Economic Reporting Review
September 12, 2001

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

OUTSTANDING STORIES OF THE WEEK

Take Away the Window Dressing, and Who Will Buy
Gretchen Morgenson
New York Times, September 2, 2001, Section 3 page 1

This article contrasts profit growth as reported by firms, with the
profit growth reported by the Commerce Department. The article notes
that the average rate of profit growth reported by companies in the
S&P 500 from 1995 to 2000 was nearly twice the rate of profit growth
reported in the Commerce Department data. (The S&P 500 companies
account for the vast majority of all corporate profits - it is
therefore implausible that their rate of profit growth sharply
differs from the economy-wide rate of profit growth.)


The Politics of a Promise
Richard W. Stevenson
New York Times, September 6, 2001, page A18

This article examines the current political situation surrounding
budget negotiations. It notes that both parties appear committed to
keeping their promises not to spend any of the Social Security
surplus. This commitment could lead to spending cuts and/or tax
increases. The article points out that most economists view it as
foolish to cut spending or raise taxes in an economic downturn.
However, both the Democratic and Republican leadership appear ready
to sacrifice good economics for what they view as good politics on
the budget.


State Colleges Feeling Pinch, Cut Costs and Raise Tuitions
Jacques Steinberg
New York Times, September 7, 2001, page A1

This article reports on cutbacks in spending and tuition increases
being implemented at state universities across the country. As a
result of slowing tax collections, many states have substantially cut
the subsidies they provide to public universities.


Social Security

No Easy Fix For Social Security
Tom Redburn
New York Times, September 2, 2001, Section 3 page 4

This column discusses the prospects for the Social Security system.
It presents the views of several economists who want to see benefit
cuts, but don't support creating individual accounts. It contrasts
the views of these economists with those who either support
maintaining the existing system or who support individual accounts,
both of whom Redburn characterizes as being trapped in a political
straitjacket.

The article provides no reason for considering the economists who
favor benefit cuts less political than other economists in the
debate. The article reports their assertions that the economy "cannot
support millions upon millions of healthy people not working year
after year after year."

Of course, it is easy to show that the economy can support the
projected increase in the costs of the Social Security program as a
result of increasing longevity. At some point, this could require
additional tax revenue, but there is no plausible scenario under
which workers in the future would not have a much higher after-tax
wage than do workers today. (The after-tax wage is the key variable
to economists; it determines labor supply, not the tax rate. For
example, a person earning $20 an hour and paying a 20 percent tax
rate, has a far higher after-tax wage than a person who earns $10 an
hour and pays a 12 percent tax rate.)

The projections from the Social Security trustees show that real
wages will be 34 percent higher on average in 2030 than they are
today. In 2040, the real wage is projected to be nearly 50 percent
higher than it is now. This means that even if taxes are increased by
2 to 3 percentage points (a larger amount than is currently projected
as necessary) workers in 2030 would still enjoy an after-tax wage
that is 30 percent higher on average than workers receive at present.
In 2050, the after-tax wage would be more than 45 percent higher.

The assertions that the current Social Security system will not be
affordable in the long-run, rests on the political view held by these
economists -- that a tax increase to support Social Security, even in
the distant future, is unacceptable. This position constitutes every
bit as much of a political straightjacket as the ones derided in the
article.


Privatized Retirement Gets Boost
Rene Sanchez
Washington Post, September 7, 2001, page A4

The Social Security Debate Plays San Diego
David Chen
New York Times, September 7, 2001, page A12

These articles report on a public meeting held by President Bush's
Social Security commission, in which the commission heard statements
from panels they had selected. Both articles include unchallenged
assertions from witnesses that are either wrong or misleading. For
example, the Post article includes a quote from a 47-year-old witness
who claims to be worried that she will not get back all the tax money
she paid to Social Security. She said she would rather put her money
"in a mattress." In fact, according to the Social Security trustees'
projections, there should be no possibility that this women would not
receive her taxes back, or that she would get a better return by
placing her money under a mattress.

