Economic Reporting Review
By Dean Baker
September 15, 2003

OUTSTANDING STORIES OF THE WEEK

Safety Problem at Nuclear Plants Is Cited
Matthew L. Wald
New York Times, September 8, 2003, page A14
http://www.safesecurevital.org/articles/2003/safety09082003.html

This article reports on a study finding serious safety problems in two nuclear power plants in New York State. Such issues are rarely given attention in the media, except in crisis situations.

High Tuition Debts And Low Pay Drain Public Interest Law
Jonathan D. Glater
New York Times, September 12, 2003, page A1
http://www.nytimes.com/2003/09/12/national/12LAW.html

This article reports on the decline in the number of lawyers who are willing to pursue careers in public interest law. This is largely attributable to the fact these jobs are relatively low paying, and law students will generally accumulate tens of thousands of dollars in debt to pay for their education.

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Jobs and the Economy

Payroll Jobs Down in August
John M. Berry
Washington Post, September 6, 2003, page A1
http://www.washingtonpost.com/wp-dyn/articles/A32964-2003Sep5.html

Tax Cut Claims Gain Criticism As Employers Shed More Jobs
Mike Allen and Jonathan Weisman
Washington Post, September 6, 2003, page A6
http://www.washingtonpost.com/wp-dyn/articles/A32724-2003Sep5.html

Jobs Report Leads Bush to Defend Reliance on Tax Cuts
Richard W. Stevenson
New York Times, September 6, 2003, page B1
http://query.nytimes.com/gst/abstract.html?res=F60815FB345C0C758CDDA00894DB40448\2

These articles report on the release of August employment data by the Labor Department, and its implications for the economy. The articles by Berry and Stevenson both note the rapid pace of productivity growth in the recovery and cite it as one of the reasons that the economy has not generated more jobs.

This is not a compelling explanation. Productivity always grows rapidly in a recovery. The 4.6 percent rate of productivity growth over the last seven quarters is not very much higher than the 4.0 percent average rate of productivity growth in the prior five recoveries. Rapid productivity growth did not prevent strong job growth in these prior recoveries. For example, the economy generated 4.5 million jobs between November 1970 and November 1972, even though productivity growth averaged 4.3 percent for the seven quarters following the end of the recession. This suggests that the problem is inadequate growth, not excessive productivity growth.

The Berry article also asserts that gains in productivity are leading to substantial increases in real wages. Recent data from the Labor Department indicate that wages are rising only slightly faster than the rate of inflation. For example, the average hourly wage has risen by 2.9 percent over the last year and at a 2.6 percent annual rate over the last quarter. With an inflation rate slightly over 2.0 percent, this translates into real wage growth of between 0.5 and 1.0 percent. By comparison, real wages were growing at close to a 2.0 percent annual rate from 1996 to 2000.

The article by Allen and Weisman includes a quote from Gregory Mankiw, the Chair of the President's Council of Economic Advisors, in which he explains that firms are always reluctant to add workers at the beginning of a recovery because of the costs involved in hiring new workers. While there can be some truth to this claim, it does not explain why firms have been reluctant to increase workers' hours. The length of the average workweek has shrunk to 33.6 hours in August. It had been as high as 34.6 hours in 1998. If there had not been a falloff in the average length of the workweek, the economy would have lost another 3 million jobs in the downturn.

At one point, the article by Stevenson lists several signs that the economy is turning up. It includes the recent rise in the stock market. The stock market bears no direct relationship to the growth rate in the economy. It fell in the seventies, even though the economy experienced relatively healthy growth and rose rapidly in the eighties when the economy was growing relatively slowly. The stock market is primarily a measure of distribution rather than growth. One plausible explanation for some of the recent rise in the stock market is the reduction in the tax rate on dividend income. This has no direct connection to economic growth.

Fed Isn't Expected to Cut Rates
John M. Berry
Washington Post, September 12, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A62618-2003Sep11.html

This article discusses the Fed's likely actions at its meeting next Tuesday. At one point it notes that growth projections for the current quarter are between 4 and 6 percent. It then asserts that "such estimates mean there is little need for any additional stimulus from lowering short-term interest rates."

While it is questionable how much stimulus a rate cut would provide, the fact that the economy is still shedding jobs suggests a need for more stimulus. A widely accepted policy goal is to have the economy growing fast enough to absorb the growth in the labor force. This is clearly not happening at present. An economy is expected to grow rapidly at the end of a slump. For example, it grew 7.3 percent in 1984. A quarter or two of good growth will not be nearly enough to both absorb the growth in the workforce and the large pool of workers who are without jobs as a result of the downturn.


