Economic Reporting Review
August 23, 1999
By Dean Baker
Productivity & Computers | Stock Market & the Fed | Taxes | Aging | Farming | Germany | Russia | Asia |
Outstanding Stories
PRODUCTIVITY & COMPUTERS
"Industries Doing More With Less"
Tim Smart
Washington Post, August 19, 1999, page E1
This article discusses recent trends in productivity growth in U.S. manufacturing. The article
notes that Labor Department data shows productivity in manufacturing in the '90s growing
more rapidly than manufacturing productivity in the '80s, and much more rapidly than
productivity in the rest of the economy.
This result is entirely driven by the rapid rate of productivity growth reported for computers.
Apart from the computer sector, manufacturing productivity growth is actually somewhat
slower than in the '80s.
It is also worth noting that the strong productivity growth measures reported for computers
depends entirely on the rate of quality improvement in computers estimated by the Commerce
Department. The Commerce Department estimates that computer quality has been improving
at a rate of between 30-40 percent annually for the last four years. This estimate is derived
from calculations that measure the cost of particular characteristics, such as additional units of
random access memory or increasing the storage capacity of the hard drive.
This measure of quality improvement seems questionable. Approximately three quarters of
computers are purchased as investment goods by businesses. The only measure of the quality
of an investment good is its ability to generate revenue. Unless the ability of a comparably
priced computer to generate revenue has increased by 30-40 percent annually (i.e. a computer
purchased for $1500 in 1999 generates 30-40 percent more revenue than a computer
purchased for $1500 in 1998), the Commerce Department's measure overstates the rate of
quality improvement in computers.
[Top]
STOCK MARKET & THE FED
"Fed's Relationship to Markets Growing More Complicated"
John M. Berry
Washington Post, August 17, 1999, page E1
This article discusses the relationship between monetary policy and the stock market. It notes
Federal Reserve Board Chairman Alan Greenspan's concern that the stock market is seriously
over-valued, but then comments, "In short, Greenspan and the staff concluded that whatever
the level of stock prices, there is no way to be sure whether there is a market bubble."
This is a rather strange assertion. The Federal Reserve Board always must act based on its
assessments of the future, which can never be known with certainty. The proper valuation of
the stock market can be determined based on projected growth of corporate profits and the
degree of risk that investors associate with holding stock.
Currently, there are few, if any, economic forecasts that project that corporate profits will grow
more rapidly than the economy in the foreseeable future. Many forecasters, such as the
Congressional Budget Office, project that corporate profits will grow much less rapidly than
the economy over the next decade.
The implication of profits growing at rate equal to, or less than, the rate of GDP growth, is that
the real returns on stock will be less than the real returns available on government bonds.
Capital gains on stock would average approximately 2.5 percent annually, as stock prices rise
in step with profits. Dividend payments currently average approximately 1.5 percent of share
prices, which gives a total return of 4 percent. By comparison, the real return on government
bonds is slightly over 4 percent, as long-term bonds currently pay slightly over 6 percent
interest, while the inflation rate is about 2 percent.
Historically, investors have demanded a large premium on stocks relative to bonds to
compensate for risk. Unless investors now consider stocks less risky than bonds (an
implausible scenario), stock prices are hugely over-valued. This sort of calculation is far simpler
then the assessments that economists at the Federal Reserve Board must perform if they are to
stage a pre-emptive strike against inflation that is not yet evident in any economic data.
[Top]
TAXES
"Phone Fee for School Internet Service Seems to Be Too Popular to Overturn"
David E. Rosenbaum
New York Times, August 15, 1999, Section 1, page1
This article comments on the apparent popularity of a fee, applied to long distance phone
service, which has been used to support the wiring of schools to the Internet. The revenue is
dispersed disproportionately to poorer school districts in order to ensure that every school will
have Internet access. At one point, noting the program's popularity, the article comments that
"what happened was that pork barrel trumped political, ideological and commercial concerns."
While the article quotes an analyst at the conservative Heritage Foundation referring to the
program as a "pork barrel," it does not indicate how the New York Times has independently
come to this assessment of the program.
