Economic Reporting Review
By Dean Baker
August 26, 2002

OUTSTANDING STORIES OF THE WEEK

Data Show Growing Trend Toward Permanent Layoffs
Louis Uchitelle
New York Times, August 22, 2002, page C9
http://www.nytimes.com/2002/08/22/business/22ECON.html

This article reports on new data from the Labor Department, which shows that the percentage of workers who have been permanently laid off from their jobs is growing.


Brazil

Bankers to Meet in U.S. on Brazilian Loan Deals
John M. Berry
Washington Post, August 19, 2002, Page A9
http://www.washingtonpost.com/wp-dyn/articles/A33836-2002Aug18.html

Brazilian Bank Officials Plan to Talk Next Week
John M. Berry
Washington Post, August 20, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A37673-2002Aug19.html

These articles discuss negotiations over Brazil's debts to foreign banks. Both articles make references to the efforts of Brazil's current president, Fernando Henrique Cardoso, to get the leading presidential candidates to commit themselves to a financial austerity plan that Cardoso negotiated with the I.M.F. The article includes several references to Cardoso's commitment to "budget stringency."

It is worth noting that the ratio of Brazil's government debt to GDP rose from 29.2 percent in 1994, when Cardoso took office, to close to 60 percent of GDP at present. By comparison, the debt increased from 33.3 percent to 51.9 percent of GDP during Ronald Reagan's presidency in the United States. Cardoso managed to run up this debt even while selling off tens of billions of dollars worth of government assets, the proceeds from which could have been used to reduce debt. It would have been appropriate to mention Mr. Cardoso's track record on fiscal matters in the discussion of his lectures to his prospective successors about the need for fiscal austerity.


The Budget

Forum Inspires Plan for Tax Cuts
Mike Allen
Washington Post, August 18, 2002, Page A8
http://www.washingtonpost.com/wp-dyn/articles/A31135-2002Aug17.html

This article discusses the possibility that President Bush may propose a new set of tax cuts. At one point, it presents the charges of Democrats that Bush's tax cuts were responsible for the switch from surpluses to deficits. It then reports Republican claims that the recession and war-related costs were the main cause.

It would have been helpful to readers to report what actually caused the shift to deficits. According to the Congressional Budget Office, the main reason for the shift from surpluses to deficits is a falloff in tax revenue due to the recession and the collapse of the stock market. Higher than projected spending accounted for $60 billion of a $333 billion shift towards deficits in the 2002 fiscal year; all but $27 billion of this additional spending was defense-related. Tax cuts added $32 billion to the deficit, as compared to the baseline projections made in January of 2001. The rest was attributable to lower than expected tax revenue.

The article also reports a claim by President Bush that the failure to cut domestic spending to pay for the Vietnam War led to "growing deficits" in the seventies. Actually, the size of the debt fell sharply relative to GDP (the only meaningful measure) in the seventies. At the end of the sixties, the ratio of the gross debt to GDP was 38.5 percent. By the end of the seventies, it had fallen to 33.1 percent, its lowest level in the post-war period. The ratio of debt to GDP soared in the eighties to 53.1 percent at the end of 1989.


Bush Tax Cuts

Bush Considers New Measures In a Bid to Boost the Economy
Richard W. Stevenson
New York Times, August 17, 2002, Page A8
http://query.nytimes.com/search/abstract?res=F00E1FFD39590C748DDDA10894DA404482

This article examines a set of tax cut proposals that president Bush is reportedly considering. At one point, the article refers to a proposal to "eliminate the double taxation of dividends." While proponents of cutting tax rates on dividends like to use this expression, it is not necessarily accurate. Many corporations take advantage of loopholes in the tax code to eliminate much, if not all, of their tax liability. So it is often not accurate to say that this income has been taxed at the corporate level, as this article asserts.

Second, when the tax rates for various types of income were established, Congress was fully aware that corporate income was subject to taxation. The notion that there is "double taxation" implies that the individual tax rates on dividend income was somehow a mistake, as opposed to a rate that was set based on the rate of taxation of corporate income in place at the time.

