Economic Reporting Review
February 11, 2002

By Dean Baker, co-Director of the Center for Economic and Policy Research

OUTSTANDING STORIES OF THE WEEK

Even Last Year, Option Spigot was Wide Open
Stephanie Strom
New York Times, February 3, 2002, Section 3, page 1

This article reports on the continued increase in option
grants (in both number and value), in spite of generally poor
corporate profit performances over the last two years.


It's Called A 'Loan' But It's Far Sweeter
David Leonhardt
New York Times, February 3, 2002, Section 3, page 1

This article examines the practice whereby corporations
provide large loans to their top executives for investment purposes.
The article points out that these loans are often forgiven by the
company, if the investments turn out poorly.

Enron's Havoc Spills Over to a Utility
David Cay Johnston
New York Times, February 2, 2002, Page B1

This article reports on the impact that Enron's bankruptcy is
having on Oregon. Energy prices in the state rose sharply relative to
the rest of the nation, after Enron took over its major utility in
1997. Now Enron hopes to sell of the utility to raise cash, but it
wants to maintain the current rate structure in place, even though
the sale will lead to considerably lower tax bills for the utility.

Enron Appears to Have Paid Taxes
Glenn Kessler
Washington Post, February 3, 2002, Page A10

This article corrects earlier accounts reporting that Enron
paid no taxes last year. According to several tax specialists and
accountants interviewed for the article, it appears that Enron paid
$112 million in taxes in 2000 as a result of the alternative minimum
tax.


Social Security

Social Security Pledges May Haunt Both Parties
Alison Mitchell
New York Times, February 6, Page A18

This article discusses the fact that the government is now
spending money borrowed from Social Security, violating promises made
by both political parties. The article concludes by raising the
possibility that the government would have to impose "crushing new
payroll taxes on young workers" in order sustain Social Security
after 2016, when its expenditures will exceed its tax revenue.

It is not clear why payroll tax increases in 2016 would be
viewed as a possibility. At that point, the Social Security system
will have accumulated more than $5 trillion in government bonds.
Under current law, it would use the interest and principal from these
bonds to allow it to cover all expenses until 2038. The article does
not identify any political figures who propose changing the law and
defaulting on these bonds. (President Bush's commission explicitly
ruled out this option.)

It is also not clear how the article is defining "crushing."
There were payroll taxes in the decades of the fifties, sixties,
seventies, and eighties, which are of comparable magnitude to the
taxes that may be needed in the distant future to sustain Social
Security. The future tax increases would be no more "crushing" than
these prior tax increases.


Bush Aides Say Deficits Won't Hurt Economy
Steven Pearlstein
Washington Post, February 6, 2002, Page E1

This article discusses the new volume of the Economic Report
of the President (ERP). According to the article, the ERP states that
the country's potential long-term growth rate has increased by close
to a full percentage point since the early nineties. It is worth
noting that the Social Security trustees have actually reduced their
projected rate over this period by almost half a percentage point. If
they had adopted the same view as the ERP, their projections would
show that Social Security will be fully solvent for more than fifty
years into the future, with no changes whatsoever.

The article also notes the ERP's argument that Social
Security privatization is merited because the government will prove
unable to save the surpluses generated by the Social Security system.
This argument is largely moot since the surpluses on tax revenue
(which excludes interest on the trust fund) are projected to be less
than 0.8 percent of GDP in 2005, the first year that privatization
can plausibly be implemented, and to shrink to less than 0.5 percent
of GDP by 2010, and disappear altogether by 2016. Whether or not sums
of this magnitude are saved will have almost no measurable economic
impact.


