Economic Reporting Review
By Dean Baker
February 24, 2003

OUTSTANDING STORIES OF THE WEEK

Thousands of Schools May Run Afoul of New Law
Sam Dillon
New York Times, February 16, 2003, Page A27

This article examines the standards of school evaluation that were put in place as part of President Bush's "No Child Left Behind Act." It notes that a large number of schools that are widely considered as successes will be evaluated as failing under these criteria, including a school in Michigan that President Bush recently singled out for praise on a visit.  

Option Math: Why So Many to So Few?
David Leonhardt
New York Times, February 16, 2003, Section 3 page 1

This article examines the distribution of stock option grants at major corporations. It notes that at most large firms the vast majority of grants are given to a small number of top executives.  

A Toxic Legacy on the Mexican Border
Kevin Sullivan
Washington Post, February 16, 2003, Page A17

This article reports on the toxic waste that has been left in Tijuana by a U.S. owned smelter. The owner has managed to avoid prosecution in Mexico, since he lives in the United States.
 

The Bush Tax Cuts 

Bush's Stimulus Plan And Its Two Big Ifs
Daniel Altman
New York Times, February 18, 2003, Page C1 

This article examines the likelihood that President Bush's tax cuts will increase economic growth. It asserts that its success depends first on the extent to which the tax cuts induce additional savings, and second on the extent to which increased savings will lead to more investment and growth.  

The article should have been careful to point out that in order for there to be even a theoretical possibility of increasing growth, the tax cuts will have to increase savings by an amount that is larger than the size of the tax cuts. According to standard theory, it is total national savings (public plus private) that determine the interest rate. If the tax cuts increase private savings, but are enough to offset the additional borrowing needed to finance the deficit, then the effect would be to raise interest rates and reduce growth. 

The article also should have presented some measure of the magnitude of the potential growth that could result from the tax cuts. Using a standard economic model, the Congressional Budget Office estimated that an increase in savings equal to approximately 2.0 percent of GDP (approximately $210 billion a year, at present) would raise GDP by a total of 1.6 percent after 30 years (Congressional Budget Office, 1997. The Economic and Budget Outlook: Fiscal Years 1998-2007, page 90). This translates into an increase in the annual growth rate of approximately 0.05 percentage points. It is virtually inconceivable that the Bush tax cuts could produce gains that are even half this size, meaning that the potential increment to growth is almost certainly less than 0.03 percentage points annually, an amount that is far too small to be visible to a typical person. Given the adverse distributional effects of the Bush tax cut, there is virtually no plausible scenario in which the vast majority of the population could avoid being hurt by the tax cuts, even if these cuts actually had a small positive effect on growth.  

Republican Agenda Shows a Surgeon's Touch
David Firestone
New York Times, February 15, 2003, Page A1 

This article discusses senate majority leader Bill Frist's influence on the Republican agenda. At one point it refers to efforts to repeal the estate tax. It notes that the repeal "is touted as a measure to protect family farmers and small-business owners." While this is the rationale politicians give for the repeal, because there are large exemptions to the estate tax, very few family farmers or small business owners are affected by it. The National Farm Bureau, a leading proponent of the tax's repeal, was unable to identify a single family who had lost their farm due to the estate tax ("Tale of Lost Farms Reflects Muddle of Estate Tax Debate," by David Cay Johnston, New York Times, April 8, 2001, Section 1 page 1).  

Shifting the Burden of Funding Pensions
Mary Williams Walsh
New York Times, February 20, 2003, Page C1 

This article discusses President Bush's new savings-related tax cuts, which would exempt a much larger share of capital income from taxation. It emphasizes the fact that these proposals are consistent with the philosophy of Glenn Hubbard, the administration's chief economist -- that capital should not be taxed at all.  

While this may be an accurate description of Mr. Hubbard's philosophy, politicians generally do not act based on the philosophies of their aides. The main effect of the administration's tax proposals is to redistribute hundreds of billions of dollars to the richest people in the country -- a very powerful interest group. It is more plausible that President Bush is acting to satisfy this interest group -- and sought an aide who believes this is a good idea -- than that his chief economist convinced President Bush to pursue a policy that furthered his own personal philosophy.  

An important feature of these new accounts, as this article notes, is that they would require individuals to pay taxes on the money that goes into account, but then have the withdrawals be tax free. Most retirement accounts now have the opposite pattern, with the deposits being tax free, but all the money in the account is subject to taxation at the time of withdrawal.  

While this sequence may matter little to the wealthy, who are likely to be in a high income tax bracket both when they are working and when they are retired, it is very important for millions of middle income workers. These workers are likely to be in a higher tax bracket during their working years than when they are retired. Therefore, if they must pay taxes on the money during their working years, rather than when they are retired, they will lose much of the current tax benefit provided by retirement savings accounts. This issue was not discussed in this article.
 

Industrial Production and the Economy 

New Look Sees Muscle In Economy
John M. Berry
Washington Post, February 15, 2003, Page E1 

Industrial Production Rises 0.7%
Daniel Altman
New York Times, February 15, 2003, Page B1 

These articles reported on new economic data released the prior day. Both articles highlighted a 0.7 percent increase in industrial production reported for January as evidence that the economy is strengthening, noting that this was twice the gain that most economists had expected. 

Neither article mentions that the December estimate for industrial production had been revised down by 0.3 percent. Also, much of the rise in reported output in January was attributable to a 4.0 percent jump in output of utilities, which is almost entirely due to cold weather. The new data showed that manufacturing output in January was just 0.1 percent higher than its November level, a 0.6 percent annual rate of growth.  