It is also worth noting that a cut in the tax rate on dividend income will be of no benefit whatsoever to the vast majority of stock holders, who hold their stock through 401(k) type accounts. The full value of these accounts is taxed as normal income at the point when a worker begins to draw on them after age 60.


Trade

Why Isn't Fast Track ... Faster?
Edmund L. Andrews
New York Times, August 18, 2002, Section 3, page 1
http://query.nytimes.com/search/abstract?res=F70F14F93E590C7B8DDDA10894DA404482

This article discusses the obstacles to new trade agreements. The article repeatedly refers to the trade agreements being negotiated as "free-trade agreements." This is inaccurate, since some of the most economically important provisions that are likely to be included in these agreements will restrict trade by increasing patent and copyright protection. It would be more accurate to simply refer to them as "trade" or even "commercial" agreements, since many of the provisions deal with issues other than trade, such as rules governing foreign investment.

At one point the article asserts that "most economists believe that the United States would be a net beneficiary from broad reductions in trade barriers, if only because American restrictions are, on average, lower than those elsewhere." According to standard trade theory, the larger a country's barriers, the more it stands to gain by reducing its barriers. While most economists undoubtedly do believe that the United States stands to gain from reductions in trade barriers, the fact that its barriers are already low is not a reason that they would cite.

The article cites U.S. barriers to sugar imports as an example of a policy that has angered developing nations. According to the article, the U.S. has restricted sugar imports to about 10 percent of the U.S. market. As a result, the price of sugar in the United States is about 17 cents a pound compared to a world price of about 5 cents a pound.

If the numbers in the article are accurate, then it is likely that developing nations as a whole will be hurt if the U.S. eliminates its barriers to sugar imports. The article reports that current imports to the U.S. are limited to 1.1 million tons a year. At 17 cents a pound, this sugar will sell for $340 per ton. If sugar costs 4 cents a pound to produce on average (20 percent below the world market price), then sugar producers are earning $286 million on their exports to the United States ($260 per ton). If the U.S. eliminated all barriers to sugar imports, so that it bought sugar at the world price of 5 cents, sugar imports would have to exceed 70 percent of the U.S. market in order for developing nations to make as much profit selling sugar at the world price, as they currently do from selling 1.1 million tons at the quota protected price. While some countries with small sugar quotas may gain from the elimination of quota barriers, these numbers indicate that developing nations as a whole are likely to get less profit from sugar exports if U.S. import quotas are eliminated.


Aid to Africa
Bush to Propose $4 Billion in Aid to Africa
Glenn Kessler
Washington Post, August 22, 2002, Page A14
http://www.washingtonpost.com/wp-dyn/articles/A46994-2002Aug21.html

This article reports on a proposal by President Bush to allocate $4 billion over several years to promote health and economic development in Africa. The headline of this article is misleading, since much of the money involved in the proposal will be re-allocated from other programs. While the article makes this point very clearly, the headline implies that the proposal involves new money for Africa.


The Trade Deficit

More Exports Reduce Deficit
Washington Post, August 21, 2002, Page E2
http://www.washingtonpost.com/wp-dyn/articles/A42488-2002Aug20.html

This article reports on the Commerce Department's release of trade data for June. This is reported in a three-sentence item in the "Business in Brief" section. The trade and broader current account deficits are at least as important to future living standards as the budget deficit. Presently, the nation is running a current account deficit of more than $450 billion a year. While much smaller budget deficits have regularly received front page attention, the current account deficit has been virtually ignored, as is the case here.


Copyrights

A New Tactic in the Download War
David Segal
Washington Post, August 21, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A42239-2002Aug20.html

Music Debate Heads to the Hill
Teresa Wiltz
Washington Post, August 21, 2002, Page A8

Record Labels Try to Force Internet Servers to Block Music Site
Amy Harmon
New York Times, August 17, 2002, Page B4
http://query.nytimes.com/search/abstract?res=FA0E11FD39590C748DDDA10894DA404482

These articles discuss efforts by the recording industry to prevent the distribution of unauthorized versions of copyrighted material. The Times article reports on efforts by the industry to get a court order that would force Internet service providers to block users' access to copyrighted material on sites posted in foreign countries. The article repeatedly refers to this material as "pirated." This is inaccurate; if a country does not have laws honoring U.S. copyrights, then this material is not "pirated" (which implies illegality). It would be more accurate to describe this material as "unauthorized."

