Economic Reporting Review
By Dean Baker
December 16, 2002

OUTSTANDING STORIES OF THE WEEK

Former CEO Comes With Some Baggage
Paul Blustein, Don Phillips, and David S. Hilzenbath
Washington Post, December 10, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A32850-2002Dec9.html

This article examines the record of John Snow, President Bush's nominee for Treasury Secretary, at CSX, the company where he served as CEO for a decade. The article notes that Mr. Snow was given a $25 million loan by the company to buy CSX stock. The loan was forgiven when the share price plummeted.

Wind Turbines Are Sprouting Off Europe's Shores
Marlise Simons
New York Times, December 8, 2002, Page A3
http://query.nytimes.com/search/article-page.html?res=9407EFDF1E3BF93BA35751C1A9649C8B63

This article examines the growth of wind power in Europe. It notes that Europe relies much more on wind power than the United States, with Denmark, the leading user, getting 18 percent of its electricity from wind power.

A House-Poor Formula?
Jonathan Weisman
Washington Post, December 13, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A47851-2002Dec12.html

This article discusses an experimental poverty measure that uses measures of housing costs and health care which differ by region and demographic group, instead of just taking a national average. This measure leads to a modest increase in the nation-wide poverty rate, but to large differences in measured poverty rates by state and demographic group.


The Stock Market and the Economy

Paying a Price for a Shaky Economy
Richard W. Stevenson
New York Times, December 7, 2002, Page A14
http://query.nytimes.com/search/article-page.html?res=9C00E4DC113BF934A35751C1A9649C8B63

This article discusses President Bush's decision to replace his top economic aids in light of the economy's poor performance. At one point, in assessing the nation's economic performance, the article refers to the 6.0 percent unemployment rate and the "jittery" stock market. The stock market is currently valued at approximately 18 times trend corporate earnings. (Its value is over 20 times the current recession depressed level of earnings.) Historically, the price to earnings ratio has averaged approximately 14.5 to 1. There is no reason to expect the stock market to rise higher relative to earnings. It should be expected to grow at approximately the same real rate as corporate profits, or 3 to 4 percent annually. Furthermore, it would not be a positive economic development if stock prices did grow more rapidly.


The Stock Market and California's Budget Crisis

Loss of Boom's Billions Sinks California
John M. Broder
New York Times, December 9, 2002, Page A1
http://query.nytimes.com/search/article-page.html?res=9503E2D81F3BF93AA35751C1A9649C8B63

This article reports on California's budget crisis. It notes that a major cause was a sharp drop in capital gains tax revenue from $17 billion in 2000 to less than $5 billion in the current fiscal year. The article then quotes B. Timothy Gage, the state's finance director as saying, "nobody expected the loss of revenues due to the drop in the stock market to be as severe as it has been."

This is not true. A sharp drop in the stock market was an entirely predictable event to anyone who followed the market and the economy closely. When the market falls sharply, capital gains tax revenue also fall very sharply, because stockholders will typically write-off their loses against stock sales where they have gains.

It was the job of the finance director to be knowledgeable about the stock market's movements and their implications for the state budget. The article should have included a comment from someone other than the finance director assessing the quality of the state's budget projections.


The Bush Stimulus Package

Friedman Chosen Top Economic Aid to Bush
Mike Allen and Jonathan Weisman
Washington Post, December 13, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A47934-2002Dec12.html

This article discusses the selection of Stephan Friedman to be President Bush's top economic advisor. At one point it discusses a new economic package being prepared by the administration, which it describes as being focused on "spurring corporate and individual investment." [It is important to note that individual "investment" means "saving." More saving means less consumption. In other words increasing individual investment means reducing current consumption -- the direct opposite of stimulus.]

While the Bush administration would characterize its proposal this way, it is not clear that this view is accurate. The proposed tax cuts for individuals will go almost exclusively to the richest taxpayers. It is questionable whether these cuts would have any significant impact on their savings. For example, making dividends tax free (one often-mentioned possibility) will give the wealthy more incentive to hold stocks that pay dividends, as opposed to bonds or the stock of companies that don't pay dividends, like Microsoft. It is not clear that it will increase the total amount of money that they save. (The tax cut on dividends would only benefit the minority of stockholders who own stock outside of 401(k)-type retirement accounts. Workers who hold stock in 401(k) plans would get no tax break whatsoever from a change in the tax treatment of dividends.)

A policy that was actually intended to spur individual investment might reasonably focus more on middle-income taxpayers. Such a tax break would give these families more incentives to save rather than consume. Given the predictable outcome of the Bush tax proposals, it would have been equally accurate to describe their purpose as being to divert more money to the wealthy in order to spur individual investment.


November Unemployment

Jobless Rate Rose To 6% in November
John M. Berry
Washington Post, December 7, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A20601-2002Dec6.html

This article reports on the Labor Department's November employment report. At one point it presents the views of an analyst who claims that wages are still rising, since the report showed a gain in the average of hourly wage of 0.3 percent for the month. Actually, the rate of nominal wage growth has slowed substantially in the last year and a half. It had been rising at an annual rate of 4.0 percent in 2000; it rose at a 2.75 percent annual rate over the last quarter, only slightly above the rate of inflation.

