Economic Reporting Review October 15

Economic Reporting Review
October 15, 2002

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

OUTSTANDING STORIES OF THE WEEK

Mexican Labor Protest Gets Results
Ginger Thompson
New York Times, October 6, 2001, page A3

This article reports on how workers in a Mexican apparel
factory managed to secure wage gains and improved working conditions
as a result of coordinated actions against their employer. The actions
proved successful because a US-based organization, the Workers' Rights
Consortium, publicized the conditions in the factory and brought
pressure against Nike. Nike is a major purchaser of the factory's
clothing.

Bailout for Airlines Showed the Weight Of a Mighty Lobby
Leslie Wayne and Michael Moss
New York Times, October 10, 2001, page A1

This article reports on the airline industry's lobbying
campaign, which resulted in a large public bailout the week after the
September 11th attack. The industry managed to secure this bailout
without any commitments to laid off workers, and in spite of the fact
that the industry's financial circumstances posed no obvious threat to
the national economy. There is long history of airlines operating
under bankruptcy protection, so the government did not have to
intervene in order to keep the airlines flying.

Companies' Big Debts Now Carry Big Risks
Gretchen Morgenson
New York Times, October 7, 2001, Section 3 page 1

This article examines the extent to which high debt loads are
likely to place burdens on corporations as they struggle to deal with
the economic downturn. It notes that many firms had substantially
increased their debt burdens during the upturn to buy back shares and
finance new investment.

The Economy

Trying to Fight Two Wars at Once
Joseph Kahn
New York Times, October 7, 2001, Section 4 page 3

This article examines the interaction between the
administration's efforts to wage a war against terrorism and also to
sustain the economy. At one point the article notes that Congress
turned to former Treasury Secretary Robert Rubin to get advice on
coping with the recession.

It is worth noting the irony of this choice. Robert Rubin was
Treasury Secretary during the period of the largest run-up in the
stock market bubble. It is the collapse of this bubble that is the
main cause of the economy's current problems.

G-7 Leaders Pledge to Foster Growth and Battle Terrorism
Associated Press
New York Times, October 7, 2001, Section 1 page 8

This article discusses a meeting between the finance ministers
and central bankers of the G-7 nations. At one point it asserts that
"many economists believe the Sept. 11 attacks have pushed the economy
into a full-blown recession." There is a large amount of data that
indicate that the U.S. economy was already in a recession prior to the
attacks of September 11th. Investment in new equipment had already
fallen by close to 10 percent from the levels reached in 2000,
commercial construction had been dropping for months and the rate of
growth of consumption spending had slowed dramatically. The economy
had already lost 500,000 jobs since its March peak by the time of the
September 11th bombing. In addition, net domestic product, a measure
of economic output that excludes depreciated capital, had been falling
since the beginning of the year.

A Different Kind of Wartime Economy
Richard W. Stevenson
New York Times, October 9, 2001, page B12

This article examines the economic impact of the war on
terrorism. At one point it comments that "the economy's strength in
recent years has derived in part from a sense of excitement about the
availability of jobs and opportunities generated by technological
advances, coupled with a drive by companies to drive down costs."

Presumably this statement is referring to the stock market
bubble, in which stock prices reached levels that could not be
rationalized by any plausible projection of future profit growth. This
bubble helped to finance a boom in investment in high tech sectors,
much of which has turned out to be wasted. It also led to a
consumption splurge, as the savings rate fell to almost zero in 2000.
This article would have been more informative if it had explicitly
identified the role of the stock market bubble in driving the boom of
the late nineties, and in causing the current recession.

Workforce Down 199,000 Before Attacks; Unemployment Rate Expected to
Surge
Steven Pearlstein
Washington Post, October 6, 2001, page E1

This article discusses stimulus packages that are being
considered by Congress and the administration. The article refers to a
set of spending and tax cuts that would total 1.5 percent of GDP,
which it describes as "a bigger jolt for the economy than the
Reagan-era tax cuts and defense build-up of the early 1980s."