Trade and Protectionism

Dean Courts Union President
Jim VandeHei
Washington Post, September 9, 2003, page A2
http://www.washingtonpost.com/wp-dyn/articles/A45399-2003Sep8.html

This article reports on Howard Dean's efforts to gain the support of the Service Employees International Union. At one point the article notes Mr. Dean's opposition to trade agreements that do not include labor and environmental standards. It comments that this position "has delighted union members, who generally oppose free trade."

Actually, most people oppose free trade in the sectors in which they make their livelihood. For example, the American Medical Association has worked hard to maintain licensing rules that seriously limit the number of foreign doctors who may practice in the United States. Most other highly paid professionals are protected by similar professional restrictions. Union members do not have a different view of trade than most other people in society. The main difference is that U.S. trade policy has largely focused on reducing trade barriers in ways that will put union members and less educated workers in direct competition with low paid labor in the developing world. It has not sought to give highly paid professionals the same sort of competition.

Western Farmers Fear Third-World Challenge to Subsidies
Elizabeth Becker
New York Times, September 9, 2003, page A1
http://www.nytimes.com/2003/09/09/international/europe/09FARM.html

Agriculture on the Table At Trade Talks in Mexico
Kevin Sullivan
Washington Post, September 10, 2003, page A12
http://www.washingtonpost.com/wp-dyn/articles/A51578-2003Sep9.html

Annan Decries Trade Policies
Kevin Sullivan
Washington Post, September 11, 2003, page A12
http://www.washingtonpost.com/wp-dyn/articles/A57444-2003Sep10.html

Protestors Defend Cause at Trade Talks
Kevin Sullivan
Washington Post, September 12, 2003, page A20
http://www.washingtonpost.com/wp-dyn/articles/A62869-2003Sep11.html

African Nations Press for an End to Cotton Subsidies in the West
Elizabeth Becker
New York Times, September 12, 2003, page A5
http://www.nytimes.com/2003/09/12/international/africa/12TRAD.html

These articles all discuss agricultural policies in the context of the WTO talks taking place in Cancun. A main theme of all five articles is that farm subsidies are extremely harmful to developing countries.

For example, the September 9th Times piece (which is a lengthy front page article that also takes up most of an inside page) quotes a vice- president of the World Bank as saying that "reducing these barriers and removing agricultural subsidies is one of the most important things that rich nations can do for millions of people to escape poverty."

This claim is not supported by research findings. For example, a recent World Bank study found that if rich nations removed all subsidies and barriers affecting merchandise trade (not just agricultural goods), it would raise income in poor countries by just 0.6 percent. This means that if a country had a per capita of GDP of $1000 at present, its income would rise to $1006 when the full impact of this trade liberalization was felt.

The World Bank's research actually shows that developing countries would gain far more if rich nations abandoned their efforts to impose U.S.-style patent and copyright protection. While agricultural barriers have been a frequent topic in recent news stories on trade, the much larger economic impact of patent and copyright protection has been completely ignored (see "The Relative Impact of Trade Liberalization on Developing Countries," [http://www.cepr.net/relative_impact_of_trade_liberal.htm ]).

All five of these articles include the assertion that the rich nations give more than $300 billion in annual subsidies to their farmers. This not true. Actual subsidies from governments to farmers are about $80 billon a year. The $300 billion a year figure is an estimate of the total cost to consumers and taxpayers in rich nations of the agricultural protection. Most of this cost is attributable to higher food prices as a result of planting or import restrictions.

Some of this money actually represents transfers to farmers in developing countries, for example when farmers in Nicaragua or Brazil are able to sell sugar at prices far above the world market price due to sugar quotas in the United States. This $300 billion figure also includes the cost to taxpayers of subsidies on food sold to developing countries.

This mistaken claim has appeared repeatedly in both papers in recent months (e.g. "Framework Set For Reduction Of Subsidies," August 14, 2003, New York Times, page C1; U.S., EU Forge Compromise On Farm Trade, Washington Post, August 14, 2003, page E1; and in a full column editorial in the New York Times, "Rigged Trade Game," July 20, 2003.)

Several of these articles focus on the harmful impact on developing countries of cotton subsidies in rich nations. World cotton prices have plummeted in recent years as a result of unusually large harvests world-wide. This is part of a longer trend in which world cotton production has increased by more than 40 percent over the last two decades. The vast majority of this increase in production has been in developing nations, partly as a result of pressure from the World Bank and other economic agencies to reorient agriculture towards export crops. At this point, rich nations account for only about 25 percent of world cotton production.

