Economic Reporting Review
By Dean Baker
March
13, 2006
In This Issue:
• Outstanding
Stories of the Week
• Housing Bubble
• The Trade Deficit and Foreign investment
• Globalization
• Vermont
• Brazil
• Wireless Internet Access
• Immigration
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The Search for Illegal Immigrants Stops at the Workplace
Eduardo Porter
New York Times, March 5, 2006, Section 3, Page 3
This article examines the government’s efforts to restrict the ability of undocumented workers to get jobs in the United States. It reports that enforcement of immigration laws at the workplace has virtually stopped in the last four years, with very warnings being given to employers who have not properly verified the immigration status of their workers.
Wal-Mart Enlists Bloggers in Its Public Relations Campaign
Michael Barbaro
New York Times, March 10, 2006, Page C1
This article reports on Wal-Mart’s use of bloggers to disseminate its press releases as part of its effort to counter its negative public image for paying low wages and other practices. Several bloggers have posted large portions of these releases verbatim, without attributing the material toWal-Mart.
“Silent Tort Reform” Is Over-Riding States’ Power
Steven Labaton
New York Times, March 10, 2006, Page C5
This article reports on a number of measures pushed through by the Bush administration which sharply limit states’ ability to regulate business. It is striking that a Republican administration that has touted states rights in many realms has worked so vigilantly to contain them in the context of setting consumer and safety standards for their citizens.
Hoping for Best In Home Sales, 2 Sides Sit Tight
Vikas Bajaj and David Leonhardt
New York Times, March 4, 2006, Page A1
This article reports on the drop off in home sales in many of the hottest markets around the country. It reports that sellers have been reluctant to accept lower prices, while buyers are hopeful that prices will go lower. It would have been useful if it had examined some of the fundamentals in the market that affect the price. For example, the rate of homebuilding is determined primarily by the price. If prices stay high, then builders will continue to build homes at approximately the same rate (@ 2 million units a year). This exceeds the 1.4 million rate of household formation by close to 50 percent. It is difficult to see rate of building would not lead to an oversupply. At present, there is considerable evidence of oversupply in the nation’s housing stock. The nationwide rental vacancy rate is at a record high.
While the article notes that house prices have had an extraordinary run-up in recent years (in fact an unprecedented increase), it should also have examined the pattern in the rental market. Rents increased only modestly in real terms earlier in the cycle and have actually been falling (after adjusting for inflation) in the last couple of years. Ignoring the ratio of home prices to rents in examining the housing market would be comparable to ignoring price to earnings ratios in examining prospects for the stock market.
It is also worth noting that over a longer term, inflation is virtually certain to rise because foreign investors and central banks are unlikely to lend the United States $750 billion a year at very low interest rates indefinitely. When they reduce their lending, the dollar will fall, sending import prices and inflation higher. This will almost certainly lead to higher interest rates, which will almost certainly have a substantial negative effect on the U.S. housing market.
As Trade Deficit Grows, So Do Tensions With China
Keith Bradsher
New York Times, March 10, 2006, Page C1
This article discusses the growing trade deficit with China. At one point it asserts that the W.T.O. makes it very difficult for the United States to take any steps to reduce this deficit. Actually, W.T.O. rules prevent the United States for setting a sharply higher exchange rate for the Chinese currency against the dollar. This would make U.S. goods far more competitive against Chinese goods.
At one point the article asserts that “economists” don’t believe that raising the value of the Chinese currency relative to the dollar will reduce the trade deficit. It asserts that a higher value of the Chinese currency will simply shift imports to other countries. It then asserts that the cause of the U.S. trade deficit is insufficient savings in the United States.
While some economists hold this view, many economists believe that if the Chinese currency rose against the dollar, many other countries that compete with China for the U.S. market would also allow the value of their currencies to rise against the dollar. This is exactly what happened last summer when the Chinese central bank slightly increased the value of its currency against the dollar.
It is also worth noting that the economists who believe that the high U.S. trade deficit is attributable to low U.S. savings, and not the over-valuation of the dollar, believe that GDP and employment in the United States are too high. Low savings can in principle lead to a higher trade deficit by raising interest rates, and thereby pushing up the value of the dollar, but if economists don’t think that the value of the dollar is the problem, then the only other link between low savings and the trade deficit is through the impact on demand and GDP growth. When people spend more money, they buy more of everything, including more imports. If there were a substantial fall in demand in the U.S. economy, then imports would also decline. With imports at less than 20 percent of GDP, even a 10 percent decline in output from more savings and less spending (@$1.3 trillion) would reduce the annual trade deficit by less than $250 billion. It would take an even larger decline in demand (and rise in savings) to bring the trade deficit down to a sustainable level without a reduction in the value of the dollar.
Trade Deficit Reaches Another High
Marty Crutsinger, Associated Press
Washington Post, March 10, 2006, Page D5
This article reports on the Commerce Departments release of data showing a record trade deficit in January. In the long-run, the trade deficit affects the economy in approximately the same way as the budget deficit. It implies that the country will have lower living standards in the future because it will be necessary to pay large sums in interest and dividends to foreigners who own large quantities of U.S. financial assets.
The most recent data indicates that the trade deficit is running at an annual rate of approximately $800 billion. The trade deficit is more than twice the size of the unified budget deficit and more than $200 billion larger than the “on-budget” deficit, which adds in the money borrowed from the Social Security trust fund. Since the Post gives great prominence to news on the budget deficit, given the greater impact of the trade deficit, this news deserved more attention than a wire service story on page 5 of the business section.
Mideast Investment Up in U.S.