"OMB Chief Hits GOP Tax, Spending Plans"
John F. Harris
Washington Post, August 14, 1999, page A7
This article discusses the debate over the Republican tax cut proposals. At one point the article
presents the argument from Treasury Secretary Larry Summers that it would be bad policy to
stimulate the economy with tax cuts at a time when it is already near full employment.
Actually, the Republican tax cuts will not provide a net stimulus to the economy, since the
budget surplus is still projected to grow over the next few years even if the tax cut is approved.
The tax cut would simply make the budget less contractionary than it would be in the baseline
scenario.
[Top]
AGING
"Great Expectations: The Retirement Mentality Vs. Reality"
Barbara Crossette
New York Times, August 15, 1999
This article discusses the implications of the projected increase in the proportion of elderly
people in nations around the world. The article provides no justification for its claim that the
future increase in retirees poses any threat to nations' economic health.
At one point, it includes the comment that "unless people can be persuaded to work longer into
old age, say Mr. Peterson and others, like Joseph Chamie, director of the United Nations
Population Division, developed countries will have to accept a loss of productivity, creativity
and even general economic health."
The assertion in this quote, which is the central theme of the article, does not have much
meaning. Retirement logically implies some loss of output as compared with people continuing
to work, but the same is true of weekends, vacations and lunch breaks. While in most nations
the percentage of retirees in the populations is projected to rise, it has also been rising in the
past. Since productivity in most industrialized nations rises at the rate of approximately 2
percent annually, and the percentage of retirees in the population rarely rises much faster than
one tenth of this rate, there is no reason to believe that a growing population of retirees should
prevent nations from enjoying continually rising living standards.
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FARMING
"Farmers Begin to Think Globally in Price Crisis"
William Claiborne
Washington Post, August 15, 1999, page A3
This article analyzes the problems facing the nation's farmers as the prices of major crops, such
as wheat and corn, have fallen well below the cost of production for most farmers. At several
points, the article discusses the hope of farmers that the government will develop new export
markets for them.
It is virtually impossible for the sort of market openings (e.g., ending the embargo against
Cuba) discussed in the article to have any measurable impact on the plight of farmers.
Commodities have a world market price that will be minimally affected by these moves.
Farmers can sell already sell as much grain as they choose to at world market prices; the
problem for them is that the price is too low.
[Top]
GERMANY
"Ex-World Capital Has Its Eye on a Virtual Future"
Roger Cohen
New York Times, August 20, 1999
This article discusses the economic prospects for Bonn as it adjusts to the move of Germany's
capital to Berlin. The article asserts that Germany is trying to "make a painful shift from a highly
regulated society where the state accounts for close to 50 percent of economic activity to a
nimbler, more entrepreneurial system better able to create jobs."
Actually, Germany has consistently outpaced the United States in productivity growth over the
last two decades. Because efficiency in Germany is growing at a more rapid pace than in the
United States, there is less demand for labor, and therefore fewer new jobs created. The
article would be more accurate if it said that the intent of Germany's government was to create
a "less nimble" system, which by being less efficient, would have more demand for labor, and
therefore create more jobs.
The article also quotes an executive at a software company complaining about the quality of
Germany's education system. According to the executive, his company has 100 job openings
but cannot find qualified workers. The article does not point out that executives of software
companies in the United States have been making exactly the same complaints. In the last
several years, they have lobbied Congress heavily to increase the number of H1B visas issued
to foreigners with special skills. They claim that it is necessary to bring in more foreigners with
computer skills, because they cannot find enough U.S. citizens with adequate training.
[Top]
RUSSIA
"Russia, One Year After the Fall"
Daniel Hoffman
Washington Post, August 17, 1999, page A1
This article examines the state of the Russian economy one year after the collapse of the ruble.
At one point the article comments: "Looking back, some economists say that Russia could not
have sustained the stronger ruble." It then quotes a Russian banker saying that "the crash in the
ruble was the best thing that ever happened to this country."
