Economic Reporting Review By Dean Baker May 19

Economic Reporting Review
By Dean Baker
May 19, 2003

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OUTSTANDING STORIES OF THE WEEK

How Microsoft Warded Off Rival
Thomas Fuller
New York Times, May 15, 2003, Page C1
http://www.nytimes.com/2003/05/15/technology/15SOFT.html?ex=1368417600&en=2d4d3d\
c65e610558&ei=5007&partner=USERLAND

This article reports on how Microsoft used tactics of questionable legality to try to prevent the growth of Linux and other competitors in the European market. The article involved investigative work by the reporter to expose behavior that was not publicly known.

______________________________________________________________________

Bush Tax Cut

House Approves 10-Year Tax Cut for $550 Billion
David Firestone
New York Times, May 10, 2003, Page A1
http://www.nytimes.com/2003/05/10/politics/10TAX.html?ex=1367899200&en=4d2c7148b\
0f36f14&ei=5007&partner=USERLAND

House Passes Tax Cut Plan
Jim VandeHei and Juliet Eilperin
Washington Post, May 10, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A36928-2003May9.html

Bush's Drive for Tax Cut
David Rosenbaum
New York Times, May 11, 2003, Page A1
http://www.nytimes.com/2003/05/11/national/11ASSE.html?ex=1367985600&en=f8199892\
9d39dced&ei=5007&partner=USERLAND

These articles report on the House of Representatives approval of a version of President Bush's tax cut. Both Times articles assert that President Bush and Congress supported this tax cut because of their "philosophy" about how the economy works. For example, the Times article by Firestone begins by asserting that the approval was "strongly endorsing President Bush's drive to stimulate the economy through lower taxes." Later it claims that the plan "embraces the core philosophy of the Bush administration and most Republicans that tax breaks for businesses and upper income individuals will create jobs."

It is not clear that the House was motivated by a belief that the tax cuts will create jobs or any philosophy about how the economy works. It is certain that the tax cuts will redistribute a large amount of income to wealthy taxpayers. It is also well documented that higher income people disproportionately vote Republican.

There is no compelling evidence that the tax cuts will lead to any significant number of jobs, especially compared with alternatives, such as increased funding to cash strapped state and local governments. Even the Congressional Budget Office, which is run by a former Bush Administration economist who is a strong proponent of supply-side economics, agreed with this assessment.

While it is possible that Republican members of Congress voted on the basis of a belief about the way the economy works, for which there is no evidence, it is also possible that they voted out of a desire to please their wealthy supporters. These articles should have laid outboth possibilities clearly for readers, rather than simply asserting that these politicians acted based on their own beliefs.

The Times article by Firestone also wrongly asserts that most taxpayers would get a tax cut from the provision in the plan which would reduce the tax rate on dividends and capital gains to 15 percent. Most taxpayers currently pay a marginal tax rate of 15 percent or less. The reduction in the tax rate discussed in this article would only apply to the minority of taxpayers who are in the 28 percent, or higher, tax bracket. While this group of taxpayers does get the vast majority of dividends and capital gains, it accounts for less than 40 percent of all taxpayers.

Neither of these articles notes that the tax proposal will not reduce the tax on dividends and capital gains for taxpayers who hold stock in retirement accounts, which is the form in which most stockholders hold most of their stock. Under this proposal, dividends and capital gains on stock held in retirement accounts will continue to be taxed as normal income when it is withdrawn. This fact has been almost completely ignored in reporting on the Bush tax cut proposal. As a result, it is likely that many workers with stock in retirement accounts wrongly believe that they will benefit from this tax cut.

G.O.P. Eyes Tax Cuts as Annual Events
Dana Milbank and Dan Balz
Washington Post, May 11, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A40258-2003May10.html

This article discusses a strategy being considered by Republicans of offering a new tax cut every year. At one point the article warns that tax cuts could lead to spiraling deficits "if government continues its inability to control spending." It is not clear what the article means by "inability to control spending." Federal government spending hit 23.5 percent of GDP in 1983. It has been under 20.0 percent since 1997, although the recent boost of spending on homeland security and the war in Iraq will push it slightly over 20.0 percent in the current fiscal year. This record seems to indicate that the government has been very effective in controlling spending.

