Economic Reporting Review By Dean Baker December 8

Economic Reporting Review
By Dean Baker
December 8, 2003

OUTSTANDING STORIES OF THE WEEK

Amid Dying Towns of Rural Plains, One Makes a Stand
Timothy Egan
New York Times, December 1, 2003, Page A1

This article examines the economic dynamics that have led to a sustained population decline in much of the farm belt over the last seventy years.

Gains In Houston Schools: How Real Are They?
Diana Jean Schemo and Ford Fessenden
New York Times, December 3, 2003, Page A1

This article carefully examines evidence on the progress of Houston's schools in the late nineties. It shows that the performance of Houston schools over this period was not exceptional by most measures. This issue is important because the supposed success of the Houston schools was the main reason that President Bush selected the district's superintendent, Rod Paige, to be his education secretary.

Health Industry Bidding to Hire Medicare Chief
Robert Pear
New York Times, December 3, 2003, Page A1

This article reports on the recent job search of Thomas A. Scully, the current director of the Center for Medicare and Medicaid services, the agency that oversees the operations of these programs. The article reports that the Bush administration waived ethics rules to allow Mr. Scully to negotiate for an employment contract with several major health industry firms, even as he was playing a key role in pushing a Medicare prescription drug benefit through Congress. These firms had major interests in the legislation. According to the article, Mr. Scully's new job is likely to pay him more than $500,000 a year.

Manufacturing

Manufacturing At Highest Level in Two Decades
Edmund L. Andrews and Floyd Norris
New York Times, December 2, 2003, Page A1

This article reports on the release of the Institute of Supply Management's manufacturing index for November. The headline of the article is somewhat misleading. The index measures changes, not levels.

The questions that provide the basis for the index ask firms to compare the current month with the prior month. If firms report increases (in orders, shipments, employment), it is entered as a positive in the index, while it is a negative if they report decreases. If most firms report increases in the current month, the index would show a very high measure, even if the increases start from a very low level. Alternatively, if most firms report decreases, it would cause the index to report a low level, even if the current levels of orders, output, and employment were very high.

The high reading shown for November indicates that most manufacturing firms are seeing an improvement in their business situation. It does not mean that they are currently operating at a high level of output, capacity, or employment. For example, the Federal Reserve Board's data on capacity for October (the most recent available) shows it at 73.5 percent. While this level is slightly higher than the low points hit earlier in the year, it is a lower level than for any other month in the last twenty years.

The Presidential Campaign

Edwards Says Bush Favors Wealthy (Ad Watch)
Howard Kurtz
Washington Post, December 3, 2003, Page A5

This article is part of a series assessing the political ads of the presidential candidates. It evaluates a new ad by Senator John Edwards' campaign, which attacks President Bush's tax cuts as being unfair. According to the article, the ad claims that as a result of president Bush's tax cuts, "a millionaire sitting beside his swimming pool" can be paying a lower tax rate than a teacher, a police officer, or a secretary.

The article asserts that the ad "creates a misleading impression." It goes on to explain that the top tax rate for high income people is 35 percent, compared to the tax rates of 15 percent and 25 percent that middle income workers pay. The article notes the response of the Edwards campaign - that investment income, such as capital gains and dividends, are only taxed at a 15 percent rate - but then asserts that "not all millionaires live off their trust funds, and teachers and police officers who own stock or mutual funds would pay the same capital gains rate."

The impression created by the ad is entirely accurate. Millionaires get a far higher percentage of their income from investments than teachers or police officers. According to the data from the Institute on Economic and Tax Policy, the richest 1 percent of households got 58.2 percent of their income from investments. By comparison, the households in the second and third highest quintiles of the income distribution get just 11.0 percent of their income from investments.

The article is also wrong in asserting that "teachers and police officers who own stock or mutual funds pay the same capital gains rate." Most of the stock or mutual funds held by middle income workers is in 401(k) type retirement accounts. When money is put into these accounts, it is typically not taxed. However, when money is withdrawn, it is taxed at the same rate as normal wage income, even if it is the result of capital gains or dividends. This means that many middle income workers are paying a higher tax rate on their investment income than the millionaires sitting beside their pools.

