Economic Reporting Review
September 6, 2001

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

OUTSTANDING STORIES OF THE WEEK

Tracking the Yo-Yo Economy
Louis Uchitelle
New York Times, August 26, 2001, Section 4 page 1

This column examines the statements that economists have been making
about the state of the economy since the slowdown began last year. It
notes that many seem to be looking for evidence that economic growth
is returning in the midst of considerable evidence suggesting the
opposite.

Rate Cuts Won't Spur an Economy Choked by Debt
Gretchen Morgenson
New York Times, August 26, 2001, Section 4 page 1

This article reports on the extent of corporate indebtedness. It
points out that as a result of high current debt levels, firms will be
reluctant to take on additional debt, and will have difficulty finding
lenders, regardless of how low the Federal Reserve Board pushes
interest rates.

Boom Missed the Middle Class In Some States, Data Suggests
Janny Scott
New York Times, August 31, 2001, page A1

This article reports the findings of an analysis of trends in family
income, which the New York Times commissioned. The analysis indicated
that the income of middle-income families was nearly stagnant over the
decade, while upper-income families experienced large gains, and
low-income families lost ground.

More Women Are Losing Insurance Than Men
Tamar Lewin
New York Times, August 31, 2001, page A13

This article reports on the findings of a study of trends in health
care coverage by the Commonwealth Fund. The study found that women are
losing coverage more rapidly than men, so that the number of uninsured
women is now almost as high as the number of uninsured men.

Former Workers at Lucent See Nest Eggs Vanish, Too
Danny Hakim
New York Times, August 29, 2001, page A1

This article examines the situation of some of the workers who were
recently laid off by Lucent. In addition to losing their jobs, many of
these workers also lost much of their savings due to a 91 percent drop
in the price of Lucent stock from its 1999 peak. Workers were given
incentives to buy Lucent stock and many had kept much of their 401(k)
money in Lucent stock. There are many workers in other firms who are
currently in a similar position.


Trade and Agricultural Subsidies

Treaties May Curb Farmers' Subsidies
Elizabeth Becker
New York Times, August 31, 2001, page A1

This article reports on the fact that recent trade agreements, most
notably the WTO pact, may limit the subsidies that can be paid to U.S.
farmers. It is worth noting that this possibility was almost never
mentioned in the debate over these trade agreements. When the
implications for agriculture were noted at all, most articles reported
comments suggesting that these agreements would be a boon for farmers.


Japan

Accelerating Decline in Japan Evokes Rust Belt Comparisons
James Brooke
New York Times, August 31, 2001, page A1

This article reports on the rising unemployment rate and falling
industrial production in Japan. At one point the article notes that
Japan's prime minister, Junichiro Koizumi, "promised to undertake
painful structural economic reforms." It then adds, "investors are
waiting to see if Mr. Koizumi, returning from a summer vacation, will
act on his bold talk."

Actually, Mr. Koizumi is acting on his bold talk. The rise in the
unemployment rate and massive layoffs of recent months are precisely
the painful structural economic reforms he promised. Instead of
encouraging firms to keep workers on their payroll through a downturn
and finding areas where they could do productive work - as had been
the practice in Japan - firms are being encouraged to carry through
U.S.-style mass layoffs. What remains to be seen is whether Mr.
Koizumu stands back and refrains from acting as the social cost of
this policy increases, or whether he will try to stimulate the economy
with increased spending or a further easing of monetary policy.

Jobless Rate In Japan Hits 5%
Akiko Kashiwagi
Washington Post, August 25, 2001, Page E1

This article reports on the new unemployment data for Japan, which
showed the unemployment rate reaching 5 percent for the first time
since World War II. At one point the article gives an account of
Japan's system of lifetime employment, where firms tried to avoid
laying off their permanent employees.

According to this account, the system of lifetime employment "led to a
troubled banking system, because Japanese banks were expected to
extend loans to major employers, even those losing large amount of
money, to keep unemployment low. These companies failed to repay
loans, eventually leading to insolvent banks that threatened the
stability of Japan's banking system and required a major taxpayer
bailout."

While this is an accurate description of the Japanese economy over the
last decade, it ignores the fact that this crisis developed in the
wake of a collapse of Japan's stock and land markets in 1989. As many
economists, such as Princeton University Professor Paul Krugman, have
argued, Japan's economy badly needed fiscal and monetary stimulus to
sustain it in the wake of the collapse of these bubbles. Instead, the
government was very cautious with both fiscal and monetary policy.
Given the failure of the government to adopt appropriate macroeconomic
policies, it is not clear that the nation would have fared any better
in the absence of the system of lifetime employment. In fact, had
companies been quicker to layoff workers, it may have simply
intensified the downturn, as seems to be happening now.


Investment Spending

Spending On Tech Is Way Down
Neil Irwin
Washington Post, August 25, 2001, Page E1

This article reports on the falloff in investment in technology over
the last year. The article includes a comment from Mickey Levy, the
chief economist at Bank of America, in which he seriously exaggerated
the growth of the technology sector. According to the article, Levy
said that "20 percent of business investment was in information
technology in 1990, compared with nearly 50 percent in 1999.

According to the most recent data from the Commerce Department,
information technology accounted for 27.9 percent of business
investment in 1990 ($176.1 billion out of $630.3 billion total
non-residential investment). The share of information technology had
risen to 34 percent in 1999 ($399.7 billion out of $1174.6 billion
total investment).


Argentina

Argentina's Stopgap Cash Gets Some Funny Looks
Larry Rohter
New York Times, August 26, 2001, Section 1 page 3

This article reports on the printing of a provincial currency by the
government in Buenos Aires province, the largest province in
Argentina. After examining the uses of the currency and noting that
other provinces are following suit, the article casts this development
in a negative light, warning that "for the central government though,
the immediate risk is that it might lose control over economic
policy."

