Economic Reporting Review
May 6, 2002

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

OUTSTANDING STORIES OF THE WEEK


Dell's Share-Price Bet Cost It $1.25 Billion
Floyd Norris
New York Times, May 3, 2002, Page C1

This article reports on Dell Computer's speculation on its own stock. During its period of rapid growth, it had regularly sold put options with the anticipation that its stock price would continue to rise. If the price had risen, these options would expire worthless; however, because its share price has plummeted over the last two years, it now faces the prospects of spending billions of dollars to honor these options.

Will a Bonus Stop a Breach?
Sabrina Jones
Washington Post, April 30, 2002, Page E1

This article examines the practice of many large companies, which have extended millions of dollars in retention bonuses to top executives, when the companies were in bankruptcy. These payments, which reduce the money available to pay off creditors, are intended to retain the same executives who led the companies into bankruptcy.

The Bears on This Message Board Had Enron Pegged
Gretchen Morgenson
New York Times, April 28, 2002, Section 3 page 1

This article reports the findings of a study examining message board postings on Enron. The study found that many of the postings had correctly identified the problems that eventually forced the company into bankruptcy. Apparently, many of the individuals who post items on these message boards were more knowledgeable about Enron than the professional analysts who tracked the company.


Social Security

Will You Still Feed Me?
Tom Zeller
New York Times, April 28, 2002, Section 4, page 16

This section is a compilation of charts showing how the percentage of the elderly in the population is projected to grow significantly over the next hundred years all around the world. One set of charts compares the ratio of working age population to elderly on each
continent, and shows how it will change by 2050. The chart includes the statement that "the smaller the ratio, the more difficult it is for a given society to support its elderly, because they are fewer wage earners per elderly person."

This statement is misleading. Nations generally get richer through time due to productivity growth. A wealthy nation can more readily support its elderly even with a lower ratio of workers to retirees, than can a poor nation with a very high ratio. For example, Sub- Saharan African nations, with per capita incomes of less than $500 per year, would have great difficulty supporting their elderly even with a ratio of 20 workers per retiree. On the other hand, industrialized nations, with per capita income of approximately $25,000 per year, could comfortably support their retired population even if the ratio of workers to retirees is just 2 to 1.

By focusing on demographic changes, without considering the impact of projected increases in productivity, this set of charts is implying that it will be very difficult to support the elderly population in the future. In fact, virtually all projections of productivity growth imply that the nations of the world will be able to support the growth of their elderly population, at the same time that their working population continues to enjoy rising living standards.


Free Trade and Protectionism, Policies and Politics

Health Care Debate Prompts Standoff on Trade Legislation
Mike Allen and Juliet Eilperin
Washington Post, May 2, 2002, Page A2

Lawmakers Trade Proposals, Attacks On Drug Benefits
Amy Goldstein
Washington Post, May 2, 2002, Page A4

Showdown on Subsidies
Paul Blustein and Dan Morgan
Washington Post, May 2, 2002, Page E1

Yes, Bananas They Handle, But Steel ...Is It Too Hot?
Daniel Altman
New York Times, May 2, 2002, Page C1

These article discuss issues related to trade policy, farm policy, and a prescription drug benefit for senior citizens. There are several problems with the reporting in these articles that are worth noting.

The Post article on a prescription drug benefit for seniors notes the increased willingness of legislators to support such a benefit and asserts that the "increased generosity is a response to polling data that have suggested elderly people want more help than Congress has considered giving them in the past."

The latest projections from the Congressional Budget Office imply that the typical senior citizen will be spending close to one-third of his or her income on prescription drugs in 10 years, if they have no assistance from the government. It is a reasonable goal for public policy to try prevent such a disaster from occurring, even if the politicians who attempt to promote policies to address this problem may be motivated by political considerations.

The Post article on the debate over providing health care benefits for workers displaced by trade presents a comment from Thomas Donohue, the president of the U.S. Chamber of Commerce, that if new trade legislation doesn't pass Congress, "I know many, many, companies that are going to move their operations offshore."

One of the main purposes of the trade agreements that President Bush is attempting to negotiate is to make it easier for U.S. corporations to move their operations offshore, by making their investments in foreign countries more secure and profitable. In this sense it will be more advantageous for companies to move offshore if new trade agreements are passed than if they are not. It is implausible that the members of the Chamber of Commerce will take steps that will reduce their profits, just because they are mad at Congress. It is to be expected that a lobbyist like Mr. Donohue would use any threat that he thinks will advance his agenda. But such an implausible threat should not have been reported without assessing its credibility.

The Post article on the new farm bill includes several comments about how U.S. and European subsidies hurt developing nations. It is worth noting that, according to the standard economic theory upon which these reporters normally rely, farm subsidies and price supports in the rich nations can actually help developing nations. In fact, one of the most frequently cited trade models showed that most developing nations were actually harmed by the trade liberalization in the Uruguay Round of the WTO ("CGE Modeling and Analysis of Multilateral and Regional Negotiating Options," by Drusilla Brown, Alan Deardorff, and Robert Stern).

Subsidies can provide lower cost food to consumers in developing nations, benefiting these nations in the same way as the availability of low cost computers. Production restrictions can also help developing nations, since they raise the domestic price of goods above the world market price. If developing nations are given an import quota, then they will benefit by being able to sell a specific amount of output at an above market price. For example, many developing nations have benefited by being able to sell limited amounts of sugar at above market prices in the United States. For these reasons, standard economic theory indicates that agricultural supports could benefit developing nations.