It is also important to realize that this measure of the inflation rate does not take into account the extent to which workers may be forced to pay more for health care costs as a result of greater co-payments required by insurers and employers. When this cost shifting is taken into account, it is likely that workers' real take-home pay has been falling in the last year.


Turnover at Treasury

Often Outspoken, Now Out of the Picture
Paul Blustein
Washington Post, December 7, 2002, Page A8
http://www.washingtonpost.com/wp-dyn/articles/A20785-2002Dec6.html

On Wall St., News of Resignations Elicits Optimism
Jonathan Finer
Washington Post, December 7, 2002, Page A8
http://www.washingtonpost.com/wp-dyn/articles/A20791-2002Dec6.html

Battered Economic Team May Soon Feel Relief
Jonathan Weisman
Washington Post, December 7, 2002, Page A7
http://www.washingtonpost.com/wp-dyn/articles/A20742-2002Dec6.html

New Team to Sell Policy On the Economy
Jonathan Weisman and Mike Allen
Washington Post, December 8, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A24767-2002Dec7.html

Two Casualties As Bush Seeks Economic Fix
Todd S. Purdum
New York Times, December 8, 2002, Page A1
http://query.nytimes.com/search/article-page.html?res=9900E0DF1E3BF93BA35751C1A9649C8B63

Bush Picks CSX Corp. Chief for Treasury
Mike Allen
Washington Post, December 9, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A30445-2002Dec9.html

These articles report on the departures of Paul O'Neill as President Bush's Treasury Secretary and Lawrence Lindsey as his chief economic advisor. Several of the articles compare O'Neill unfavorably with Robert Rubin, who was Treasury Secretary under President Clinton.

This comparison seems peculiar, since Robert Rubin stood by as the stock market expanded into an unsustainable bubble. The current recession is attributable to the collapse of this bubble. While O'Neill did not act effectively to counteract the impact of the bubble's collapse, the decision to let the bubble expand unchecked created a massive economic problem which would have been difficult to address under any circumstances. In this respect, Mr. Rubin's record should be viewed in the same light as the Japanese policy makers who let that country's stock bubble expand to unsustainable heights in the eighties.

In this vein, the Purdum article describes Lindsey as a "relentless economic pessimist" because he sold his stock years ago. Simple arithmetic showed that the market had entered an unsustainable bubble in the late nineties. Mr. Lindsey's decision to sell his stock meant primarily that he understood the relationship between the stock market and the economy and didn't feel like throwing his money away (see "Dangerous Minds? The Track Record of Economic and Financial Analysts."[http://www.cepr.net/dangerous_minds.htm]). It is certainly not evidence of pessimism about the economy.

The Purdum article includes a set of 3 charts that purport to reflect the state of the economy under Lindsey and O'Neill. One of the charts is the Dow Jones Industrial Average and a second is the consumer confidence index. A chart showing corporate profits would be a much more meaningful measure of the health of the business sector. The growth in the real value of the median hourly wage would be a better measure of the well-being of households than the consumer confidence index.

The Blustein article discusses comments by O'Neill in which he appeared to question the appropriateness of a strong dollar policy. These comments are characterized as a gaffe. As a result of the strong dollar, the United States is currently borrowing more than $500 billion a year from abroad. This current account deficit is no more sustainable than a budget deficit in excess of the same magnitude. The fact that O'Neill would question the merits of this policy does not seem to be a gaffe.

The article by Weisman and Allen notes the shift from large surpluses under Clinton to deficits under Bush. It then reports that Republicans blame the national emergency created by the September 11th attacks, while Democrats blame the Bush tax cuts. The article should have pointed out that, according to the Congressional Budget Office, the largest factors have been the recession and the loss of capital gains tax revenue due to the collapse of the stock bubble.

The article by Allen refers to a set of proposals that the President Bush is expected to put forward as "investment incentives." This is a questionable characterization of these measures, since their most direct effect will be to put more money into the hands of the wealthy. For example, one proposal would reduce or eliminate the personal income tax on dividends. The vast majority of investors will receive no direct benefit from this tax cut, since they hold their stock through retirement funds. The money in these accounts is taxable as normal income when the worker draws on it after retirement. This would be true whether it is the result of interest, dividends, or capital gains.

Similarly, President Bush also proposes to increase the ceiling on the amount that workers can place into a tax sheltered retirement account in a given year. Very few workers are contributing at the current ceiling, which is close to $12,000 a year. Only the most affluent are likely to benefit from the opportunity to put even more money in a tax sheltered account.

This article also claims that economists say it is "anyone's guess" as to whether or not these policies will work to stimulate the economy. Actually, most economists hold strong views on the effectiveness of these sorts of tax policies. While some would argue for the merits of such policies, there are also large numbers of economists (probably a substantial majority) who would see these policies as having little effect as stimulus. Given the centrality of these issues to the profession, and the existence of a large body of research, it is unlikely that many economists would say that their effectiveness is "anyone's guess."


