Economic Reporting Review
By Dean Baker
September 2, 2003

OUTSTANDING STORIES OF THE WEEK

For Houston Schools, College Claims Exceed Reality
Diana Jean Schemo
New York Times, August 26, 2003, page A12
http://www.nytimes.com/2003/08/28/national/28HOUS.html

This article presents evidence that school administrators in Houston had lied about the percentage of their graduates who had gone on to college. This follows earlier reports that school administrators had falsified scores on standardized tests. This evidence is especially important, because the Secretary of Education, Rod Paige, had made his reputation based on his performance as the superintendent of Houston’s school district.

The Budget and the Economy

2004 Deficit to Reach $480 Billion, Report Forecasts
Jonathan Weisman
Washington Post, August 27, 2003, page A2
http://www.washingtonpost.com/wp-dyn/articles/A46805-2003Aug26.html

Leap in Deficit Instead of Fall Is Seen for U.S.
Edmund L. Andrews
New York Times, August 27, 2003, page A1
http://www.nytimes.com/2003/08/27/politics/27BUDG.html

These articles report on the new ten-year budget projections from the Congressional Budget Office. Both articles report the budget and deficit projections only in dollar terms. It would be more informative to readers if these figures were presented as a share of GDP. For example, the $475 billon deficit projected for next year is equal to approximately 4.3 percent of GDP, somewhat lower than the peak of 6.0 percent in 1983 or the 4.7 percent level in 1992. (However, the on-budget deficit, which excludes the Social Security surplus, is projected to be $644 billion, or approximately 5.8 percent of GDP, almost the same as the 1983 record.)

By expressing items as a share of GDP, it is also easier to determine the major causes of the budget shortfall. Income tax revenue (both individual and corporate) is projected to be equal to 8.2 percent of GDP in 2004, the lowest share in the post-war period. By comparison, they were equal to 12.4 percent of GDP in 2000.

U.S. Agricultural Policy and Mexico

U.S. Corn Subsidies Said to Damage Mexico
Elizabeth Becker
New York Times, August 27, 2003, page C4
http://www.nytimes.com/2003/08/27/business/27CORN.html

This article discusses a report from Oxfam International that finds that U.S. agricultural subsidies are hurting Mexico’s economy. At one point the article asserts that “trade and development experts at the World Bank say that reducing or eliminating the agricultural subsidies and tariffs of wealthy nations would help developing nations more than any other single action.” While this may be what these experts say (no experts making this claim are identified in this article), it is not what their models show.

Models from the World Bank show that in most cases removing rich country trade barriers and subsidies would have very limited impact on developing countries. For example, it found that removing all rich nation barriers and subsidies on goods (both agricultural and manufactured) would raise income in low and middle income countries by an average of 0.6 percent. Other studies show that many developing countries would actually suffer a net loss from the removal of these barriers. In contrast, World Bank studies show much larger losses from the imposition of patent and copyright protection on developing nations through the TRIPS agreement. In other words, the models show that the elimination of patent and copyright protection in developing countries would be more effective in helping developing nations than the elimination of protections for agriculture (see “The Relative Impact of Trade Liberalization  on Developing Countries,” [http://www.cepr.net/relative_impact_of_trade_liberal.htm].

It is worth noting that if corn subsidies are harming Mexico in net (lower corn prices are a benefit to Mexican consumers) as this report claims, then Mexico would be able to remedy this problem if it were allowed to impose tariffs or quotas to protect its corn farmers. Mexico is prevented from imposing such barriers by NAFTA and other trade agreements. It is also worth noting that most trade models predict that Mexican farmers would suffer massive displacement as a result of the free importation of grain from the United States even if U.S. farmers did not receive subsidies.

At one point the article comments that Mexico’s entire budget for agricultural subsidies is less than one-tenth what the U.S. spends on subsidizing corn farmers alone. This comparison is irrelevant since the vast majority of U.S. corn does not end up in Mexico. The relevant comparison is the subsidy per bushel, which cannot be determined from this information.

The Economy

Economy Grew At 3.1% Rate In 2nd Quarter
Martha McNeil Hamilton
Washington Post, August 29, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A61578-2003Aug28.html

Economy Shows Unexpected Strength
Jonathan Fuerbringer
New York Times, August 29, 2003, page C1
http://www.nytimes.com/2003/08/29/business/29ECON.html

These articles report on the release of new data which showed GDP growth in the second quarter of the year was somewhat higher than had initially been reported. Both articles present the current economic news and the prospects for the future in overwhelmingly positive terms, citing only economists with positive assessments of the economy.

