Economic
Reporting Review
October 22, 2002
By Dean Baker, co-Director of the Center
for Economic and Policy Research
OUTSTANDING STORIES OF THE WEEK
Out of Work, and Out of the Benefits Loop
David Leonhardt
New York Times, October 17, 2001, page C1
This article reports on the drop in the percentage of the
unemployed who are eligible for unemployment benefits. As a result of
the fact that many more workers are now part-time or short-term
employees, they often do not meet state requirements for unemployment
benefits.
Deepening Wrinkles in the New Economy
Louis Uchitelle
New York Times, October 17, 2001, page C2
This article reports on a new study by McKinsey & Company,
which indicates that the U.S. economy is unlikely to sustain the
productivity growth rates of the late nineties. The study implies
that future productivity growth may exceed the slow rate of the period
from 1973-1995, but will not be as high as the 2.5 percent rate of the
late nineties.
Outcomes Differ for Insiders and Small Investors at Global Crossing
Geraldine Fabrikant and David Cay Johnston
New York Times, October 15, 2001, page C1
This article reports on the profits made by several of the
major investors in Global Crossing, a new telecommunications company.
These investors managed to sell their shares at substantial gains.
The company's stock is now almost worthless.
U.S. Weighs the Hidden Cost of its Pharmacy Bill
Donald G. McNeil Jr.
New York Times, October 17, 2001, page A1
This article examines the circumstances that have allowed
Bayer, a German drug manufacturer, to charge $350 for a month's
supply of Cipro, the favored antibiotic for treating Anthrax. An
Indian manufacturer is able to profitably sell a high quality version
of the same drug for $10 a month. The Indian producer is being
excluded from the U.S. market by Bayer's patent.
Health Care Costs
High Cost of Being Well: Benefits at a Premium
Milt Freudenheim
New York Times, October 16, 2001, page C1
This informative article reports on the finding of a survey,
that health insurance premiums will rise by approximately 15 percent
in 2002. The article points out that this is the third consecutive
year of double digit increases in health insurance premiums.
It is interesting to note that, with annual premium costs
averaging more than $3000 per worker, the increase in this year's
premium is more than $450 for an average worker. This is comparable
to the increase that companies experienced last year, and are
projected to see for the next several years, according to the article.
By contrast, the 1.89 percentage point tax increase that would
be needed to make the Social Security trust fund fully solvent for
the next seventy five years, would be an additional cost of
approximately $470 for a worker earning $25,000 per year. According
to the Social Security trustees, a single increase of this size would
be sufficient to meet the program's seventy-five year funding
requirements.
While the prospect of a one-time increase in Social Security
taxes -- or ways to avoid such an increase -- has been reported on at
length in the media, the reality of rapidly rising health care costs
has received relatively little attention. As the information in this
article shows, rising health care costs pose a far greater threat to
living standards.
Social Security
Personal Retirement Account is Debated
Edward Walsh
Washington Post, October 19, 2001, page A27
This article reports on a meeting of President Bush's Social
Security commission. It reports the assertion of its co-chairman,
Richard Parsons, that nearly everyone agrees that some investment in
the stock market should be part of the solution to Social Security's
problems.
It is worth noting that the only projections for stock returns
that were actually derived from the Social Security trustees'
projections for profit growth show that the stock market will only
provide slightly higher returns than the government bonds currently
held by the trust fund (see Dean
Baker's Second Letter to Martin Feldstein). The
Commission has refused to produce its own projections for stock
returns.
The Economy
Survey Indicates Rising Confidence
John M. Berry
Washington Post, October 13, 2001, page E1
This article reports on a rise in the University of Michigan's
consumer sentiment index for the first part of October. The rise in
the index was entirely attributable to a rise in the expectations
component of the index, which measures what consumers expect the
economy to look like six months in the future. This component of the
index is highly volatile and has very little relationship to current
consumption decisions.
In contrast, the component of the index that measures
consumers' assessment of current conditions, which has a much closer
relationship to spending, fell from 94.6 in September to 92.1 in the
first part of October.