The Budget

Bush Sees Big Rise In Military Budget For Next Five Years
James Dao
New York Times, February 2, 2002, Page A1

Bush to Seek Deep Cuts in Domestic Programs
Eric Pianin
Washington Post, February 3, 2002, Page A1

These articles report on aspects of President Bush's budget.
Most of the proposed changes in spending are reported only in dollar
terms, without noting either the percentage change involved, whether
the proposed changes are real (inflation adjusted) or nominal, or the
percentage of the budget devoted to items being discussed. Since the
vast majority of readers, even highly educated ones, have only the
most limited knowledge of the budget, citing budget figures outside
of their context is almost meaningless. It would be far more useful
to report percentage changes and/or the percentage of the budget at
issue than the dollar amounts of budget cuts or increases.

Bush Budget Proposes Education Tax Credit
Mike Allen
Washington Post, February 4, 2002, Page A2

This article reports on an education tax credit and other
aspects of President Bush's budget. At one point the article notes
that the administration is projecting a $1 trillion surplus over ten
years. It then includes a comment from a Democratic congressional
staffer that the entire surplus is attributable to Social Security
and Medicare surpluses, and that without these surpluses, the budget
would be in deficit for the whole period.

This manner of presentation makes it appear as though there
is a partisan dispute over whether the prior statement is true. There
is no issue here -- the projections show that without the Social
Security and Medicare surpluses the budget would be in deficit over
the next ten years. The significance of this projected deficit is a
matter subject to dispute. Its existence is not.


The Budget and Tax Cuts

As Troubles Multiply, the Equation Changes
Richard W. Stevenson
New York Times, February 5, 2002, Page A18

This article contrasts the views of Democrats who would like
to roll back part of the Bush tax cut, with Republicans who would
like to move the cuts forward. At one point it quotes a political
analyst who poses the question as "is it better to let 10 or 15
percent of society have the freedom to do more for themselves than it
is to use that money to make sure that 50 percent of society doesn't
get worse off." Actually, the portion of the tax cuts that are
presently at issue -- rolling back the top two tax brackets and the
estate tax -- would affect only the richest 1-2 percent of society.


The Budget and Social Security

President Submits $2 Trillion Budget That Raises Deficit
Richard W. Stevenson
New York Times, February 5, 2002, Page A1

Leading Democrats Open Fire on Plan to Dip Into Social Security
Surplus
Alison Mitchell
New York Times, February 5, 2002, Page A8

These articles both discuss President Bush's budget and its
effects on Social Security. Both include comments implying that
Social Security will impose a very large burden on the nation's
economy in the near future. For example, the Times article refers to
the "huge" costs of paying for the retirement of the baby boom
generation.

According to the Social Security trustees, the additional
revenue needed to balance the program over its seventy five year
planning horizon would be only slightly larger, measured as a share
of GDP, than President Bush's recently proposed spending increases
for the military and homeland security.

The second article could lead readers to believe that
spending the Social Security surplus reduces the program's resources.
In fact, Social Security will have the exact same amount of
government bonds regardless of whether the government uses the
surplus to finance current spending, or to pay down the national debt.


Argentina

In New Blow to Peso, Argentine Court Voids Bank Freeze
Larry Rohter
New York Times, February 2, Page A4

This article reports on a ruling by Argentina's supreme court
that the government could not deny Argentineans access to the funds
in their bank accounts. At one point the article notes that,
according to "most estimates only 10 percent of Argentina's 36
million people have money deposited in the banks." It then adds, "but
it is precisely that middle and upper class that must begin spending
again so that the economy can be reactivated."

Spending has the same effect on the economy regardless of
whether it is done by poor or middle and upper income families, or by
the government directly. If the government were to distribute money
to the poor in some way (e.g. a tax credit) or undertake a large
public spending program, it would stimulate the economy as much as
the spending of the middle class or rich. There are political reasons
why these may not be viable policies, but economics does not preclude
alternative means of stimulating the economy.


Argentine Government Proposes Tight Budget
Paul Blustein
Washington Post, February 6, 2002, Page A15

This article reports on the new budget put forward by
Argentina's government. It makes a series of strong claims about the
appropriate economic policy for Argentina, without any supporting
evidence. For example, it asserts that "putting a lid on deficit
spending is essential to winning IMF backing and keeping Argentina
from returning to the hyperinflation that ruined its economy in the
1980s."