The Times article includes a comment from a witness stating that the
average life expectancy for a black male is 64.8 years, and "they
typically do not live long enough to retire." The gap in life
expectancies for black and white men at age 40 is seven years, while
it is less than 2 years at age 65. This means that many black men die
at early ages, before they have paid much in taxes and when they are
likely to have children who will receive survivor benefits under the
Social Security program. As a result, blacks actually get a higher
rate of return on average than whites.

This Social Security commission was explicitly selected to develop a
privatization proposal in accordance with the president's views. The
witnesses who were chosen to testify at the meeting were picked with
an eye to advancing this agenda. Given the political nature of this
process, it was inappropriate to present the witnesses' statements,
even when they were clearly inaccurate, without some analysis of
their accuracy.


The Stock Market

Japanese Report Adds to Global Economic Fears
Paul Blustein and Akiko Kashiwagi
Washington Post, September 7, 2001, page A1

This article discusses the prospects for the world economy in light
of new data showing that Japan's economy is shrinking. At one point
the article paraphrases a comment from an economist at Credit Suisse
First Boston, that the "stock market declines in the United States
and Europe do not necessarily reflect economic reality." In fact,
even with the recent declines, the price to earnings ratio in the
U.S. stock market is more than 30 percent higher than its historic
average. This is especially striking since the Congressional Budget
Office (CBO) projects that real profit growth will average just 1.0
percent annually over the next decade, as compared to an historic
average of more than 3.0 percent. The economist quoted in the article
must have a view of the economy wildly at odds with that of the CBO,
if he believes that the market decline in the United States did not
reflect economic reality.


Budget Issues

Congress Returns To Larger Stakes In Budget Debate
Lizette Alvarez
New York Times, September 3, 2001, page A1

At Pair of Labor Gatherings, Bush Gets Set for Fall Fight
Neil A. Lewis
New York Times, September 4, 2001, page A16

These articles discuss the prospects for the debate over the budget
in Congress this fall. Both articles include assertions that the
recent downward revision to surplus projections leaves Congress with
little money for new programs or additional tax cuts. This is only
true if the standard being applied is that the Social Security
surplus cannot be spent. This standard has only been viewed as
relevant for the last three years; prior to 1999 the government
routinely spent the entire Social Security surplus. If the same
budgetary standard used in prior years were used today, even after
the revisions to the projections, Congress has far more money at its
disposal than it did for most of the last three decades.

The article by Alvarez includes a quote from Congressman David Obey,
who argues that the slowing economy, along with the tax cut, has
taken away the money needed to address the nation's problems. It
would be foolish economics to restrain spending, if tax collections
are down solely as the result of a temporary slowdown. Virtually all
economists would agree that it's better that the government spend
money when the economy is in a slump than when it is near a cyclical
peak. Obey's view appears to be the opposite.


Daunting Task Greets Congress
Helen Dewar
Washington Post, September 4, 2001, page A1

This article discusses some of the issues that are likely to come
before Congress this fall. At one point the article outlines plans
for a prescription drug benefit for senior citizens and asserts,
"Bush and the Republican leaders support a more market-based approach
than those advanced by Democrats." It is not clear that the
Republican proposals for prescription drug benefits can accurately be
described as more market-based than the ones being advanced by
Democrats. The Republicans want the government to give the
pharmaceutical industry a patent monopoly for prescription drugs --
arresting those who attempt to compete in the market -- without
having to contend with government price controls or a government
buying agent, either of which could be part of a Democratic plan.

It isn't clear that a government-enforced monopoly without regulation
- the Republican solution -- implies less government involvement than
a government-enforced monopoly with regulation -- the Democratic
solution. It is clear that the pharmaceutical industry would have
larger profits in the first scenario.

This article also notes plans by Congressional Democrats to raise the
minimum wage, but that "Republicans insist on tax cuts to help small
businesses pay for it." In fact, the tax cuts being proposed by the
Republicans are likely to be larger than the additional wages that
small businesses would pay to workers as a result of an increase in
minimum wage. Rather than describing these tax cuts as helping small
business to pay for a minimum wage hike, it would be more accurate to
describe them as a political quid pro quo that Republicans expect in
exchange for going along with an increase in the minimum wage.


