Economic Reporting Review
March 25, 2002

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

OUTSTANDING STORIES OF THE WEEK

Prosperity Feeds Housing Pinch
Peter Whoriskey
Washington Post, March 19, 2002, Page A1

This article reports on the impact that rising housing prices have had on moderate income families in the Washington, DC metropolitan area. The article helps to demonstrate how an increase in stock prices is redistributive, rather than a pure gain. People made wealthier as a result of their stockholdings raise the price of housing for everyone, since they are prepared to pay more to buy or rent.


Chinese Oil Country Simmers as Workers Protest Cost-Cutting
John Pomfret
Washington Post, March 17, 2002, Page A24

Leaner Factories, Fewer Workers Bring More Labor Unrest to China
Erik Eckholm
New York Times, March 19, 2002, page A1

These articles discuss growing unrest among workers in China. The proximate cause of this unrest is job loss related to China's removal of support for industries, as required under the terms of its admission to the WTO. According to the articles, the government is not meeting its promises to provide laid off workers with severance pay.


Steel Tariffs

Europe Presses U.S. on Steel Tariffs
Elizabeth Olson
New York Times, March 20, 2002, Page W1

This article discusses the European Union's response to the tariffs that President Bush imposed on imported steel. At one point, it comments that in addition to the loss of export markets in the United States, "there will be a painful indirect effect as cheap steel diverted from America floods Europe instead."

Many of the articles that reported on the imposition of steel tariffs included analysis from economists, who claimed that the steel tariffs would hurt the U.S. economy. These economists argued that higher steel prices would raise the price of cars, appliances, and other goods that use steel. They claimed that the tariffs would therefore lead to a net loss of jobs, even if they ended up saving some jobs in the steel industry.

If these economists were correct, then the influx of low priced steel into Europe will not be "painful." Rather, it should be a boon to Europe's economy, since it will be reflected in lower prices for cars, appliances, and other goods that use steel.

In reality the secondary effect of steel prices on other products is likely to be very small, since steel accounts for a relatively small percentage of total costs. But if the economic effect of higher steel prices in the U.S. is negative, then the effect of lower steel prices in Europe must be positive.


The Fed and the Recession

Fed Holds Interest Rates Steady
John M. Berry
Washington Post, March 19, 2002, Page A1

Fed Leaves Rates Steady; Hints Increases May Be Coming
Richard W. Stevenson
New York Times, March 20, 2002, Page C1

These articles report on the Federal Reserve Board's decision to adopt a neutral stance toward future interest rate changes. Both articles include assertions that the rebuilding of inventories is likely to lead to a substantial boost to growth in the current quarter. The Post article even quantifies this impact, noting that if inventories just held constant in the first quarter (rather than shrinking), it would add 4.5 percentage points to GDP growth. (The same point was made in another Post article this week, "Economy Shows More Strength," by John M. Berry, Washington Post, March 16, 2002, Page E1.)

While this is true as an accounting identity, approximately half of the goods that will appear in inventories are imported. These means that the rebuilding of inventories will be associated with a large surge in imports. Imports are subtracted from GDP, which means that the net effect of the inventory increase will be approximately half of the size indicated in the Post article.

The data for the January trade deficit indicates that such a surge in imports is occurring, with imports rising by 3.6 percent from December's level ("Trade Deficit Sharply Wider In January," Bloomberg News, New York Times, March 20, 2002, Page C3). If the trade deficit remains at its January level for the whole quarter, it will reduce reported GDP growth for the first quarter by approximately 1.1 percentage points. If it continues to rise in February and March at the same rate relative to the fourth quarter average, it will reduce reported GDP growth by approximately 2.3 percentage points.

The trade deficit data for January was only reported in a brief (200 word) wire service story on the third page of the business section in the Times and was not mentioned anywhere in the Post. In addition to affecting the strength of the economic recovery, the trade deficit also affects the future wealth of the U.S. economy, since it indicates the growth of the foreign debt. Currently foreign debt is growing at the rate of more than $400 billion a year. This will have far more impact on the nation's future prosperity, and its ability to afford the retirement of the baby boom generation, than the relatively small differences in the budget proposals put forward by Republicans and Democrats. Yet, both papers give considerable attention to projections of budget deficits or surpluses, even while they almost completely ignore the trade deficit.

