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Economic Reporting Review OUTSTANDING STORIES OF THE WEEK Utah Oil and Gas Leases Stir Criticism This article presents the findings of a report by the Environmental
Working Group that the Bush Administration has been leasing dozens of land
tracks for oil and gas drilling that had previously been designated as
wildness areas. Many of the leasers were major campaign contributors,
according to the study. Call In the Feds. Uh Maybe Not This article reports on how financial firms can sometimes evade
effective regulation, due to conflicts in authority between state and
federal regulators. It focuses on the failure of Metropolitan Mortgage and
Securities, a financial services firm based in Spokane, Washington that
recently went bankrupt. Tax Return Projections Income Tax Refunds Up, But Less Than Expected This article reports on early data from the Internal Revenue Service on the size of tax refunds. The article reports that tax refunds are running on slightly higher than they were last year, an average increase of $97 for the forty million returns filed by February 20. The article reports that this is "a figure far lower than economists had estimated last year." Actually some economists had pointed out that tax refunds were likely
to be approximately the same size this year as last year. While the lower
tax rates would lead to higher refunds, this effect would be largely
offset by the higher capital gains tax liability that many stockholders
incurred in 2003, due to the fact that the stock market showed substantial
gains for the first time since 1999 (e.g. see ERR, January 20, 2004 [http://www.cepr.net/Economic_Reporting_Review/2004_01_20.htm]).
The effect of the 2003 run-up in stock prices on capital gains tax
liability, and therefore the size of 2004 tax refunds, should have been
apparent to any competent economic analyst. Budget Projections CBO Disputes Bush Promise To Cut Deficit in Half in 5 Years Budget Office Predicts Deficit Over 10 Years: $2.75 Trillion These articles report on a new set of budget projections from the Congressional Budget Office (CBO). The article notes that the CBO baseline assumes that discretionary spending (items such as defense spending, transportation, and education funding) will keep pace with inflation. In the past discretionary spending has largely kept pace with overall GDP growth, keeping its share of GDP roughly constant. If discretionary spending keeps pace with GDP growth over the next decade it would add more than $1.5 trillion to these deficit projections. It is also important to note that the CBO projections do not take into
account the impact that sustained current account deficits will have on
the budget. The current account deficit is financed by selling U.S.
financial assets (e.g. stocks, corporate bonds, government bonds) to
foreign investors. While the interest and dividends paid on these assets
are generally taxable when they are owned by U.S. nationals, these
payments are usually not subject to U.S. taxes when the assets are owned
by foreigners. The increased foreign holdings of U.S. assets over the next
decade is likely to add close to $600 billion to these deficit projections
(http://www.cepr.net/publications/Current_Account_Deficit.htm). Trade In N.Y. Debate, It's No More Mr. Nice Guys In Edwards, an Echo of Clinton These articles discuss the race for the Democratic presidential nomination. Both articles include references to "free trade." In fact, the article by Harris refers to the policies promoted by President Clinton as "unabashed free trade." This is inaccurate. President Clinton was a major supporter of protectionist measures. A major goal of the Clinton administration's trade policy was to spread patent and copyright protection throughout the world and to make the rules government both more stringent. The effect of these forms of protection is to raise the price of protected items, such as prescription drugs or DVDs, by several hundred percent above the free market price. The Clinton administration also supported measures to protect doctors' wages in the United States by tightening quotas and imposing other barriers to foreign educated doctors. The Clinton administration generally only supported more liberalized
trade when the effect was to place blue-collar workers in the United
States in competition with low paid workers in the developing world. In
most other areas of trade policy it often pursued protectionist paths. Social Security and Medicare Fearing that a Gap Will Become a Chasm This article discusses the long-term budget problems facing the country due to the projected growth in the cost of Social Security and Medicare. Since the article does not put the numbers mentioned in any context, it is likely to leave many readers confused. For example, the article cites the estimate of a recent study that the long-term deficit facing the country is equal to $44 trillion. Only a tiny minority of readers would be able to assess the importance of this figure. In fact, the article itself described the $44 trillion number as "almost unthinkable." However, if the article placed the projected deficit in relation to projected income, the 6.5 percent figure would be readily understandable to most readers. In other words, according to this study, the projected long-term deficit could be balanced by raising taxes by an amount equal to 6.5 percent of income (see "The Forty Four Trillion Dollar Deficit Scare [http://www.cepr.net/Deficit_Scare.htm]). Furthermore, the bulk of this projected shortfall is attributable to the assumption that per capita health care costs in the United States (adjusted for demographics) continue to rise far more rapidly than per capita GDP. If per capita health care costs only rose for demographic reasons, and otherwise kept pace with per capita GDP growth, the deficit would be equal to 1.5 percent of GDP. Since every other wealthy