Economic Reporting Review By Dean Baker August 5

Economic Reporting Review
By Dean Baker
August 5, 2002

OUTSTANDING STORIES OF THE WEEK

Once Upon A Time, A Restless C.E.O…
David Leonhardt
New York Times, July 28, 2002, Section 3 page 4

http://query.nytimes.com/search/abstract?res=FB0D17FE345C0C7B8EDDAE0894DA404482

This article examines the often-repeated claim that high CEO compensation packages are necessary to keep CEOs from moving to other companies. It points out that it is actually very rare for a CEO of major company to move to another company. Virtually all CEOs at large corporations retire when they leave their position.

Side Effect of Welfare Law: The No-Parent Family
Nina Bernstein
New York Times, July 29, 2002, Page A1

http://www.nytimes.com/2002/07/29/national/29WELF.html

This article reports on new research, which shows that one of the main reason for a recent decline in one-parent families, is an increase in the number of children living without their parents. As a result of the 1996 welfare bill, many parents have been forced to give up their effort to raise their children, and have turned them over to relatives or to foster parents.

Starved for Food, Zimbabwe Rejects U.S. Biotech Corn
Rick Weiss
Washington Post, July 31, 2002, Page A12

http://www.washingtonpost.com/wp-dyn/articles/A23728-2002Jul30.html

This article reports on the United States government’s offer of genetically modified corn to Zimbabwe, which currently faces a famine. Zimbabwe’s government is refusing the corn, because the United States will not mill the corn seeds. If the seeds are not milled, then some will inevitably be planted. This will leave Zimbabwe vulnerable to patent suits from the companies that own the patents. It will also exclude Zimbabwe’s corn from Europe, its major export market in normal years, since Europe’s rules prohibit the importation of genetically modified food.

Broken System? Tweak It, They Say
Louis Uchitelle
New York Times, July 28, 2002, Section 3 page 1

http://query.nytimes.com/search/abstract?res=F40B14FA345C0C7B8EDDAE0894DA404482

This article reports the views of several prominent economists on the trend towards deregulation in the last quarter century, in the wake of the recent wave of corporate scandals.

In Loophole, Death Still Certain but Not Taxes
David Cay Johnston
New York Times, July 28, 2002, Page A1

http://query.nytimes.com/search/abstract?res=F30813FB3C5F0C7B8EDDAE0894DA404482

This article reports on the growth of exotic insurance policies that allow wealthy families to escape the estate tax.

Second Quarter GDP Growth

U.S. Growth Sluggish in 2^nd Quarter
John M. Berry
Washington Post, August 1, 2002, Page E1

http://www.washingtonpost.com/wp-dyn/articles/A28747-2002Jul31.html

New Report Shows U.S. Economy Slowed Significantly for Quarter
David Leonhardt
New York Times, August 1, 2002, Page C1

http://www.nytimes.com/2002/08/01/business/01ECON.html

These articles report on the Commerce Department’s release of data on second quarter GDP growth. Both articles report comments from economists claiming that the 1.1 percent rate of growth was surprisingly low.

It is not clear why economists would have been surprised by this rate of growth. The vast majority of the data that goes into compiling GDP is already known before the GDP report is published. For example, data on consumer expenditures, which account for 70 percent of GDP, is already known for 2 of the 3 months. The same is true for trade and construction. Data for all three months is available for equipment investment, before the GDP report is published.

As a further example, the Post article quotes an economist who claimed, “the trade deficit deteriorated more than anticipated, cutting 1.8 percentage points from growth.” Prior to the release of the GDP report, the Commerce Department had already released data showing the trade balance in goods for April and May [http://www.census.gov/foreign-trade/Press-Release/current_press_release/exh9.txt]. (This data excludes services, but the change in the service balance typically would not have much impact, since service trade is far smaller than goods trade.) The trade deficit for the first quarter was $425.7 billion at an annual rate. The trade deficit for April and May was running at an annual rate of $490.1 billion. If the trade deficit for June is assumed to be the same as the average for the prior two months, then it would imply that the deficit was rising at a $256.4 billion annual rate (the quarterly change must be multiplied by four). This increase would subtract more than 2 percentage points from the growth rate. Based on this data, it is not clear why any economist would have expected the second quarter trade deficit to have been smaller than indicated in the GDP report. A broader range of experts should probably be consulted.