Productivity

U.S. Productivity Rises Faster
Jeanine Aversa
Washington Post, September 6, 2001, page E3

Productivity Growth Rate Is Revised Down to 2.1%
Reuters, New York Times,
September 6, 2001, page C2

These articles report on the release of revised productivity data for
the second quarter. Contrary to the Post article headline, the
reported rate of productivity growth was revised down, from a 2.5
percent annual rate in the advance report to a 2.1 percent annual
rate in this report.

This article includes a comment that "one of the main reasons that
productivity grew so much in the second quarter was that businesses
... cut workers' hours at a 2.6 percent annual rate." The drop in
reported hours was in fact the only reason that productivity grew in
the quarter, since output fell, as the article reports.

It is worth noting that quarterly data on hours -- and therefore
productivity - are highly erratic (see ERR 8-13-01). It is very
unlikely that hours actually declined at a 2.6 percent annual rate in
the second quarter. This would be the equivalent of losing jobs at
the rate of nearly 4 million a year. If the economy were actually
shedding jobs at this pace, there would be no doubt that it had
entered a recession.


Immigration

Migrants Wary of Guest Worker Plan
William Booth
Washington Post, September 2, 2001, page A1

This informative article examines views among immigrant workers of
proposals for establishing guest worker programs. At one point the
article refers to a business-lobbying group, which it characterizes
as "a coalition of employers who need low-wage workers." No employers
need low-wage workers, unless they are inefficient. All employers
find it desirable to pay workers low wages, just as they would find
it desirable to pay less money for electricity and rent.

If all firms had to pay high enough wages to attract non-immigrant
labor, then the least productive jobs would go unfilled. Some firms
may go out of business because they are not efficient enough to make
a profit when they pay the market wage, but this is how a capitalist
economy is supposed to work.


China's Stock Market

In China, Stock Scams Burn Small Investors
Clay Chandler
Washington Post, September 3, 2001, page A1

This article reports on some of the problems confronting small
investors who buy shares on China's stock market. According to the
article: "shadowy investment funds collude in bidding share prices up
and down. Executives exploit confidential information about corporate
strategy for personal gain. Accountants stamp their approval on bogus
or misleading financial reports. ... Business journalists, meanwhile,
think nothing of touting worthless companies in exchange for a hot
stock tip or a "red envelope" filled with cash." There have been
numerous reports of all of these problems in the U.S. stock exchanges
in recent years, as well. Presumably, the situation is worse in
China, but it is worth noting that small stock investors face the
same sort of risks in the United States.


Mexico

Great Expectations Of Mexico's Leader Sapped by Reality
Ginger Thompson and Tim Weiner
New York Times, September 4, 2001, page A1

This article examines the difficulty that Mexico's new president,
Vicente Fox, has had in fulfilling his campaign promises. The article
notes in passing that Fox has been unable to meet his job growth
targets because "for now the economic decline in the United States
has ended growth in Mexico, which sells roughly 85 percent of its
exports to the United States."

It is worth noting that this is one of the costs to Mexico of linking
its economy so closely to the United States. If Mexico's economy was
growing rapidly as a result of the stimulus provided by a rapidly
growing U.S. economy, its government would be eager to take credit
for this growth. By the same token, it must also accept
responsibility for slow growth that is the result of a slowdown in
the United States.


Recording Contracts

Music Starts Complain About Stringent Contracts
Laura M. Holson
New York Times, September 6, 2001, page C1

This article reports on hearings before the California state Senate
in which several prominent recording artists complained about
long-term contracts that tie them to a single company. The article
reports the position of the industry, that it needs long-term
contracts to recoup the expenses associated with promoting artists.

It would have been useful to include the views of an independent
economist. In the absence of long-term contracts, the industry would
not spend large amounts of money promoting individual artists.
Recording artists -- like the ones mentioned in the article -- would
then be free to negotiate with any company they choose, but it is
unlikely they would have much prominence. This situation may result
in a wider range of music being made available to the public, but it
would probably lead to a situation in which there are few, if any,
major stars.