Economic Reporting Review
By Dean Baker
January 5, 2004

A Trench Caves In; a Young Worker Is Dead. Is It a Crime?

David Barstow

New York Times, December 21, 2003, Page A1

http://query.nytimes.com/gst/abstract.html?res=F10810FB395B0C728EDDAB0994DB404482

This is the first article in a three part series that examined the enforcement of work place safety laws. The articles show how enforcement of safety rules has weakened over the last two decades. Furthermore, even when blatant disregard of safety rules leads to serious injury or the death of workers, employers rarely face serious legal consequences.

IRS Speeds Corporate Tax Audits

Jonathan Weisman

Washington Post, December 29, 2003, Page A1

http://www.washingtonpost.com/wp-dyn/articles/A37109-2003Dec28.html

This article reports on plans by the Internal Revenue Service to adopt faster procedures for conducting corporate audits. The article points out that this new method will allow the IRS to conduct more audits, but the streamlined procedures will make it much easier for sophisticated accountants to conceal tax fraud from the IRS.

A Operation to Ease Back Pain Bolsters the Bottom Line, Too

Reed Abelson and Melody Petersen

New York Times, December 31, 2003, Page A1

http://www.nytimes.com/2003/12/31/business/31BACK.html

This article reports on a new form of back surgery, spinal fusion, which doctors are administering with increasing frequency. The article points out that there is little evidence that this procedure is better for patients than simpler alternatives, but the relatively high reimbursement rates from Medicare and Medicaid make it a profitable operation for doctors and hospitals to perform.

Market Caps Off Sustained Rebound

Ben White and Carrie Johnson

Washington Post, January 1, 2004, Page E1

http://www.washingtonpost.com/wp-dyn/articles/A46235-2003Dec31.html

Year’s Big Rally Helps Investors Regain Ground

Jonathan Fuerbringer

New York Times, January 1, 2004, Page A1

http://www.nytimes.com/2004/01/01/business/01STOX.html

Energized by the Economy, Small Stocks Lead the Way to Big Gains

Floyd Norris

New York Times, January 2, 2004, Page C1

http://www.nytimes.com/2004/01/02/business/02norris.html

These articles report on the stock market’s performance in 2003 and assess the prospects for 2004. The articles report that the market’s prospects for another strong year in 2004 are good, based on predictions that the economy will be healthy.

None of these articles ever mention the price to earnings ratios of the various market indexes. The price-to-earnings ratio is the most important measure of the stock market’s value – indicating whether it is currently undervalued or overvalued compared to historic patterns. Discussing the stock market’s value without making reference to its price to earnings ratio is comparable to assessing the value of an apartment building without ever considering how much rent it generates. For a sports analogy, this is like assessing running backs in football without ever considering their average yards per game or per carry.

Historically, the price-to-earnings ratio for the stock market as a whole has averaged approximately 15 to 1. If the price-to-earnings ratio were considerably higher than this (e.g. it hit a bubble peak of 33 to 1 in March of 2000), then an investor would be foolish to hold stock even if the immediate prospects for the economy were very bright. Alternatively, the price to earnings ratio has sometimes been under 10 to 1, as was the case in the mid-seventies. In such situations, the stock market is likely to provide good returns, even if the economy is not performing very well.

At present, the ratio of price to trend corporate earnings is approximately 20 to 1. At this ratio, investors can anticipate lower than normal returns over the long run. Historically, stocks have provided an average real return of 7 percent annually. If the price to earnings ratio remains at 20 to 1, then investors can anticipate average real returns of approximately 5 percent annually (see "Stock Returns for Dummies" [http://www.cepr.net/stock_market/Stock%20Returns%20for%20Dummies.pdf].