Federal Pension Rules

Treasury Wants To Permit Firms To Convert Pension Plans
Albert B. Crenshaw
Washington Post, December 10, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A32547-2002Dec9.html

Administration Proposes Rules That Can Alter Pension Plans
Richard A. Oppel Jr.
New York Times, December 10, 2002, Page C1
http://www.nytimes.com/2002/12/10/business/10PENS.html

These articles report on new pension rules from the Treasury Department which will allow companies to convert traditional defined benefit plans to "cash balance accounts." Cash balance accounts guarantee workers a fixed return on the money placed into their pension, as opposed to a specific percentage of their working wage, which is typically the case with defined benefit plans.

In most defined benefit plans, the value of pensions increases rapidly in the last years of a worker's tenure. For example, a worker may see the value of a pension increase by 25 percent if he or she stays with a company for 35 years, instead of 30 years. Many workers stayed with their companies in the hope of benefiting from such steep increases in the value of their pensions. The new rules from Treasury mean that companies have no obligation to maintain the pension benefit schedules that were in place through a worker's entire career with the company. As a result, many older workers will get much lower benefits than they had anticipated.

The Post article reports on this rule change as a question of equity between younger and older workers, with the implication that lower pension payments to older workers will somehow increase the benefits accruing to younger workers. This is incorrect, since there is no question that firms have the option to set whatever pension schedule they like for new workers. The only question at issue was the firm's obligation to older workers, based on their past work.

The treasury ruling means that they can reduce these obligations. It is comparable to allowing firms to take back pay previously given to these workers. The Times article correctly described what is at issue with this ruling.


Trade

Former Mexican Leader Urges U.S. to Let More Workers Enter
Mary Jordan
Washington Post, December 9, 2002, Page A18
http://www.washingtonpost.com/wp-dyn/articles/A28623-2002Dec8.html

U.S., Chile Agree on Free Trade
Paul Blustein
Washington Post, December 12, 2002, Page A42
http://www.washingtonpost.com/wp-dyn/articles/A42567-2002Dec11.html

Antiwar Veteran Eager for Battle
Adam Nagourney
New York Times, December 9, 2002, PageA22
http://query.nytimes.com/search/article-page.html?res=9C0CE4DB1F3BF93AA35751C1A9649C8B63

U.S. and Chile Reach Free Trade Accord
Elizabeth Becker and Larry Rohter
New York Times, December 12, 2002, Page C1
http://www.nytimes.com/2002/12/12/business/worldbusiness/12TRAD.html

These articles all discuss trade agreements. They refer to trade agreements that the United States has negotiated in recent years as "free trade" agreements. While this is the term conventionally used by proponents of the trade agreements, it is not accurate. These trade agreements do not "free" all trade. In fact, they actually increase some forms of protectionism, most notably patent and copyright protection. It would be more accurate to refer to these agreements as simply "trade" agreements.

The article on NAFTA discusses its success exclusively in terms of its effect on trade, noting that Mexico's foreign trade has quadrupled since the agreement was passed in 1994. Economists do not view trade as an end itself -- the test of an agreement is its effect on living standards. Mexico's per capita income has grown at a rate of just 1.0 percent annually since NAFTA was passed. By comparison, it grew more than 4.0 percent annually from 1960 to 1980. Since the growth of the last eight years has been accompanied by increasing inequality, it is likely that most Mexicans have actually experienced declining living standards since NAFTA was implemented.


Germany

Freshly Reelected, Schroeder Falls Fast
Peter Finn
Washington Post, December 12, 2002, Page A30
http://www.washingtonpost.com/wp-dyn/articles/A42647-2002Dec11.html

This article reports on the decline in German Chancellor Gerhard Schroeder's popularity since his re-election two months ago. At one point it reports that the government will violate the rules governing the euro zone countries by running a deficit in excess of GDP "because the government avoided any deep spending cuts." It would have been equally accurate to report that the deficit is due to the fact that government did not raise taxes enough.

The article concludes by reporting the views of a German political scientist that "people are willing to support painful reforms [weaker protections for workers] that change the welfare system in order to save it." It is worth noting that neither of the major parties called for a weakening of worker protections in the last election, which raises questions about public support for such measures.

It is also questionable whether such measures will benefit Germany's economy. There is very little evidence that weaker protections for workers lead to lower unemployment (see "Labor Market Institutions and Unemployment: A Critical Assessment of Cross Country Evidence," [http://www.newschool.edu/cepa/papers/archive/cepa200217.pdf]).

This article neglects to mention the role of the European Central Bank (ECB) in obstructing growth in Europe. While the Federal Reserve Board had lowered interest rates in the United States to 1.75 percent in September of 2001, the ECB had kept its interest rate at 3.25 percent until just last week. Virtually all economists would agree that the U.S. economy would be in far worse shape if the Federal Reserve Board had followed the interest rate policy of the ECB.