Bills on Tax Cut and Debt Are Set to Collide
David Firestone
New York Times, May 14, 2003, Page A19
http://www.nytimes.com/2003/05/14/politics/14TAX.html?ex=1368331200&en=fb8719465\
1d9b396&ei=5007&partner=USERLAND

This article reports on the progress in the Senate of President Bush's tax cut bill and a bill that would increase the ceiling on the national debt. The article quotes Democrats who assert that President Bush's tax cuts will increase the annual deficits and the debt, and then quotes Bill Frist, the Senate majority leader, who denies that the tax cut will increase the deficit in the long-run. It would have been helpful to point out that there is no plausible scenario in which the tax cut will not lead to higher deficits, even in the long-run.

Senate Approves Tax Cut Proposal
Jonathan Weisman
Washington Post, May 15, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A61817-2003May15.html

Tired Senators Achieve Goal, to Pass a Tax Bill, Any Tax Bill
David Firestone
New York Times, May 15, 2003, Page A1
http://www.nytimes.com/2003/05/16/politics/16ASSE.html?ex=1368504000&en=6a18bf18\
dc9c3ed7&ei=5007&partner=USERLAND

These articles report on the Senate's approval of a tax cut package. Both articles refer to the tax cut as eliminating the double taxation of stock dividends. While proponents of the tax cut use the term "double taxation" in the same way that they used the expression "death tax" to refer to the estate tax, it not accurate. Corporations and individuals are distinct legal entities, who each pay tax on their income only once.

This legal distinction is extremely important. The government grants many valuable privileges to corporations, most importantly limited liability, that a group of unincorporated individuals do not have. The value of these privileges is proven by the fact that individuals voluntarily create corporations, knowing that income will be taxed at the corporate level. In this sense, the corporate tax is entirely voluntary -- if individuals felt that the privileges the government grants to corporations did not outweigh the cost of the tax, then they would form partnerships and avoid the corporate tax altogether.

The Times article claims that "theoretically, the point of a tax reduction is to revive a stagnant economy." It is not clear that this is even the point of this tax cut, since so much of the tax cut is targeted to wealthy individuals who are likely to spend a relatively small portion of their tax cut. If the intention was to revive the economy, in theory, virtually any other use of this money would be more effective.

The Post article concludes by asserting that the tax cut will have a large effect on the 2004 presidential campaign because the large deficit it creates means that "Bush's Democratic opponents would have to either campaign to raise taxes or would have to find the money for their proposals elsewhere." This statement implies that the Democratic candidates will be held to a different standard than Republican candidates, since they have found little need to explain how their tax cuts will be paid for.

Health Care

Kucinch's 'Medicare for All' Offers No Role for Private Insurers
Juliet Eilperin
Washington Post, May 11, 2003, Page A7
http://www.washingtonpost.com/wp-dyn/articles/A40260-2003May10.html

This article reports on a proposal by Representative Dennis Kucinch, a candidate for the Democratic presidential nomination, which would establish a universal health system similar to Medicare. It asserts that this proposal is "far more interventionist" than other proposals, because it would eliminate the role of private insurers. It is not clear that this makes the plan more interventionist. All health systems, including the current one, require heavy government regulation of private insurers. This is due to the fact that the most effective way for the insurance industry to make money is to not insure people who get sick. Preventing the industry from charging excessive fees to unhealthy people requires large-scale intervention by the government into the industry's practices, and also continuous monitoring to ensure the quality of the care provided. It is not clear that eliminating the role of the insurance industry is more interventionist, although there is a vast body of research that shows it is more efficient.

The article also asserts that the Kucinch plan is similar to the Canadian model "that came under fire when President Bill Clinton tried to revise the U.S. health care system in the early 1990s." The system President Clinton proposed had very little resemblance to the Canadian system. It is not clear why anyone who opposed the Clinton plan would have attacked the Canadian system.

Italy

Berlusconi, in a Rough Week, Says Only He Can Save Italy
Frank Bruni
New York Times, May 10, 2003, Page A
http://www.nytimes.com/2003/05/10/international/europe/10ITAL.html?ex=1367899200\
&en=96dbfbf5e02d3766&ei=5007&partner=USERLAND

This article reports on an interview with Italian Prime Minister Silvio Berlusconi. At one point the article notes Mr. Berlusconi's plans for a series of labor, pension, and tax reforms, which it says "many Italians seem to want." It would have been appropriate to note that many Italians also are strongly opposed to these proposals. Berlusconi's efforts to change labor laws protecting workers from dismissal drew millions of people into the street in protest last year. These were some of the largest protests in Italy's history. While a significant number of Italians undoubtedly approve of Mr. Berlusconi's agenda, it is far from clear that it commands majority support.