The I.M.F. has just imposed a stringent set of conditions on Argentina
as a requirement of its most recent set of loans. For example, even
though Argentina is in the middle of a recession, the I.M.F. is
insisting that its government balance its budget, a policy virtually
guaranteed to raise unemployment and worsen the recession. Given the
ability of the I.M.F. to dictate such policies to Argentina's
government, along with the tremendous influence of international bond
markets on interest rates (and Argentina's unsustainable debt service
payments), it seems that it has already lost control over its most
important economic policies.

The article also quotes two experts extolling the virtues of adopting
the dollar as Argentina's currency. This decision would also cause
Argentina's government to lose considerable control over economic
policy, since the printing of dollars would be controlled by the
Federal Reserve Board in the United States, not Argentina's central
bank. The article does not indicate why it would be a matter of
concern if Argentina's government cedes control of economic policy to
its provincial governments, but not when it cedes control to the
I.M.F. or the Federal Reserve Board.


The Economy

Short-Term Consumer Confidence Drops
John M. Berry
Washington Post, August 29, 2001, Page E1

U.S. Economic Growth Drops To Almost Zero
John M. Berry
Washington Post, August 30, 2001, Page A1

These articles report on the release of new economic data on the state
of the economy. The primary news item in both articles is a negative
report on the state of the economy -- a drop in consumer confidence in
the first article and a sharp downward revision to second quarter GDP
in the second article. In both cases, the articles chose to highlight
positive news.

Specifically, both articles refer to an improvement in consumers'
expectations about the future, a measure that has very little
relationship to current or future levels of consumption. The headlines
to the jump-page section of both articles reflected this optimism:
"Long-Term Confidence Up," and "Some Economists See Signs That a
Pickup Has Begun."


The Budget

President Asserts Shrunken Surplus May Curb Congress
David E. Sanger
New York Times, August 25, 2001, page A1

This article discusses the current budget situation in the context of
a speech that President Bush gave in Texas. At one point the article
indicates that the nation could be facing "difficult fiscal times." It
is worth noting that insofar as budgets are constrained at present, it
is because a different yardstick is being applied, not because the
nation is in a bad financial situation. Even ignoring the Social
Security surplus, the deficit would be smaller, measured as a share of
GDP, than at any point from 1970 to 1998. (If we include the Social
Security surplus, which was standard practice for both politicians and
the press until about two years ago, we are looking at one of the
largest federal budget surpluses in history). If the current situation
can be described as a "difficult fiscal time," than this 28-year
period would have to be described in much graver terms.


Russia

Hard Living Is Making For Unhealthy Russia
Sharon LaFraniere
Washington Post, August 25, 2001, Page A1

This article reports on some of the factors contributing to the poor
health of the Russian population. At one point, the article refers to
a statement by Russian President Vladimir Putin, that an aging,
dwindling population is a national security concern. It is worth
noting that the low life expectancies of the Russian population
actually reduce the extent to which an aging population poses a
problem.

The article also includes a quote from a population expert who notes
that Russia's low birth rate is similar to the low birth rates in
other countries, which he characterizes as a "global problem." It is
not clear why low birth rates should be viewed as a problem. A stable
or declining population would place less pressure on land and other
resources and would generate less pollution. The article gives no
reason why this scenario should be viewed as bad.


Biotech Foods

U.S. Challenges EU's Biotech Food Standards
Alan Sipress and Marc Kaufman
Washington Post, August 26, 2001, Page A1

This article reports on a dispute between the United States and the
European Union (EU) over the sale of genetically altered foods in the
EU. The dispute centers on whether genetically altered foods will have
to be labeled as such when sold in Europe. The industry is opposed to
labeling because they claim that labels would "unfairly stigmatize the
products." The article includes a quote from an undersecretary at the
State Department, who described this view as a "free trade" position.

This is a dubious claim. Supporters of free trade usually believe that
consumers are the best judges of which products they should consume.
In this case, the industry is asserting that its own assessment of the
quality of its product is more accurate than the judgment of
consumers, who it believes will "unfairly stigmatize" their
genetically modified products. It would be more consistent with free
trade to inform consumers about the way in which food was grown and
allow them to decide for themselves which products to consume.

At several points the article refers to estimates of the losses to the
U.S. industry as a result of the EU's labeling requirement. The basis
for these estimates is not clear. It appears as though the numbers are
losses of potential sales to the EU. However, this would be a large
exaggeration of the actual losses to the industry, since most of the
food not sold in Europe could presumably be sold in other countries,
although possibly at a somewhat lower price.


Reorganizing the Federal Government

Bush Plan Could Cut Federal Workers
Ellen Nakashima
Washington Post, August 26, 2001, Page A1

This article discusses President Bush's plans to reorganize the
federal government. One of the changes it notes is "cutting waste in
the student loan program." It is unlikely that there is a category of
spending in this program that is universally accepted as "waste." It
would have been more appropriate to describe the President as
intending to eliminate spending that he characterizes as "waste."


Electricity Deregulation in California

Lights Off Is New Policy For Coping in California
Mireya Navarro
New York Times, August 26, 2001, Section 1 page 10

This informative article examines the continuing problems that
Californians are facing as a result of the deregulation of its
electricity markets. At one point the article refers to the situation
of southern California and comments that rates there "rose sharply
because it did not participate in the power deregulation experiment
that is regarded as the source of the state's energy trouble."

Actually, rates soared in southern California precisely because it did
take part in the statewide deregulation plans. Rates more than doubled
last summer, eventually leading to the re-imposition of price controls
(see ERR 8-8-00).