Economic Reporting Review
February 19, 2002

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

OUTSTANDING STORIES OF THE WEEK

Scandal's Ripple Effect: Earnings Under Threat
Gretchen Morgenson
New York Times, February 10, 2002, Section 3 page1

This article examines the possibility that many firms may
have substantially overstated earnings by using the same sort of
accounting gimmicks as Enron.


Executives Beyond Enron Took Months To Report Sales
David Leonhardt
New York Times, February 11, 2002, Page C1

This article reports on a loophole in disclosure rules, which
has allowed many top executives to make large stock sales without
publicly reporting them. The clause allows sales of stock back to the
firm to go unreported for as long as 13 months.


How Executives Prospered as Global Crossing Collapsed
Geraldine Fabrikant with Simon Romero
New York Times, February 11, 2002, Page C1

This article reports on large sales of Global Crossing stock
by its top executives in the period just before the company slid into
bankruptcy. Some of these executives managed to make tens, or even
hundreds, of millions on stock that is now almost worthless.

As It Beat Profit Forecast, I.B.M. Said Little About Sale of a Unit
Gretchen Morgenson
New York Times, February 15, 2002, Page C1

This article reports on the fact that IBM included the
profits from the sale of a division in its most recent quarterly
profit statement. Under standard accounting practices, the profit
from the sale of an asset should be listed separately as a non-
recurring item.



Health Care

Bush Outlines Health Plan, Raises Funds
Dana Milbank
Washington Post, February 12, 2002, Page A2

Bush Urges $300 Billion For Health Care Changes
Elisabeth Bumiller
New York Times, February 12, 2002, Page A18

These articles discuss President Bush's health care
proposals, which include plan to increase the role of H.M.O.'s in
Medicare. Both articles report that the proposals involve an
additional $300 billion in federal spending over the next decade. It
would have been useful to compare this figure with currently
projected health care expenditures, both by the government and the
nation as a whole. The Health Care Financing Administration projects
that the country will spend approximately $22,855 billion on health
care over this period, with approximately $10,057 billion being paid
by the public sector. This means that President Bush's proposed
spending is equal to approximately 1.3 percent of projected health
care expenditures over the decade, and an increase of approximately
3.0 percent over the amount of projected public sector spending.

It is also worth noting that the inclusion of H.M.O.'s in the
Medicare program has largely been a failure. Studies by both the
Congressional Budget Office and the General Accounting Office have
found that it cost more to serve beneficiaries through H.M.O.'s than
through the existing health care system. In addition, more than one
third of the beneficiaries who have enrolled in H.M.O.'s have
subsequently been dropped because the companies claimed that there
were unable to make a profit – even though their reimbursements were
higher than what Medicare would have paid if the beneficiaries had
remained in the traditional program.


Argentina

Ban Lifted, Argentines Rush at Chance to Shed Pesos
Jennifer L. Rich
New York Times, February 12, 2002, Page W1

This article reports on the current economic situation in
Argentina. At one point it asserts that "economists say the future of
the peso is rising on aid from the International Monetary Fund."
While the Argentine government is seeking support from the IMF, it is
possible that that its economy, and the peso, would actually do
better without this support. The IMF has been demanding that
Argentina balance its budget, even though its economy is already in a
severe recession. The cuts being demanded would be the equivalent of
a $280 billion tax increase or spending cuts in the United States. If
Argentina actually implements tax increases or spending cuts of this
magnitude, its economy is likely to fare very poorly, even if it does
get support from the IMF.

Generational Equity

On Tax Cuts and Deficits, A Battle of Believers
Richard W. Stevenson
New York Times, February 10, 2002, Section 3 page 4

This article discusses the debate between proponents of tax
cuts and those who would rather pay off the national debt. At one
point it refers to a comment by Harvard economists Gregory Mankiw,
that the debt raises issues of generational equity, "do we want to
dump this debt on our children?"

This comment is peculiar because the federal debt does not directly
raise any issues of generational equity. When we dump debt on our
children we also dump assets in the form of government bonds. This
debt only creates a distributional issue within generations – between
those who hold large amounts of bonds and those who don't – it
doesn't directly affect the distribution between generations.

The more obvious issue of generational equity is the extent to which
living standards increase through time. This is primarily determined
by improvements in technology, the growth of the capital stock, and
the change in the foreign debt. This article does not discuss any of
these factors (it doesn't discuss the foreign debt at all) in the
context of generational equity.

The article also includes a chart comparing the movement in the
interest rate on treasury bonds with the size of government deficits.
To make this comparison accurately, the chart should use the real
interest rate (the nominal interest rate minus the inflation rate)
and the deficit measured as a share of GDP.


Robert Rubin

Rubin Relishes Role of Banker As Public Man
Joseph Kahn and Alessandra Stanley
New York Times, February 11, 2002, Page A1

This article discusses former Treasury Secretary Robert
Rubin's current role as a top executive at Citigroup. At one point
the article discusses a phone call that Mr. Rubin made to a top
Treasury official, in which he urged him to try to dissuade credit
rating agencies from downgrading Enron's debt. Citigroup stood to
lose a large amount of money if the debt was downgraded, since it
owned hundreds of millions of dollars of Enron's debt.

The article asserts that Mr. Rubin made the call not only as
a banker, "but also as a former Treasury chief concerned about the
risks to the markets." The article does not indicate how it
determined that Mr. Rubin's concern about financial markets was
actually a motivating factor in his call. Since the call was very
questionable ethically, if not legally, it is reasonable to believe
that Mr. Rubin would try to develop a pretext that would put his
actions in a more positive light. The article does not indicate how
it determined that Rubin was being honest in claiming that he was
concerned about the stability of financial markets when he placed his
phone call. Subsequent events have shown that he was mistaken if he
had such concerns.

