Economic Reporting Review By Dean Baker June 2

Economic Reporting Review
By Dean Baker
June 2, 2003

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OUTSTANDING STORIES OF THE WEEK

Love the Worker, Not the Union, A Store Says As Some Organize Aaron Nathans New York Times, May 24, 2003, Page B1 http://query.nytimes.com/gst/abstract.html?res=F10E17FD3F550C778EDDAC0894DB404482 This article reports on organizing efforts, and the management's response, at Whole Foods Market. Labor-management relations rarely receive attention in the media, so this article provides valuable insight into an important topic. Water Tap Often Shut to South Africa's Poor Ginger Thompson New York Times, May 29, 2003, Page A1 http://www.nytimes.com/2003/05/29/international/africa/29WATE.html This article examines the changes in water provision in South Africa since the end of Apartheid. It notes the spread of privatized water systems, which have often priced water out of the reach of much of the population. This is an interesting examination of an issue crucial to the lives of hundreds of millions of people in the developing world. Court Papers Suggest Scale of Drug's Use Melody Petersen New York Times, May 30, 2003, Page C1 http://www.nytimes.com/2003/05/30/business/30DRUG.html This article reports on evidence in a court case on the extent to which the pharmaceutical company Warner-Lambert promoted its drug Neurontin for uses not authorized by the Food and Drug Administration. According to article, the evidence shows that dozens of doctors were paid by the company to prescribe the drug for unauthorized uses and then to encourage other doctors to follow their lead. This is the sort of abuse that standard economic theory predicts would result from a market distortion like patent protection. It is important that such abuses are well-documented. _______________________________________________________________________________________________ Bush Tax Cut A Payoff Now, Paying the Price Later Jonathan Weisman Washington Post, May 24, 2003, Page A1 http://www.washingtonpost.com/wp-dyn/articles/A33186-2003May23.html Congress Passes $350 Billion Tax Cut Bill Jonathan Weisman Washington Post, May 24, 2003, Page A1 http://www.washingtonpost.com/wp-dyn/articles/A33202-2003May23.html Bush's Fortunes Tied to Economy's Dan Balz Washington Post, May 24, 2003, Page A7 http://www.washingtonpost.com/wp-dyn/articles/A32932-2003May23.html With Tax Cut Bill Passed, Republicans Call for More David Firestone New York Times, May 24, 2003, Page A11 http://www.nytimes.com/2003/05/24/politics/24TAX.html?ex=1054699200&en=47b234851136cd39&ei=5070 Republicans Explain an About-Face John Tierney New York Times, May 24, 2003, Page A11 http://www.nytimes.com/2003/05/24/politics/24REPU.html?ex=1054699200&en=af7577738931a4a1&ei=5070 These articles report on congressional approval of President Bush's tax cut. There are many questionable assertions in these articles. For example, the first article by Weisman begins by describing the tax cut as "a gamble over which economic force will prove more significant: a rise in the federal deficit, or an investment boom that could create a million new jobs." While the tax cuts could have a modest positive impact on investment by raising stock prices, it is almost inconceivable that it would lead to anything resembling a "boom." The impact on stock prices islikely to be fairly modest-less than a 10 percent increase-and stock prices have at best a minimal impact on investment. The vast majority of investment is financed by borrowing or retained earnings, not issues of new stock shares. The article does not identify any economist who is predicting an investment boom based on the tax cut. The projections of up to a million new jobs are based primarily on expected increases in consumption. This article also notes that the cuts in the capital gains and dividend taxes will encourage firms to either buy back their own stock-thereby driving up share prices-or paying out larger dividends. It asserts that "either strategy would boost the economy." This is not at all clear. If companies feel more pressure to pay dividends, then they may cut back on investment, which is primarily financed through retained earnings. Unless shareholders save one hundred percent of the additional money paid out as dividends, or their increased capital gains due to share buybacks, then the result will be a decline in national savings. The corresponding increase in consumption may be helpful in giving the economy a short-term lift, but the resulting drop in investment will mean slower growth in the long-run. The second article by Weisman describes the tax cuts as an "unprecedented shift of taxation away from investment income." Actually, this cut in taxes on investment income is not very different from past actions of Congress. For example, in 1978 Congress lowered the top rate of taxation on capital gains from 35 percent to 28 percent. In 1995, it voted to lower the top tax rate on capital gains from 28 percent to 20 percent. Investors are a powerful interest group and have often managed to lobby Congress successfully for special treatment. The article by Balz asserts that Democrats