Economic Reporting Review
September 17, 2001

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

OUTSTANDING STORIES OF THE WEEK

Chinese Mines Exploit Workers' Desperation
Phillip P. Pan
Washington Post, September 9, 2001, Page A1

This article examines the pay and working conditions in mines in
Gangzi, China. The article points out the dangerous working
conditions and low pay. In July, an explosion led to the death of 92
miners. Now many of their relatives are working in the mines to make
up for lost income.

Truer Gauge Of Living Standards Bodes Ill
Louis Uchitelle
New York Times, September 9, 2001, Section 3 page 3

This article reports on the decline in net domestic product over the
last year. Net domestic product is equal to gross domestic product,
the standard measure of economic output, minus depreciation. Over the
last year, net domestic product has fallen, even while gross domestic
product has continued to grow, albeit very slowly. The difference is
due to the fact that a large share of output is going to replace worn-
out and obsolete equipment, primarily computers and software that
have short lives. If net domestic product continues to decline, it
means that living standards will be deteriorating, even if gross
domestic product continues to grow.


As House Prepares Farm Bill, Questions of Who Needs Help, and How Much
Elizabeth Becker
New York Times, September 9, 2001, Section 1 page 22

This article examines the distribution of farm subsidies among
farmers. It points out that payments are highly concentrated among
the largest farms, with 2 percent of farmers receiving one-third of
all subsidies over the last four years.


August Unemployment

Unemployment Jumps
John M. Berry
Washington Post, September 8, 2001, Page A1

This article discusses the 0.4 percentage point rise in the
unemployment rate reported in August and the reported loss of 113,000
jobs in the Labor Department's survey of establishments. At one point
the article notes that the separate survey of households, which
provides data on unemployment, showed a drop of 1 million people in
the number of employed people. The article explains the discrepancy
between the two surveys by noting that "the household survey covers
many people in the work force of 141 million, such as the self-
employed, who are not on business payroll."

This is not a plausible explanation of the differences in the changes
in the number of jobholders reported by these surveys. The self-
employed number fewer than 10 million. To explain the discrepancy in
the two surveys, it would have been necessary for nearly ten percent
of the formerly self-employed to indicate that they had lost their
job in August.

The more plausible explanation is that the month-to-month changes in
reported employment in the household survey are large and erratic,
and often bear little relationship to what actually is happening in
the labor market. For example, in July the household survey showed an
increase of almost 450,000 in the number of employed workers. Due to
these erratic movements, the monthly change in the levels of
employment reported in the household survey should not be viewed as
meaningful.

All the economists used as sources for this article indicated that
they expected an economic turnaround in the near future. This has
been true of most of the sources that have been cited in news
articles about the state of the economy since the slowdown began last
fall. Given the poor record of these sources is assessing the state
of the economy -- including their failure to predict the downturn --
it would be appropriate to provide a more balanced range of views
from experts.

It is worth noting that the poor employment news for August came in a
month when the tax rebate was having its strongest impact. This
should have provided at least somewhat of a boost to the economy and
to employment levels for the month.


Capital Gains Tax Cuts and the Budget

In Washington, Blame Game Intensifies
Dana Milbank
Washington Post, September 8, 2001, Page A1

Capital Gains Tax Reduction Is Considered
Mark Allen and Juliet Eilperin
Washington Post, September 9, 2001, Page A1

Bush's Aides Seek To Focus Efforts On the Economy
Richard L. Berke and David E. Sanger
New York Times, September 9, 2001, Section 1 page 1

These articles discuss how President Bush and Congress are attempting
to deal with the prospect that some of the Social Security surplus
will be spent. The articles discusses a plan put forward by Senator
Lott, to cut capital gains taxes as a way to temporarily increase
revenue.

The argument for such a cut is that it may induce more investors to
sell stocks earlier -- especially if the tax cut is temporary -- and
thereby lead to a temporary increase in tax revenue, even if leads to
a loss of revenue over the long-term. In fact, it is not at all clear
that a cut in the capital gains tax could currently have this effect,
because the tax rate is already so low.

The vast majority of capital gains are currently taxed at a 20
percent rate. This is down from a 28 percent rate in the early
nineties. The impact of a reduction in the capital gains tax of a
fixed amount (e.g. 4 percentage points), will have the same impact on
investors' decision to sell stock regardless of the prior tax rate.
(In other words, a reduction in the tax rate from 20 to 16 percentage
points will provide as much incentive to move forward stock sales as
a reduction from 28 to 24 percentage points.) If the tax rate is
reduced from 28 to 24 percentage points, it is necessary to increase
the amount of realized capital gains by just 16.7 percent in order to
offset the revenue lost due to the lower tax rate. With the current
tax rate of 20 percent, it would be necessary to increase realized
capital gains by 25 percent just to break even.