The other major piece of economic news released the previous
day was the Commerce Department's report of a 2.4 percent drop in
retail sales in September, the largest monthly decline on record. The
New York Times put this sales drop in the headline (see "Retail Sales
Decline 2.4%, Biggest Drop in Decade," 10-14-01;C3), while the Post
emphasized the rise in the consumer sentiment index.
As the economy has turned downward in the last year, the Post
has repeatedly run stories that sought to portray a positive economic
outlook (For example, see "Economy Gains As Consumers Keep Spending,"
Washington Post, July 14, 2001, Page E1 and ERR 7-23-01; "Economic
Reports Show Gains," Washington Post, June 27, 2001, Page E1 and ERR
7-2-01; "Economy Beats Expectations," Washington Post, April 28,
2001, Page A1 and ERR 5-7-01; and "Reports Offer Positive Economic
News," Washington Post, April 3, 2001, page E1 and ERR 4-9-01.)
Latin America
Venezuela Waits for 'Revolution' to Bear Fruit
Juan Forero
New York Times, October 17, 2001, page A3
Economic Pain Spreads From U.S. Across Latin America
Clifford Krauss
New York Times, October 14, 2001, page A3
The first of these articles reports on the current economic
situation in Venezuela, while the second article reports on the
situation across Latin America. The main thrust of the article on
Venezuela is that the economic situation is not very good. At one
point it notes that growth is projected to be just 3.2 percent this
year, and may fall below 3.0 percent next year. It is worth noting
that most other major Latin American economies, including Argentina,
Mexico, and Brazil, are experiencing recessions, so by comparison,
Venezuela's economic performance in quite impressive. Its current
growth rate is also considerably better than what Venezuela had been
experiencing. Its growth rate in the nineties averaged 1.7 percent.
At one point, the article by Krauss characterizes the growth
rate of most Latin American countries in the nineties as "generally
good." According to the World Bank, growth in the region averaged 3.4
percent in the nineties, only slightly better than the 3.2 percent
rate currently projected for Venezuela.
The Krauss article also includes a discussion of Brazil's
problems in which it notes that its currency had recently taken a
sharp plunge. It then cites an economist who claims that this plunge
has taken away the central bank's option to cut interest rates. It is
not clear that this is the case. A central bank that wants to keep an
over-valued currency from falling may need to maintain high interest
rates for this purpose. However, once a currency has fallen -- and is
now exchanging at a very low price -- it becomes less likely that it
will fall still further. This means that the central bank could
actually have more freedom to lower interest rates now that Brazil's
currency has already lost much of its value, since investors may not
fear that it will fall even lower.
Peronists Gain in Argentine Vote
Anthony Faiola
Washington Post, October 15, 2001, page A16
This article reports on the victory of the opposition party in
parliamentary elections in Argentina. In discussing the country's
economic situation, the article twice asserts that experts consider
it necessary for Argentina to balance its budget. Many experts
believe that it is a foolish policy for a nation in the middle of a
severe recession, like Argentina, to make budget cuts and lay off
workers. This can have the effect of further depressing the economy.
Economic Stimulus
House Panel Approves $100 Billion Stimulus Bill
Bloomberg News
Washington Post, October 13, 2001, page A5
Package of G.O.P. Tax Cuts Is Approved by House Panel
David E. Rosenbaum
New York Times, October 13, 2001, page A8
Labor Leaders Oppose a Trade Bill
Steven Greenhouse
New York Times, October 17, 2001, page A14
Greenspan Says Slump Could Last For Months
John M. Berry
Washington Post, October 17, 2001, page A14
Greenspan Sees Economic Slide as Temporary
Richard W. Stevenson
New York Times, October 18, 2001, page C1
These articles all discuss plans that are being promoted as a
stimulus for the economy. Many of the proposals mentioned in these
articles cannot plausibly be viewed as an economic stimulus. For
example, the article by Greenhouse quotes a lobbyist from the Chamber
of Commerce describing fast-track trade authority as a necessary
stimulus for the economy.
Trade agreements typically take several years to negotiate.
