Economic Reporting Review By Dean Baker July 1

Economic Reporting Review
By Dean Baker
July 1, 2002

OUTSTANDING STORIES OF THE WEEK

Suits Say Wal-Mart Forces Workers to Toil Off the Clock
Steven Greenhouse
New York Times, June 25, 2002, Page A1

http://www.nytimes.com/2002/06/25/national/25WALM.html

This article reports on the practice of many Wal-Marts across the country of requiring workers to do work, either before they have punched in for the day or after they have punched out. The company apparently requires workers to work off-clock to avoid paying overtime.

Ready for an Upturn. Not Ready to Spend
Louis Uchitelle
New York Times, June 23, 2002, Section 3, page 1

This article reports on the factors that are discouraging businesses from engaging in a new round of capital spending.

Trade

Chretien is Hoping to Aid Africa by Mobilizing Rich Nations
Clifford Krauss
New York Times, June 23, 2002, Page A8

Meager Harvests in Africa Leave Millions at the Edge of Starvation
Rachel L. Swarns
New York Times, June 23, 2002, Page A1

Security Tight For G-8 Talks At Idyllic Spot In Canada
Clifford Krauss
New York Times, June 26, 2002, Page A6

http://www.nytimes.com/2002/06/26/international/americas/26CANA.html

G-8 Adopts African Aid Package, With Strict Conditions
David E. Sanger
New York Times, June 28, 2002, Page A10

http://www.nytimes.com/2002/06/28/international/africa/28AFRI.html

These articles all make references to efforts to aid poor nations by removing trade barriers. Studies from the World Bank and elsewhere indicate that the removal of trade barriers will have very little impact on growth in developing nations. For example, a recent World Bank study projected that if the rich nations removed all barriers to merchandise exports from developing nations, it will raise their GDP by an average of just 0.6 percent as of 2015 (Global Economic Perspectives, 2002, p 168). This means that if the per capita GDP of a poor nation might have been $500 a year in 2015, with no change in policy, per capita income would be $503 in 2015, if the rich nations remove their barriers to merchandise exports. It would have been appropriate to note the size of the projected impact of the policy that the G-8 nations apparently agreed to support at their summit.

The articles by Krauss both refer to G-8 efforts to promote "free market" policies in developing nations. Actually, much of the trade agenda of the G-8 has not been directed towards promoting free markets. One of the main items being pushed by rich nations in recent trade negotiations has been the imposition of U.S.-style patent and copyright protection in developing nations. These forms of protectionism can be very costly to developing nations. According to a set of estimates from the World Bank, the protectionism imposed in the TRIPS agreement could cost developing countries far more than any gains they experience from trade liberalization (see "The Relative Impact of Trade Liberalization on Developing Countries," by Mark Weisbrot and Dean Baker [http://www.cepr.net/relative_impact_of_trade_liberal.htm]). The Sanger article includes the assertion that President Bush "signed into law a $51 billion increase in farm subsidies over the next six years." Actually, the subsidies included in this bill are somewhat smaller than the average subsidies farmers have received over the last three years, since Congress passed emergency farm aid bills each year.

Bush Facing Test in House As Economic Agenda Stalls
Richard W. Stevenson
New York Times, June 24, 2002, Page A1

http://www.nytimes.com/2002/06/24/politics/24ECON.html

This article discusses the obstacles that President Bush has faced in promoting his economic agenda, since the passage of his tax cut last summer. The article refers to Mr. Bush's efforts to promote "free trade" agreements and his "free-trade philosophy." One of the top agenda items for the United States in recent trade agreements has been to increase protectionism by imposing U.S.-style patent and copyright laws on developing nations. Given this reality, it would be more appropriate to simply refer to "trade" or "commercial" agreements. It is also not clear how the article has determined that President Bush has a "free-trade philosophy." As a politician, it is reasonable to believe that President Bush will make whatever claims about his own beliefs that advance his agenda. Since his actions are obviously inconsistent with a free trade philosophy (some examples are included in the article), there is no obvious reason to assume that President Bush actually believes in a "free-trade philosophy."

At one point the article refers to the need to increase the nation's debt ceiling. It notes the size of the current debt and comments that "much of which is obligations to pay future Social Security benefits." The bonds held by the Social Security trust fund account for just under one quarter of the total debt. This fact is not in any obvious way relevant to the topics addressed in the article.

Pakistanis Fume as Clothing Sales to U.S. Tumble
Keith Bradsher
New York Times, June 23, 2002, Page A3

This article discusses the current economic situation in Pakistan. It notes that there have been large-scale layoffs in the textile industry. It attributes these layoffs both to U.S. quotas on imports from Pakistan and insecurity among foreign buyers due to the threats from war with India and terrorism.

It is not apparent that the U.S. import quotas can be held responsible for any job losses. The quotas are actually higher in 2002 than in 2001, so their existence would not seem to provide a basis for reducing employment. Also, if foreign buyers are reluctant to enter the country, then this could lead to a large drop off in sales from Pakistan. If sales have fallen off for this reason, then it is likely the case that Pakistan is not even filling its current quota.