It is also worth noting that a cut in tax rate could have an opposite
effect, if investors expect that the capital gains tax rate will be
lower in the future. In this case they will have an incentive to sell
earlier any stock on which they have lost money, in order to write
off their losses at a higher rate, thereby reducing their tax
liability by a larger amount.


The Budget

Congress Still Divided on Education Reform
Michael A. Fletcher
Washington Post, September 9, 2001, Page A7

This article discusses the prospects for the budget debate. It twice
refers to a "budget crisis," including once in the sub-headline.
While there may be a crisis for politicians who promised not to spend
any money from the Social Security surplus, it is not clear that
there is any basis for asserting the existence of a "budget crisis."
The surpluses currently projected, measured as a share of GDP, are
larger than any surpluses in the half-century prior to 2000.


Japan

In Unemployment Itself, a Hint of Hope for Japan
Howard W. French
New York Times, September 9, 2001, Section 4 page 4

This article examines the plight of middle-aged workers in Japan who
have been laid off by their former employers. At one point, it warns
that Japan's economy could "lock these workers in a costly state of
wandering and limbo just as Japan begins bracing for a huge
population decline expected in the decades ahead." If this were to
happen, it would describe a situation largely without precedent
anywhere in the world -- a large group of highly skilled workers
finding themselves permanently unemployed, even as Japan faces a labor
shortage due to its declining population.

At another point, the article includes an assertion that "people in
their 50's and 60's got the maximum benefit from Japan's economy."
Since workers in Japan have consistently enjoyed rising real wages,
this is a questionable assertion. A worker currently in their forties
would have enjoyed real wages that were more than one-third higher,
on average, than did a worker currently in their sixties, when they
were the same age.

This article also implicitly assumes that Japan's shift towards a
U.S.-style market economy will lead to more rapid economic growth.
There is little evidence to support this view. Japan's per capita GDP
growth averaged 4.2 percent annually over the four decades from 1960
to 2000. No country that followed that U.S. model has ever been able
to sustain a pace of per capita GDP growth that was anywhere close to
this rate.



Nikkei Plunge Has Investors On the Edge
James Brooke
New York Times, September 11, 2001, page C1

This article reports on a further drop in Japan's stock market. At
one point it attributes the downturn to a recognition by foreign
investors that "free market change to Japan's economy will come
slowly, if at all." It is not clear that this recognition would lead
to a sell-off of stocks. The adoption of "free market change" is
usually associated with letting a large number of firms and banks go
into bankruptcy at the same time that the government refrains from
stimulating the economy, with either fiscal or monetary policy.
It is not clear that investors would view this scenario as good for
corporate profits.

The article also notes that the Nikkei stock index closed at lower
level (measured in yen) than the Dow Jones index (measured in
dollars) for the first time since 1957. It also includes a chart
showing the two indexes. It is worth noting that in 1957, there were
close to 400 yen to a dollar. At present, there are approximately 120
yen to a dollar. This means that measured in a common currency, the
Nikkei index would still have risen more than twice as much than the
Dow over the last 44 years.


South Korea

Behind South Korea's Political Crisis, an Economy in Disarray
James Brooke
New York Times, September 9, 2001, Section 1 page 9

This article examines the current economic and political problems
facing South Korea. At one point it reports: "many critics say that
Mr. Kim has faltered in South Korea's biggest economic battle -- to
break up the nation's often monopolistic conglomerates .... which
have hurt the economy with risky practices. Often deeply indebted to
banks they partly own, they have incurred debts that are hazardous
for both borrowers and lenders."

While the Korean system has come under strain in recent years --
which is aggravated by the current slowdown -- it has been incredibly
successful in raising living standards in the nation. Per capita GDP
growth has averaged over 6 percent annually in South Korea over the
last 40 years. This is more than twice the rate than any country
following a U.S. type system has been able to maintain. This history
suggests that the Korean system of long-term relationships between
firms and banks, may have benefits that will be lost if it moves in
the direction advocated by the critics cited in this article.


Economic Forecasts

Economists Lower Forecasts But Do Not Expect a Recession
Reuters
New York Times, September 11, 2001, page C16

This article reports on the lowered forecasts for economic growth by
a group of business economists. It is worth noting that economic
forecasters tend not to be very accurate at predicting turning
points, such as recessions. In September of 2000, the average growth
forecast of the Blue Chip fifty forecasters for 2001 was 3.5 percent.
The most recent forecast was 1.6 percent. The average forecast, in
September of 2000, for the fourth quarter of 2000 (which started the
next month) was 3.6 percent. The actual rate was 1.9 percent.