ECONOMICS REPORTING REVIEW: Checking the Facts
Week of August 19 - 25, 2000

Dean Baker is co-director of the Center for Economic and Policy Research.


THE BUDGET AND THE ECONOMY 

"In L.A. Truth-Stretching Was Mostly in Check," by Glenn Kessler in the Washington
Post, August 19, 2000, page A8. 

"Will Issues Be Answer?" by David Rosenbaum in the New York Times, August 19,
2000, page A1. 

"In Tax Plans, Truth Is Closely Budgeted," by Glenn Kessler in the Washington Post,
August 23, 2000, page E1. 

"G.O.P. Sends Clinton Bill to End Estate Tax," by Lizette Alvarez in the New York
Times, August 25, 2000, page A14. 

The first two articles discuss the two major party candidates' stand on some key
budget issues. Both include useful analysis of the candidates' positions that go
beyond just repeating their claims. However, both include comments that are
somewhat misleading. 

The Post article discusses the extent to which President Clinton should be given
credit for lowering the deficit. In this context it includes a comment from Rudolph
Penner, a former director of the Congressional Budget Office, that Clinton was helped
by the refusal of Congress to go along with "an unnecessary stimulus package and a
massive health care reform bill." The proposed stimulus package was relatively small,
less than $30 billion, and most of the spending was temporary. It is difficult to see
how this spending in 1993 and 1994 would have affected the budget in the current
year. 

It also is not clear that the proposed health care bill would necessarily have led to
higher deficits. The bill would have required most firms to pay for their workers'
health insurance, which may have reduced government expenditures through
Medicaid and other payments for uninsured workers. In addition, in the period since
1992, inflation in the medical care sector has been more than 50 percent higher than
the overall rate of inflation. The Clinton health care program was intended to slow
the rate of growth of health care costs. If it had succeeded, it would have led to
savings in both the private and public sector. 

The Times article notes Vice President Gore's intention to use the surplus to pay
down the debt, adding, "the theory being that this would improve the economy and
make it easier to pay Social Security benefits after the baby boomers retire." This
accurately conveys the Vice President's rhetoric on this issue, however standard
estimates of the effect of paying down the debt on economic growth show that its
impact is relatively modest. 

For example, the Congressional Budget Office estimates that paying down the debt,
at roughly the rate proposed by Mr. Gore, would lead to a cumulative increase in GDP
of 1.6 percent after thirty-five years (Congressional Budget Office, 1997, "The
Economic and Budget Outlook: Fiscal Years 1998-2007"; page 90). This is less than
the difference in the GDP growth that had been projected for the last year and what
the nation actually experienced. In other words, the greater than expected growth
of the last twelve months, if it is not subsequently reversed, will have a far greater
impact on living standards twenty or thirty years from now, than any gains that we
hope to receive from paying down the debt. 

The Times article also uncritically repeats Mr. Gore's pledges to spend money for
hiring and training teachers and for environmental protection. It is not clear that his
pledges actually imply larger expenditures for these purposes, after adjusting for
inflation. The most frequently cited measure of the projected budget surplus over the
next ten years assumes that spending on most programs does not keep pace with
inflation. It would be possible to increase spending above the baseline levels assumed
in this projection and still have a reduction in the real level of spending for education
and environmental protection. Until Mr. Gore more carefully specifies his proposals, it
will not be possible to determine whether he intends to increase the real level of
spending in these areas. 

At one point, the Times article notes that Governor Bush wants to eliminate the
estate tax. The article comments that the tax applies to estates of more than
$675,000. It should have pointed out that under current law, $1,000,000 of an
estate will be exempted from the tax after 2006. The second Post and Times articles
similarly only mention the size of the current exemption, not the level that will be in
place after 2006. This distinction is important, since close to half of the estates
currently subject to the tax, fall within the gap between the current exempted
amount and the amount that will be exempted after 2006, which means that they
would not be subject to tax if the 2006 rules were in place. 

"Bush Says Gore Erred in Calling Tax Cut Too Big," by Frank Bruni in the New York
Times, August 23, 2000, page A1. 

This article discusses Governor Bush's efforts to defend his tax cut proposal against
criticisms from Vice President Al Gore. At one point it refers to a comment from
Governor Bush that his plan would allow for a surplus even after assuming that
government spending increases by $3.3 trillion over the next decade. This article
should have noted that this $3.3 trillion increase in spending is the amount needed to
compensate for inflation and population growth, it does not imply any new
government programs or expansion of existing ones. The Post article on this topic ("A
Shift in Bush's Footing," by Mike Allen, August 23, 2000, page A1) did make this
point. 