The Times article on steel protection discusses plans to negotiate a world-wide reduction in steel capacity as an alternative to tariff barriers. It implies that this route would be more desirable. It is worth noting that this sort of cartel is also protectionist. All the arguments that raising the price of steel through tariffs would hurt the economy are equally true of raising the price of steel through a world-wide reduction of capacity. Also, raising steel prices through capacity reduction has a much more harmful impact on developing countries than do U.S. tariff barriers. U.S. tariff barriers, by keeping steel out of the United States, help to bring down the price of steel in the rest of the world, making it cheaper for developing countries, most of which are net importers of steel. While the discussion of agricultural policy shows a considerable concern for the impact of the policy on developing countries, this issue is not considered at all in the context of steel policy.

It is also worth noting that the adjustment of the dollar to a more sustainable level (e.g. a 20 to 30 percent decline in its value) is likely to have more impact on U.S. imports of agricultural products and steel than the policies that are being discussed in these articles. At present, the fact that the dollar is hugely over-valued amounts to a substantial subsidy on imports. The impact of the over-valued dollar is not discussed at all in these articles.


The Dollar

O'Neill Unbowed On Dollar
Paul Blustein
Washington Post, May 2, 2002, Page E1

Dollar Falls As Top Official Casts Doubts On Intervention
Richard W. Stevenson
New York Times, May 2, 2002, Page C1

These articles report on a Senate hearing on whether the dollar is over-valued. The articles report the conflicting views presented on this issue. It would have been helpful for readers to include some analysis of the implications of the views presented. Specifically, those who maintain that the dollar is not over-valued are implying that the United States can continue to incur foreign debt at the current rate. It would be worth pointing out that this would imply that the net foreign indebtedness of the United States would exceed $12 trillion in a decade, reaching 70 percent of projected GDP. Foreign indebtedness would exceed GDP before 2020. The growth in the foreign debt has approximately the same effect on future living standards as does government borrowing of the same magnitude.

While these articles refer to the possibility of direct government intervention to bring down the dollar (selling dollars and buying foreign currency in the foreign exchange market), they are other ways to have an impact on the value of the dollar. It is very likely that the value of the dollar could be reduced simply by having Alan Greenspan and Treasury Secretary Paul O'Neill publicly express the view that they think the dollar is over-valued. (Prior remarks by O'Neill, which were briefly interpreted this way, depressed the value of the dollar temporarily.) The federal government could also eliminate restrictions on banks offering checking and saving accounts denominated in other currencies. This would make it easier for millions of families to hold a portion of their assets in euros or yen, and thereby protect themselves against the risk that the dollar might fall in value.


Airline Labor Costs

US Airways Ready to Test Federal Loan Program
Edward Wong
New York Times, April 27, 2002, Page B1

This article discusses US Airways' plans to take advantage of a program providing government guaranteed loans to airlines, which was passed in the immediate wake of the September 11th attacks. The article reports that US Airways may be seeking the guarantees as a way to get the government's backing in efforts to force concessions from its workers. It includes a chart showing that US Airways has the highest costs per passenger mile, implying that concessions by workers are necessary.

It is important to note that US Airways tends to have higher costs than other airlines because it generally flies shorter routes. Therefore, the fact that its costs are generally higher on a per mile basis is not necessarily a problem, because its revenue will generally be higher on a per mile basis. For example, a round trip shuttle between Washington DC and New York costs about $320, or close to 80 cents per passenger mile. By contrast, it is possible to fly round trip coast to coast (@ 6000 miles) for approximately the same price. This would translate into revenue of less than 7 cents per passenger mile. Without adjusting for the average length of flights, it is not possible to make meaningful comparisons of costs per passenger mile.


German Wage Negotiations

Germany Braces for Strikes As Unions Take Off Gloves
Edmund L. Andrews
New York Times, May 2, 2002, Page W1

This article reports on the state of negotiations between Germany's metalworkers' union and major manufacturers. The article refers to Germany's unemployment as being "nearly 9 percent nationwide." Germany uses a somewhat different measure of unemployment than does the United States. By the U.S. measure, unemployment in Germany as a whole is approximately 8 percent. In the area of former West Germany, the unemployment rate is slightly over 6 percent, almost the same as in the United States.

At one point the article reports that "industry negotiators and many economists argue that any wage increases of more than 3 percent will delay Germany's economic recovery and lead to higher unemployment." It would have been appropriate to note that many economists do not hold this view. According to OECD data, German corporations have experienced a large increase in profitability over the last 15 years, due to a redistribution from labor to capital. Given this rise in profits, there is no obvious reason why a modest increase in real wages (the inflation rate is between 2.0-2.5 percent) should prevent German firms from sustaining or expanding production.


Venezuela

As Fears Linger, Venezuelans Press for Truth About Killings During
Chavez ProtestsGinger Thompson
New York Times, April 27, 2002, Page A8

This article reports on efforts to determine the circumstances that led to 17 people being shot in protests in Venezuela earlier this month. At one point the article presents the views of an oil company administrator, who reportedly originally supported Venezuela's president Hugo Chavez, "but had been increasingly disenchanted by a declining economy ...."

Actually Venezuela's economy is not declining. It has grown at about 3 percent a year, for the last two and a half years. This contrasts with the economies of Argentina, Brazil, Mexico and most other Latin American nations, which are currently experiencing recessions.