Economic Reporting Review
By Dean Baker
January
3, 2006
In This Issue:
• Outstanding
Stories of the Week
• China's
Economy
• The
Housing Bubble
• Declining
Population In Japan
• Pensions
• The
Trade Deficit and Productivity
• Trade
• Health
Care Costs
• Germany
• Federal
Employee Wages
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Outstanding
Stories
of the Week
Below
a Mountain of Wealth, A River of Waste
Jane Perlez and Raymond Bonner
New
York Times, December 28, 2005, Page A1
This article reports on the mining practices of
Freeport-McMoRan, a New Orleans based mining company that has considerable
damage to the environment in Indonesia.
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China's
Economy
That
Blur, It's China Moving Up In the Pack
David Barboza and Daniel Altman
New
York Times, December 21, 2005, Page C1
This article reports on China's re-evaluation of the size of its economy. Based on new data, the government's statistical agency estimated its economy is 17 percent larger than previously reported. The article reports that this increment to growth pushes China into 4th place among world economies, behind the United States, Japan, and Germany. It also reports that China's economy is now situated to surpass the U.S economy by 2035 based on its projected growth path.
Actually, using a purchasing power parity (PPP) measure of GDP, which most economists view as the more realistic basis for making international comparisons, China is already the world's second largest economy. With the revised data on the current size of China's GDP, its economy should exceed the size of the U.S. economy within a decade.
According to the Penn World Tables, the generally accepted source for estimates of PPP GDP, China's GDP on a PPP basis in 2000 was approximately $5.1 trillion (including Hong Kong). If its growth has averaged 7.5 percent annually since 2000, then its current GDP would be approximately $7.2 trillion (in 2000 dollars), compared to $11.1 trillion for the United States. If the 17 percent figure is correct, then China's GDP would already be $8.4 trillion or more than 75 percent of the size of the U.S. economy.
Starting from this level, and using World Bank growth
projections for China and CBO growth projections for the U.S., China's economy
should be roughly equal to the size of the U.S. economy in 7 years. There is
considerable error in the measurement of China's economy in its own currency
units, and also in constructing purchasing power parity measures, but it is
likely that the size of China's economy will be comparable to the size of the
U.S. economy in the very near future.
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The
Housing Bubble
Take It From
Japan: Bubbles Hurt
Martin Fackler
New
York Times, December 25, 2005, Section 3, Page 1
This article examines the impact of the collapse of Japan's housing bubble in 1990 for the implications that it may hold for the U.S. housing market. The article concludes by asserting that the country would be better served if the housing bubble deflates slowly.
In fact, this assertion runs directly counter to the information presented in the article. The main focus is on a man who purchased an apartment in 1990 for $400,000, near the peak of the bubble. He would like to move today, but he still owes $300,000 and his home would only sell for $200,000.
Every week, approximately 160,000 families buy new or existing homes at bubble inflated prices. The longer the bubble persists, the more people who will find themselves in a situation similar to that of the person described in the article. On the other hand, if the bubble deflates quickly, the number of people who will have paid a ridiculous price for a house will be minimized.
Rapid deflation of the bubble will also be beneficial in
that it will allow people to recognize the true value of their home, and plan
their savings accordingly. With housing currently at bubble-inflated prices,
many people are not saving enough to meet their retirement needs.
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Declining
Population In Japan
Japan's
Population Fell This Year, Sooner Than Expected
Norimitsu Onishu
New
York Times, December 24, 2005, Page A8
This article reports on new data indicating that Japan's population shrank in 2005 for the first time. The article asserts that a declining population "poses serious challenges to the long-term vitality of Japan and its ability to care for one of the fastest-aging societies."
While advocates of cutting retirement benefits routinely make such assertions, they have no basis in economic theory. Normal productivity growth is in the range of 1.5-2.0 percent, and Japan's economy has often sustained a more rapid rate of growth. This means that if even if the ratio of retirees to workers were rising at the rate of 1.0 percent annually (which is far faster than is actually the case), and there was no offsetting reduction in the proportion of dependent children in the population, then the everyone in Japan would still be able to enjoy a living standard that improves at an annual rate of 0.5 to 1.0 percent.
The universally projected increases in productivity will make it easy to care for the aging population, since the people freed up (due to higher productivity) from the manufacturing or retail sector, can be shifted over to sectors that involve care for the elderly. In fact, since Japan is a densely populated country, a declining population will provide an additional bonanza of reduced crowding and lower housing costs.
Paradoxically, to support its argument that that the aging
of the population is posing a crisis, the article reports that firms now hire
cheaper contract labor, instead of full-time workers, and that some workers have
given up looking for jobs altogether. Insofar as these claims are true, they are
evidence of a surplus of labor, not a shortage. When labor is in short supply,
wages are bid up and workers get to dictate their terms of employment. If
workers can't find decent jobs, then Japan has too many workers (in spite of
their aging population), not too few.
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Pensions
Transit
Strike Reflects Nationwide Pension Woes
Steven Greenhouse
New
York Times, December 24, 2005, Page A1
This article examines the decline of the traditional defined benefit pension systems in the context of the New York transit workers strike. At one point it asserts the Pension Benefit Guarantee Corporation is running a $23 billion deficit this year. Actually, this is a cumulative deficit due to pension defaults over the last five years, not an annual deficit.