BILINGUAL EDUCATION 

"Test Scores Rise, Surprising Critics of Bilingual Ban," by Jacques Steinberg in the
New York Times, August 20, 2000, Section 1, page 1. 

This article reports on an improvement in test scores for students in California who
were classified as not proficient in English. This improvement comes two years after
California instituted a ban on bilingual education. The article touts this improvement
as proof that the ban on bilingual education has proved to be a boon for students
who are not proficient in English. 

The evidence presented in the article is actually much weaker than the headline and
lead paragraphs imply. California has instituted a number of changes in its
educational policies in the last two years, such as smaller class sizes and changes in
teaching methodology. These changes have led to increases in test scores generally,
not just for students who are not proficient in English. In fact, in the Oceanside
Unified School District, which is the focus of the article, test scores increased more
for the students who were already proficient in English than for those who were not,
as indicated in a chart accompanying the article. This suggests that the other
changes, not the elimination of bilingual education, may have been responsible for
the higher test scores among students who are not proficient in English. 

There are other methodological issues that make it difficult to draw conclusions from
the increase in test scores noted in the article. The vast majority of students who
were not proficient in English were never enrolled in bilingual programs, so the
elimination of these programs could have no direct effect on their test scores. Also,
if some students dropped out of school altogether because of their difficulty with
English, or for some other reason did not take the tests, it would raise average test
scores. The data presented in this article does not in any way control for this effect.


In principle, it should be possible to measure the impact that the ban on bilingual
education has had on the performance of students not proficient in English. However,
the information presented in this article does not provide a sufficient basis for making
this assessment. It is worth noting that this article, with its misleading headline, ran
as the lead story on the front page of the Sunday newspaper, by far the most widely
read paper of the week. 


FEDERAL RESERVE BOARD AND INTEREST RATES 

"Fed Quandary: Push Jobless Rate Up to Curb Inflation?" by John Berry in the
Washington Post, August 20, 2000, page H1. 

This article assesses the economic situation prior to the Federal Reserve Board's
meeting to decide on interest rate policy. At several points it asserts that firms will
pass on higher labor costs in the form of higher prices. This is not necessarily the
case. Over the last ten years there has been a large shift from wages to profits, as
the capital share of corporate income has increased by 3.0 percentage points. If
wage growth began to increase, it is reasonable to believe that there would be some
reduction in profit margins, so that prices need not rise as much as wages. 

The article also includes some discussion about views within the economic profession
as to how low the unemployment rate could go before triggering inflation. The article
notes that most economists used to believe that 6.0 percent unemployment was the
lowest rate that was consistent with stable inflation. Since the economy has now
been below this level for six years, and the inflation rate has actually slowed
somewhat most economists have reassessed their position, as the article notes. The
article points out that some economists now view the trigger point as being between
5.0 and 5.5 percent unemployment while others believe it may be between 4.0 and
4.5 percent. Instead of relying exclusively on economists who were proven wrong by
the recent performance of the economy, it may have been more helpful if the article
had presented the views of some of the economists who proved right, such as James
Galbraith of the University of Texas or Ray Fair at Yale University. 

"Fed Lets Rates Stand But Points to 'Risks,'" by John Berry in the Washington Post,
August 23, 2000, page E1. 

"Still Inflation-Wary, Fed Lets Rates Stand," by Richard Stevenson in the New York
Times, August 23, 2000, page C1. 

These articles report on the decision by the Federal Reserve Board not to raise
interest rates. Both articles include assertions that more rapid productivity growth
has allowed firms to incur higher wage costs without raising prices. In fact, there is
little evidence that firms are incurring higher wage costs even though the
unemployment rate is low. 

For example, the Bureau of Labor Statistics (BLS) hourly compensation series shows
a 4.7 percent increase from the second quarter of 1999 to the second quarter of
2000. This growth rate is slower than the 5 percent increase over the prior year. The
BLS employment cost index does show some acceleration in the growth of labor
costs, with a 4.4 percent increase in the last year, compared with a 3.5 and 3.2
percent rise in 1998 and 1999, respectively. However, the BLS average hourly wage
series shows no change in the pace of wage growth over the last two years, with
the average wage rising by 3.7 percent from July of 1998 to July of 1999, and again
to July of 2000. 

These data suggest that low unemployment does not appear to be leading to more
rapid wage growth, as the conventional theory predicts. This means both that there
is little basis for concern about wage-driven inflation. Moreover, they imply that
workers do not appear to be sharing in the gains from more rapid productivity
growth. Because of the surge in oil prices over the last year, workers' wages have
barely kept pace with the rate of inflation, which has been approximately 3.7 percent
over the last year. 