Each article cites two sources, both of whom are associated with financial firms. (Bruce Steinberg, of Merrill Lynch, was cited in both articles.) The Fed's interest rate decisions affect the whole economy, most importantly through their impact on the unemployment rate. Therefore it would be appropriate to rely on a wider range of sources, presenting views from economists in government, academia, labor unions, or at least non-financial firms.


Venezuelan Oil

Labor Strife of a Different Collar
Juan Forero
New York Times, March 19, 2002, Page W1

This article reports on the discontent among executives at Venezuela's state-owned oil company over the government's interference in the running of the company. The article notes the decision of Venezuela's President, Hugo Chavez, to cut production in support of OPEC. It then adds, "many of the company's managers disagree with this stance, saying instead that Venezuela should have taken advantage of Washington's desire to curtail American reliance on Middle East crude."

Regardless of the desires of Washington politicians, there are no subsidies for buying non-Middle East oil. Unless Venezuela provided oil at a lower cost than Middle East producers, it could not expect to gain market share at their expense. If Venezuela refused to support OPEC, it could easily lead to a breakdown of the cartel, in which case oil prices could drop by close to 50 percent from current levels. In that event, Venezuela would almost certainly get less profit from its oil sales, even if it doubled its output. These facts should have been included in this article.


Russia and OPEC

Putting OPEC Over a Barrel
Sharon LaFraniere
Washington Post, March 16, 2002, Page E1

This article discusses Russia's growing importance as a supplier of oil in world markets. It claims that Russia has increased production -- and spurred OPEC's calls for restraining output -- as part of an economic development strategy that depends on revenue from oil exports.

It is questionable whether Russia's oil policy can be viewed as part of a coherent development strategy. According to this article, it reluctantly agreed to cut exports for a brief period by 150,000 barrels a day, but it will not do so again. This cut is approximately 3 percent of Russia's exports. This means that if cooperating with OPEC helped to raise the price of oil by just 3 percent (approximately 75 cents per barrel), then Russia would actually get more revenue by producing less oil.

The article also goes on to discuss Russia's willingness to endure a price war with OPEC in which the price of oil drops to $14.50 barrel. If prices were to stay at this level for a year (as they did through much of 1999), before eventually returning to current levels, it would take Russia more than ten years to make up the lost revenue with its additional output of 150,000 per barrel.

Almost any plausible calculation would suggest that Russia stands far more to gain economically by cooperating with OPEC, rather than fighting with it. This is the reason that even non-OPEC members such as Norway and Mexico have gone along with recent plans to restrict production.

The United States has indicated an interest in seeing low world oil prices. It is possible that Russia's efforts to increase oil production are motivated more by a political concern to please the Bush Administration than by its direct economic interests.


Foreign Aid

Bush Shift on Foreign Aid Strengthens U.S. Position at Summit
Paul Blustein
Washington Post, March 16, 2002, Page A20

On the Eve Of Latin Trip, Bush Ties Aid To Reforms
Elisabeth Bumiller
New York Times, March 20, 2002, Page A7

Losing Faith: Globalization Proves Disappointing
Joseph Kahn
New York Times, March 20, 2002, Page A6

These articles discuss the summit on global poverty in Monterrey, Mexico. The Post article asserts that President Bush is likely to be warmly received based on his decision to increase development aid by a total of $5 billion over the years 2004-2006.

The article refers to this as a 14 percent increase. It would be more appropriate to adjust for projected inflation, which would reduce the size of the proposed increase to 7 percent. Measured as a share of GDP, the increase is large enough to keep U.S. foreign aid approximately constant at 0.1 percent of GDP, about one-fourth the level of aid provided by European nations.

The Times articles both refer to a revised proposal by the Bush administration, which would increase aid by a total of $10 billion over the years 2004-2006. The article by Kahn describes this as a 50 percent increase in 2006. The article by Bumiller asserts that under the proposal, "the United States will double its foreign aid budget from $10 to $20 billion." The claim that annual aid will be doubled to $20 billion a year under the proposal is a mistake. Adjusting for inflation, the aid level would be approximately 36 percent higher than its current level, if it reaches $15 billion in 2006.