Both articles also noted that inventories in December rose more than had been expected. While this was presented as a positive sign -- that retailers are rebuilding their stocks in anticipation of future demand, it may also be attributable to the fact that consumers did not by as much as had been expected, leaving more items on store shelves. Since non-auto sales fell in November and showed very weak growth in December, it is certainly plausible that the December inventory build-up was a sign of economic weakness rather than strength.  
 

Russia 

Glimmers of an Investor-Friendly Russia
Sabrina Tavernise
New York Times, February 15, 2003, Page B1 

This article reports on the current economic situation in Russia. The article notes that Russia's economy has been performing reasonable well in recent years, at one point noting that, "the economy has been growing robustly for nearly five years."  

This dates the turnaround to Russia's abandonment of the peg of its currency to the dollar in the summer of 1998, over the strong objections of the I.M.F. and the U.S. Treasury. It is worth noting that news reports at the time presented the decision to end the peg to the dollar as a catastrophic action which would have disastrous consequences for Russia's economy (e.g. see "Yeltsin Must Resort to Reform by Decree," by Sharon LaFraniere, Washington Post, July 18, 1998, page A14; "Russian Bailout Fails To Ease Market Fears," by Sharon LaFroniere, Washington Post, July 28, 1998, page A1; and "Yeltsin and Crew Are Sinking Like the Ruble," by Michael Wines, New York Times, August 22, 1998, page A1).
 

Medicare 

Medicare Plan's Trouble Could Offer a Lesson
Robin Toner
New York Times, February 17, 2003, Page A 

This article discusses the political opposition to President Bush's plan to restructure Medicare. At one point it asserts that the plan is, "aimed at making the program more cost-efficient and more like a marketplace of competing private plans." While proponents of the plan may claim that they want to make Medicare more efficient, a large body of evidence indicates that increasing competition will raise costs, not lower them. For example, a study by the General Accounting Office found that when Medicare beneficiaries joined H.M.O.s, it raised the cost of Medicare. 

Forcing more Medicare beneficiaries into H.M.O.'s will create new opportunities for the insurance industry to profit from Medicare. The Bush administration has close ties to the insurance industry and has received substantial campaign contributions from the industry. Since there is no evidence that pushing beneficiaries into H.M.O.'s will save money, it is at least as likely that the primary aim of the program is to increase profits for the insurance industry.
 

Ireland 

Ireland, Once a Celtic Tiger Slackens Its Stride
Alan Cowell
New York Times, February 19, 2003, Page C1 

This article reports on Ireland's economic outlook. It notes that its growth rate has slowed somewhat from its boom years at the end of the nineties and that its inflation rate is now about 4.5 percent. The article attributes a large part of Ireland's current problems to the fact that it is part of the euro zone, and the European Central Bank (ECB) was not going to raise interest rates just to lower the inflation rate in one of Europe's smallest nations. 

Actually, it is not obvious that an independent Irish central bank could have guided a better economic path for the nation. The higher interest rates that the article implies would have been desirable, as they would have slowed growth and raised the Irish unemployment rate. As it stands, the growth rate is still close to 6.0 percent. It is also worth noting that the inflation rate has edged down a percentage point over the last two years from a rate of 5.5 percent in 2000. This indicates that inflation can be lowered without the surge in unemployment that higher interest rates would have caused.  

In addition, it should be expected that Ireland would have a higher inflation rate than the rest of Europe. Its price level had been considerably lower than that of other rich countries. Now that its recent growth spurt has placed Ireland among the richest countries in Europe, it would be expected that prices of land and non-traded services would begin to even out with those of other countries, just as would be the case with a formerly poor region of the United States.
 

The Steel Industry 

Big Steel on the Rebound
Greg Schneider
Washington Post, February 18, 2003, Page E1 

This informative article reports on the restructuring taking place in the steel industry. At one point, it assesses the advantages of foreign producers and comments that they "pay their workers less than U.S. companies." While this is true in many countries, steelworkers in Europe and Japan receive wages that are comparable to the pay received by workers in the United States.  

The article also writes that foreign producers benefit due to government-provided health care for their workers. This is true, but only because it provides health care more efficiently than the system in the United States. Government-provided health care must be paid for with taxes. If the health care systems in other rich countries were as inefficient as that in the United States, then the tax burden on the steel producers, and/or their workers, would offset any gain to them from not having to pay the cost of health care directly.
 

The Budget 

Spending Bill Caps 2-Year Surge
Jonathan Weisman
Washington Post, February 19, 2003, Page A14 

This article discusses the 2003 appropriations bill that was signed by President Bush this week. In referring to President Bush's 2004 budget proposal, it refers to $400 billion being set aside for a Medicare overhaul and a prescription drug benefit for senior citizens. It should have noted that the $400 billion is for a ten-year spending path, not for a single year.
 

Armenia  

Rich Armenia vs. Poor Armenia in Presidential Election
David Rohde
New York Times, February 19, 2003, Page A3 

This article discusses the current political situation in Armenia. At one point it describes the economic situation favorably by noting that it has the highest economic growth rate of any country in the former Soviet Union. While Armenia's economy is growing rapidly at present, it follows a sharp decline after the collapse of the Soviet Union. According to the World Bank, its per capita GDP is still about 20 percent below the level it had reached when it was part of the Soviet Union.