The Times article misrepresented the conventional economic theory on the causes of
inflation by referring to the economy's maximum sustainable growth rate. The
standard theory holds that inflation begins to accelerate when the unemployment
rate falls below a certain level, the non-accelerating inflation rate of unemployment
or NAIRU. (Most economists had argued that the NAIRU was 6.0 percent
unemployment prior to 1994, now the range of estimates goes as low as 4.0
percent.) The growth rate only matters insofar as rapid growth lowers the
unemployment rate. If rapid growth pushed the unemployment rate below the NAIRU,
then the conventional theory predicts that it will lead to higher inflation. A rapid
growth rate at a level of unemployment above the NAIRU would not be expected to
lead to higher inflation. 


THE TRADE DEFICIT 

"Trade Gap Widened To Record In June," by Marcy Gordon, Associated Press, in the
Washington Post, August 19, 2000, page E1. 

"Trade Deficit Set a Record During June," by Associated Press in the New York
Times, August 19, 2000, page B5. 

This article (the same article appears in both papers) reports on the release of data
showing that the trade deficit hit a new record in July. The article minimizes the
significance of the trade deficit in a way that cannot be justified by economic
theory. 

The article refers to "economists" who suggest that the trade deficit is not a problem
because it is due to more rapid growth in the United States than in its trading
partners. This perspective is contrasted with the view of "critics" who do consider
the deficit a problem. 

Many of the critics are also economists. They point out that the differences in
growth between the United States and its trading partners cannot explain the size of
the U.S. trade deficit. Nor is it possible that the deficit will be eliminated or
substantially reduced by plausible future differences in growth, with our trading
partners growing more rapidly, unless the United States falls into a steep recession. 

In many ways a trade deficit can be seen as being comparable to a budget deficit of
the same magnitude. Both imply a future interest burden, as the government
accumulates debt through budget deficits, or the nation accumulates foreign debt
through trade deficits. In both cases, there are limits to how large the deficit can go
or how long it can be sustained before the markets react in a way that makes further
borrowing difficult or impossible. While the nation's trade deficit, which is running at a
$360 billion annual rate (or more importantly its current account deficit which is
running at close to a $450 billion annual rate), does not approach its borrowing
capacity, it clearly cannot be sustained for long. It is unlikely that news of a budget
deficit of $450 billion would be given such little attention by these papers. 

These articles assert that "the trade deficit is the sole blot on an otherwise vibrant
U.S. economy." Some would view the fact that the real wages of a typical worker
have not risen in the last year as blot. Record levels of household indebtedness
relative to income could also be viewed as a blot, as could record levels of corporate
debt, and a hugely over-valued stock market. 


POLAND 

"Despite Soaring Prosperity, Poland Still Isn't Sure of Itself," by Steven Erlanger in
the New York Times, August 25, 2000, page A1. 

This article examines current attitudes in Poland towards the economy and the
government. The main theme, as indicated by the headline, is that despite prosperity
the Polish people are to a large extent unhappy about their current situation. The
article attributes this pessimism to excessive expectations in earlier years. 

There is another plausible explanation. Near the end, the article mentions that the
unemployment rate is 13.5 percent, and rising. Presumably the unemployed are not
sharing in the nation's prosperity. Also, with an unemployment rate at this level,
much of the rest of the workforce must be fearful for their own jobs. It is likely that
the reality of unemployment in the present, or the fear of it in the future, has
contributed to the sense of pessimism among the Polish people discussed in this
article. 


AIDS IN DEVELOPING NATIONS 

"Clinton Signs Bill Establishing Global Fund to Fight AIDS," by the Associated Press in
the Washington Post, August 20, 2000, page A5. 

This article reports that President Clinton signed a bill which establishes a global trust
fund to combat AIDS in developing nations. He committed the United States to
contribute $300 million to the fund. The article asserts that the fund "has been
likened to a kind of global Marshall Plan against the infectious disease." 

While a global Marshall Plan may be appropriate -- since tens of millions of lives are
at risk to AIDS -- this fund does not come close to being of the same order of
magnitude as the Marshall Plan. In today's dollars, the Marshall Plan assistance to
post-war Europe would be close to $100 billion, more than 200 times as much money
as President Clinton is pledging to the fight against AIDS. 


OUTSTANDING STORIES OF THE WEEK 

"Spending More Where Predecessors Urged Less," by David Rosenbaum in the New
York Times, August 22, 2000, page A19. 

This article briefly explains the history of a program under which the federal
government provides subsidies to school districts that include a large number of
federal workers or military personal. Governor Bush indicated that he intended to
substantially increase spending on this program, and his pledge was widely reported.
It is unlikely that many readers were familiar with this rather obscure program and
had any sense what an increase in funding would imply.


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