Economic Reporting Review
December 13, 1999:
WTO aftermath; Gore's budget; Bradley's health plan
By Dean Baker
WTO
"WTO Talks Push Past Deadline"
John Burgess and Steven Pearlstein
Washington Post, December 4, 1999, page A1
"WTO Negotiators' Reach Far Exceeded Grasp of Complexities"
Steven Pearlstein
Washington Post, December 5, 1999, page A47
"The Shipwreck in Seattle"
David E. Sanger
New York Times, December 5, 1999, Section 1 page 14
Each of these articles on the ending of the WTO talks in Seattle include assertions that the
WTO's purpose is to remove restrictions on international trade. One of the main goals of the
United States in previous rounds of WTO (or GATT) negotiations has been to increase
international protection for patents and copyrights. These measures are restrictions on trade,
since they provide a monopoly to a single seller of pharmaceuticals, books, or recorded music
and videos. In the absence of patent and copyright protection, competition would lower the
cost of these products enormously, in some cases by more than 90 percent. Since the
extension of protection for patents and copyrights has been a major part of the WTO's work, it
is inaccurate to assert that the organization exists only to remove barriers to trade.
The Times article is somewhat misleading in asserting that the protestors in Seattle actually
wanted a stronger WTO, because they wanted it to be able to impose labor and environmental
standards. The protestors in Seattle were a diverse group with a wide variety of demands. But
the ones who supported labor and environmental standards, in most cases, primarily wanted
the United States to be able to apply labor and environmental standards to its own imports. At
present, if the United States applied such standards to its imports, it would be violating WTO
rules. A large portion of the protestors would have been satisfied if the United States (and
other nations) could apply labor and environmental standards to imports and the WTO stayed
out of the issue altogether.
"U.S. Isolated on Key Issues at Trade Talks in Seattle"
Joseph Kahn and David E. Sanger
New York Times, December 4, 1999, page A6
This article discusses the deadlock in negotiations at the WTO. At one point the article notes
the efforts of Internet companies to obtain rules prohibiting taxes on Internet commerce. It
characterizes such a prohibition as a measure "the companies consider crucial to maintain the
expansion of the Internet globally."
At present, most sales of goods over the Internet in the United States are not subject to the
sales tax which would apply to goods sold in traditional retailers. By allowing Internet
companies to escape their share of the overall tax burden, the government is effectively
subsidizing them. Naturally this sort of subsidy contributes to the growth of Internet commerce.
If the government decided to favor any group of stores by allowing them to evade taxes in a
similar manner, it would also improve their sales.
Insofar as the growth in Internet commerce is attributable only to this tax subsidy, there is no
economic reason to see it continue. Consumers would gain far more if the tax break were
distributed evenly among all retailers. If the Internet offers real benefits to consumers, then
Internet sales will continue to grow even without special tax treatment. If Internet companies
believe that their sales can only grow if they maintain this special treatment, it means that they
don't think they can compete with traditional retailers on a level playing field.
"WTO Talks Said to Send 'Grim Message'"
Steven Pearlstein
Washington Post, December 8, 1999, page E1
This article reports on attitudes towards the failure of the WTO talks in Seattle. The article
asserts that the collapse of the talks could "cause the already burgeoning U.S. trade deficit to
climb even higher." It characterizes this view as "the consensus of trade experts, economists
and business leaders polled since the meeting of the World Trade Organization collapsed
Friday night."
The article does not present the views of any economists that were associated with opponents
of the WTO. Nor does it present any clear mechanism through which the trade deficit is likely
to rise further. While some nations could impose greater barriers to U.S. exports, the United
States currently has such a large trade deficit with most nations that any retaliatory measures it
took would almost certainly have a larger impact on reducing imports; the net effect would
therefore be to reduce the trade deficit. In any case, the prospect of U.S. retaliation should be
sufficient to discourage nations from hastily imposing barriers to U.S. goods. (Most economists
argue that the size of the trade deficit or surplus is not the correct way to measure the gains
from trade in any case.)
It is also worth noting that several of the economists and experts quoted in the article have a
record of being wrong about the impact of trade agreements on the U.S. trade balance. Fred
Bergsten, who is the director of the Institute for International Economics, and Jeffrey Garten
and Laura Tyson, both former high-ranking Clinton administration officials, were all prominent
NAFTA proponents who claimed that the pact would improve the U.S. trade balance with
Mexico. Since NAFTA passed, the U.S. trade surplus with Mexico has been reversed,
resulting in a 1998 trade deficit with Mexico of more than $16 billion.
More about Europe.
[Top]
EMPLOYMENT
"Jobless Rate Steady at 4.1 Percent"
John M. Berry
Washington Post, December 4, 1999, page E1
"234,000 New Jobs in November Kept Economy Humming"
Louis Uchitelle
New York Times, December 4, 1999, page A1
These articles discuss the Labor Department's release of employment data for the month of
November. The Post article discusses at some length a new report from the President's
Council of Economic Advisors, which finds that more than 80 percent of the jobs that have
been created in the Clinton years are in categories that pay above the median wage.
This figure is completely meaningless. A worker experiences no benefit whatsoever because his
or her job is placed by economists in a high-paying job category. Workers only benefit if their
job is actually high-paying. There is considerable research showing the movement in wages
over the course of the Clinton years for workers at various points along the income distribution.
