Week of August 7 - 13, 2000

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

LAYOFF RATES 

"Layoffs May Be at a Record Low, Survey Finds," by Jonathan Fuerbringer in the New
York Times, August 10, 2000, page C1. 

This article reports on a new survey from the Labor Department, which gives data on
the frequency of layoffs and the subsequent work experience of laid off workers. To
some extent the article, and especially the headline, misrepresents the data in the
survey. 

The survey has only been conducted over a twenty year period. Furthermore, the
survey methodology was changed in the nineties, so the data from years prior to
1994 is not directly comparable. Therefore the status of the "record low" layoff rate
is somewhat dubious. 

The article also asserts that "nearly three-fifths of those laid off from age and salary
jobs found new jobs that paid the same or more." The survey found that 3,275,000
workers had been laid off from jobs they had held for more than three years (the
group examined by the survey). The survey found that 866,000 workers, or 26.4
percent of the total number either remained unemployed, or dropped out of the labor
force altogether. Another 164,000 were working part-time. Only 928,000, or 31.3
percent of the displaced workers in the survey, reported finding jobs that paid them
equal or higher wages.




BRAZIL 

"Brazil Moves From Wings to Center Stage," by Stephan Buckley in the Washington
Post, August 6, 2000, page A20. 

"A 'Solid Recovery' Is Seen in Report on Brazil Economy," by Jennifer L. Rich in the
New York Times, August 10, 2000, page C3. 

These articles discuss Brazil's economic recovery. The Times article reports that the
economy is expected to grow by almost 4.0 percent this year and between 4.5 and
5.0 percent next year. The Post article discusses ways in which Brazil is increasingly
asserting its influence in international forums. At several points, the article comments
on the success of economic policies instituted by Brazil's president, Henrique
Cardosa, in reducing inflation and restoring stability. It notes that "foreign investment
topped a record $32 billion last year, even after a messy devaluation clobbered
Brazil's markets." 

It is worth noting that the IMF worked hard to prevent Brazil from carrying through
with this devaluation. It insisted that Brazil raise its interest rates above 40 percent
and demanded that the country spend billions of dollars in foreign exchange to
support its over-valued currency. It warned that devaluation would lead to a
devastating surge of inflation and undermine confidence in the economy. The IMF
acquiesced in the devaluation only after the draining of foreign exchange reserves
made it impossible for Brazil's central bank to continue to support its currency. 

At the time of the devaluation, most of the reporting in the Times and Post
uncritically accepted the IMF's view that currency devaluation would be catastrophic
for Brazil. It also blamed the crisis leading up to the devaluation on Brazil's failed
economic policies. The praise for Cardosa's policies in this article was almost entirely
invisible at the time of the devaluation (see "One Choice Made, More to Come," by
Sylvia Nasar, New York Times, January 16, 1999, page B1; "Brazil Is Warned to Clean
Up Its Economic Act," by Richard W. Stevenson, New York Times, January 16, 1999,
page B1; "As an Economy Sinks, U.S. Sees Painful Choices," by David E. Sanger, New
York Times, January 14, 1999, page A1; and "Brazil Devalues Currency," by Paul
Blustein, Washington Post, January 14, 1999, page A1. See also Dean Baker's news
analysis for the week of January 16, 1999, and January 9, 1999).




SOUTH KOREA 

"South Korea Replaces Top Economic Officials," by Samuel Len in the New York
Times, August 8, 2000, page A6. 

This article reports on the decision by South Korea's president, Kim Dae Jung, to
remove several of his top economic officials. At one point, the article notes that
Korea's stock market did not response positively to the new appointments, with the
main index dropping by 4.85 percent. 

The article then refers to this index as "a barometer of the country's economic
mood." There is considerable evidence that stock markets are subject to wide swings
due to factors that have almost nothing to do with the economy -- for example the
worldwide plunge in stock prices in October of 1987, which had no apparent cause.
However, insofar as stock prices have a rational foundation, they are a measure of
expectations of future corporate profits. This may have very little relationship to a
nation's economic mood or well being. A country's workers may fare quite well in a
period when profits are relatively modest, if workers are seeing their wages rise due
to a smaller profit share. It is inaccurate to present the mood or shareholders as
being identical to the mood of the nation as a whole.