Washington's Slow Pace in Trade Talks Annoys the Chileans
Larry Rohter
New York Times, June 25, 2002, Page A3

http://www.nytimes.com/2002/06/25/international/americas/25CHIL.html

This article reports on efforts to complete a trade agreement between the United States and Chile. It highlights the fact that Chile now has more trade with the European Union than with the United States, which is attributed in part to the fact that it signed a trade agreement with Chile that takes effect at the beginning of next year.

The article notes the "chagrin" of American negotiators over the fact that the EU has passed the U.S. as Chile's major trading partner, and implies that this represents a loss to the United States. According to standard trade models, the trade between Chile and the EU should make Chile wealthier, which under most circumstances will increase the eventual gains to the Unite States from expanding trade with Chile. If American negotiators are "chagrined" over the growth in trade between the EU and Chile, then they must not adhere to standard trade theory.

The article includes six separate references to "free trade" agreements between the U.S. and Chile. Since aspects of any trade agreement are likely to increase some forms of protectionism, they should be referred to simply as "trade" agreements.

The article also refers to the recent farm bill passed by the U.S. Congress, which it describes as granting "$180 billion in subsidies to American farmers." It would have been appropriate to note that these subsidies are distributed over a ten year period and actually represent a decline from the current level of farm subsidies.

Corporate Scandals and the U.S. Model

U.S. Businesses Dim as Models For Foreigners
Edmund L. Andrews
New York Times, June 27, 2002, Page A1

http://www.nytimes.com/2002/06/27/business/27GLOB.html

This article reports on how the recent wave of corporate corruption scandals has reduced the appeal of the U.S. business model in the rest of the world. At one point it asserts that "most experts agree that the main problem is not with the [accounting] principles themselves but with people who are determined to distort their companies' financial results."

When a system fails, economists usually attribute the fault to the design of the system rather than the particular individuals involved. For example, few economists attribute the failure of central planning to the specific people who managed the economies of the former USSR and eastern Europe. Similarly, given the apparently widespread failure of the U.S. system to prevent abuses by top executives, it seems more reasonable to attribute the problem to the system of corporate accountability in the United States, rather than the specific individuals. The article does identify anyone who has the view attributed to "experts."

At one point the article notes that the United States is running a large trade deficit. It claims that it must attract a net inflow of "$1.3 billion in foreign money every day" to support this deficit. Actually, the causation is the opposite of what is implied here. The large inflow of foreign money raised the value of the dollar. This in turn made foreign imports cheaper and more attractive to consumers in the United States, and made U.S. exports more expensive to foreigners. As a result, the United States is running a large trade deficit. If the capital inflows decline, the dollar will fall. This will reduce demand for imports and lead to more U.S. exports, thereby reducing the size of the trade deficit.

Argentina

2 Argentines Killed in Protests on Economy
Larry Rohter
New York Times, June 27, 2002, Page A8

http://www.nytimes.com/2002/06/27/business/27GLOB.html

This article reports on the deaths of two protestors in Argentina. At one point the article refers to the fact that Argentina removed the link between its currency and the dollar and defaulted on its debt last December. It claims that these actions were responsible for "triggering a deep economic and social crisis."

Actually Argentina had already been in an economic crisis prior to December. Its economy had been in a recession for three and a half years and the unemployment rate had risen to 20 percent. Since the interest rate it paid on its debt had risen above 20 percent, it was widely recognized that its situation was not sustainable if it continued to keep the currency pegged to the dollar and to make payments on its debt. The decision by the I.M.F. to end support for Argentina after these actions has further weakened the country's economy, but ending the dollar peg and defaulting on the debt did not create the current crisis.

Brazil

Brazil's Roller Coaster Market
Larry Rohter
New York Times, June 25, 2002, Page W1

http://www.nytimes.com/2002/06/25/business/worldbusiness/25BRAZ.html

This article reports on the uncertainty in financial markets about Brazil's future. At one point that article comments that "Brazil, in sharp contrast to Argentina, has been the fund's [I.M.F.] model pupil." Actually, through the mid-nineties, Argentina was touted as the I.M.F.'s model pupil, as it privatized many state-owned assets, including its Social Security system. The I.M.F. began to publicly distance itself from Argentina only when it was clear that it was heading for serious economic problems in the late nineties.

Chile

Chile Will Privatize a New Span of Its Noted Social Safety Net
Larry Rohter
New York Times, June 24, 2002, Page A4

http://www.nytimes.com/2002/06/24/international/americas/24CHIL.html

This article reports on the Chilean government's plans to privatize its unemployment compensation system. At one point, the article comments that "because of efficiencies from piggybacking the new system on Chile's existing system private pension program, the commission that the fund manager will earn is only 0.6 percent." The article does not identify the base on which the 0.6 percent administrative cost is being assessed. Without this information, it is impossible to determine whether this is a high or low administrative fee. It is also worth noting that, according to the World Bank, the administrative costs of Chile's privatized Social Security system are thirty times as high as the administrative cost of the publicly run system in the United States.