It is worth noting that almost no economists foresaw the recession in 2001. (The consensus growth projection for 2001 in September of 2000 of the “Blue Chip” forecasters was 3.5 percent; actual growth was 0.1 percent.) Over the last three years, economists have consistently erred on the optimistic side in their assessment of the economy. Given this history, it would be appropriate to ensure that the views of a wider range of economists are included in news articles.

While the economy is likely to experience strong growth through the third quarter, it is questionable how long this can be maintained. The tax rebates and record levels of home mortgage refinancing are fueling the economy at present. While the tax rebates check were sent to families in July and August, there will be no comparable boost to income in fourth quarter of the year. Also home refinancing has dropped more than 70 percent from its peak levels in June. The mortgage contracts negotiated in June are just now being settled, with many consumers getting cash which they intend to spend. However, this flow will slow to a trickle in the next two months. Also the mortgage industry itself, which directly employs more than 400,000 people will take a large hit due to the plunge in refinancing.

            In addition, state and local budget cuts and tax increases will take an increasing toll on the economy through the fall. Finally, much of the nation has experienced a real estate bubble as home prices increases have exceeded the overall rate of inflation by more than 30 percentage points nationwide, over the last eight years. If this unprecedented run-up in home prices is reversed, it will virtually guarantee a second dip to the recession.

The Housing Market

Prices Climb Amid Record Sales of Homes
Bloomberg News
New York Times, August 26, 2003, page C4
http://query.nytimes.com/gst/abstract.html?res=F00911F6395D0C758EDDA10894DB40448 

July Home Sales Set Record
Daniela Deane
Washington Post, August 26, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A44772-2003Aug25.html

Home Sales Remain Strong; Confidence Index Climbs
Reuters
New York Times, August 27, 2003, page C6
http://www.nytimes.com/2003/08/27/business/27ECON.html

These articles report on the situation in the housing market. All three note the strong home sales recorded in July, and the likelihood that this will be a peak, since mortgage interest rates have risen sharply in subsequent months. However, in assessing the future strength of the housing market, none of the articles mention the extraordinary run-up in home prices over the last seven years.

For example, the Post article notes that in the past home price increases have leveled off when interest rates have risen, but does not discuss the possibility that they will actually fall given present levels. This would be comparable to discussing movements in the stock market without ever referring to price-to-earnings ratios. Just as it is impossible to seriously assess the stock market’s future prospects without examining its current price-to-earnings ratio, it is equally impossible to assess the housing market without examining the current level of home prices.

The Reuters article includes a quote from Mickey Levy, the chief economist at Banc of America Securities, in which he predicts continued strength in housing construction based on the fact that the inventory of unsold homes is very low. The vast majority of home sales come from the existing stock of homes which is approximately 100 million, rather than new construction, which is currently about 1.8 million a year. If the number of current homeowners who chose to sell their home increased by just a small amount – for example, because they feared future price declines -- it would lead to a huge increase in the inventory of unsold homes. Therefore this measure is extremely sensitive to current views about the housing market.

Oil Drilling in the Arctic Wildlife Refuge

GOP Renews Hopes for Alaska Oil Drilling
Juliet Eilperin
Washington Post, August 26, 2003, page A4
http://www.washingtonpost.com/wp-dyn/articles/A44726-2003Aug25.html

This article discusses Republican efforts to include the authorization of oil drilling in the Arctic National Wildlife Refuge as an item in an energy bill. At one point it cites Representative Bill Tauzin, the chairman of the House Energy Committee, as saying that drilling in the refuge would boost the nation’s oil reserves. Actually drilling in the refuge would deplete the nation’s reserves. As long as the oil in the refuge remains in the ground, it represents a reserve that could be drawn down in the event of an emergency. Once it is drilled out of the ground, the oil no longer exists as a reserve.


Copyrights and Patents

In Reversal, U.S. Nears Deal on Drugs for Poor Countries
Elizabeth Becker
New York Times, August 28, 2003, page A1
http://www.nytimes.com/2003/08/28/business/28TRAD.html

This article discusses the apparent willingness of the U.S. to accept conditions for the manufacture and export of drugs that its trade negotiators had previously rejected. At one point it refers to efforts by poor countries to avoid being forced to enforce patent protections for drugs. The article refers to their “moral and political arguments” on the topic.