None of these articles provide any economic analysis of the costs of the protection being sought by the recording industry. This would be comparable to reporting on the steel tariffs without any reference to their economic impact, although the losses to the economy would be much smaller in the case of steel.


German Unemployment and the ECB

Seeking Votes, German Leader Endorses Plan To Aid Jobless
Steven Erlanger
New York Times, August 18, 2002, Page A5
http://query.nytimes.com/search/abstract?res=F70D15FE38590C7B8DDDA10894DA404482

This article discusses a new set of proposals by German Chancellor Gerhard Schroder, which are intended to reduce unemployment in Germany. While the article discusses various plans to reduce unemployment, it never mentions the monetary policy of the European Central Bank (ECB). While the Federal Reserve Board has lowered interest rates aggressively in response to the economic slowdown in the United States, and recently indicated its willingness to lower rates further, the ECB has edged interest rates in Europe only slightly. Its current short-term rate is 3.25 percent, compared to 1.75 percent in the United States.

Numerous economists, including even the I.M.F., have criticized the refusal of the ECB to lower interest rates. They have argued that this has slowed the economy in Europe, as well as the rest of the world, and kept unemployment unnecessarily high.


The Recession

George W.'s Worst Fear: A W-Shaped Recession
Edmund L. Andrews
New York Times, August 22, 2002, Page A14
http://www.nytimes.com/2002/08/22/politics/22TALK.html

This article examines the possibility that the economy will slip back into a recession, and the resulting political fallout. At one point, it reports that most forecasters do not consider a double dip recession likely. It is worth noting that most forecasters also didn't anticipate the first dip of the recession.


Growth in Developing Nations

Small-Picture Approach to a Big Problem: Poverty
Daniel Altman
New York Times, August 20, 2002, Page C2
http://www.nytimes.com/2002/08/20/business/20DEVE.html

This informative article reports on a new trend within development economics to examine micro level patterns of behavior, such as the ways in which knowledge of farming methods are communicated among farmers. At one point the article contrasts this micro-level approach with the macro-level policy advice from the I.M.F. and World Bank on government budgets and monetary policy. While the article notes that these macro policies appear to have failed in much of the developing world, it lists several countries where they have supposedly succeeded. This list includes Mexico.

According to data from the World Bank, Mexico's per capita GDP grew by just 11 percent from 1980 to 2000, the period in which it was closely following advice from the I.M.F. and World Bank. By contrast, it grew 113 percent in the twenty years from 1960 to 1980. Given this record, Mexico should probably not be included in the list of success stories.


The Stock Market

President Moves to Spur Investors
Mike Allen and Jonathan Weisman
Washington Post, August 17, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A28067-2002Aug16.html

This article discusses the possibility that President Bush may propose tax breaks that are intended to boost the stock market. The article describes the measures as helping "small investors," but there are very few small investors who would stand to benefit from the measures discussed in the article. 

For example, one of the measures would raise the amount of stock market losses (net of gains) that can be written off on taxes from $3,000 to $6,000. The vast majority of small investors have most of their money in 401(k) type accounts, where losses and gains do not affect tax liability until after workers have begun to cash them in after reaching age 60. (Even then, the full value of the account would be taxable, so the larger loss allowance would be of no benefit whatsoever.) A second proposal would raise the limit that workers can put into IRAs each year from close to $11,000 to $20,000. Very few workers can afford to put even $11,000 into an IRA; therefore only relatively wealthy employees would gain from the increase in this limit.

The article seems to accept that the public as a whole would benefit if measures like these succeeded in propping up the stock market. This is inaccurate. The stock market is redistributive, transferring wealth from people who own little or no stock to those who own large amounts of stock. A seriously over-valued stock market, as the nation experienced in the late nineties, badly distorts investment decisions. As a result of the nineties stock bubble, hundreds of billions of dollars were wasted on telecom and internet projects that had no economic rationale. Had it not been for this bubble, the money might have been invested productively. For this reason, proposals intended to prop up the stock market should be viewed as special interest measures, comparable to protective tariffs for steel or farm subsidies.