In 1980, prior to the Reagan tax cuts taking effect,
individual and corporate income taxes were equal to 11.7 percent of
GDP. In 1984, when the tax cuts had been fully phased in, these taxes
were equal to just 9.8 percent of GDP, a decline of 1.9 percentage
points. In 1980, defense spending was equal to 4.9 percent of GDP. It
reached 6.1 percent in 1983, and eventually peaked at 6.2 percent in
1986.

The rise in defense spending from 1980 to 1983 was 1.2
percentage points of GDP. If this is coupled with the 1.9 percentage
point decline in taxes, it gives a total stimulus of 3.1 percentage
points of GDP, more than twice the size of the 1.5 percentage point
stimulus discussed in this article.

Drug Patents

GlaxoSmithKline Gives AIDS Drug Rights to Generic Maker
Reuters
New York Times, October 9, 2001, page C4

This article reports on the decision by GlaxoSmithKline to
grant a license to a generic manufacturer in South Africa, for
production of three types of AIDS drugs. At one point the article
asserts that drug companies have been "criticized for not doing more
to help poor countries."

Actually, most of the criticism against drug companies has
been because of their efforts to block low cost generic drug
production in developing nations. Activists trying to promote
treatment of AIDS, and other diseases, would undoubtedly be delighted
if drug companies made drugs available at little or no cost to poor
people in developing nations. However, much of their activity has been
devoted to fighting the industry, which is using TRIPS and other trade
pacts to prevent generic producers from selling low cost drugs in
developing nations.

Stock Prices

Investing Now: Strategies Must Reflect Uncertainties of a World
Changed by Catastrophe
Dave Kansas
Washington Post, October 7, 2001, page H1

This article discusses individual investment strategies in the
wake of the September 11th attacks. It begins by referring to
"patriotic pleas to buy stocks." While some people have urged buying
stock as an act of patriotism, there is no logical link between buying
stock and patriotism.

Paying too much for a share of stock is no more patriotic than
paying too much for a used car. The decision to buy shares of stock,
when the purchasse cannot be justified by the economic prospects of
the company in question, is simply transferring money from the stock
purchaser to the seller. It provides no benefit to the nation as a
whole.

First Impressions, Lasting Influence
Glenn Kessler
Washington Post, October 7, 2001, page A1

This article assesses the role that Treasury Secretary Paul
O'Neill appears to be playing in the Bush Administration. At one
point, it notes that "while he [O'Neill] often has facts to back up
his statements, he rarely cites those facts publicly, leaving some
listeners to assume that he's just being opinionated." The example it
gives of such behavior is when O'Neill urged people to buy stock in
the wake of the recent market plunge. The article then quotes
O'Neill's assertion that "'if you look at the data points' ... over
the past 40 years when the market has fallen sharply it has risen
within a year and a half."

Actually, Secretary O'Neill's interpretation of the data is
rather unusual in this particular case. The implication is that stocks
will always be a good buy, after they have fallen, regardless of their
current level. This means that it would have been wise to invest in
stocks in Japan after the Nikkei Index had dropped to 30,000 ffrom its
1989 peak of 39,000. The index has subsequently fallen to 10,000.

The fact that the Nikkei index was still over-valued at 30,000
would have been apparent to anyone who had examined current and
projected future profits. Similarly, it is possible to recognize that
the market remains over-valued, in spite of its recent plunge, based
on current price-to-earnings ratios and projections of future profit
growth. The price to earnings ratio in the stock market is still close
to 23 to 1 (measured against pre-recession profit levels), compared to
an historical average of 14.5 to 1. The Congressional Budget Office
projects that real profit growth will average close to 1 percent
annually over the next decade, far less than the historic average of
more than 3.0 percent. Someone like Secretary O'Neill, who had
apparently failed to make such elementary calculations, could not be
said to have the facts to back up his claims about the stock market.