Productivity Growth

Productivity Raced Ahead in 3rd Quarter
John M. Berry
Washington Post, December 4, 2003, Page E1

This article reports on new data from the Labor Department showing that productivity increased at a 9.4 percent annual rate in the 3rd quarter. At one point the article quotes Josh Bivens, an economist at the Economic Policy Institute (EPI), which it identifies as "a think tank with organized labor backing."

It is unusual for articles to identify the funding sources of the institutions it cites. For example, articles that rely on experts from the conservative Heritage Foundation or American Enterprise Institute almost never point out that some of their funds come from corporate sources. In the case of the EPI, the identification is only partly accurate - approximately one fifth of the Institute's funding comes from organized labor; most of the rest comes from foundations.

It is also worth noting that the GDP and productivity data for the quarter may have been exaggerated. It is possible to measure GDP on other the output side (consumption, investment, government, and net exports) or the income side (wages, profits, and dividends). In principle, both methods should give the same figure. In reality, they never add up to be exactly the same; the difference is referred to the as the "statistical discrepancy."

In the most recent quarter, the measure of GDP on the output side showed far higher growth than the measure of GDP on the income side, as the statistical discrepancy shrank by $61.3 billion. This corresponds to a growth rate that is approximately 2.2 percentage points lower than the 9.4 percent growth reported based on output measures of GDP for the quarter. Productivity growth is measured based on the output side, which means that if the income side measure proves more accurate then productivity growth would have been overstated for the quarter. Some productivity experts, such as Martin Baily, Chair of the Council of Economic Advisors in the Clinton Administration, suggest averaging the output and income side growth measures in estimating productivity growth.

Russia and Global Warming

Russia to Reject Pact on Climate, Putin Aid Says
Steven Lee Myers and Andrew C. Revkin
New York Times, December 3, 2003, Page A1

This article reports on a statement by an aide to Russian president Vladimir Putin, that Russia will not ratify the Kyoto agreement, which limits greenhouse gas emissions. At one point the article asserts that "with the Russian economy increasingly reliant on oil and gas production and exports, the officials concluded that the treaty's limits could become a drag on economic growth in the future."

It is not clear that the treaty would have harmed Russia's economic growth at all. The provisions of the treaty would have allowed Russia to emit the same amount of greenhouse gases as it did in 1990. Due to the collapse of Russia's industrial sector in the wake of the break-up of the Soviet Union, its current levels of greenhouse gas emissions are far below its 1990 level. Under the treaty, Russia would have been able to sell emission permits equal to the difference between current emission levels and the 1990 level. This could potentially have been a large source of revenue for Russia.

While it is possible that Russia's officials have determined that this revenue stream would not outweigh other costs that might be result from complying with the treaty, it is also possible that President Putin was motivated by other considerations. The Bush administration has worked hard to try to scuttle the Kyoto agreement. It is certainly possible that President Putin was motivated more by a desire to win favor from the Bush administration than by concerns about the impact of the treaty on the Russian economy.

Trade

President To Drop Tariffs On Steel
Mike Allen
Washington Post, December 1, 2003, page A1

President in a Political Vise Over Steel Tariff Decision
Elizabeth Becker and David E. Sanger
New York Times, December 2, 2003, Page A18

These articles discuss the debate within the Bush administration on keeping in place the steel tariffs imposed last year. At one point the Post article refers to President Bush's "free-trade principles," while the Times article refers to the Clinton administration's "free-trade policies." These characterizations are inaccurate.

Both the Clinton and Bush administration have actively promoted certain types of protectionist barriers, most notably increased patent and copyright protection. They have sought to include these forms of protectionism in trade agreements such as the WTO, NAFTA, and the FTAA. The Clinton administration also supported protection that limited competition from foreign doctors in 1997, after the American Medical Association and other organizations of physicians complained that an influx of foreign doctors was driving down their salaries.

The Budget and Baby Boomers

No Escaping The Red Ink As Bush Pens `04 Agenda
Richard W. Stevenson and Edmund L. Andrews
New York Times, November 29, 2003, Page A10

A $400 Billion Purchase, All on Credit
John Tierney
New York Times, November 30, Section 4 page 10

Both of these articles discuss the difficulties of providing for Social Security and Medicare for the baby boom generation. Both include assertions that are not supported by the standard government projections for these programs, which provide the basis for nearly all economic analysis.

