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Multiple Layers Of Contractors Drive Up Cost of Katrina Cleanup
Joby Warrick
Washington Post, March 20, 2006, Page A1
This article exposes some of the inefficiencies with the contracting system that the federal government put in place to deal with the clean-up from Hurricane Katrina. There was very limited accountability in many of the contracts. As a result much of the money appears to have been wasted.
Old Options Produce New Hangover
Gretchen Morgenson
New York Times, March 19, 2006, Section 3, Page1
This article reports on the effect that option grants from the late nineties are having on shareholder equity at several major tech companies. As a result of the large number of options that are coming due, corporations like Intel, Dell, and Texas Instruments have been forced to use much of their profits in recent years to buy back shares. They do this because the large number of new shares issued to fill the options would otherwise dilute the value of the stock. Investors should have anticipated the impact of these buybacks, but the weak performance of these stocks indicates that they probably did not.
Politics Drives Money Binge
Carl Hulse
New York Times, March 18, 2006, Page A1
This article examines the Senate’s approval of a 2007 budget resolution. The article asserts that the new budget constituted a “binge” and a “splurge,” but it provides almost no evidence for supporting these assertions. On careful examination, it appears that the article defines “budget-busting” or “padding” as any spending that exceeds the amount proposed by President Bush in his 2007 budget. It would have been helpful to readers if the article had stated clearly its definition of waste, since there are many policy analysts who disagree with this definition.
The article also provides almost no context to examine the real nature of the budget problem. For example, it notes that the government debt is projected to rise to almost $9 trillion next year and the deficit is projected to be close to $350 billion. The $9 trillion figure will be close to 69 percent of GDP. This is a higher debt to GDP ratio than at any point since the mid-fifties. It exceeds the peaks reached in the mid nineties. (The debt to GDP ratio had been falling from the end of WWII until 1981.)
A $350 billion deficit is equal to approximately 2.7 percent of GDP. A deficit of this size can actually be sustained forever, given current growth projections. However, this figure does not include the money borrowed from Social Security and the government employees’ retirement funds. Including this borrowing would raise the debt to approximately $600 billion or 4.6 percent of GDP.
It would have also been appropriate to discuss the role of rising health care costs in deficit projections. Virtually all budget analysts agree that if health care costs drive up Medicare and Medicaid spending as projected, the deficit will be unmanageable in the not very distant future. Due to the strength of powerful political interests, like the pharmaceutical industry, the insurance industry, and the American Medical Association, politicians are scared to discuss proposals to contain health care costs. It would have been appropriate to include some discussion of this issue in this sort of analysis of budget politics.
Bernanke Challenges Interest Rate Speculation
Nell Henderson
Washington Post, March 21, 2006, Page D3
Global View Is Backed By Fed Chief
Eduardo Porter
New York Times, March 21, 2006, Page C1
These articles discuss a speech by Federal Reserve Board Chairman Benjamin Bernanke. Both articles note that Mr. Bernanke referred to his view that there is now a world-wide savings glut.
This is a striking statement from a chairman of the Fed (he has said it before). It implies that he believes that there is a world-wide problem of insufficient demand, comparable to what the world experienced during the great depression. Most economic theory now assumes that a shortage of demand cannot be a sustained problem. It holds that there can be demand shortfalls for brief periods during a recession, but the market is self-correcting and will soon bounce back towards full employment.
Many of the standard arguments derived from economic theory do not apply if the economy experiences sustained periods of underemployment. For example, there is no reason to assume that the country as a whole will benefit from reducing barriers to trade, if increased imports can simply result in higher unemployment. Similarly, there is no benefit to reducing the budget deficit during a period of underemployment. Since there is already a glut of savings, a lower deficit would simply imply reduced demand and higher unemployment.
Both articles refer to Mr. Bernanke’s comments about the decision of foreign central banks to buy U.S. Treasury bonds, and how this decision is keeping down long-term interest rates. Presumably the largest actors in these markets, the Chinese and Japanese central banks, are keeping U.S. interest rates down as a matter of conscious policy, most likely to boost the U.S. economy and thereby stimulate demand for their exports. The hundreds of billions of dollars of bonds that they have been purchasing are a big enough share of this market to affect rates, and these central bankers must recognize that fact.
Schooling China in the American Way
Peter S. Goodman
Washington Post, March 23, 2006, Page D1
This article reports on a visit by several senators to China in which they expressed their concerns over China’s trade policies. The article reports that they complained about China’s undervalued currency, which they argued gave it an unfair advantage. It reports that they also complained about China’s failure to respect U.S. copyrights and patents. It is worth noting that copyrights and patents are state-granted monopolies that obstruct free trade and lead to large losses in output.
The subtitle of the article is “senators preach free trade and speech to lukewarm hosts.” If the article had more clearly identified the contradictory nature of the senators’ complaints, the lukewarm reception would have been more understandable.