Both articles attributed part of the rise in the trade deficit to efforts by importers to bring in goods in advance of a possible strike by West Coast longshoreman. If this is true, then these additional goods would have artificially inflated inventories for the quarter and had no net effect on GDP. (Inventory accumulations are added to GDP, imports are subtracted.)

The Post article asserts that “government policymakers and all but a few private forecasters remain confident that growth will pick up again.” It is worth noting that no government policymakers and very few private economists predicted the last recession, or the collapse of the stock market bubble.

The Post article also claims that the revisions to GDP data for the last three years, which were released with this report, “do not change the overall nature of the recession.” The revisions lowered the GDP growth rate since the onset of the recession by almost a full percentage point. This lowers the rate of productivity growth by approximately the same amount. Many economists had touted the continued strength of productivity growth through the recession as a basis for optimism about the economy’s future prospects. These revisions substantially undermine this cause for optimism.

It is worth noting that net domestic product (NDP) has grown at an annual rate of just 0.1 percent since the second quarter of 2000. NDP excludes depreciation. It is arguably a better measure of economic growth, since wages and profits must be paid out of NDP – no one can eat depreciation. Neither article reported on the weak growth in NDP.

Corporate Scandals

‘Political Market’ Reigns
Steven Pearlstein
Washington Post, July 31, 2002, Page E1

http://www.washingtonpost.com/wp-dyn/articles/A23472-2002Jul30.html

This article reports on the response of the political system to the recent wave of corporate scandals. The article applauds the quick response to the scandals, noting that several executives now face trials and that the president has signed a new bill regulating corporate behavior, which it describes as “one of the most comprehensive pieces of regulation since the Carter administration.”

The article presents only the views of experts who support this position. It could have found experts who feel that the measures taken to date are grossly inadequate. For example, due to the power of entrenched interest groups, Congress has taken no action to require that stock options be treated as an expense, even though a large number of the nation’s leading financial experts insist that this would be the proper accounting method.

Congress has also taken no measures to curb the practice whereby corporations place their workers’ pensions into their own stock. Virtually every financial analyst agrees that it is an inappropriate investment practice to have large amounts of a company’s stock in its pension. (For this reason, the amount of a company’s stock has long been restricted to 10 percent of the total fund in traditional defined benefit plans.) But, on this measure as well, entrenched interest groups have prevented congressional action, even though the workers at both Enron and WorldCom fell victim to precisely this practice.

In short, given recent events, it would have been a simple matter to write a story that presented the exact opposite perspective from the one given in this article. The article should have sought to present a more balanced picture.

Trade

Bush Lobbies House To Pass Trade Bill Before Recess
Mike Allen and Juliet Eilperin
Washington Post, July 28, 2002, Page A1

http://www.washingtonpost.com/wp-dyn/articles/A6965-2002Jul26.html

President Pushes Trade Legislation In Visit to Capitol
Alison Mitchell
New York Times, July 27, 2002, Page A1

http://query.nytimes.com/search/abstract?res=F70815FA3D5F0C748EDDAE0894DA404482

House Backs Trade Power for President
Mike Allen and Juliet Eilperin
Washington Post, July 28, 2002, Page A1

http://www.washingtonpost.com/wp-dyn/articles/A10764-2002Jul27.html

Bush Hails Vote In House Backing Trade Legislation
Alison Mitchell
New York Times, July 28, 2002, Page A1

http://query.nytimes.com/search/abstract?res=F50710FB3C5F0C7B8EDDAE0894DA404482

Senate Approves Trade Bill, Delivering Victory to Bush
Helen Dewar
Washington Post, August 2, 2002, Page A4

http://www.washingtonpost.com/wp-dyn/articles/A31182-2002Aug1.html

These articles discuss the successful effort to gain passage of a bill that provides President Bush with enhanced trade negotiation power. All four of these articles refer to the issue being debated as the negotiation of “free trade” agreements. This is an inaccurate description of the issues being negotiated. A major part of the U.S. agenda in these negotiations, as stipulated in the measure approved by the House, will be to increase protectionist barriers in the form of increased patent and copyright protection. Much of the U.S. negotiating agenda has little direct bearing on trade, since it relates to rules on investment and domestic regulation of industry. Given the actual agenda of the United States in recent trade pacts, it would be more accurate to refer to these agreements as simply “trade” or “commercial” agreements.

