Economic Reporting Review
June 17, 2002

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

OUTSTANDING STORIES OF THE WEEK

Whatever Happened to the Recovery Rally?
Floyd Norris
New York Times, June 14, 2002, Page C1

This article discusses the fact that stocks are performing far worse in this recovery than they did in prior recoveries. It suggests that the reason for the poor performance is that the price to earnings ratio of the market was already very high, so that even strong profit growth would not justify higher stock prices anytime soon.

Bermuda Move May Sound Good, But Investors Could Get Burned
David Cay Johnston
New York Times, June 13, 2002, Page C1

This article discusses the fact that shareholder protections are far weaker in Bermuda than in the United States. This means that shareholders in companies that legally move their headquarters to Bermuda in order to escape U.S. taxes may find themselves less able to control the companies management, and prevent improper actions.

Watch It: If You Cheat They'll Throw Money!
David Leonhardt
New York Times, June 9, 2002, Section 3 page 1

This article reports on provisions in the contracts of many top executives at major corporations, which make it almost impossible to fire them, even if they have severely harmed the company. In some cases, CEOs have been protected even when they broke the law. As a result, CEOs often get paid large sums to leave voluntarily.

Enthusiasm Waning in Congress For Tougher Post-Enron Controls
Stephen Labaton and Richard A Oppel Jr.

This article reports on the successful efforts by corporate lobbyists to derail any serious efforts to increase government regulation in the wake of a series of corporate scandals.


The Estate Tax

Terminate Estate Tax, Bush Urges Senators
Amy Goldstein
Washington Post, June 8, 2002, Page A8

Senate Votes Down Permanent Repeal Of Inheritance Taxes
Helen Dewar and Juliet Eilperin
Washington Post, June 13, 2002, Page A5

Effort to Repeal Estate Tax Ends in Senate Defeat
Carl Hulse
New York Times, June 13, 2002, page A1

Battle on Estate Tax: How Two Well-Organized Lobbies Sprang Into Action
Carl Hulse
New York Times, June 14, 2002, page A27

These articles report on the debate over the repeal of the estate tax, which the Republicans hope to make permanent. As a result of the tax bill passed last year, the estate tax is phased out as of 2010, but then returns to its 2001 rate in 2011. The Republicans have emphasized the absurdity of this pattern in arguing for the permanent repeal of the tax This view has been echoed in some reporting on this issue. For example, the Post article by Goldstein referred to this pattern as a "quirk in the law."

Actually, this pattern was a deliberate effort by the Republicans to conceal the true cost of last year's tax cut. Tax cuts are conventionally scored over a ten year horizon. By writing the law so that the estate tax returns in 2011, the tax cut was scored as costing significantly less, even though no one expected that Congress would actually allow the estate tax to return to its prior level after 2010.

These articles include frequent references to Republican claims that the estate tax destroys family farms and other family businesses. In fact, because of the high amount that is currently exempt from taxation altogether ($1 million for an individual, $2 million for a couple) it is virtually inconceivable that anyone would lose a family business because of their liabilities under the estate tax. (The law also provides options for stretching out payments for as long as ten years for family-owned farms and businesses.) When asked for an example of a family that had lost its farm because of the estate tax, the National Farm Bureau was unable to produce a single example (see "Tale of Lost Farms Reflects Muddle of Estate Tax Debate," by David Cay Johnston, New York Times, April 8, 2001, Section 1 page 1).

These articles also include references to claims by Democrats that repealing the estate tax will take money away from Social Security. Actually, the repeal of the estate tax will have no effect on Social Security. The Social Security trust fund will have the exact same assets regardless of whether or not the estate tax is repealed. Since many people are confused on this point, it would be appropriate to point out that these assertions by Congressional Democrats are not true.


May Employment Report

Jobless Rate Declined Slightly Last Month
John M. Berry
Washington Post, June 8, 2002, Page A1

Jobless Rate Fell 0.2 Point Last Month
Daniel Altman
New York Times, June 8, 2002, page B1

These articles report on the Labor Department's release of data on employment for May. The May employment report included benchmark revisions that showed the number of jobs lost in the recession had been underestimated by more than 500,000. This indicates that the recession was considerably more severe than had been shown in the data previously released. This fact, which is arguably he most significant piece of news contained in the report, was not reported at all in the Times article. It was mentioned briefly in the Post article.


Japan

Japan Set to Press Ahead On Privatizing Railways
Ken Belson
New York Times, June 8, 2002, page B2

This article reports on Japan's plans to privatize portions of its railroad system, as well as several other state-owned enterprises. The article repeatedly emphasizes Japan's indebtedness, reporting that "Japan's fiscal position is so dire that a pile of 10,000-yen notes [approximately equal to an $80 bill] sufficient to repay the national debt would be 1,100 times the size of Mount Fuji, the country's tallest peak at 12388 feet."

The relative size of a stack of bills and Mount Fuji is not a meaningful measure of the burden of the debt. While Japan's debt has been rising rapidly, because the interest rate it pays is so low (in spite of recent downgradings by bond rating agencies), its annual interest burden, measured as a share of GDP, is still far lower than that of the United States. If the interest rate on its debt remains this low, it will be many years before the debt poses as large a burden to Japan's government, as our national debt does to the United States at present. (The burden currently posed by the U.S. debt is far lower than it was ten years ago.)