country has been able to largely stabilize its health care costs in this way, if the U.S. proves unable to do so, it can largely avoid this projected deficit problem simply by contracting to use the more efficient health care systems of other countries (see "Medicare Plus Choice: The Solution to the Long-Run Budget Problem [http://www.cepr.net/publications/medicare_choice_plus.htm]). While it would be far more efficient to fix the U.S. health care system, if this proves politically impossible, foreign trade offers an easy alternative to the disaster scenario described in this article. The article also sets up an inaccurate contrast between what it describes as the "theory" that the trust funds are building up large surpluses with "the practice" that those surpluses are being spent. There is no theory governing the Social Security and Medicare trust funds that requires that they be held in reserve, and the article presents no source that implies such a theory exists. The theory (or law) governing these two trust funds requires that the surpluses be used to purchase government bonds - exactly what is happening in practice. Under the law, the bonds held by these two trust funds must be repaid from general revenue (personal and corporate income taxes), just like any other bonds issued by the U.S. government. At one point, the article presents a quote from Boston University professor Lawrence Kotlikoff, in which he asserts that "suggesting that some minor adjustments to Social Security will solve the problem is doing a disservice." In fact, this is precisely what the Social Security trustees reports indicate - the adjustments needed to balance the program for the next seventy five years are no large than the adjustments that were made in each of the decades from the fifties through the eighties. It would have been helpful if it relied on a more balanced group of
experts - the only economists cited in the article have been avid
promoters of the view that the Social Security and Medicare will bankrupt
the country. Trade and the Dollar How a Stronger Yuan Could Hurt the U.S. This article discusses the impact that a strengthening of the Chinese currency, the yuan, is likely to have on the U.S. economy. At one point it comments that the U.S. current account deficit cannot be closed by the devaluation of the dollar (and revaluation of the yuan) alone, arguing that the problem is that the U.S. does not save enough. It is important to recognize that the savings rate is in part
determined by the current account deficit, especially when the United
States has large amounts of excess capacity, as is the case at present. If
the dollar fell against the yuan and other currencies, it would give a
boost to U.S. exports and cause customers in the United States to
substitute away from more expensive imports to domestically produced
goods. This would lead to increased output and employment. Higher levels
of employment would raise savings, as many people who are currently
without jobs would now be able to save from their wages. Higher levels of
employment would also lead to more tax revenues at all levels of
government, thereby increasing public savings. While the effect of higher
output on savings may not be enough to fully balance the current account
deficit (if investment exceeds national saving, then it must be the case
that the shortfall is made up by foreign borrowing), the increase in
savings brought on by a decline in the dollar may take the economy far in
this direction. China Like Japan in the 1980's, China Poses Big Economic Challenge This article discusses China's recent economic growth. At one point it
describes China's economy as being "one-third the size of
Japan's." Actually, using a purchasing power parity measure of GDP,
which assesses the output of each country at a standard set of prices,
China's GDP is twice as large as Japan's. Hungary Hungary Eager and Uneasy Over New Status This article discusses the economic consequences of Hungary's entry to the European Union, along with nine other countries, at the beginning of May. At one point it describes it a as a paradox that Hungary hopes to raise its living standards by joining the EU, but that its economy had been growing in part because of its relatively cheap labor. It is difficult to see any paradox in this situation. Most governments have as a goal (at least officially) raising the living standards of their people. They are all limited in their ability to this by domestic and international constraints. Presumably, Hungary would attempt to achieve gains in living standards (which would mean higher wages) as rapidly as gains in productivity will allow. The article includes a comment Heather Grabbe, the deputy director of the Center for European Reform, asserting that China does not pose the same threat to jobs in Europe as it does in the United States because "the European Union has enjoyed little growth, in employment or anything else." The article does not explain why low job growth would make the EU less concerned about losing jobs to China. Typically workers are more concerned about losing their jobs in an environment of weak job growth than strong job growth. It is also worth noting that that the EU has had a substantially better
jobs performance than the United States over the last three years. While
the EU's job growth has been weak, the U.S. has lost more than 2 million
jobs over this period. Debt Nation's Debt Grew at Rapid Pace in 2003 This article reports on new data from the Federal Reserve Board on debt and financial flows in 2003. It notes that overall debt, and especially consumer debt, grew at their fastest pace since the mid-eighties. It is worth noting that the inflation rate in the mid-eighties was approximately 3.5 percent, while it was less than 2.0 percent in 2003. In real terms, the rate of debt growth in 2003 was the fastest on record.
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