For example, the article by Tierney includes an assertion from Lawrence Kotilikoff, a professor at Boston University, that "Social Security and medical benefits will effectively bankrupt the next generation and gravely damage the economy." The article by Stevenson and Andrews asserts that "Social Security and Medicare will not be able to pay full benefits to the baby boomers as they retire."

Neither article presents any evidence to support these assertions. The most recent Social Security trustees reports shows that the program will be able pay all benefits with no increases in taxes whatsoever through the year 2042. At that point the oldest baby boomers will age 96 and the youngest will be 78 [http://www.socialsecurity.gov/OACT/TR/TR03/II_project.html#wp105724]. The Medicare program is projected to be able to pay benefits through the year 2026 with no changes whatsoever [http://www.cms.hhs.gov/publications/trusteesreport/2003/secif.asp].

In both cases, the programs are presently on far sounder financial footing then they have been through most of their existence. It was necessary to raise Social Security taxes in every decade from forties through the eighties. It was necessary to raise Medicare taxes in every decade of its existence. It is therefore inaccurate to claim that these programs are either in especially precarious shape at present, or that they threaten the economic well-being of future generations.

There is no obvious meaning that can be attached to the claim by Kotlikoff that these programs will "bankrupt" future generations. The wage growth projections from the Social Security and Medicare trustees imply that before tax wages will be nearly 40 percent higher in thirty years than they are at present. This means that even if taxes were raised by a full ten percentage points - an amount several times larger than any plausible estimates suggest could be necessary - after-tax wages will still be 25 percent higher in thirty years than they are today. If the high productivity growth rates of the last eight years are maintained (the trustees assume that the economy reverts to the slow productivity growth rates of the years 1973-1995), then average before tax wages will be 80 percent higher in thirty years than it is presently.

The article by Stevenson and Andrews includes a comment from a budget analysis at the Heritage Foundation noting that real government sending per household is at a post-war high. This is presented as evidence of profligacy, but it actually is a normal situation that should be expected. As society gets richer, it spends more money on all categories of goods and services (e.g. housing, food, cars), it would be expected that it also spends more money on the goods and services provided by the government.

Aging Crises

Scotland Takes Action to Halt Drop in Population
Lizette Alvarez
New York Times, November 30, 2003, Page A4

This article discusses concerns in Scotland over its aging population. At one point it asserts that "the long-term consequences of a baby bust are well known: a bankrupt pension system; sky-high health care costs, … a shortage of skilled workers; and a diminished pool of brainpower." Actually none of these developments are necessary consequences of a lower birthrate.

If the ratio of retirees to workers rises, then it is necessary to increase the percentage of the wage that goes to support retirement systems - as has been done everywhere in the developed world over the last fifty years. This article does not indicate why it assumes that the future will be different (i.e. pension systems will be allowed to go bankrupt, instead of taxes being increased) than the past. It is important to remember that future generations of workers will be considerably richer than prior generations, especially if worker shortages push up wages. A somewhat higher tax burden on wages -- that could be 50 percent higher in thirty years -- poses no obvious economic problem. (Of course, the rising tax burden to support the elderly is at least partially offset by the reduction in taxes needed to provide for education, child care, and other needs of young children.)

An aging population is generally associated with rising health care costs. However, no European country is projected to experience the same sort of rise in health care costs due to demographics as the United States currently experiences, due to its dysfunctional health care system. The U.S. currently spends 14 percent of its GDP on health care. This is projected to rise to 17 percent in ten years. By contrast, health care spending averages 8 percent of GDP in other rich countries. There is no other country where health care costs are even rising half as rapidly as in the United States (measured in shares of GDP).

Finally, any shortages of skilled labor or "brainpower" can be met by providing more training to the young workers. In most countries, less than one-third of the workforce is currently receiving the equivalent of a college education. If the size of cohorts shrinks, then this percentage can easily be raised. In addition, immigration can provide an almost endless supply of skilled workers.