Argentina's current deficit is equal to about 2.6 percent of
its GDP. This is a relatively small deficit for a nation in the
middle of a severe recession. By comparison the deficit in the United
States reached 4.7 percent of GDP in the relatively mild recession of
1990-91. Since a large number of nations are running considerably
larger deficits than Argentina, and almost none have hyperinflation,
it is not clear why the article asserts that Argentina's current
deficit will lead to hyperinflation.

In fact, sharp cuts in Argentina's budget may actually be the
biggest threat to the economy at present, since they will worsen its
recession. If Argentina were to immediately move to balance its
budget, as the IMF has recommended, it would be comparable to a $270
billion increase in annual tax payments in the United States. There
are no politicians or economists who are currently advocating this
path to get the United States out of recession.

It is also not clear that Argentina is "desperately" in need
of new loans from the IMF as the article repeatedly asserts. If
Argentina stops paying interest on its debt, it will have a surplus
in both its budget and its current account; therefore it would have
no immediate need for new loans.



Ecuador

The Industrial Evangelist of Ecuador's Revival
Juan Forero
New York Times, February 2, Page A4

This article discusses the career and importance of Joyce De
Ginatta, one of the most prominent business leaders in Ecuador. At
one point, it discusses Ecuador's adoption of the U.S. dollar as its
currency, a policy strongly supported by Ms. De Ginatta. The article
implies that the policy has been a success, noting that Ecuador grew
by 5.4 percent in 2001, which was the highest growth rate in Latin
America.

It is worth noting that this growth was entirely a bounce
back from a deep recession, which lowered GDP by 7.3 percent in 1999,
according to data from the World Bank. It would be expected that an
economy coming out of this sort of recession would experience rapid
growth. Even with the relatively strong 2001 performance, Ecuador's
GDP is still only back to its 1998 level. This is very dismal growth
record for a developing nation.



Europe

Inflation Steps Up Its Pace in Europe
Edmund L. Andrews
New York Times, February 2, 2002, Page B2

This article reports on new data that showed a slight uptick
in inflation across the Euro zone nations. The article at several
points indicates that inflation is the reason that the European
Central Bank (ECB) is not lowering interest rates.

It is worth noting that it is not inflation per se that is
preventing lower interest rates, but rather the ECB's attitude toward
inflation. According to the article, the inflation in the Euro zone
nations has been 2.5 percent over the last year. This compares to a
1.6 percent overall rate of inflation in the United States, and a 2.7
percent rate in the U.S. core rate (excluding food and energy), which
economists view as more significant. Although the inflation rates in
the U.S. and Euro zone are comparable, the Federal Reserve Board has
lowered interest rates to 1.75 percent in order to stimulate the
economy. The ECB has left interest rates at 3.25 percent.


Alaska Gas and Jobs

Study Opposes Alaska Share of Pipeline
Reuters
Washington Post, February 3, 2002, Page A23

This article reports on a study which advises against the
state of Alaska taking an ownership stake in a natural gas pipeline.
At one point, it refers to claims that the pipeline could create
400,000 jobs. This overstates the potential job creation from this
sort of project by an order of magnitude. It is unlikely that the
pipeline could create more than 40,000-50,000 jobs.


Japan

Japan Stocks at 18-Year Low
Clay Chandler
Washington Post, February 6, 2002, Page E1

Storm Brews in Japan Over Seaweed
James Brooke
New York Times, February 3, 2002, Page A8

These articles examine aspects of Japan's current economic
slump. Both articles, like numerous other pieces published in the
Post and Times, include unattributed assertions that the main cause
of Japan's stagnation is inefficient industries. It is not apparent
that this is true. The most obvious problem facing Japan, given its
growing unemployment, excess capacity, and falling prices, is lack of
demand. Many prominent economists, including Paul Krugman of
Princeton University and Harvard's Jeffrey Sachs have argued this
position. This view should be presented alongside the position
expressed in recent articles.