Economic Reporting Review
By Dean Baker
January
9, 2006
In This Issue:
• Outstanding
Stories of the Week
• The
Housing Market
• Social
Security
• The
Minimum Wage
• Taiwan
and China
• Ukraine,
Russia, and Natural Gas
• Greenhouse
Gas Emissions
• Corporate
Profit Restatements
• German
Unemployment
• Pensions
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Outstanding
Stories
of the Week
Facing
Weaker Home Sales, Builders Sweeten Deals
Sandra Fleishman
Washington
Post,
December 31, 2005, Page A1
This article reports on a growing trend among
builders in the DC area to provide special incentives to sell their homes. These
incentives can include tens of thousands of dollars towards furnishing or
mortgage costs. This trend could be evidence of the ending of the housing bubble
in the area.
U.S. Not Told Of 2 Deaths During Study of Heart Drug
Stephanie Saul
New
York Times, January 4, 2006, Page C3
This article reports on the decision of Scios, a division
of John & Johnson, not to disclose the deaths of 2 of the patients taking
part in a clinical trial of Natrecor, a heart drug. Scios had not reported these
deaths to the Food and Drug Administration when it was considering approval of
the drug, nor did it report them in an article on the trial in the New
England Journal of Medicine.
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The
Housing Market
Views
on Rates Differ Within Fed
Jeannine Aversa
Washington
Post, January 4, 2006, Page D3
This article reports on the minutes from the December 13th meeting of the Federal Reserve Board's Open Market Committee. At one point the article reports on their assessment of the housing market, in which they see signs that the market is slowing but don't see a "significant weakening."
When reporting on Fed statements about the housing market, it is worth noting that Alan Greenspan carefully avoided saying anything definitive about the stock bubble until after it burst. He has since said that this was a deliberate policy choice. He believed that the stock bubble should follow its own course and that it would be wrong for the Fed to say anything that might led to its premature deflation.
Presumably, Mr. Greenspan would have the same attitude
toward a housing bubble as he did toward a stock bubble. This means that he
would try to avoid public statements (including comments that would be published
in Fed minutes) that would suggest that he was concerned about housing bubble,
even if he were in fact very concerned about a housing bubble.
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Social
Security
Spending for 2004
Was Up 5 percent
Christopher Lee
Washington
Post, January 5, 2006, Page A13
This article discusses final data on federal spending for fiscal year 2005. At one point it refers to spending on Social Security, which it describes as a "very popular but fiscally uncertain program." The most recent Social Security trustees' report shows that the program could pay all future benefits for 35 years with no changes whatsoever. The Congressional Budget Office projects that Social Security will be able to pay all benefits through the year 2052 with no changes whatsoever.
Both these projections indicate that Social Security is
stronger financially than it has been through most of its history and is in fact
in much better shape than other programs with designated tax streams, most
obviously Medicare. The article provides no support for its assertion that
Social Security is "fiscally uncertain."
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The
Minimum Wage
States
Take Lead In Push to Raise the Minimum Wage
John M. Brooke
New
York Times, January 2, 2006 Page A1
This article reports on efforts to raise state level minimum wages, given that Congress has not passed an increase in almost a decade. The article notes that business groups claim that a higher minimum wage costs jobs. It then reports that advocates of a higher minimum wage "cite studies that found that raising the minimum wage did not cause job loss."
It would have been worth noting that this is one of the most heavily researched areas of economics. There have been a large number of studies done in the last fifteen years, including several done by some of the country's most respected labor economists. The vast majority of these studies have found little or no job loss associated with a higher minimum wage, even among teens, the group most affected by an increase in the minimum wage. Given the volume of research on this topic, it is probably safe to conclude that any job loss that might result from a higher minimum wage would be small.
It is also worth noting that there tends to be high turnover in minimum wage jobs. This is important because it means that any possible job loss that might result from a higher minimum wage would mostly be met by fewer jobs being offered rather than anyone actually losing their job.
As a practical matter, this would typically mean that it takes low-wage workers somewhat longer to find jobs. Using plausible assumptions about the size of any job loss, this almost guarantees that low wage workers would be better off. For example, if there is a 20 percent increase in the minimum wage (approximately $1 an hour at current levels), this may be associated with 3.0 percent fewer jobs being available (a 0.15 elasticity of labor demand). This means that an average minimum wage worker would work 3 percent fewer hours in a year, but take home 20 percent more money for each hour worked. The net effect would be an increase in income of approximately 17 percent.
The article includes an assertion from the owner of a dairy farm and restaurant, who employs 300 people, that a $1 increase in the minimum wage being debated in Ohio would cost him $250,000 a year. The dairy owner reports that just over half his workers are high school and college students who he hires at $5.25 an hour (10 cents above the current minimum). He says that most of them earn raises shortly after being hired.
If the students employed by the dairy owner work an
average of 20 hours a week, and 200 of his employees fit into this category,
then the proposed $1 an hour minimum wage hike would cost him only $180,000 a
year, even if all of these students were still earning just the 5.25 an hour
starting wage. If the claim that most of the workers soon get a substantial wage
increase is true, then the cost to this dairy owner from the $1 hike in the
minimum wage would be far less than the $250,000 he claimed in the article.