Free Trade Accord at Age 10: The Growing Pains Are Clear

Reported by Elizabeth Becker, Clifford Krauss and Tim Weiner and written by Mr. Weiner

New York Times, December 27, 2003, Page A1

http://query.nytimes.com/gst/abstract.html?res=FB0714F93F5A0C748EDDAB0994DB404482

This article assesses the effects of NAFTA on Canada, Mexico, and the United States, as the tenth anniversary of its implementation is reached. The article uses the phrase "free trade" at fourteen different points, including in the title. The term is used to refer to either the agreement or to proponents of NAFTA-type trade agreements.

This is an inaccurate usage of the term "free-trade," since the agreement does not create free trade between the countries involved. In some cases, such as the professional barriers that limit the ability of highly paid professionals (e.g. doctors and lawyers) the treaty did almost nothing to remove trade barriers. In other cases, such as patent ad copyright protection, NAFTA actually increased protectionism. It is therefore inaccurate to refer to the agreement as a "free trade agreement." It would be more accurate to simply refer to it as a "trade agreement."

In assessing the effects of the agreement on Mexico it also would have been useful to comment on Mexico’s growth rate in the NAFTA decade. This is the most basic measure of economic performance, and since NAFTA did have a large effect on Mexico’s economy (the impact on Canada and the United States was much more limited), the growth rate provides a good preliminary assessment of NAFTA’s impact. Mexico’s per capita GDP growth averaged less than 1.0 percent in the decade since NAFTA. Successful developing countries, like Taiwan and South Korea, sustained per capita GDP growth of more than 6.0 percent annually for forty years. In the two decade from 1960 to 1980, when Mexico was pursuing a path of import substitution, its per capita GDP growth averaged more than 4.0 percent annually.

THE YEARS AHEAD: ECONOMICS; Questioning The Age of Wal-Mart

Steve Lohr

New York Times, December 28, 2003, Section 5 Page 5

http://query.nytimes.com/gst/abstract.html?res=F30F10F73E5A0C7B8EDDAB0994DB404482

This article discusses the impact of Wal-Mart and other discounters, who place a premium on cutting costs everywhere possible. The article notes that an increasing number of manufacturing jobs are being lost to imports, and now many white-collar jobs are also being lost to outsourcing. It then raises the possibility that "protectionist" policies may be implemented.

Actually, the United States already has a large number of protectionist policies, although most of them are intended to benefit highly paid professionals, like doctors and lawyers. For example, in 1997, the government limited the number of foreign medical residents who could be admitted to the United States in response to concerns that an influx of foreign doctors was depressing the wages of U.S. doctors. Under current law, it would also be illegal for a paper to attempt to compete with the New York Times by hiring foreign journalists at lower wages, and then charging lower advertising and subscription rates.

At one point the article refers to a "wage insurance" proposal that was designed by Robert Litan at the Brooking Institution. This proposal would compensate workers who lose their jobs due to trade, for any resulting reduction in wages at their new job. It is worth noting that such a proposal would compensate only a small fraction of the wage losses attributable to trade. According to standard economic theory, the vast majority of wage loss attributable to trade will not be incurred by the workers who directly lose their job because of trade, but rather by the much larger group of workers who must accept lower wages because of the reduction in demand for their labor. This fact should have been mentioned in this discussion.

Democratic Candidates Differ on Economy, but Often Subtly

Edmund L. Andrews

New York Times, December 31, 2003, Page A1

http://www.nytimes.com/2003/12/31/politics/campaigns/31ECON.html

This article briefly examines the democratic presidential candidate’s stands on some key economic issues. The article includes several complaints about the candidates’ positions that are not supported by evidence presented in the article. For example, it reports that none of the candidates offer plans on "how to steer the budget from the Bush-era deficits to the surpluses created in the Clinton administration." There is no obvious reason that anyone would want to run a budget surplus. A budget surplus would only make sense if one believed that the real interest rate on government debt, which is currently close to 1 percent, is a higher return than money would get if it is either invested in public capital (e.g. infrastructure, research, or education) or returned as a tax cut. Few economists would argue that this is the case.

