Economic Reporting Review
By Dean Baker
May 5, 2003

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OUTSTANDING STORIES OF THE WEEK

Jobless and Hopeless, Many Quit the Labor Force
Monica Davey and David Leonhardt
New York Times, April 27, 2003, Page A1
http://www.njfac.org/jobless.htm

This article reports on the decline in labor force participation that has resulted from the weak labor market of the last two years. It examines the ways in which several different families have tried to cope with the lack of employment opportunities.


Productivity Growth

Economy Still Looks Soft
Business in Brief, compiled from news service reports
Washington Post, May 2, 2003, Page E2
http://www.washingtonpost.com/wp-dyn/articles/A3155-2003May1.html

Industry Index and Job Data Both Point To Weakness
Bloomberg News
New York Times, May 2, 2003, Page C5
http://www.nytimes.com/2003/05/02/business/02ECON.html?ex=1052452800&en=df2fbd14\ce04cd2e&ei=5007&partner=USERLAND

These articles briefly discuss the release of first quarter productivity numbers by the Commerce Department. The data for the first quarter showed productivity growth was just at a 1.6 percent annual rate. While quarterly productivity numbers are quite erratic, over the last year productivity growth has been just 2.3 percent. From the standpoint of improving living standards, the actual rate of productivity growth was considerably lower than this figure, since there was a 0.8 percentage point gap between the growth in gross domestic output and net domestic output over the last year. The difference between the two measures is the portion of output that goes to replace worn out plant and equipment. It is only net output that affects living standards.

Adjusting for the large gap (which is a recent development) between gross and net output, the increase in net productivity growth over the last year was roughly 1.5 percent. This is approximately the same as the rate of productivity growth over the period of the productivity slowdown, from 1973 to 1995.

The fact that productivity growth may be falling back to the levels experienced during the slowdown should have been important news. In the past, productivity reports that have shown strong growth have been given considerable attention. In this case, the Commerce Department's report was only mentioned briefly in two small wire service stories.


Job Loss

The $550 Billion Question: Will Jobs Follow Tax Cuts?
Daniel Altman
New York Times, May 2, 2003, Page C1
http://www.nytimes.com/2003/05/02/business/02JOBS.html?ex=1052539200&en=a1e82644\7fc327d7&ei=5007&partner=USERLAND

This article assesses the likelihood that President Bush's proposed tax cut will produce a significant number of jobs. It is accompanied by a chart that compares the job loss in this recession with prior periods. The chart shows job loss over the prior 18 months. It would have been more reasonable to show job loss over the prior 24 month period, which then would have the official beginning of the last recession as the start point. The 2,053,000 jobs lost over this period is the largest jobs loss for any two years in the post-war era. This job loss figure will be revised to be about 300,000 larger when the Bureau of Labor Statistics makes its benchmark revisions in
June.


Growth in Europe and the United States

U.S.-Europe Discord Rocks the Shared Economic Boat
John Tagliabue
New York Times, April 29, 2003, Page W1
http://www.nytimes.com/2003/04/29/international/europe/29ECON.html

This article discusses the state of the European economy. At one point it notes the efforts of European nations to contain government budget deficits. It presents the view of unnamed analysts that "the United States can run up deficits, they argue, because the promise of growth holds out the prospect that they will be paid off within a reasonable time. European governments, by contrast, must subject themselves to tight financial discipline because their economies never get up the head of steam to pay later for the generosity." Current projections from the Congressional Budget Office and other government agencies show that the U.S. government deficit will be large and rising for the indefinite future. It is not clear why any analyst would believe that the U.S. government will be paying back the money it is currently borrowing, in the sense of reducing its
debt. Lenders would more reasonably be concerned that the interest and principal be repaid when it is due, even if that comes from new borrowing, which will most likely be the case in both the United States and Europe. There is no evidence that investors view a default on debt by either the U.S. or European nations as a likely event in the foreseeable future.

The article also asserts that Europeans fear that U.S. government deficits will cause the United States to compete for capital in world markets. Actually, the United States was competing for capital in world markets even when it was still running large budget surpluses. In 2000 the United States had a current account deficit of $410 billion, which means it was borrowing this money from the rest of world.

