Economic Reporting Review
By Dean Baker
September 22, 2003

OUTSTANDING STORIES OF THE WEEK

Overseers Missed Big Picture As Failures Led to Blackout
Eric Lipton, Richard Perez-Pena and Matthew Wald
New York Times, September 13, 2003, page A1
http://www.nytimes.com/2003/09/13/national/13POWE.html?ex=1064376000&en=93b520f5\441f8903&ei=5070

This article presents a detailed examination of the factors thatled to East Coast blackout in August.

Who's Watching Your Fund Manager?
Gretchen Morgenson
New York Times, September 14, 2003, Section 3 page 1
http://query.nytimes.com/gst/abstract.html?res=FA0C14FB3A5F0C778DDDA00894DB40448\2

This article reports on the lack of oversight of the people who manage mutual funds, and the demonstrable need for oversight.

Jobs and the Economy

Rapid Growth Seen For U.S. Economy
Edmund L. Andrews
New York Times, September 13, 2003, page B1
http://209.157.64.200/focus/f-news/981797/posts

This article assesses the economy's prospects for the next year and a half. The main theme of the article is that the economy is projected to grow rapidly, but unemployment is expected to remain close to its current level of 6.1 percent, a situation that it describes as "with no real parallels in the last half century."

Actually, the economy typically grows rapidly following a recession. The 4 percent projected growth path discussed in the article is slow compared to the growth following most prior recessions. For example, the economy grew 5.8 percent in 1973, 5.6 percent in 1976, and 7.3 percent in 1984. There is nothing at all mysterious about the current recovery – the economy is simply not growing as fast at it did following prior recessions, and therefore it is not creating jobs.

At one point the article asserts that the annual rate of productivity growth has "been above 5 percent both this year and last." According to the Bureau of Labor Statistics, productivity growth in the non-farm business sector (the standard measure) has averaged 4.4 percent over the last six quarters.

In noting the current strength of the economy the article neglects to mention home refinancing. This is important both because home refinancing had been giving a huge boost to the economy, and also because the pace of refinancing has slowed sharply in the last three months. Homeowners have been pulling equity out of their homes at more than a $200 billion annual rate, much of which has fueled consumption. In addition, the mortgage industry generates more than $50 billion a year in fees and directly employees over 400,000 people. The prospect of a sharp decline in this sector could significantly dampen growth later this year and next.

The article also neglects to mention the housing bubble. Home prices have outpaced the overall rate of inflation by nearly 35 percentage points over the last 8 years, an unprecedented run-up. This bubble has played a huge role in sustaining the economy, both by directly stimulating housing construction and indirectly by allowing people to borrow against their homes to support other consumption. If the bubble were to burst, it would have a huge impact and virtually guarantee a second dip to the recession. Omitting the housing bubble in a discussion of the current economy is comparable to leaving out the stock market bubble in a discussion of the economy in 1999 or 2000 (which often happened in reports at the time).

It is also worth noting that the article apparently relies heavily on the Blue Chip survey of economic forecasters for its assessment that the economy would grow by 4.0 percent in 2004. The track record of this group is mixed. For example, in September of 2000, the consensus growth forecast for 2001 was 3.5 percent. Even the most pessimistic 10 forecasters among this group projected growth of 2.6 percent. Actual growth for 2001 was 0.1 percent.

The Budget

Dizzying Dive to Red Ink Poses Stark Choices for Washington
David Firestone
New York Times, September 14, 2003, page A1
http://209.157.64.200/focus/f-news/981961/posts

This article discusses the turnaround in budget projections from showing massive surpluses in 2001 to large deficits at present. It describes this reversal as having been largely the result of unforeseeable events, describing the current budget situation as "hard to imagine."