It is a frequent complaint of reporters that they must accurately report the news with very strict time and space constraints. In this case, the news would be far more accurately presented if the adjective “free” were left out of these articles.

WTO Negotiations May Hold Key to Bush’s Legacy on Free Trade
Paul Blustein
Washington Post, July 28, 2002, Page A6

http://www.washingtonpost.com/wp-dyn/articles/A10898-2002Jul27.html

This article examines the prospect that reductions in farm subsidies and tariff reductions on agricultural products will be a part of the next WTO agreement. The article asserts that, “reducing farm subsidies is a major goal of the WTO talks, because subsidies encourage overproduction of crops in rich countries and drive down global prices, hurting farmers in poor countries.”

The agenda described in this article would be detrimental to the vast majority of farmers in developing countries, since it calls for the removal of developing country barriers to the importation of agricultural products. Farmers in developing countries sell a much larger portion of their output to their domestic market than they export internationally. This means that lower prices from increased competition from low cost imports domestically is likely to be far more important than any increase in international prices resulting from the removal of subsidies in rich nations. For example, in China, tens of millions of grain farmers face displacement over the next few years as a result of competition from imported grains. If a major goal of the WTO talks was actually helping farmers in poor countries, as this article claims, then negotiators would not be insisting that these countries remove their barriers to agricultural imports.

This article also repeatedly uses the term “free trade” in reference to trade agreements that increase protectionism, by increasing patent and copyright protection. The article would be more accurate if it did not use the word “free” in this context.

Welfare Reform

Bush Criticizes Senate’s Version of Welfare Bill as Harmful
Elisabeth Bumiller
New York Times, July 30, 2002, Page A14

http://www.nytimes.com/2002/07/30/politics/30BUSH.html

This article reports on the congressional debate over the bill re-authorizing welfare funding for five years. At one point it refers to criticism by some Democrats, that President Bush’s proposals for increased work requirements are mean-spirited and will hurt children in families receiving welfare. The article then reports that “Republicans counter that Democrats said the same thing in 1996, yet welfare rolls have been reduced by more than half since then.”

No one ever disputed that tighter requirements would lead to a reduction of people on welfare rolls. The issue is what happens to the families who either stay on the rolls, meeting more stringent work requirements, or end up leaving the welfare rolls. The evidence on the plight of these families is mixed.

Copyrights

Movie Studios Press Congress in Digital Copyright Dispute
Amy Harmon
New York Times, July 29, 2002, Page C3

http://www.nytimes.com/2002/07/29/technology/29DIGI.html

This article reports on efforts by the entertainment industry to get Congress to pass legislation requiring that new hardware include digital locks that prevent the reproduction of copyrighted material. The article does not include any economic analysis of the impact of such extreme efforts to protect copyrights.

Although the Times has included numerous reports on disputes over copyrights, it has almost completely ignored the economic dimensions of this issue. This would be comparable to ignoring the economic implications of the steel tariffs recently imposed by President Bush, although the costs are at least an order of magnitude greater in the case of copyrights. Copyrights, which are effectively a government-imposed tax of 100 percent in the case of digital material (it would otherwise be reproduced a zero cost), may be unenforceable in the digital age, as was recently argued by an OECD economist.

Stock Transfer Taxes

Stoking a Stock Market Revolution
Tony Smith
New York Times, July 30, 2002, Page W1

http://www.nytimes.com/2002/07/30/business/worldbusiness/30BRAZ.html

This article reports on the efforts of Raymundo Magliano, the chair of Brazil’s main stock exchange, to promote the Brazilian market. At one point it refers to a 0.38 percent tax on stock trades on the market as “crippling.” Actually, taxes on stock trades have been very common, and have not in general prevented the smooth operation of markets. For example, England still places a 0.5 percent tax on stock trades on the London market.

The Strength of the Economy

Is Economic Double Dip Lurking on the Horizon?
Daniel Altman
New York Times, July 29, 2002, Page A15

http://www.nytimes.com/2002/07/29/business/29ECON.html

This article assesses the likelihood that the economy will again sink into a recession. While the article presents the views of a range of economists and analysts, none of them comment on the impact of a collapse of the housing bubble, the inflationary impact of a falling dollar, or the contractionary effects of state and local government cutbacks due to budget shortfalls. These are all important problems facing the economy in the near future.