It is worth noting that a major reason that so many pensions are presently under-funded is that pension fund managers and regulators somehow did not anticipate the collapse of the stock bubble. When the stock market was reaching clearly unsustainable levels in the late nineties, they used projections that assumed that price-to-earnings ratios would rise even higher. This allowed many corporations and governments to go several years without making contributions, creating the basis for the current shortfall.
It is also would have been appropriate to mention the main
economic argument for defined-benefit pension funds. In principle, a government
or large corporation is largely indifferent to risk in the sense that they can
easily average out periods of low and high stock prices in their pension
payments to workers. Workers care hugely about whether the market is high or low
when they retire, because they do not have the opportunity to borrow against
earnings in a future life. For this reason, a defined benefit pension allows
employers to provide a form of insurance that is of great value to workers, but
in principle imposes little cost on the employer. In exchange for this benefit
workers will typically accept lower wages than they would otherwise, making a
defined benefit a win-win proposition, offering gains for both sides.
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The
Trade Deficit and Productivity
What
Makes a Nation More Productive? It's Not Just Technology
Daniel Gross
New
York Times, December 25, 2005, Section 3, Page 3
This article reports on the factors that have sustained strong productivity growth in the United States in the last 5 years. It is worth noting that the growing trade deficit has likely been an important factor in raising productivity.
The availability of low-priced imports has led to the replacement of many workers in low-productivity jobs. For example, low-cost shoes will reduce the demand for shoe repair workers, since people will just buy new shoes.
The role of the trade deficit is especially important,
because when it rises, it will have the effect of temporarily boosting
productivity growth. However, it is impossible to sustain a growing trade
deficit indefinitely. When the trade deficit stops growing and starts to shrink,
then it will have the oppose effect on productivity growth. As imports rise in
price, there will be increased demand for workers in many low productivity jobs.
In this sense, the recent surge in productivity growth is at least in part
driven by forces that cannot be sustained and will be reversed in the not too
distant future.
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Trade
Clinton
Can Handle Left's Frustration
Raymond Hernandez
New
York Times, December 28, 2005, Page C17
This article reports on the growing anger among many progressives at Hillary Clinton over her continued refusal to oppose the war in Iraq. At one point it compares this anger to the anger the President Clinton faced over his "championing of free-trade policies."
Actually, President Clinton did not champion free trade
policies. He supported protectionist measures that sustained high salaries for
doctors and other professionals. He also strongly supported strengthening
copyright and patent protections, which increased profits for the entertainment,
software, and pharmaceutical industry. Mr. Clinton generally only favored
free-trade measures in sectors where it reduced the pay of less educated workers
by putting them in direct competition with low paid workers in developing
countries.
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Health
Care Costs
Huge
Rise Looms for Health Care in City's Budget
Mary Williams Walsh and Milt Freudenheim
New
York Times, December 26, 2005, Page A1
This article reports on budget projections showing that New York City will be facing far higher health costs for its workers than it had previously projected. The article does not fully explain the accounting that would lead to such a sharp increase in annual costs. It also implies that the city is behind private sector employers because it has not moved to cut costs. It is worth noting that private sector employers have moved to cut costs by transferring the burden to workers, not by delivering health care services in a more efficient manner.
The inefficiency of the US. Health care system is imposing
a large and growing burden on the country's economy. Health care in the U.S.
already costs more than twice as much per person as the average for other
wealthy countries, and the gap is growing rapidly. Redistribution of this cost
does not reduce the size of the burden.
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Germany
German
Firms' Success Isn't Trickling Down
Peter S. Goodman
Washington
Post, December 28, 2005, Page D1
This article reports on the fact that most Germans do not appear to be benefiting from the growing profitability of German corporations. It reports that many are insecure about their future employment prospects and are therefore hesitant to spend money. It asserts that weak consumer demand is impeding economic growth in Germany, and because of Germany's size, in the rest of Europe as well.
It is worth noting that this situation is exactly what is intended by policies promoted by the OECD, the IMF, and other leading economists. They have argued (often in very strong terms) that Germany must pursue policies that will reduce security at the workplace. They have said that adopting policies that workers less secure (and give employers more flexibility) is essential for Germany to remain competitive in a global economy.
These institutions (along with the World Bank) have also argued that Germany should reduce the generosity of its Social Security system. The expected response from a reduction in the size of public pensions, or greater uncertainty about the future size, is increased private savings (i.e. less consumption). Presumably, the institutions that advocated cutting Germany's Social Security benefits are pleased with the weak growth in Germany's consumption.
At one point the article asserts that Germany's
unemployment rate is currently over 10.0 percent. Actually, its unemployment
rate is 9.0 percent using the OECD's standardized measure of unemployment, which
is essentially the same as the U.S. measure. Unemployment continues to be very
high in former East Germany. The unemployment rate in the area that is formerly
West Germany is approximately 7.0 percent by the OECD measure.
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Federal
Employee Wages
Order
Implements Federal Pay Raises
Christopher Lee
Washington
Post, December 24, 2005, Page A4
This article reports on the annual pay raises received by
different categories of federal employees. The article reports only nominal wage
growth. It would have been helpful to note that inflation for last year has been
approximately 3.5 percent. This means that workers who receive a nominal pay
increase of 3.5 percent will be getting enough money to keep the purchasing
power of their wage roughly constant.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.