreement would "allow greater access to generic drugs."
It
is not clear that this agreement increases the ability of developing countries
to obtain generic drugs. Previously, the TRIPS rules allowed general compulsory
licensing of brand drugs. The new agreement appears to restrict compulsory
licensing to cases of health emergencies, with the rich country governments
(which also are the base of the drug companies) apparently being allowed to
decide whether a specific situation poses a health emergency. The rules for
these compulsory licenses are also sufficiently complicated that no country has
applied for one during the two years that they were in effect on a temporary
basis. For these reasons, the agreement may actually be restricting access to
generic drugs compared to pre-existing rules.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.