Major Changes Raise Concerns on Pension Bill
Mary Williams Walsh
New York Times, March 19, 2006, Page A1
This article discusses a proposal for restructuring rules for defined-benefit pension plans that is being considered by Congress. At one point it discusses rules on assumptions about rates of return. It is worth noting that one of the main reasons that so many pension plans are now severely under-funded is that they made overly optimistic assumptions about returns during the stock market bubble.
The methodology used by pension funds in the late nineties effectively assumed that the stock bubble would persist and grow ever larger. As a result, many companies claimed that their pensions were fully funded and made no contributions for several years. Pension fund managers still do not want to tie their stock return projections to price-to-earnings ratios and projected profit growth. This creates the possibility of making the same mistake that they did in the late nineties.
Youth Is Wasted on the Generation Y Investor
Paul J. Lim
New York Times, March 19, 2006, Section 3, Page3
This article reports on the investment patterns of young investors. The article claims that they are investing too small a share of their retirement accounts in equities, which it attributes to their ignorance. It reaches this conclusion by looking at the historic gap between the returns on equities and bonds.
This argument is obviously incorrect because historically high price-to-earnings ratios have been far lower than at present. On average, the price-to-earnings ratio has been approximately 15 to 1. Currently it is over 20 to 1. Given the widely accepted projections of profit growth and current price-to-earnings ratios, the expected returns on equities will be far lower than they were historically.
This is especially likely to be the case if most stockholders hold the same views on stock returns as the investment advisor cited in this article. In this case, they will be unwilling to hold stock for the returns implied by the current price-to-earnings ratio. That means that as soon as stockholders recognize that they cannot possibly get the returns they presently expect, they will dump their stock until the price-to-earnings ratio falls back toward its historic level. In that case, young investors are very wise to keep their equity holdings to a minimum and stay out of the market until prices fall to a sustainable level.
Delicate Balance of Power
Peter S. Goodman
Washington Post, March 21, 2006, Page D1
Opponents of New French Labor Law Step Up Protests
Craig S. Smith
New York Times, March 21, 2006, Page A9
These articles discuss efforts to weaken protections for workers in Italy and France. At one point, the article refers to efforts to insulate workers from the “inevitable forces of globalization.” The article does not indicate what forces it views as inevitable or why.
As a factual matter, trade agreements have been designed to put some workers into international competition, while explicitly protecting other workers. For the most part, more educated workers like doctors, lawyers, economists and journalists have been largely protected from globalization, while trade agreements have been designed to directly place manufacturing workers in competition with low wage workers in the developing world. This is done by removing barriers to investment and trade that could make it difficult to ship cars, clothes, or other manufactured products from the developing world to the wealthy countries.
It would have been possible to also craft rules that facilitated a flow of doctors, lawyers, economists, and journalists from the developing countries to the wealthy countries. For example, trade agreements could have prohibited any restrictions that prevented newspapers from hiring journalists from the developing world at whatever wage they were willing to work. While free trade in these professional services would have led to enormous economic gains for both rich and poor countries, professionals are such a powerful lobby in rich countries that they have been able to largely preserve their protection from international competition.
At one point the article on France warns that it will become increasingly important to change French labor laws as the ratio of workers to retirees falls. Actually, France is currently suffering from a problem of high unemployment, implying that it has too many workers. If more of these workers retire, then presumably the problem of high unemployment will become less severe, as workers become more scarce.
French Premier Considers Easing Job Law
Craig S. Smith
New York Times, March 22, 2006, Page A8
This article reports on the dispute in France over a new law that makes it easier to fire workers under age 26. At one point the article asserts that this dispute is part of “long struggle to break the strangle-hold of its rigid social-welfare system, which economists say has kept growth sluggish and unemployment high for decades.”
Not at all economists attribute France’s economic problems to its welfare state. There are other countries, such as Denmark and Ireland, that have welfare states that are comparable in their level of generosity, yet have enjoyed low unemployment rates and healthy growth.
Some economists attribute poor growth in France in part to the restrictive monetary policies that have been pursued by the European Central Bank. Virtually all economists would agree that the United States would have experienced slower growth and have higher unemployment if the Federal Reserve Board had pursued similar policies.
Buyouts Only a Partial Solution For Delphi
Dina ElBoghdady
Washington Post, March 23, 2006, Page D1
This article reports on the impact that an agreement with the United Auto Workers, providing for the buying out of workers’ contracts, will have on the future of the Delphi Corporation, the country’s largest parts supplier. At one point the article reports that Delphi workers receive an average of $75 an hour in wages and benefits.
This figure is clearly a gross exaggeration of the actual compensation received by Delphi’s workers. The average wage for Delphi workers is less than $30 an hour, according to statements by the company. This would mean that an average worker receives more than $45 an hour in benefits, or more than $90,000 a year. While Delphi’s pension and health care benefits are generous, it is implausible that they pay even half this much to workers each year.
Most likely the $75 an hour figure represents some calculation of total labor costs for each hour worked, where total labor costs include payments to laid-off and retired workers. While this may be a useful figure for Delphi’s accounting, it is misleading when presented as compensation actually received by workers.
Dean Baker is co-Director of the Center for Economic and Policy Research in Washington, DC.