The article by Kahn characterizes the United States as one of the few nations "to have benefited unambiguously from the trend toward open markets worldwide," citing the large capital inflows, which have allowed the U.S. to run large trade deficits. It is not clear that this is an unambiguous benefit. The trade deficit has cost the United States more than 1 million manufacturing jobs. Since these jobs are a
source of relatively high paying employment for workers without college degrees (approximately 75 percent of the work force), the loss of manufacturing jobs has been an important factor depressing the wages of these workers.

In addition, the benefits of cheap imports will have a cost in the future, in much the same way as running a budget deficit leads to future costs. In future years, the United States will be able to import less because of the foreign debt that it is currently accumulating.


European Growth and Stagnation

EU Summit Ends With a Bang and a Whimper
T.R. Reid
Washington Post, March 17, 2002, Page A22

This article reports on the conclusion of an EU summit meeting that was devoted to Europe's efforts to pull ahead of the U.S. economically. At one point, the article discusses the factors that economists cite as slowing European growth. It includes high taxes to fund medical benefits. While all the EU nations provide universal health care coverage to their citizens, due to the greater efficiency of their health care systems, government expenditures for health care in the EU, measured as a share of GDP, are actually lower than in the United States.

The article neglects to list the tight monetary policy of the European Central Bank (ECB) as one of the factors constraining European growth and competitiveness. At present, the ECB has set its short-term interest at 3.5 percent, compared to the 1.75 percent rate set by the Fed. This is in spite of the fact that the euro zone nations have a lower inflation rate and a higher unemployment rate than the U.S. Even the IMF has criticized the anti-growth policy of the ECB.


Accounting For Stock Options

Battle Lines Drawn on Stock Options
David Leonhardt
New York Times, March 17, 2002, page A29

This article reports on the battle between corporations and regulators on the proper accounting of stock options. Government regulators, joined recently by several members of Congress and Alan Greenspan, have urged that stock options be deducted as an expense against profits, at the time they are issued.

At several points, this article asserts that such a change in accounting would reduce earnings, especially for high tech stocks that issue large amounts of options. In fact, this accounting cannot change a company's real earnings at all. If investors in financial markets are well informed, as assumed in economic theory, the change in the accounting of stock options will have no effect on these companies whatsoever.

The change will only matter if investors do not know how to read financial statements, and are either currently being misled by the failure to report stock options as an expense, or would subsequently be confused by having them listed as an expense. The possibility that investors are as ill-informed, as the concern over the accounting of stock options implies, suggests that U.S. financial markets are extremely irrational and that stock prices may often not reflect the actual profitability of corporations.


Doctors and Protectionism

Many Doctors Shun Patients With Medicare
Robert Pear
New York Times, March 17, 2002, page A1

This article reports on a growing tendency among doctors across the nation to refuse to treat Medicare patients, because they view the compensation rates as inadequate. It is worth noting that, according to the OECD, doctors in the United States earn more than twice as much as the average in other industrialized nations (even after deducting expenses such as malpractice insurance). 

One of the main reasons that such huge salary differences persist, is that doctors have used their political power to protect themselves from both foreign and domestic competition (e.g. see "Caught in the Middle," by Lena H. Sun, Washington Post, March 19, 1996, Health Section, page 10; "A.M.A. and Colleges Assert There is a Surfeit of Doctors," by Robert Pear, New York Times, March 1, 1997, page A7 and "U.S. to Pay Hospitals Not to Train Doctors, Easing Glut," by Elisabeth Rosenthal, New York Times, February 15, 1997, page A1). If doctors in the U.S. were paid as much as in other wealthy nations, it would save U.S. consumers approximately $80 billion a year.

It would have been appropriate to note the impact of protectionism in sustaining doctors' salaries. Undoubtedly, there are many well-qualified foreign doctors who would be happy to work for the reimbursements provided by Medicare. This discussion would be especially appropriate since so much attention have been given to the Bush Administration's decision to protect the steel industry. The tariffs on steel are unlikely to cost consumers even one tenth as much as restrictions on foreign doctors practicing in the United States.