This research shows that the real wages of all but the highest-paid workers had fallen during the
first years of the Clinton administration, but have been rising since 1996. The wage of workers
at the middle of the income distribution have just recently passed their 1992 level. (See the
Economic Policy Institute's Quarterly Wage and Employment Series, http://www.epinet.org .)
The Times article includes the assertion that "labor shortages must eventually become
inflationary," because the unemployment rate stayed at 4.1 percent. Prior to 1994, virtually all
economists had argued that inflation would accelerate if the unemployment rate fell below 6
percent. It has been below that level for more than five years and inflation has actually declined
somewhat during this period. Having been shown wrong, most economists subsequently argued
that inflation would accelerate if unemployment fell below 5 percent. It has been below this
level for more than two years, and inflation has continued to remain stable. Given this recent
history, there is no reason for believing that the inflation rate will necessarily accelerate if
unemployment remains at its current level.
More about Labor.
[Top]
SOCIAL SECURITY
"Panel Advises Adding to Life Expectancies"
Robert Pear
New York Times, December 7, 1999, page A8
"Longevity's Growth May Have Price"
John M. Berry
Washington Post, December 7, 1999, page A8
These articles discuss a report of a technical panel that analyzed and evaluated the economic
and demographic assumptions used by the Social Security trustees to evaluate the health of the
program. Both say that the panel recommended raising the projected rate of wage and
productivity growth.
This is slightly misleading. The panel did recommend assuming a slightly faster rate of wage and
productivity growth than appeared in the 1999 Social Security trustees report. However, the
rate of annual real wage and productivity growth they suggested is still 0.3 percentage points
lower (when adjusted for measurement changes) than the rate suggested by the last expert
panel, which issued its report in 1995. In the four years since that report was issued, real wage
and productivity growth far exceeded the rates projected in the 1995 report.
More about Social Security.
[Top]
FEDERAL BUDGET
"Economic Debate Emerging in Race"
Richard W. Stevenson
New York Times, December 5, 1999, Section 1 page 39
This article, describing the positions that major presidential candidates have taken on various
economic issues, comments that Vice President Gore has "made clear that he would emphasize
the same themes as President Clinton in economic policy: allocating the non-Social Security
surplus to a variety of programs, from the military to Medicare and education."
It is worth noting that the baseline from which this surplus is calculated assumes large cuts in
most areas of government spending. In this baseline, discretionary spending (which includes the
military and most education spending) would be cut by 25 percent, measured as a share of
GDP, by 2009. While Gore may be proposing increases in spending against this baseline, it is
not clear that his budgets would led to increases in spending compared with recent levels.
[Top]
HEALTH CARE
"Health Care Promises"
Howard Kurtz
Washington Post, December 9, 1999, page A30
This box analyzes a 30-second television commercial by Democratic presidential candidate Bill
Bradley, which presents the basic points of his health care plan. The analysis notes that the
commercial does not give the cost of the plan, which it asserts is "$650 billion, by his
[Bradley's] estimate."
The analysis does not point out that this is the projected cost over a 10-year period, not a
single year. GDP is projected to be approximately $120 trillion over this period, and total
federal revenue is projected to be approximately $25 trillion. This means that the Bradley plan
is projected to cost approximately 0.5 percent of GDP or 2.6 percent of federal revenue.
These figures would probably be more meaningful to most readers.
[Note: Dean Baker is circulating an economists' letter in support of the Bradley health care
plan.]
"African AIDS Victims Losers of a Drug War"
Karl Vick
Washington Post, December 4, 1999, page A1
This informative article discusses the plight of people with AIDS in sub-Saharan Africa. The
article notes that many victims are unable to afford medicine because the nations of the region
are obligated to pay the patent-protected price for these drugs as a result of recent trade
agreements. At one point the article refers to the patent-protected price as "the market price."
The market price is the price that would be prevail in the absence of patent protection, which is
effectively a state-imposed monopoly.
[Top]
MALAYSIA
"More and More Malaysians Question Economic Policies"
Wayne Arnold
New York Times, December 4, 1999, page B2
This article reports on alleged unhappiness among foreign investors and Malaysians over the
economic policies of Malaysia's Prime Minister Mahathir Mohamad, who has refused to follow
the policies recommended for Malaysia by the IMF. As evidence of this unhappiness, the
article reports the comments of several individuals connected with financial institutions. It also
notes a decline in support for Mohamad among middle-class Malaysians in recent elections. It
is at least as plausible that this drop in support was attributable to opposition to repressive
political policies as to Mohamad's economic policies.
At one point the article comments that Malaysia's recent economic upturn "has less to do with
Mr. Mahathir's policies than with a cyclical rebound generated by a demand for Asian exports
from the United States and Europe." While this assertion is probably true, the fact that there
can be a strong rebound lends credence to the view that there are no major structural barriers
to Malaysia's continued growth.
The subhead of this article is: "A Longing for Good Medicine, Even if Bitter." Malaysia's per
capita GDP has grown at more than a 4.0 percent annual rate since 1960, far faster than any
country which has followed the IMF model. While few doubt that the IMF's policy