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Taiwan
and China
Taiwan
Chief Seeks Arms, Not Better Ties to China
Keith Bradsher
New
York Times, January 2, 2006 Page A3
This article discusses Taiwan’s concerns about the
growing economic and military strength of China. At one point the article
asserts that China’s economy is six times the size of Taiwan’s economy. On a
purchasing power parity basis, Taiwan’s economy was close to $600 billion in
2005. China’s economy was close to $8 trillion, more than 13 times as large.
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Ukraine,
Russia, and Natural Gas
For
Putin and the Kremlin, A Not So Happy New Year
C.J. Chivers
New
York Times, January 3, 2006 Page A8
This article reports the dispute over the price of the natural gas that Russia sells to Ukraine. The article notes that Russia has been selling natural gas to Ukraine at far below market prices. It now wants to raise the price to the world market price. The article implies that an immediate rise of this magnitude would impose a severe burden on Ukraine's economy.
While this view is certainly plausible, it is worth noting
that the IMF has often argued the opposite, specifically in the case of Russia.
Rather than seeking a gradual path from a centrally planned economy to a market
economy, the IMF insisted on "shock therapy," the immediate conversion
to a market economy. While this policy resulted in an economic collapse in
Russia (its economy shrank by more than 40 percent), the IMF has never
explicitly acknowledged this plan as failure, and no one publicly lost their job
because of their bad advice.
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Greenhouse
Gas Emissions
States
Adopt California’s Greenhouse Gas Emissions
Sholnn Freeman
Washington
Post, January 3, 2006, Page D1
This article discusses plans by several state governments to pass regulations that would restrict emissions of greenhouse gases. At three separate points the article reports claims that these restrictions would have substantial economic costs. It would have been appropriate to put these projected costs in some context so that readers would be able to asses their importance.
It worth noting that there are other policies that impose substantial economic costs, such as increased military spending and tough crime laws that lead to large prison populations, but these costs are almost never mentioned. Since the Post has chosen to highlight the costs associated with polices that restrict greenhouse has emissions, it should at least try to put these in some context so that readers can assess their significance.
It is also worth noting that the failure to take some
steps to curb global warming also imposes substantial economic costs. For
example, the increase in the number and severity of hurricanes in the Atlantic
is a predictable outcome of global warming. The estimates of damage from
Hurricane Katrina alone have been as high as $200 billion. It would have been
appropriate to mention the economic costs of global warming in an article that
discusses the costs of curtailing global warming.
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Corporate
Profit Restatments
Four
Years later, Enron’s Shadow Lingers as Change Comes Slowly
Stephen Labaton
New
York Times, January 5, 2006 Page C1
This article discusses the extent to which corporate accounting has become more accurate and honest in the years since the Enron scandal broke. At one point it reports that the number of earnings restatements has been rising sharply, nearly doubling over the last two years. The article attributes this increase primarily to greater vigilance by auditors rather than any corporate wrongdoing.
If the restatements are simply due to a greater
attentiveness to technical accuracy, then their impact on profits should be
largely random. That would mean that roughly the half the restatements should
show lower profits, and roughly half should show higher profits. The article
does not give any evidence on this breakdown.
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German
Unemployment
Manufacturing
Leads Upswing in Europe
Marcus Walker
Washington
Post, January 4, 2006, Page D5 (article not available online)
This article reports on the release of December data from
a manufacturers purchasing managers’ index that shows an upswing in
manufacturing activity across Europe. At one point the article discusses
Germany’s economy and reports that its unemployment rate is 11.2 percent.
Actually, Germany’s unemployment rate is approximately 9.0 percent using a
U.S. definition of unemployment. The 11.2 percent figure includes people who are
involuntarily working part-time as being unemployed. These people are counted as
being employed in the United States.
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Pensions
I.B.M.
To Freeze Pension Plans to Trim Costs
Mary Williams Walsh
New
York Times, January 6, 2006, Page A1
This article reports on I.B.M.'s decision to stop adding to the benefits that its workers accrue in its defined benefit pension system. The article reports that I.B.M. claims that this decision would save it $3 billion. If this is true, then this is an extraordinarily large cut in the compensation of the affected workers.
The article includes a discussion of the larger trend for companies to abandon traditional defined benefit pensions. It is would have been worth including some discussion of the original rationale for employer-based defined benefit pensions. In principle, a company should be largely indifferent to market risk, in the sense that it can balance out periods of low stock prices with periods of high stock prices and give workers the average return.
On the other hand, workers care hugely about market risk, because if they happen to retire at a time when the market is low, they will have no opportunity to make this up in a future life. A defined benefit pension is a way for a firm to provide insurance to workers, which has considerable value to workers, but little cost to firms. In principle, firms also benefit because providing this security allows them to pay a lower wage than would otherwise be the case.
If firms are able to effectively manage risk, then
offering a defined benefit pension should be a win-win proposition. The
large-scale abandonment of these plans suggests that corporate executives can no
longer competently manage risk.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.