This is not true. It was easy to show that the budget projections of 2001 were overly optimistic, in large part because they rested on projections of capital gains tax revenue which assumed that the stock bubble would continue to expand (see CEPR Budget Byte 1-31-01 [http://www.cepr.net/Bytes/cbo_budget_byte010131.htm ). Also, the inevitable collapse of the bubble was sure to lead to the sort of recession and slow growth that the nation is currently experiencing, which has also had a negative impact on the budget (e.g. "The Costs of the Stock Market Bubble"). It required nothing more than simple arithmetic to recognize the existence of the stock bubble and the inevitability of its collapse.

While the resulting reversal in the nation's budget situation was entirely predictable, it is remarkable that the government's forecasting agencies (the Congressional Budget Office and the Office of Management and Budget), along with most prominent budget analysts in the private sector, failed to foresee the collapse of the stock bubble and its implications. This issue is never considered in this article. In fact, all of the economists and policy analysts cited in the article somehow managed to miss the stock bubble and its implications for the budget.

This article includes a reference to a report by the business-backed Committee for Economic Development that raises the prospect that future generations will have a lower standard of living than current generations as a result of the budget deficit. It is worth noting that this projection assumes that Congress watches budget deficits grow to more than 20 percent of GDP and never raises taxes or cuts spending in order to keep the deficit under control. There is no historical precedent for this sort of political breakdown in the United States.

Furthermore, projections using the same methodology would show that the foreign debt poses a more serious problem. If current trends continue, the net foreign indebtedness of the United States will exceed the value of the stock market by 2018 and the combined value of the stock market and the housing stock by 2032.

Trade

Hark! Voices From the Street Are Heard in the Trade Talks
Elizabeth Becker
New York Times, September 13, 2003, page A6
http://query.nytimes.com/gst/abstract.html?res=FA0E14F83A5F0C708DDDA00894DB40448\2

Proposal at W.T.O. Meeting Rejects Changes in Subsidies
Elizabeth Becker and Ginger Thompson
New York Times, September 14, 2003, page A6
http://www.nytimes.com/2003/09/14/international/americas/14TRAD.html?ex=10643760\00&en=780bf94e8e5deb12&ei=5070

Coming U.S. Vote Figures In Walkout at Trade Talks
Elizabeth Becker
New York Times, September 16, 2003, page A6
http://www.nytimes.com/2003/09/16/international/americas/16TRAD.html

These articles report on negotiations over agricultural subsidies at the W.T.O. talks in Cancun. Both repeat assertions that subsidies in rich countries are seriously harming developing countries. These claims are contradicted by research from the World Bank. For example, a recent World Bank study found that if the United States eliminated all barriers and subsidies associated with merchandise trade (not just agriculture), it would have no effect on growth in sub-Saharan Africa [http://econ.worldbank.org/files/1715_wps2595.pdf ]. The World Bank's research indicates that requiring developing countries to respect the patents and copyrights of rich nations will be far more costly than any potential gains from the elimination of trade barriers in agriculture.

The Becker and Thompson and the September 16th Becker article include the assertion that rich nations give $300 billion annually in agricultural subsidies to their farmers. The actual figure is approximately $80 billion. This error has been a regular feature of reporting on trade in both the Post and Times (see ERR 9-15-03).

The September 13th Becker article also includes a discussion of the negative impact that rich nation cotton subsidies have had on developing countries. Rich nation subsidies have less impact on world cotton prices than the fact that there has been a huge increase in cotton production in the developing world. This increase has come about as the World Bank and other agencies encouraged developing countries to switch from food production to export crops. If so many countries had not followed this route, the world price of cotton would be far higher today.

Rich-Poor Rift Triggers Collapse of Trade Talks
Kevin Sullivan
Washington Post, September 15, page A1
http://www.washingtonpost.com/wp-dyn/articles/A10774-2003Sep14.html

Walkout Shadows Free Trade's Future
Paul Blustein
Washington Post, September 16, page A13
http://www.washingtonpost.com/wp-dyn/articles/A15933-2003Sep15.html

These articles discuss the causes of the breakdown of the W.T.O. talks in Cancun and the implications for the future of trade policy. Both articles describe the agenda of the U.S. and other rich nations at the W.T.O. as opening up trade and removing barriers. This is inaccurate. Much of the recent agenda of these countries has involved increasing barriers and restrictions. For example, the United States and Europe have pushed hard to limit the flow of intellectual products by imposing strict copyright and patent restrictions. These are enormously costly forms of protection, raising the price of protected items by several hundred percent above the free market price.