The article notes the continuing difference in GDP growth rates between the United States and Europe. It is important to note that much of this growth is attributable to three factors that have nothing to do with living standards. First, the United States has a measure of computer quality improvement that raises its annual growth rate by 0.3 to 0.5 percentage points relative to Europe's. (Most of the difference is eliminated if net domestic product – the measure of usable output – is the basis of comparison.) The United States has a more rapid rate of population – and therefore labor force – growth, which adds close to 1.0 percentage point to the growth potential in the United States. And Europeans have opted to take much of the benefit of higher productivity growth in the form of more leisure – shorter workweeks and longer vacations – rather than higher living standards. This has lowered the annual growth rate by 0.2 to 0.5 percentage points in Europe compared to the U.S. Adjusting for these three factors – the rate of growth of net output per hour, the best measure of the rate of improvement in living standards – is similar for Europe and the United States.


First Quarter GDP

Economy Grew at a Rate of 1.6 % In First Quarter
Daniel Altman
New York Times, April 26, 2003, Page B1
http://query.nytimes.com/gst/abstract.html?res=F30612F83F590C758EDDAD0894DB40448\
2

Economy Grew Only Slightly in First Quarter
John M. Berry
Washington Post, April 26, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A39250-2003Apr25.html

These articles report on the Commerce Department's data on first quarter GDP growth. The four experts cited in the articles (2 in each) all work for firms in the financial industry. It would be helpful to include the views of analysts in academia, government, unions, or at least other business sectors.

At one point the Post article asserts that "the drop in inventories clipped about half a percentage point off the quarter's growth rate." The Commerce Department data did not show a drop in inventories in the first quarter. The report showed that inventories grew at a $12.8 billion annual rate in the first quarter. Because this rate of accumulation was considerably slower than the $25.8 billion rate reported for the previous quarter, it slowed the overall growth rate. But the data indicate that firms where still accumulating inventories in the first quarter.

At one point, the Post article notes the continued strength of the housing sector and the large contribution that this sector made to growth in the quarter. In commenting on the near-term outlook, it would have been appropriate to mention the housing bubble and that vacancy rates for rental units hit another record high in the first quarter. The surging rental vacancy rate will eventually affect the home sales market, and could lead to the collapse of the housing bubble.

The Times article includes a discussion on the release of data on the sales of new and existing homes in March. It notes that sales of new homes were reported to be substantially higher than February's levels, while sales of existing homes fell in March. While this discrepancy is presented as somewhat of a paradox, there is a simple explanation.

Sales of existing homes are recorded when the transfer is finalized and the house is turned over. This is typically 6 to 8 weeks after a contract is signed. In contrast, new homes sales are recorded when the contract is signed. This means that the March data on existing home sales is largely referring to sales contracts negotiated in February or even January. The data on new home sales reflects sales that were actually contracted in March. Since these series measure very different numbers, there is no obvious contradiction in the March data.


Medicare and Social Security

Close Look at a Focused President
Mike Allen
Washington Post, April 27, 2003, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A42544-2003Apr26.html

This article reports on an academic conference assessing the Bush presidency to date. At one point it presents the view of one academic that the purpose of the Bush tax cuts is "depriving the government of revenue so that Congress will be forced to restrain spending and unable to rescue Social Security and Medicare."

According to the projections of the Social Security and Medicare trustees, Social Security will be able to pay all promised benefits for almost forty years into the future, with no changes whatsoever. Medicare will be able to pay all scheduled benefits for twenty five years. There is no plausible scenario in which President Bush's tax cuts will prevent the rescue of these programs, since they are not projected to face any problems until long after he will have left office. The tax and spending policies that are in place at the point where these programs may need additional funding will be decided by future presidents and congresses.


Bush Tax Cuts

In House, Fight Brews Over Bush Tax Plan
Jonathan Weisman
Washington Post, April 27, 2003, Page A5
http://www.washingtonpost.com/wp-dyn/articles/A42439-2003Apr26.html

Bush Offers New Argument for His Tax-Cut Proposal
Jonathan Weisman
Washington Post, April 29, 2003, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A50898-2003Apr28.html

Greenspan Upbeat About Economy
John M. Berry
Washington Post, May 1, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A62474-2003Apr30.html

These articles report on the battle over President Bush's tax cut proposal. All three articles assert that President Bush's tax cut proposal will virtually eliminate the taxation of corporate dividends. This is not true. Most stockholders hold most of their stock in retirement accounts. The dividends earned on this stock would still be taxed as normal income at the point where the money is withdrawn. The president's proposal would not reduce the tax on these
dividends at all.