It is worth noting that many economists argued exactly this position prior to the collapse of the
ruble, most notably Harvard economist Jeffrey Sachs. A lower valued ruble makes Russian
goods more competitive both domestically and internationally. The I.M.F. and the "reformers"
in the Russian government, backed the Clinton Administration, insisted on maintaining the value
of the ruble.
Although there were differing views among economists at the time, virtually all of the news
reporting on Russia's financial crisis last summer predicted that the devaluation of the ruble
would be disastrous for the Russia economy. (See, e.g., " U.S. Expects Yeltsin Will Survive
Economic Woes," by Thomas W. Lippman, Washington Post, 8/15/98, page A12; "Yeltsin
and Crew Are Sinking Like the Ruble," by Michael Wines, New York Times, 8/22/98, page
A1; and "Yeltsin Must Resort to Reform by Decree," by Sharon LaFraniere, Washington
Post, 7/18/98, page A14.)
See also "Outstanding Stories of the Week."
[Top]
ASIA
"Asia's New Ascent"
Sandra Sugawara
Washington Post, August 18, 1999, page E1
This article describes a generally upbeat picture for East Asian economies based on the fact
that they are moving towards U.S.-style capitalism. While there is evidence that East Asian
economies are recovering, it is questionable whether adopting U.S.-style capitalism would
really prove to be beneficial.
According to data from the United Nations, in the period from 1960 to 1994, per capita GDP
grew at a 4.9 percent annual rate in Japan, a 5.2 percent rate in Thailand, and a 7.0 percent
rate in South Korea. There are few cases where economies that follow the U.S. model have
been able to sustain even half this rate of growth.
"Fearing Deflation, China Orders a Ban on New Factories"
Seth Faison
New York Times, August 19, 1999,
This order reports on the Chinese government's efforts to cope with a problem of
over-production and falling prices. The general view of economists interviewed in the story
appeared to be that China is suffering from a chronic problem of inadequate demand. Such a
shortfall can best be solved by higher wages, increased government spending or printing
money, which would help to create inflation. Until very recently, few mainstream economists
viewed inadequate demand as a real economic problem.
[Top]
OUTSTANDING STORIES OF THE WEEK
"The Russian Devolution"
John Lloyd
New York Times Magazine, August 15, 1999
This article examines the process of Russia's transition away from a centrally planned economy.
It details the extensive graft and corruption that has been associated with the privatization
process advocated by Russian "reformers," the IMF and the Clinton administration.
"Teamsters Leaders Want End of U.S. Supervision"
Steven Greenhouse
New York Times, August 14, 1999,
This article reports on the status of efforts to eliminate corruption within the Teamsters.
"Managed-Care Medicaid Experiment Fails in Ohio" Amy Goldstein
Washington Post, August 14, 1999, page A1
This article reports on the problems that states have had in switching Medicaid beneficiaries
into HMOs. It focuses on the experience of Ohio, where the number of HMOs declining to
serve Medicaid beneficiaries has forced the state to alter its plans. As the article points out,
other states have encountered similar problems.
"Mexicans in U.S. Say Wiring Money Can Be Costly"
Rick Wills
New York Times, August 14, 1999,
This article discusses the fees that firms such as Western Union typically charge people in the
United States who wire money to relatives in Mexico. The fees can often run as high as 25
percent of the money being transferred. The article notes that fees for sending money to
countries where there is more competition are usually much lower.
"ATM Cards Fail to Live Up to Promises to Poor"
David Barstow
New York Times, August 16, 1999, page A1
This article investigates the impact of a recent change in government policy, where benefits to
the poor, such as welfare, are paid through electronic funds transfers. This policy requires
beneficiaries to use special ATM cards to access their money. The article reports on the limited
availability of ATM machines that accept these cards. This forces many people to travel
considerable distances or pay fees in order to get their money.
[Top]
Dean Baker is a senior research fellow at the Preamble Center and at the Century Foundation.
Recent articles can be found on the websites of the New York Times and Washington Post.
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