Argentina

Argentine Economy Dives, Setting Off Investor Panic
Anthony Faiola
Washington Post, October 6, 2001, page A25

This article reports on the further deterioration in
Argentina's financial circumstances in the wake of the September 11th
attack. The article notes that Argentina has tied its currency to the
dollar and that many contracts have been negotiated in dollars. Based
on this fact, it asserts that a devaluation "would likely lead to
bankruptcies and spark an even deeper recession."

The International Monetary Fund made almost identical
assertions concerning the situation in Russia in 1998 and Brazil in
1999, both of which had also tied their currency to the dollar. When
these nations devalued their currency, the resulting boost to
international competitiveness, and fall in interest rates, led both
countries out of stagnation and to resumed growth.

The article also notes that the deteriorating economy has
lowered tax collections, which means that the government will have to
either raise taxes or make additional spending cuts in order to
balance its budget. The article discusses only the political issues
surrounding the government's ability to implement these measures. It
is worth noting that raising taxes or cutting spending in a downturn
are both contractionary policies, which are virtually certain to make
the nation's recession worse. Most economists advocate the exact
opposite course -- nations should lower taxes and/or increase spending
during an economic downturn.

Canadian Health Care

Canada's Health Care Shows Strains
Barbara Crossette
New York Times, October 11, 2001, page A12

This article reports on the problems facing Canada's health
care system. The subhead is "universal coverage inspires pride, but
its expenses increase," implying that the cost of maintaining
universal health care coverage is becoming unbearably high. In fact,
the opposite is true. Canada has significantly cut real spending on
health care over the last decade. By contrast, during this period,
health care spending in the United States has increased by almost 3.0
percent a year above the rate of inflation.

As the chart in the article shows, Canada spends less than
half as much per person on health care as the United States, in spite
of having an older population (spending is reported as $1,899 per
person in Canada compared to $$3,858 in the United States). While the
evidence from Canada and other nations is that a system of public
insurance for health care is more efficient than the private insurance
system in the United States, it might not be twice as efficient. For
example, it may be necessary for Canada to spend 60 percent of what
the U.S. spends per person (a 20 percent increase from its current
levels) in order to maintain a high quality of health care.

Indonesia

Slow Growth and Wider Deficit Are Seen for Indonesia
Wayne Arnold
New York Times, October 11, 2001, page W1

This article examines the current economic situation in
Indonesia. The article identifies Indonesia as "Asia's only OPEC
member." There are several other Asian nations in OPEC including Iraq,
Iran, and Saudi Arabia.

The article notes that Indonesia has not met the schedule of
privatizing assets demanded by the IMF. It claims that some economists
"warn that further sales delays could force the I.M.F. to delay its
next loan." The IMF cannot be forced to delay its next loan. Any delay
in loans by the IMF will be a conscious decision of its policy making
board, because the board is dissatisfied with the pace of Indonesia's
privatization.

Insurance Against Terrorist Attacks

Government Role at Issue in Proposal to Help Insurance Industry
Stephen Labaton and Joseph B. Treaster
New York Times, October 12, 2001, page C1

This article discusses attitudes within in the Bush
Administration towards a proposed mechanism to provide a government
back-up for catastrophic insurance losses resulting from terrorist
attacks. While it notes the opposition of White House economic advisor
Lawrence Lindsey to such plans, it would have been helpful to describe
the basic logic behind this position.

Some types of endeavors are more susceptible to terrorist
attacks than others. For example plane travel rather than train
travel, or nuclear power plants as compared to power derived from
conventional or alternative energy sources. With regard to terrorist
risks associated with nuclear power, for example, there is no obvious
public interest in effectively subsidizing such industries by
providing free insurance. The government always has the option to
retrospectively support an industry that has been badly hurt by
terrorism, as it is now doing with the airline industry. But the
possibility of this sort of support would not provide the same sort of
subsidy as would the guaranteed backing that would be implied by the
insurance provisions under consideration.