The World Bank's policies have made many countries enormously dependent on the prices of a single crop. According to the September 12th Times article, a group of west African countries rely on cotton for 10 percent of their GDP, 40 percent of their exports and 70 percent of their agricultural exports. Such reliance on a single crop would place these countries' economies in a precarious state, regardless of the agricultural policies being pursued in the rich countries.


Copyright Enforcement in the Internet Age

Fighting the Idea That All the Internet Is Free
Steve Lohr
New York Times, September 9, 2003, page C1
http://www.nytimes.com/2003/09/09/technology/09FREE.html

261 Lawsuits Filed on Internet Music Sharing
Amy Harmon
New York Times, September 9, 2003, page A1
http://www.nytimes.com/2003/09/09/technology/09MUSI.html

New Parent-to-Child Chat: Do You Download Music?
Amy Harmon
New York Times, September 10, 2003, page A1
http://www.nytimes.com/2003/09/10/technology/10MUSI.html

These articles report on efforts by the music industry to use schools, courts, and parents to enforce their copyrights. None of the articles provide any economic analysis of this important issue. The core problem stems from the fact that with Internet technology, music can be transferred at zero marginal cost. However, the entertainment industry insists on trying to enforce copyrights - which are government-granted monopolies - in order to charge fees for music. The sort of lengthy discussions of this issue that appear in these articles should include some economic analysis and more modern and efficient means of financing creative and artistic work.

The article by Lohr refers to the fact that material can be costlessly transferred over the Internet as an "idea" that is being combated. It never points out that it is an idea that also happens to be true; in the absence of government intervention, items on the Internet are free.

These articles include several inappropriate comparisons that put unauthorized copying of recorded material in a negative light. For example, the article by Lohr compares it with credit card fraud. The September 10th article by Harmon compares it with plagiarism. Both comparisons are completely inappropriate. Unauthorized reproduction of digital material involves a free exchange between consenting individuals. It is illegal solely because the government has chosen to grant a third party a monopoly in the form of copyright protection.

In this sense, the exchange most closely resembles black market transactions, such as the sale of foreign-made blue jeans in the former Soviet Union. Given the rules under which the Soviet economy was constructed, these transactions had negative externalities - for example they diverted scarce foreign exchange from other uses - but the problem resulted from the inefficiency of the underlying system, not the transactions as such.

The second article by Harmon, which is devoted to a discussion of how parents can most effectively discourage their children from copying material off the web, might have compared this to how parents in the Soviet Union sought to discourage their children from participating in the black market. This would have made for a more informative piece.


Argentina and the IMF

Argentine Deal Is Likely to Be One of a Kind
Tony Smith
New York Times, September 12, 2003, page W1
http://www.nytimes.com/2003/09/12/business/worldbusiness/12debt.html

This article reports on a loan agreement between the IMF and Argentina, under which the IMF backed away from most of the conditions it had originally demanded. At one point it contrasts Brazil's position relative to the IMF with that of Argentina. Brazil has closely followed an agreement with the IMF that its new president Lula da Silva negotiated shortly after being elected. The article quotes an economist as saying that Brazil would not want to follow Argentina and take a hard line with the IMF because "these days nobody has a bad word to say about Brazil, so why put that in jeopardy."

Brazil's agreement with the IMF required fiscal austerity and extremely high interest rates to contain inflation. As a result, Brazil's economy has been thrown into a recession and the unemployment rate is rising. The prospect of a prolonged recession should give Brazil substantial reason to question the value of its good relationship with the IMF.


Growth and Inflation

Inflation Rates Fall Worldwide
John M. Berry
Washington Post, September 12, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A62700-2003Sep11.html

This article reports on IMF economists celebrating the fact that inflation rates have fallen sharply across the world over the last two decades (the sub-headline is "IMF Official Credits Free-Market Policies"). Economists usually measure the success of economic policies by their impact on growth. GDP growth has slowed sharply in the last two decades in nearly every region of the world. For example, per capita GDP grew by 2.8 percent annually in Latin America from 1960 to 1980. It grew less than 0.5 percent annually since 1980. In sub-Saharan Africa it grew 1.5 percent annually in the first period. It contracted at almost a 1.0 percent annual rate in the second period.

While the IMF's "free-market" policies may have led to lower inflation, they have also been associated with slower growth throughout most of the developing world. This slowdown in growth has been associated with diminished progress in raising life expectancy, literacy rates and other measures of well-being.