COPYRIGHTS 

"Chasing Hollywood 'Pirates,'" by David Streitfeld and Ariana Eunjung Cha in the
Washington Post, August 9, 2000, page A1. 

This article examines some of the problems that the entertainment industry has
encountered as it tries to maintain its copyright protection in the Internet Age. While
the article notes how copyright enforcement has become much more difficult as a
result of the Internet and the spread of digital technology, it never questions
whether the copyright system is the best way to support creative and artistic work.
This is an obvious question that should have been addressed in a lengthy analysis
such as this. (See "Economic Scene: The Internet Carries Profound Implications For
Providers of Information," by Hal R. Varian, New York Times, July 27, 2000, page C2,
for a discussion of these issues.) 

The article also never notes the main distinction between intellectual property and
other forms of property. Intellectual property is non-exclusive. This means that any
individual can listen to music or see a video on the web, without in any way reducing
the ability of any other individual to hear the same music or see the same video. This
is not true for other types of property like land, food, or clothes. This is the source
of the problem in copyright enforcement, since it involves imposing a price on a
service that the market could deliver at zero cost.




SOCIAL SECURITY 

"From G.O.P. Ticket, A One-Sided View," by Eric Pianin and Charles Babington in the
Washington Post, August 5, 2000, page A12. 

"Bowing to the Middle Keeping to the Right," by Alison Mitchell in the New York
Times, August 5, 2000, page A7. 

"Bush Puts New Spin On G.O.P. Blueprint," by Richard W. Stevenson in the New York
Times, August 6, 2000, Section 1 page 14. 

"Clinton Veto Sets Stage for Tax Cut Battle," by Ellen Nakashima in the Washington
Post, August 6, 2000, page A4. 

These articles all discuss proposals put forward by the presidential candidates for
Social Security and Medicare. They all include assertions suggesting that these
programs are in need of reform or repair. For example, the Times article by Mitchell
includes an assertion by Governor Bush that he will strengthen Social Security for the
generation that fought World War II. The Post article by Pianin and Babington asserts
that many experts believe that raising taxes or cutting benefits will be necessary to
maintain the solvency of these programs. 

This discussion seriously distorts the true financial strength of these programs. For
example, current projections show that if absolutely nothing is done, Social Security
will still be able to pay promised benefits until 2037. At that point, the youngest
member of the generation that fought World War II will be 110 years old. In short,
Governor Bush's claim that he will strengthen Social Security for this age cohort is
ridiculous on its face, since there is almost no conceivable scenario in which the
program would be short of funds during their lifetime. 

The Medicare program is projected to be fully solvent until 2022, at least thirteen
years after the winner of this year's presidential election will have left office. The
amount of revenue needed to address the long-term projected shortfalls in these
programs is not large relative to the tax increases that were put in place in each of
the decades from the fifties to the eighties. The projections showing long-term
shortfalls in these programs assume very slow economic growth. Even if these
projections prove accurate, and nothing is done to strengthen these programs over
the next decade, there would still be plenty of time to address looming shortfalls
without causing significant economic disruptions, just as was true with the shortfalls
that arose in previous decades.




FARM LABOR 

"Farm Work by Children Tests Labor Laws," by Steven Greenhouse in the New York
Times, August 6, 2000, Section 1, page 10. 

This informative article examines the situation of children working on farms in
Virginia's eastern shore. At one point the article presents the assertion of
farm-owners, that they would prefer not to hire children, but that there is a shortage
of adult workers. Farm labor is among the lowest paying occupations, even for
adults. If farmers offered higher wages, then presumably more people would be willing
to work on farms. The farmers claim about a labor shortage really just means that
they prefer hiring children to paying higher wages.




JULY EMPLOYMENT REPORT 

"Job Growth Slows, Suggesting Fed May Not Raise Interest Rates," by David
Leonhardt in the New York Times, August 5, 2000, page B1. 