The Sullivan article asserts that the rich countries believe that "free trade has created jobs and wealth around the world." While their politicians use this rhetoric, it is unclear that they actually believe this claim. Growth in the vast majority of developing countries has slowed dramatically in the last two decades, as countries have increasingly adopted the neo-liberal policies associated with the World Bank, I.M.F., and W.T.O. It is unlikely that the rich nations' leaders believe that their policies have promoted growth, unless these leaders are ignorant of basic economic data.

The Blustein article also includes the erroneous assertion that rich nations provide $300 billion in farm subsidies to its farmers each year. At one point this article describes the political impact of 22 developing countries blocking an agreement as scoring "propaganda points." When President Bush, or any high official in the United States or a close ally, does something primarily for the purpose of affecting public opinion, it is usually characterized as a "public relations gesture." It would never be described as "scoring propaganda points."

Both articles make frequent references to "free-trade" policies or agreements. Much of the thrust of current trade negotiations either increases barriers, such as increased patent or copyright protection, or deal with issues not directly related to trade, such as investment or environmental regulations. Therefore it would be more appropriate to describe these arrangements as either "commercial" agreements or simply "trade" agreements.

China's Currency

Evans to Deliver Harsh Criticism of China for Trade Policies
Mike Allen
Washington Post, September 15, page A4
http://www.washingtonpost.com/wp-dyn/articles/A10328-2003Sep14.html

Administration Joins Outcry Against China Trade Policies
Edmund L. Andrews
New York Times, September 16, 2003, page A6
http://www.nytimes.com/2003/09/16/international/asia/16IMPO.html

These articles report on politicians' criticisms of China's currency policy. At one point, the Post article asserts that according to "some trade experts" a rise in China's currency "could have mixed effects on sales of U.S. goods." A rise in the value of China's currency would raise the price of China's goods relative to the goods produced in the United States, both in the United States and the rest of the world. According to standard economic theory, this would unambiguously increase the demand for U.S. goods. The article does not identify any trade experts who hold the view that the effect would be mixed.

Copyright in the Internet Age

File-Sharing Battle Leaves Musicians Caught in the Middle
Neil Strauss
New York Times, September 14, 2003, page A1
http://query.nytimes.com/gst/abstract.html?res=F40717F6355F0C778DDDA00894DB40448\2

In the Age of the Internet, Whatever Will Be Will Be Free
Steve Lohr
New York Times, September 14, 2003, Section 4, page 1
http://query.nytimes.com/gst/abstract.html?res=F60713FE355F0C778DDDA00894DB40448\2

These articles reflect on the problem of trying to enforce copyrights when music can be freely transferred over the Internet. Neither article considers alternative methods of supporting creative and artistic work, for example individual tax vouchers. The problems of enforcing copyrights (a relic of the feudal system), which are constantly in the news, would seem to suggest the need for policy makers to consider alternatives that are more consistent with modern techonology.

Canadian Drug Prices

Illinois May Buy Canadian Drugs
Ceci Connolly
Washington Post, September 13, page A1
http://www.washingtonpost.com/wp-dyn/articles/A10735-2003Sep14.html

This article reports on plans by the state of Illinois to buy prescription drugs from Canada in order to meet the needs of its employees. At one point the article presents the comments of a spokesperson for the drug's industry's lobbying group – that Illinois' action amounts to "importing other countries price controls." It would have been appropriate to note that the only reason that drugs are so expensive in the United States is that the U.S. government grants drug companies unrestricted patent monopolies. In Canada, and other countries, this government granted monopoly is limited by pricing restrictions. The U.S. industry is arguing for stronger government intervention – absolute government monopoly – not less, as the comment presented in the article implies.