When discussing the candidates' health care proposals it only considers what their cost is to the government. This is a remarkable omission, since the Congressional Budget Office and numerous other economists have shown that the country will face huge economic costs (some of which will show up in the budget through Medicare and Medicaid) if health care costs in the United States are not contained. While the health care reform proposals put forward by some of the candidates have the potential to constrain costs (Moseley Braun, Kucinch, and Sharpton), this article never even addresses the issue.

Euro and Pound Advance As Dollar’s Drop Continues

Associated Press

New York Times, December 30, 2003, page C8

http://www.nytimes.com/2003/12/30/business/worldbusiness/30dollar.html

This brief article reports on the continuing decline of the dollar against other major currencies, which caused it to reach a new record low against the euro. It is worth noting the contrast between the reporting of the decline in the dollar over the last three years with the coverage of the decline of the euro in 1999-2000. At that time, the fall in the euro was routinely attributed to fundamental weaknesses in the European economy. Many news articles even suggested that Europe’s economy faced a serious crisis unless major changes were made (e.g. "The Euro Experiment: A Bold Idea That Isn't Working," New York Times, September 15, 2000, page C1; "Modest Purchases by Central Bank Briefly Lift the Euro," New York Times, September 15, 2000, page C3; or "When Will The Euro's Slide End?," Washington Post, September 16, 2000, Page E1). By contrast, the sharp decline in the dollar over the last three years – which has more than reversed the earlier fall in the euro – has received relatively little attention, as evidenced by this page 5 news service story in the Times.

While the fall in the dollar does not imply a crisis in the U.S. economy, just as the earlier decline in the euro did not mean that Europe’s economy was in crisis, it will likely lead to a higher inflation rate in coming months. The core problem is that the United States is currently borrowing from abroad an amount equal to approximately 5 percent of its GDP to support its trade deficit. At some point it will no longer be able to borrow as much, which will lead to further declines in the dollar and somewhat lower living standards in the United States.

MEDIA: The Year Ahead: Giving an Audience What It Wants, but Not Giving It Away -- Movies; Studios Fight Piracy With Education

Laura M. Holson

New York Times, December 29, 2003, Page C6

http://query.nytimes.com/gst/abstract.html?res=F00A13FF385A0C7A8EDDAB0994DB404482

This article reports on the movie industry’s efforts to get people to respect its copyrights. At one point the article reports that the studios plan to "educate" people on how failing to respect copyrights threatens the "fundamental economics" of movie production. It also reports that industry representatives are being allowed to make presentations to this effect in classrooms.

It would have been appropriate to include the views of economists on the inefficiency of the copyright system as a means of promoting creative work, compared with alternative mechanisms, such as an individual tax voucher designed for this purpose (see "The Artistic Freedom Voucher: An Internet Age Alternative to Copyright [http://www.cepr.net/Publications/Afv.pdf]). It is easy to show that the economic distortions created by copyright protection are many times larger than the losses associated with protection for textiles and agriculture, or other sectors in which reducing or eliminating protection has been a major focus of public policy.

It is also striking that the movie industry is apparently being allowed to present its views in classrooms without opposition. This would be comparable to allowing cotton growers to present their perspective on cotton subsidies without any opposing position being presented. If the industry’s representatives are actually being allowed into classrooms in order to promote their perspective, then this fact deserved more attention than it is given in the article.

THE YEARS AHEAD: POPULATION; Signs of Aging in the Global Head Count

Sam Roberts

New York Times, December 4, 2003, Section 4 page 4

http://query.nytimes.com/gst/abstract.html?res=F30C12F73E5A0C7B8EDDAB0994DB404482

This article discusses the aging of the world’s population. At one point, the article reports that by 2030 more Americans will be over 65 than under 15, which it asserts will place "an enormous burden on those in the middle to support the dependent old and young." It is not clear why the article considers this to be "an enormous burden." The Social Security projects the dependency ratio (the ratio of the old and young to the working age population) to be 0.808 in 2030. By contrast, it was 0.947 in 1965 and remained above 0.8 through most of the eighties. It is currently slightly under 0.7.