At one point the article quotes the director of the commission that established the plan as claiming that the system "will inject up to $3 billion in new investment capital into the Chilean economy over the next seven or eight years." If this is true, then it implies that workers will be assessed fees that are on average far larger than the unemployment benefits they receive. (If the benefits are equal to the amount being paid into the system, then there would be no additional money to inject into capital markets.) It is also not clear that this would be a net increase in funds available to capital markets, since the increased fees charged to workers may lead to some reduction in their savings.

The Budget Deficit and Debt

Bush Urges Increase in Debt Ceiling
Dan Morgan
Washington Post, June 26, 2002, Page A23

This article reports on the debate over raising the nation's debt ceiling. At one point it notes that each party intends to blame the other: "the GOP is using the budget impasse to paint Democrats as big spenders, Democrats say the need to raise the debt ceiling highlights what they term as the folly of Bush's 2001 tax cut legislation."

Actually, most of the switch from projected surpluses to deficits has been attributable to a large falloff in revenue as a result of the recession and the stock market collapse. The Congressional Budget Office's (CBO) January 2002 projections for the 2002 fiscal year show a shift from a surplus to deficit of $333 billion compared with the January 2001 projections. CBO attributes $60 billion dollars of this shift to legislated increases in spending, of which $33 billion were for national defense. It attributes $253 billion to lower projected revenues, but only $32 billion of the decline was attributable to tax cuts. The rest was the result of lower tax collections due to the recession and stock market collapse. It would have been helpful to include this information in the article, since most readers will not be able to assess the accuracy of the partisan claims.

House Raises the Debt Ceiling by $450 Billion to $6.4 Trillion to
Avoid Default
Richard W. Stevenson
New York Times, June 28, 2002, Page A21

http://www.nytimes.com/2002/06/28/politics/28DEBT.html

This article reports on the House's approval of a bill raising the nation's debt ceiling. It reports that "the national debt is split roughly equally between debt held by the public, the more than $3 trillion in outstanding Treasury bonds and public securities, and the government's obligation to pay future Social Security benefits." According to the Social Security trustees' report, the debt by the held trust fund is currently just under $1.4 trillion, less than one quarter of the national debt.

The Stock Market and the Economy

In Blossoming Scandal, Culprits Are Countless
Steven Pearlstein
Washington Post, June 28, 2002, Page A1

http://www.washingtonpost.com/wp-dyn/articles/A58584-2002Jun27.html

This article discusses some of the factors that laid the basis for the corporate scandals that are now being exposed. One of the experts cited in the article is Kevin A. Hassett, an economist at the American Enterprise Institute. Mr. Hassett is identified as the author of a new book, "Bubbleology." It would have been appropriate to note that Mr. Hassett was the co-author of an earlier book, "Dow 36,000," which argued that price to earnings ratios in the stock market would rise to 100 to 1. (They are currently about 20 to 1 and reached 35 to 1 at their peak in March 2000).

In identifying the factors that caused the bubble, it would have been worth noting that much of the economic reporting of recent years has included impossible assertions about returns in the stock market and/or profit growth. For example, an article in the Washington Post two years ago asserted that most analysts expected profit growth to average 10-15 percent annually over the next decade ("Has Wall St's Bear Market Hit Bottom?," by Steven Pearlstein, Washington Post, March 14, 2001, Page A1). This rate of profit growth would imply a massive redistribution away from wages and a sharp decline in workers' living standards. There has never been a redistribution of income even close to this size in the past.

Corporate Scandals Taking Toll on Markets
Steven Pearlstein
Washington Post, June 26, 2002, Page A1

http://www.washingtonpost.com/wp-dyn/articles/A44973-2002Jun25.html

This article reports on the impact that the recent rash of corporate accounting scandals has had on the stock market. It is worth noting that the stock market had been, and still is, hugely over-valued by historic measures. The price to earnings ratio is still over to 20 to 1, compared to a historic average of less than 15 to 1. Unless investors are willing to accept far lower returns on stocks than they have received in the past, the market will have to decline further, even if there are no additional scandals. This point is only noted in passing near the end of the article.

Welfare Reauthorization

Senate Panel Approves Welfare Bill
Amy Goldstein
Washington Post, June 27, 2002, Page A7

http://www.washingtonpost.com/wp-dyn/articles/A50879-2002Jun26.html

This article reports on the debate over the reauthorization of the welfare program for the next five years. It reports on the efforts of several Democratic senators to include additional funding for child support. It also reports the argument of Republicans opposed to increased funding that "states have ample money, since the number of families on welfare has plunged in half in recent years."

It would have been helpful to note that most states currently are facing large budget shortfalls as revenues have fallen far below projections (e.g. see "Falling Tax Revenue Trips Budget Alarms," Washington Post, June 27, 2002; Page A1). This information would have better enabled readers to assess the merits of the arguments presented.