They also are generally phased in over a period of years, so that
their impact in the first years after they are put into effect is
rather limited. Given this time frame, unless the current downturn
lasts longer any previous post-war recession, fast-track trade
authority cannot be viewed as stimulus measure, even if the resulting
trade agreements are very beneficial to the economy.
Similarly, the cut in the capital gains tax being promoted by
Republicans in Congress cannot plausibly stimulate the economy in the
short-term. Proponents of capital gains tax cuts usually argue that
they will encourage people to save. While the evidence on this point
is ambiguous, insofar as a capital gains tax cut does encourage
saving, it would mean that people are cutting back their consumption
even more. This drop in consumption is contractionary, and will make
the recession worse.
Few readers have the time and expertise to recognize the
fallacy of some of the arguments being presented for various stimulus
plans. It would be helpful to include some assessment from economists
on the merits of these plans.
The article by Berry presents a warning from Federal Reserve
Board Chairman Alan Greenspan about the dangers of over-stimulating
the economy, noting that a large stimulus package could boost
long-term interest rates. The relationship between government
deficits and interest rates is actually much less significant than
the comment in the article implies. At the peak of the previous
business cycle in 1989, the budget deficit was almost 3 percent of
GDP. At the peak of the most recent cycle in 2000, the surplus was
more than 2 percent of GDP. This 5 percentage-point shift, from
deficit to surplus, was associated with a decline in the real
interest
rate on home mortgages and corporate bonds of just 0.8 percentage
points.
If the impact of future increases in the deficit (or
reductions in the government's surplus) is proportional to the past
impact, overspending by $100 billion (1 percent of GDP) would raise
long-term interest rates by approximately 0.16 percentage points. An
increase in interest rates of this magnitude would have a very
limited impact on home buying and business investment.
The article by Stevenson begins by noting Greenspan's view
that the downturn will be relatively short-lived and that the economy
will again experience rapid productivity growth due to technological
advances. It is worth noting that Mr. Greenspan failed to see the
recession coming, and predicted just a short inventory correction.
Arctic Wildlife Refuge
Maneuvering Continues on Plan to Drill for Oil in Arctic Refuge
Katherine Q. Seelye
New York Times, October 14, 2001, page A15
This article discusses the political battle over proposals to
drill for oil in the Arctic National Wildlife Refuge. At one point,
the article refers to job creation claims by advocates of a natural
gas pipeline through Alaska, which is being proposed as an
alternative to oil drilling in the Refuge. According to the article,
Senator Tom Daschle claims this pipeline will create 400,000 jobs.
This amount of job creation from constructing a pipeline is not
plausible. It is unlikely that a pipeline would generate even
one-tenth this number of jobs.
The article also refers to claims by Interior Secretary Gale
Norton that drilling for oil in the Refuge will make the nation less
dependent on foreign oil. Actually, the opposite is true. If the oil
in the Refuge is drained out, then the United States will have lost a
reserve that could have been tapped in a time of crisis.
The W.T.O. and TRIPS
Trade Officials Hope to Clear Air Before Big Meeting
Elizabeth Olson
New York Times, October 13, 2001, page C2
This article reports on talks between trade officials that are
supposed to establish the agenda for the next round of W.T.O.
meetings in October. At one point the article notes the
dissatisfaction of developing nations "about the failure to roll back
agreements worked out during the 1986-1993 Uruguay Round."
It would have been helpful to readers to point out
specifically which agreements have raised concerns. The specific
agreement that the developing nations demanded be placed on the
agenda is the Trade Related Aspects of Intellectual Property or TRIPS
agreement. In addition to draining tens of billions of dollars from
their economies, this agreement may force people in developing
nations to pay several hundred percent more for essential drugs --
such as AIDS medicine -- making them unaffordable to much of the
population of these countries.
There have been numerous articles on the upcoming WTO meeting,
some of which were even devoted to the concerns of developing
nations, that have not mentioned the controversy around TRIPS at all
(see ERR 8-6-01 and "Walking The Trade Tightrope Confidently," by
Richard W. Stevenson, New York Times, August 5, 2001, Section 3 page
4).