running in next year's elections "will have to advocate raising taxes to find the money to fund the domestic programs they favor." This is not clear. Statements from politicians are often given very little scrutiny by the media. There is no obvious reason to assume that Democratic candidates will not be able to say anything they want about their budget proposals-whether or not it makes sense-without inconsistencies being a serious issue. These articles include numerous assertions about what the proponents of the tax cut believe will be its economic benefits. For example, the first article by Weisman asserts that proponents "believe the tax cuts will trigger a wave of new investment." The articles do not indicate how they determined the actual beliefs of these politicians. While it is possible that tax cut proponents actually hold this view, it is also possible that they simply want to give more money to a powerful interest group. The Balz article includes an assertion that the public does not understand how the country fell into this period of recession and slow growth. It is very clear that the cause of the recession was the collapse of the stock market bubble, which led to a falloff in investment of approximately $100 billion annually and a smaller falloff in consumption as a result of the loss of stock wealth. If the public is actually not aware of this fact, then it is probably in part attributable to the quality of economic reporting. The Tierney article includes a quote from Bruce Bartlett, a conservative economist, comparing deficits attributable to tax cuts, as opposed to a deficit attributable to spending. Mr. Bartlett claimed that "there's a big difference between a deficit resulting from a rise in spending and a deficit resulting from a cut in taxes. One takes resources out of the economy, the other puts resources back in." It would have been appropriate to point out that this is not true. Additional spending, for example on education, research and development, and infrastructure, put resources into the economy. There is no logically consistent way in which it can be claimed that tax cuts put money into the economy and spending pulls it out. On Taxes, What's The Fairest of Them All? Daniel Altman New York Times, May 24, 2003, Section 3 page 4 http://www.nytimes.com/2003/05/25/business/yourmoney/25VIEW.html?ex=1054699200&en=320011ddf57c83ce&ei=5070 This article examines some of the ways in which the Bush tax cut can be viewed as increasing economic efficiency. The article asserts that the tax cut "will take most tax considerations out of a company's decision to sell stocks or bonds." It is not clear that the tax cut will have much effect on this decision at all. Companies will still be able to deduct the interest paid on bonds from their taxable profits, while the dividends paid to shareholders will not be deductible. In this sense a profit-maximizing corporation has exactly the same tradeoffs after the tax cut was passed as before. Even the situation of most corporate shareholders was not changed by the tax cut. Most corporate stock is held either by institutions such as pension funds and universities and private foundations or in retirement accounts in which dividend income is still subject to taxation as normal income. The article implies that eliminating the tax on corporate income is a step toward greater economic efficiency. Corporate status is a privilege of enormous benefit that the government makes available to its citizens. (The most important benefit is limited liability, which gives the corporation the right to damage individuals-for example by polluting their drinking water-while granting its owners legal protection against the claims of the people who were harmed.) The benefits associated with corporate status are demonstrated by the fact that shareholders willingly pay the corporate income tax, rather than form partnerships, which are not subject to an income tax. The elimination of the corporate income tax would effectively mean that the government is giving away the protections of corporate status at no cost. The article also does not consider the ways in which the differential treatment of dividend and capital gains income will give individuals incentives to game the tax code. It is reasonable to expect that top-level executives will restructure their pay packages so that more of their compensation can appear in the form of dividends and capital gains, and thereby avoid paying a large part of their taxes. Health Care Universal Health Care Gets Boost Amy Goldstein and Dan Balz Washington Post, May 26, 2003, Page A1 http://www.washingtonpost.com/wp-dyn/articles/A39078-2003May25.html This article discusses some of the health care proposals put forward by the some of the Democratic presidential candidates. The article discusses these proposals as being almost completely motivated by a desire to appeal to key constituencies in the Democratic Party primaries. The attribution of political motives for backing health care reform is in contrast to reporting on tax cuts-which routinely referred to proponents beliefs about the economy or philosophy about society (e.g. see the articles noted above). The article presents