At one point the article notes that he is seen as the
architect of Clinton's deficit reduction policy, which it asserts
that even some Republicans view as the basis of the late nineties
prosperity. It is worth noting that there is no economic theory that
provides a plausible link between the size of the growth upturn in
the late nineties and the deficit reduction that the nation
experienced.

It is also worth noting that Rubin was the architect of the
strong dollar policy, which has increased U.S. indebtedness to the
rest of worth by more than $2 trillion over the last decade.


Germany and the Euro

German Face Is Blushing: Red Ink Irks Its Partners
Edmund L. Andrews
New York Times, February 11, 2002, Page A5

Europeans Decide Against Warning Germany on Budget Deficit
Paul Meller
New York Times, February 13, 2002, Page A6

These articles discuss the debate in the European Union (EU)
over whether to issue a warning to Germany over the fact that its
budget deficit was getting close to the limit of 3 percent of GDP
laid out in the EU's Stability and Growth Pact.

In their analysis of Germany's deficit, neither article
considers the extent to which the tight monetary policy of the
European Central Bank (ECB) has been a contributing factor. The ECB's
policies contribute to the deficit by slowing growth and raising the
unemployment rate. The ECB has set its short-term interest rate at
3.25 percent. This compares to a 1.75 percent rate set by the Federal
Reserve Board in the United States. The ECB has chosen to maintain a
higher interest rate even though inflation is lower in Europe than in
the United States and unemployment is higher. Even the IMF has
criticized the ECB for keeping interest rates too high. The role of
the ECB should have been noted in these articles.

The article by Meller asserts that the motivation for the
Stability and Growth Pact was a concern that large deficits would
lead to inflation and undermine the Euro's value. This concern has no
foundation in economic theory. If a government in the Euro zone were
to run excessive deficits, the main impact would be a deterioration
in its creditworthiness as investors became reluctant to lend to it,
not an increase in the inflation rate. The federal government in the
United States has never felt a need to limit deficits run by state
governments. California, the largest state, is larger relative to the
U.S. economy than any member nation is relative to the Euro zone,
except France, Germany, and Italy.


The Budget and the Economy
Cheney to Address Panel on Economy
Mike Allen
Washington Post, February 15, 2002, Page E2

House Adopts New Tax Cuts; Senate Votes Benefits
Richard W. Stevenson
New York Times, February 15, 2002, Page A19

These articles discuss the debate over budget policy. Both
articles refer to a new study by the President's Council of Economic
Advisors, which reportedly shows that the tax cut package passed last
year substantially reduced the severity of the recession. It is worth
noting that the main stimulative impact of the tax cut that went into
effect last year was a $300 per worker income tax rebate. This rebate
was put in at the insistence of Congressional Democrats, not the Bush
Administration, and was derived from a proposal that came from its
Progressive Caucus.

The Post article refers to charges by Democrats that the tax
cut will be "draining" Social Security and Medicare surpluses just
before the baby boomers begin to retire. Actually, the tax cuts will
have no effect whatsoever on these programs. Under the law, these
programs will have the exact same assets regardless of whether the
surplus is saved or spent.


Labor Market Liberalization in Europe

Italians Hopes Blair Visit Helps Berlusconi's European Image
Melinda Henneberger
New York Times, February 15, 2002, Page A3

This article reports on Britain Prime Minister Tony Blair's
visit to Italy. At one point it discusses the possibility of an
alliance in Europe between Italy, Spain, and England, the governments
of which favor less labor market protection than others within the
European Union. The article characterizes their position as "economic
reform."

It would be appropriate to use a more neutral term for policies that
clearly favor employers at the expense of workers. If "reform" simply
means change, then France has been the leader within Europe, with its
adoption of a 35-hour workweek two years ago.



Japan

Inaction by Bank of Japan Raises New Concern
Ken Belson
New York Times, February 9, 2002, Page B2

This article discusses Japan's economic prospects. At one
point it refers to "unpopular but necessary economic measures." The
article does not indicate how it has determined which economic
measures are necessary to get Japan's economy out of its slump. Some
economists, such as Princeton University professor Paul Krugman have
argued that a policy of deliberate inflation by Japan's central bank
would be the best way to restore growth to the Japanese economy. This
article apparently rejects Professor Krugman's view, but presents no
evidence to support its alternative perspective.


Japanese Leader Promises New Economic Stimulus Plan
Clay Chandler
Washington Post, February 14, 2002, Page A29

Japan's Debt Under Study For New Cut In Rating
Ken Belson
New York Times, February 14, 2002, Page W1

These articles report on new economic developments in Japan.
The Post article used five experts as sources. They all affiliated
with financial institutions -- in order of appearance: Daiwa
Securities, Shinko Securities, Merrill Lynch & Co., Nikko Salomon
Smith Barney Ltd., and Morgan Stanley Dean Witter & Co.. It would
have been appropriate to rely a broader variety sources, for example
academic economists or economists affiliated with labor unions or the
government, or at least a non-financial corporation. By contrast, the
shorter Times article quoted a professor at the International
University of Japan Research Institute.

The Times article reports that Japan's debt to GDP ratio is
140 percent of GDP or "more than $45,000 for each citizen." These
figures can be misleading, since the debt includes money owed to
Japan's Social Security system. This debt is usually not included in
measures of the debt in the United States and other nations. Also,
much of this debt is held by Japan's central bank, so it is not a net
debt of the government. In spite of this large debt, Japan's annual
interest burden is among the lowest of the OECD. This is both due to
the fact that much of the debt is held by the central bank and that
the interest rate on the debt is far lower than in any other OECD
country. Since most of Japan's debt is held domestically, the $45,000
does not represent a net burden to its population.