This article reports on the Labor Department's release of employment data for the
month of July. At one point the article asserts the wage growth in the report was
"one sign of inflationary pressure." It adds that wage growth is "continuing at a pace
that is faster than in late 1999. Since the start of the year, wages have risen at an
annual rate of 4.0 percent, up from 3.2 percent in the second half of last year." 

It is very difficult to make a case that wage growth is accelerating based on recent
data. Over the last three months hourly wages have grown at just a 3.57 percent
annual rate. This is almost exactly the same as the 3.54 percent rate for all of 1999.
It is considerably less than the 4.85 percent rate for the first three months of this
year. It is necessary to pick time periods very carefully to show any acceleration in
wage growth at all, and even then the change is minimal. This point is important
because the Federal Reserve Board sees evidence of accelerating wage growth as a
reason to raise interest rates to slow the economy. 

It is also worth noting that the rate of inflation over the last year has been
approximately 3.5 percent, almost exactly the same as the rate of wage growth. This
means that, in spite of extraordinary productivity growth and the lowest
unemployment rate in thirty years, workers are barely seeing any gains in real wages.




SENATOR LIEBERMAN AND STOCK OPTIONS 

"An Ally of Big Business Balances a Friend of the Earth," by David E. Rosenbaum in
the New York Times, August 9, 2000, page A18. 

This very informative article examines Senator Lieberman's record as a supporter of
big business. It also points out the financial support that major industries have
extended to Senator Lieberman throughout his career. 

One of the items mentioned in the article was Senator Lieberman's intervention to
overturn the Federal Accounting Standards Board's (FASB) rules governing the
treatment of stock options. The article's discussion of this issue was insufficient to
convey its importance to readers. 

In 1994, FASB developed new rules that required that the value of stock options be
treated as an expense, and be deducted from profits at the time they are issued.
Many firms that relied heavily on stock options to compensate their employees,
particularly upstarts in the computer industry, objected strongly to these rules. They
argued that the reduction in reported profits would lower their stock prices by as
much as 20 to 30 percent, thereby reducing their ability to raise capital in the stock
market. 

According to standard economic theory, the change in accounting rules should have
no effect whatsoever on stock prices. The theory holds that stock prices are
determined by well-informed investors, who will recognize the true value of corporate
profits, regardless of the accounting rules in use at the time. 

If the Silicon Valley executives were right about the impact of the accounting rule on
stock prices (i.e. they were not wasting their time worrying about this issue), it
implies that either the rule change would have led investors to undervalue the stock
of firms that issue large amounts of options, or the current system -- in which stock
options never get deducted against profits -- leads to an over-valuation of stock
prices. 

The implications of the latter are striking. For example, if the proper value of the
whole stock market is 20 to 30 percent less than its current level, it would imply an
excess value of $4 to $6 trillion, an amount larger than the publicly held national
debt. While not all firms rely on stock options to the same extent as the Silicon
Valley firms, the magnitude of the potential distortions created by an inappropriate
accounting procedure, and the eventual losses to the investors who were misled, are
enormous. 

The article should have presented a fuller explanation of this issue in order to convey
to readers the potential consequences of Senator's Lieberman's interference with the
Accounting Board's rules.




THE LUMBER INDUSTRY 

"Logging's Shift South Brings Concern on Oversight," by Douglas Jehl in the New York
Times, August 8, 2000, page A1. 

This useful article examines the increasing concentration of logging operations in the
southeastern United States. The article points out that the depletion of the forests
in the northwest, coupled with tighter logging regulations, has made the southeast
relatively more attractive to logging companies. It is also worth noting that most of
the lumber operations in the northwest have relatively high paid union labor. Most of
the workers in the southeast are non-union and earn considerably lower pay. This
difference in wages is a factor in the movement of the industry from the northwest
and should have been mentioned in the article.




OUTSTANDING STORIES OF THE WEEK 

"Fuel Bills Empty Poor Pockets, Unfilled by Boom," by Neela Banerjee in the New York
Times, August 9, 2000, page A1. 

This article examines how the higher cost of gasoline and home heating oil have
imposed significant hardships on many families who have not benefited much from the
recent period of prosperity. 

Back to CEPR's Economics Reporting Review website.