no reason for believing that Democratic politicians are more motivated by political concerns than Republican politicians. The article also includes numerous comments implying that the health care proposals are irresponsible, in the sense that they make commitments that are unaffordable, repeatedly emphasizing their cost to the public sector. The article includes no discussion of private sector health care costs-except an incorrect assertion that Senator John Kerry "is the only Democrat to make cost containment a central element of his plan." (The plan proposed by Representative Dennis Kucinch, modeled after the universal systems in Canada, Denmark, Sweden and several other countries, has a solid record of success in controlling costs.) Ignoring private sector costs makes it impossible to seriously discuss health care reform proposals, since the path of these costs determine both the willingness of the public to support substantial changes and the ability of the economy to sustain the current system. For example, the current projections from the Center for Medicare and Medicaid Services show health care costs, measured as a share of GDP, rising by nearly 3.0 percentage points over the next decade. This implies that if the current system is left unchanged, an average family of four will be paying approximately $6,000 more (in 2003 dollars) in health care costs in 2013, compared to a situation in which the rise in health care costs were held to the rate of economic growth. The political appeal of a restructuring of the health care system might be much greater if the public were aware of the sharp decline in living standards that health care experts are projecting would result from leaving the current system in place. This article only mentions the health care plan put forward by Dennis Kucinch once, and provides none of its details. This is the only plan that is fully elaborated, and has a track record in the real world that can be examined. Limits on Legal Fees In 13 States, a Push to Limit Lawyers Fees Adam Liptak New York Times, May 26, 2003, Page A1 http://www.nytimes.com/2003/05/26/national/26FEES.html This article reports on proposed legislation being considered in 13 states which would limit the contingency fees that plaintiffs' lawyers could charge to 10 percent, or less, of the final settlement. The article does not point out that such a restriction is effectively a form of price control, and would constitute and extraordinary interference with individuals' freedom of contract. It also fails to note the irony that this government intervention is being pushed by conservative groups, such as the Heritage Foundation. The article also does not point out the likely implications of such a government-imposed price cap. There would continue to be no restriction on the amount of money that defendants, such as large corporations, could spend on a case. This means that any corporation with sufficient assets could ensure that plaintiffs' lawyers would lose money by taking a case, simply by filing endless motions and appeals. These legal actions would require responses from plaintiffs' lawyers, and could easily drag out even the most clear-cut case for three to five years. Such tactics could ensure that plaintiffs' lawyers lose money even if they win a case. If lawyers could not anticipate earning money on a case, then they would not take it. In other words, it is reasonable to expect that this rule would make it impossible for the victims of corporate wrongdoing to collect damages, unless they are so rich that they could afford to pay hundreds of thousands of dollars in attorney's fees upfront. (The proposed legislation does not limit the fees that a client pays a lawyer, only the amount that can be paid on a contingency basis. This means that wealthy clients need not be affected by the price cap.) Genetically Modified Foods Battle Over Biotechnology Intensifies Trade War Elizabeth Becker with David Barboza New York Times, May 29, 2003, Page C1 http://www.nytimes.com/2003/05/29/business/29BIOT.html This article reports on efforts by the Bush administration to force the European Union to be more open to genetically modified foods. At one point the article presents the assessment of agricultural officials that U.S. farmers may have lost more than $1 billion in sales over the last five years because of Europe's hostility to genetically modified foods. Later, the article notes the biotech industry's hostility to labeling requirements, quoting a spokesperson that it would be "the equivalent of putting a skull and crossbones on the packages." The implication of the spokesperson's statement is that Europeans do not want to buy biotech foods-the industry will only be able to sell its products in Europe if it can pass them off as conventionally grown foods. If this is true, then the statement that U.S. farmers lost sales is inaccurate. The only sales they would have had in Europe would have taken place if they were allowed to deceive European consumers about the nature of their product. This is comparable to a manufacturer of counterfeit Gucci handbags complaining about lost sales because they are unable to sell them with the "Gucci" label.