Paul Blustein
Washington Post, March 7, 2006, Page A1
This article reports on the growth of investment in the United States by countries in the Middle East. At one point it reports that the reason that the United States is getting more foreign investment is because it needs foreign investment to finance the trade deficit.
Actually, the causation runs in the other direction. There is no investor who places money in the United States because the United States is running a trade deficit. This would in fact be a very good reason not to place money in the United States, since it means that at some point the value of the dollar is likely to fall and therefore dollar denominated investments in the United States will be worth less.
The causation runs in the opposite direction. The decision by foreign investors to put money in the United States raises the value of the dollar above the level it would be at in the absence of foreign investment. This raises the price of U.S. exports to other countries, causing foreigners to buy less U.S. exports. The higher dollar make imports cheaper, which causes people in the United States to buy more imports. As a result of lower exports and higher imports the trade becomes larger.
Bush, in High-Tech Center, Urges Americans to Welcome Competition From India
Elisabeth Bumiller
New York Times, March 4, 2006, Page A5
This article reports on President Bush’s visit to India. At one point it quotes President Bush as defending outsourcing by saying that this is “the reality of the global economy.” It would have been appropriate to point out that the specific pattern of international competition is the reality of the global economy only because of government policy, just like the U.S. occupation of Iraq is a reality because of U.S. military policy.
The United States government has designed trade policy to put some workers (primarily manufacturing workers) into competition with workers in developing countries. It has maintained or increased protections for many high-paid occupations like doctors, lawyers, journalists and economists. While proponents of this path for trade policy might prefer that it appear to be the outcome of an inevitable process of globalization, it would have been useful to point out that this is not the case.
Vermont Losing Prized Resource As Young Depart
Pam Belluck
New York Times, March 4, 2006, Page A1
This article reports on the trend among young people to move out of the state of Vermont. It describes this as creating a worker shortage, reporting that dairy farmers are employing undocumented workers to milk their cows.
Actually, this situation can be viewed as quite desirable. This means that workers have their choice of jobs and presumably are seeing rising real wages and improving working conditions. While the article quotes Vermont’s governor as saying “the cows have to be milked,” this is not true. It appears as though dairy farming is no longer competitive in Vermont due to higher wages. This is the normal process of economic development; less productive segments of the economy die off. Apparently, the governor wants to try to protect dairy farm owners by providing special arrangements whereby they can hire workers at below market wages.
Brazil’s Lula Gets No Break at Carnival
Monte Reel
Washington Post, March 6, 2006, Page A9
This article discusses the prospects for re-election ofBrazil’s president, Luiz Inacio Lula da Silva. At one point the article comments that “even though 3.5 million jobs have been created, the gross domestic product has risen 2.3 percent and the trade deficit has shifted to a surplus in the past four years, people seem reluctant to give Lula credit.”
Actually, the job and economic growth described in this sentence are very poor. To keep the unemployment rate constant, Brazil’s economy would have to create about 1.8 million jobs annually, or 5.4 million over the last three years. Brazil’s economic growth has actually been better than the passage asserts. It has averaged approximately 2.3 percent annually over the last three years, which is presumably what the article intended to say. However, this is still extremely poor growth for a developing country. This translates into per capita GDP growth of approximately 1.0 percent annually. In the years between 1960 and 1980, Brazil had per capita GDP growth of 4.6 percent. This economic record could easily explain why Brazil’s population is not happy with Lula’s performance.
It is also worth noting that the switch from a trade deficit to a trade surplus does produce benefits in the long-run, but in the short-run it is associated with a lower standard of living, other things equal. Running a trade deficit effectively allows a country to live beyond its means, just like borrowing on a credit card. The growing trade deficit has been one of the key factors improving living standards for many people in the United States over the past decade. While large trade deficits are not sustainable, they can give the illusion of prosperity while they last.
Hey Neighbor, Stop Piggybacking on My Wireless
Michael Marriott
New York Times, March 5, 2006, Page A1
This article discusses the difficulty that wireless Internet users have in preventing other from taking advantage of their networks. It would have been useful to include some economic analysis of this problem. Wireless Internet service has many of the characteristics of public goods like street lights. The fact that additional people have access to the service has little impact on the ability of the network owner to use their system. Also, it is difficult to exclude other people from benefiting from a wireless network.
This is a strong argument for providing Internet wireless service as public good paid for with tax dollars, as some cities have done. This would eliminate the waste associated with trying to exclude people from using the service who have not paid for it.
Illegal Workers’ Presence Growing
S. Mitra Kalita
Washington Post, March 8, 2006, Page A16
This article discusses the findings of a new study by the Pew Hispanic Center which showed a large increase in the number of undocumented workers over the last year. At one point the article presents comments from representatives of the U.S. Chamber of Commerce, the National Restaurant Association and the “Essential Worker Immigration Coalition.” All three spokespeople complained that businesses cannot find the workers they need and argued that they therefore must hire undocumented workers.
It would have been helpful to include comments from someone with a different perspective. In a market economy, the way that firms get workers is by offering hiring wages. Since real wages for most workers, especially those at the bottom of the wage distribution, have been stagnant or falling in recent years, it doesn’t appear that there have been notable shortages of workers. Furthermore, if firms cannot afford to pay the prevailing wage, and therefore cannot attract workers, then this is evidence that they are inefficient. In a market economy, less efficient firms are supposed to be driven out of business. This is one of the main mechanisms through which the economy’s productivity increases, as workers go from less productive firms to more productive firms.
It would have been helpful to include some information on the Essential Worker Immigration Coalition, such as its main funding sources. Most readers are probably not familiar with the organizationDean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.