The Stock Market

Many Signs of a Recovery, Except Among Investors
Jonathan Fuerbringer
New York Times, June 9, 2002, Section 3 page 6

This article discusses the stock market's recent performance. The article notes that the market has been losing value, even though the economy appears to be recovering. Remarkably, the article never discusses price-to-earnings ratios. The current priceto earnings-ratio in the market is more than 22 to 1. The historic ratio has been less than 15 to 1. The Congressional Budget Office projects that real (inflation adjusted) profits will rise at the rate of 1.0 percent annually over the course of the decade, far below the historic average of 3.5 percent. This information suggests hat the market is likely to continue to fall or stagnate, even if the current recovery continues. Ultimately, it is profits, not the state of the economy, that determine the value of the stock market.


Increasing the Debt Ceiling

Senate Backs Increase in Debt Limit
Associated Press
Washington Post, June 12, 2002, Page A6

Senate Votes To Increase Debt Ceiling
Richard W. Stevenson
New York Times, June 12, 2002, Page A17

These articles report on the Senate's approval of a bill that would increase the nation's borrowing limit. Both articles report partisan claims that the other party is to blame for increased indebtedness. Neither article provides readers with information that would allow them to assess these claims.

According to the Times article, the Republicans blamed the rise in the debt on the increasing cost of Social Security. Democrats blamed the Bush tax cut. It is easy to show that both claims are not true. In January of 2001, the Congressional Budget Office (CBO) was projecting large surpluses, even though Social Security costs were expected to rise. Therefore, the fact that the cost of Social Security has largely followed projections cannot explain the deficit.

While the tax cuts have increased the size of the deficit, they are not the major cause. The government lost approximately $40 billion in revenue in 2001 as a result of the tax cuts and will lose another $60 billion in 2002. However, the downward shift from the CBO projections has been close to $300 billion for both years. The major cause of this shift has been a reduction in tax revenue due to both the recession and the decline in the stock market. The government would still be running a large deficit even if the Bush tax cut had not been approved.

The Post article refers to the increase in the debt as a "problem." It is worth noting that it is not necessarily a problem from an economic point of view. If the debt had not increased in the recession, the downturn would have been far worse. Also, the government's current level of borrowing could be sustained indefinitely, because the debt-to-GDP ratio is not growing.


May Retail Sales

Bad Weather Blamed For May Sales Drop
John M. Berry
Washington Post, June 14, 2002, Page E1

This article reports on new data from the Commerce Department, which showed that retails sales fell 0.9 percent in May compared with April. The article quotes several market analysts who attributed this drop off to bad weather. While bad weather is one possible explanation, it is also possible that consumers are spending less because they are less optimistic about their current financial situation. This view is supported by the most recent data from the Michigan Survey of Consumer Confidence, which was released the following day. The index for May fell sharply.

It is also worth noting that the stock market apparently did not attribute the decline in sales to the weather, as Wal-Mart's stock fell 3.1 percent after the release of the data on retail sales (see "Wal-Mart Leads Stock Decline After News of Drop in Retail Sales," Bloomberg News, 6-14-02; E3). If the report simply reflected unusually bad weather in May, rather than economic weakness, there is no reason that Wal-Mart's stock should have dropped since future profits would not be affected.


World Bank Grants and Loans

G-7 Nations Reach Compromise on AID to Poorest Countries
Paul Blustein
Washington Post, June 14, 2002, Page E3

This article reports on a compromise agreed to by G-7 finance ministers over the percentage of World Bank assistance to the world's poorest countries, which should take the form of outright grants, instead of loans. At one point the article reports the position of several European countries, that shifting aid from loans to grants could undermine the finances of the World Bank, and "thereby deprive poor countries of a vital source of assistance." Since the repayment of the loans to the World Bank is coming directly from the world's poorest countries, changing loans to grants would not reduce the net flow of money to these countries. However, this change will reduce the amount of money that flows through the World Bank and is subject to its control.


Brazil

Brazil Tries to Fight 'Wave of Anxiety' on Economy
Larry Rohter
New York Times, June 14, 2002, Page W1

This article reports on Brazil's efforts to cope with concerns in financial markets about the country's future prospects. At one point, the article contrasts the I.M.F.'s support for Brazil in its current path, with the I.M.F.'s contentious relationship with Argentina over the last six months: "but Brazil has consistently followed the fund's guidelines, meaning that the fund's own credibility would be damaged if the situation here worsened."

Actually Argentina was considered a model nation by the I.M.F. for most of the nineties. It was widely praised for its low inflation and privatization program. While the subsequent collapse of its economy has hurt the I.M.F.'s credibility to some extent, the I.M.F. now claims that it was against many of the policies that it supported with billions of dollars in Argentina, such as linking its currency to the dollar. Since the media has largely accepted these claims, relatively few people outside of Argentina recognize the damage caused by the I.M.F.'s policies there.

At one point the article reports that a top aide to Brazilian Presidential candidate Luiz Inacio da Silva called for breaking off "free trade" negotiations with the United States. The United States agenda in these talks was not necessarily on of free trade. One of its main agenda items was actually increasing protections for pharmaceutical industry patents and copyrights held by the entertainment and software industry. It would be more appropriate to describe the negotiations as being simply about "trade" or "commercial" arrangements.