France

Huge Strike by Public Workers Paralyzes France
Elaine Sciolino
New York Times, May 14, 2003, Page A3
http://www.nytimes.com/2003/05/14/international/europe/14FRAN.html?ex=1368244800\
&en=daae1cac2a60f750&ei=5007&partner=USERLAND

This article reports on a strike in France over the government's plans to cut pensions for public sector workers. The article describes the pensions as "expensive and generous." It would have been helpful if it had provided the basis for this assessment. Italso characterizes the proposed cutbacks as "modest." Given the size of the strike, estimated at 800,000 to 1,000,000 workers, it appears that the workers affected do not view the cutbacks as modest.

The article also asserts that in France, as well as Germany and Austria, governments are "finding it necessary" to scale back pensions. This is inaccurate. Insofar as currently scheduled benefits are creating an imbalance in funding, this would force governments to either raise taxes or cut benefits. The decision to cut benefits is a political choice that these governments are making; it is not an economic necessity. It is also worth noting that the pension funding problem would be somewhat alleviated if the European Central Bank pursued a more expansionary monetary policy. This would lead to lower unemployment rates, especially for France and Germany, and thereby increase tax revenue.

Trade

Bush's Trade Carrot Brings High Hopes, Hearty Skepticism
Paul Blustein
Washington Post, May 10, 2003, Page A16
http://www.washingtonpost.com/wp-dyn/articles/A36923-2003May9.html

Bush Seeks a Free Trade Zone With the Mideast by 2013
Elisabeth Bumiller
New York Times, May 10, 2003
http://www.nytimes.com/2003/05/10/international/middleeast/10PREX.html?ex=136789\
9200&en=1bd5196ede9cbaba&ei=5007&partner=USERLAND

These articles report on President Bush's announcement that he plans to have a trade pact enacted with the countries of the Mideast by 2013. Both articles repeatedly use the term "free trade" to describe the pact that Mr. Bush is seeking. While Bush often uses this term to describe his goal in trade negotiations, it is inaccurate. Many of the issues that have been addressed in past "free trade" pacts do not involve freeing trade. In fact, strengthening forms of protectionism, such as patents and copyrights, is often a central component of such pacts. Given the actual content of these pacts, the term "free trade" should have been put in quotation marks.

The Post article also includes an assertion that Mr. Bush is motivated by "the belief that free-trade deals like the one Washington has with Mexico" lead to more rapid economic growth. It is not clear that this belief explains President Bush's motivations. There is little evidence that agreements like NAFTA promote growth in developing nations. In the case of Mexico, annual per capita GDP growth has averaged less than 1.0 percent since the passage of NAFTA, a pathetic performance for a developing nation. This growth rate is only about one fourth as rapid as Mexico's growth rate in the period from 1960 to 1980, when it was relying on policies of import substitution. Standard economic models, such as those used by the World Bank, show that reducing trade barriers has only a marginal impact on growth, increasing annual growth rates in most cases by less than 0.1 percentage point.

On the other hand, policies promoted in agreements like NAFTA can often have large benefits for U.S. corporations. For example, NAFTA made U.S. investments in Mexico more secure, thereby increasing access to Mexico's supply of relatively cheap labor. Also, the privatization of state assets, which is often a requirement of such agreements, can often lead to windfalls for well-connected companies.

While it is possible that President Bush is acting based on a belief for which there is no real evidence, it is also possible that he is acting out of desire to help powerful political backers.

Trade Deficit

Trade Deficit Near Record
Business in Brief, Compiled from reports by the Associated Press,
Bloomberg News, Dow Jones News Service and Washington Post staff
writers
Washington Post, May 14, 2003, Page E2
http://www.washingtonpost.com/wp-dyn/articles/A52309-2003May13.html

Trade Deficit Widened in March
Bloomberg News
New York Times, May 14, 2003, Page C4
http://www.nytimes.com/2003/05/14/business/14ECON.html?ex=1368331200&en=d3517d13\
36c2940a&ei=5007&partner=USERLAND

These articles report on data released from the Commerce Department which show that the trade deficit rose to a near record level in March. Both articles are small pieces buried in the middle of the business section. (The Post article is 3 sentences.) The United States current account deficit, which is driven primarily by the trade deficit, is currently running at annual rate of more than $550 billion a year. This has approximately the same effect on future living standards as a budget deficit of the same magnitude. Both papers have given substantial coverage to considerably smaller budget deficits. The relative amounts of coverage given to these deficits cannot be explained by their economic impact.