These countries also have powerful economic arguments for this position. Patent protection constitutes an enormous interference with the free market, raising the price of drugs by several hundred percent above the competitive price. In addition, since the vast majority of patents are held by rich nations, enforcing patent protection will result in a transfer of wealth from poor nations to rich nations. According to World Bank models, the economic losses to developing countries from imposing patent protection will exceed the gains they would receive if rich nations were to remove all remaining trade barriers.

To Fight Music Piracy, Industry Goes to Schools
Rebecca Dana
Washington Post, August 28, 2003, page A1
http://www.washingtonpost.com/wp-dyn/articles/A56352-2003Aug27.html

This article reports on efforts by the music industry to force colleges to assist them in preventing the unauthorized downloading of copyrighted music. This lengthy article includes no discussion of the economic inefficiency of copyrights – as demonstrated in part by the fact that universities are being forced to devote millions of dollars of resources to aid the recording industry.

The article also inappropriately compares unauthorized copying of music with drug use and drinking on college campuses. The comparison is inappropriate, since both drinking and drugs could have harmful consequences for students and others (e.g. when a student drives in an impaired state). By contrast, downloading music simply represents a loss of profits to the recording industry. A more appropriate comparison would be the black market purchase of blue jeans in the former Soviet Union.

 
Russia

After Decades, Russia Narrows Grounds for Abortions
Steven Lee Myers
New York Times, August 24, 2003, page A3
http://query.nytimes.com/gst/abstract.html?res=F20B15FE3E5D0C778EDDA10894DB404482

This article discusses a new law in Russia that places restrictions on abortions after the first trimester of pregnancy. At one point the article asserts that  “Russia’s demographic crisis” has been a factor in the decision to impose restrictions on abortion.

The article does not indicate why it views Russia as having a demographic crisis. It does have a declining population, but this does not pose any obvious problems for the country. In fact, since a declining population will mean less stress on natural resources, less congestion, and less pollution, it may be considered a boon to Russia. Of course, insofar as the decline in population is a result of the higher mortality rates that followed the collapse of the economy in the early nineties, this is obviously not a positive development, although a higher birth rate will not improve the health of those already living.

Microsoft and Software Monopolies

Microsoft’s Big Role on Campus
Ariana Eunjung Cha
Washington Post, August 25, 2003, page A1
http://www.washingtonpost.com/wp-dyn/articles/A40000-2003Aug24.html

This article discusses Microsoft’s donations of cash, software, and computer equipment to colleges and universities. At one point it comments that these donations “allow universities to follow through on projects that they could not have otherwise dreamed of, given their limited research budgets.” In this context, it would have been worth noting that one of the reasons why research is expensive is that the government grants patent monopolies to Microsoft and other producers of software and equipment needed for research. If more of these items were produced on an open access basis (i.e. not subject to patent or copyright protection), a development that Microsoft has vigorously opposed, then the cost of carrying through research would be much lower. While Microsoft’s donations may enable some universities to carry through research that they could not otherwise afford under the existing system, it is likely that universities in aggregate would be able to support much more research, in an open software world, even without Microsoft’s donations.

Electricity Regulation

Thinking Inside the Grid
Neil Irwin
Washington Post, August 25, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A39975-2003Aug24.html

This article discusses the problems that are preventing the modernization of the nation’s electricity grid. At one point it refers to the efforts of Virginia utilities to gain regulatory approval to link to a larger regional grid, so that they could sell their power to neighboring states. The article notes that electricity in the Virginia currently costs far less than it does in neighboring states. It then refers to a study sponsored by Dominion Virginia Power, one of the utilities seeking permission to link to the grid, which shows substantial savings to Virginia consumers, if it linked to the regional grid.

It is worth noting that utilities have made similar arguments to promote deregulation in other states with relatively low cost electricity. That is how they persuaded the legislature in Montana to support deregulation, even though its electricity prices were far lower than the prices paid in neighboring states. After deregulation, electricity prices in Montana nearly doubled (see “Under Deregulation, Montana Power Price Soars,” New York Times, August 21, 2003, page A16). The predicted result of deregulation is that prices in the deregulated market will converge. This means that electricity prices are likely to fall in high cost states, and are likely to rise in low cost states like Virginia.