The April 27th article by Weisman and the Berry article also assert that the intention of the tax cut is to boost long-term growth. It is not clear that this is the intention of the tax cut. Most economic analyses show that the tax proposal will have very little impact on growth and is more likely to reduce it than to increase it (e.g. the Congressional Budget Office's study [http://www.cbo.gov/showdoc.cfm?index=4129&sequence=0 ]). Given these analyses, it is possible that President Bush views the tax cuts as a way to give money to wealthy backers and simply claims that they will lead to growth in order to make them palatable to the general public.

At one point, the April 27th article by Weisman discusses a proposal being considered in the House, which it says would lower the tax rate on capital gains and dividends to 18 percent for "all but the lowest- income taxpayers." Actually the vast majority of taxpayers already pay a marginal tax rate of 14 percent or less. This 18 percent tax rate would either raise the tax rate on dividends and capital gains for most taxpayers, or would only apply to the minority of taxpayers who currently face a higher rate of taxation.

The Berry article asserts that President Bush's tax proposal would eliminate the "double taxation" of corporate dividends. Proponents of the tax cut use this expression in the same way that advocates of eliminating the estate tax refer to it as the "death tax." However, it is not accurate to say that dividends are subject to double taxation. Dividends are taxed only once, at the individual level. It is true that corporations pay a tax on profits, but corporations are a distinct legal entity, so the same income is not being taxed twice.

If shareholders felt that the benefits they gained as a result of the government giving them corporate status did not exceed their tax payments, they would simply re-establish the company as a partnership and avoid corporate taxes. The fact that corporations exist means that shareholders view the benefits of corporate status as exceeding the tax burden.


Prescription Drugs

FDA Says It Can Take Away Drugs' Prescription Status
Marc Kaufman
Washington Post, April 26, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A39499-2003Apr25.html

This article reports on statement by top officials of the Food and Drug Administration (FDA), that it can remove a drug's status as a prescription drug and allow it to be sold over-the-counter. The article describes statements of FDA officials as assertions that it can "force" drug makers to sell their drugs as over the counter medicines.

This article actually turns the issue of "force" on its head in this discussion. The drug industry's position is that it wants to be able to determine if a drug can be distributed over-the-counter or whether a prescription is required. Requiring a prescription for a drug is a serious restriction on its distribution, which is enforced by the government. The drug industry is arguing that it can, by itself, decide whether a drug should be distributed as an over the counter drug or by prescription only.

The industry's claim means that it can – on its own authority -- require the government to arrest people who do not distribute its drug in the manner it has authorized. The FDA's argument is that it alone – not the manufacturer of the drug – has the authority to decide whether the government should require a doctor's prescription for the distribution of a drug. In contrast, the industry's position is that it can force the government to limit the distribution of its drug to those who have a doctor's prescription, even in cases where there is no demonstrated safety issue at stake.


Iraq and Oil

OPEC May Feel Pressure With Return of Iraqi Oil
Robert J. McCartney
Washington Post, April 26, 2003, Page A26
http://www.washingtonpost.com/wp-dyn/articles/A42921-2003Apr26.html

This article speculates on the impact of restored Iraqi production on OPEC. At one point the article asserts that Iraq has the world's second largest reserves of oil after Saudi Arabia. According to the United States Energy Information Agency, Iraq's reserves of 113 billion barrels put it third behind both Saudi Arabia and Canada, which it estimates as having 180 billion barrels of oil.

The article also asserts that a reduction of $5 per barrel in the world price of oil would add half a percentage point to the world growth rate. Actually, this is an estimate of the one-time increase in output associated with a $5 per barrel drop in price; it would not lead to a sustained increase in the growth rate of this amount.


State Fiscal Deficits

Does Pain Make States Stronger?
David Firestone
New York Times, April 27, 2003, Section 4 page 4
http://www.federalismproject.org/masterpages/links%20and%20articles/Does%20Pain%\20Make%20States%20Stronger.htm

This article discusses the fiscal crises faced by most state governments. At one point it attributes this crisis in part to "profligate spending" in the nineties. It is not clear that state spending in the nineties was profligate. It increased only slightly faster than the overall rate of GDP growth. Spending was also driven in part by the fact that inflation in medical and education services, the two largest categories of state spending, was much more rapid than the overall rate of inflation through most of the decade.

The article also presents a series of numbers indicating how federal tax and spending changes would affect state governments. It should have noted that the estimated $75 billion loss of state revenue from the 2001 tax cut was a ten year total, not a single year figure. It also would have been helpful if the tax and spending figures were presented as a percentage of total state spending or revenue. Very few readers are familiar with state budget figures; therefore presenting these numbers as percentages would allow them to access their importance.