Economics Reporting Review: 
The NYT and Post Under the Microscope
Week of December 23 - December 29

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

OUTSTANDING STORIES OF THE WEEK 

"Sham Shelters for Business Flourish as Scrutiny Fades," by David Cay Johnston in
the New York Times, December 19, 2000, page A1. 

This article reports on the growing use of tax shelters by major corporations and
accounting firms. Accounting firms are often paid with a share of the tax savings,
providing them with a substantial incentive to suggest practices of dubious legality.
Since IRS scrutiny has been significantly reduced in recent years, accounting firms
can now pursue these shelters with little fear of punishment. 

"Drug Makers Design Studies With Eye to Competitive Edge," by Sheryl Gay Stolberg
and Jeff Gerth in the New York Times, December 23, 2000, page A1. 

This article describes an expensive study designed by Bristol-Myers Squibb, which
was intended to assist marketing Pravachol, a cholesterol lowering drug which has
been losing market share to competitors. According to the article, the study was
structured in a way that virtually guaranteed that Pravachol would appear equally
good as the main drug with which it competes. This research is likely to provide little
information of medical value. 

"Biotechnology Companies Try to Ward Off Generic Drugs," by Andrew Pollack in the
New York Times, December 28, 2000, page C1. 

This article reports on how biotech companies hope to prevent competition from
generic drug manufacturers by arguing that the law governing the testing procedures
for generic drugs would not apply to its products. Biotech companies claim that
generic manufacturers should have to go through a lengthy and costly testing
procedure, which would virtually eliminate any possibility of them entering the
market. 

"An Unequal Calculus of Life and Death," by Barton Gellman in the Washington Post,
December 27, 2000, page A1. 

"A Turning Point That Left Millions Behind," by Barton Gellman in the Washington Post,
December 28, 2000, page A1. 

"The Limits of $100 Million," by Bill Brubaker in the Washington Post, December 29,
2000, page A1. 

This series of three articles describes how the pharmaceutical industry responded to
the AIDS crisis in sub-Saharan Africa, which could lead to tens of millions of deaths.
It describes the drug industry's charity programs, which provide very limited access
to low cost AIDS drugs, as a way to head off demands for making drugs available at
a price closer to their cost of production. The industry also has worked to deny
African nations access to generic drugs produced in India. 


ELECTRICITY DEREGULATION 

"Deregulation Fuels A Crisis in California," by William Booth in the Washington Post,
December 23, 2000, page A1. 

"In California, Woes on Power Set Off Clashes," by Laura M. Holson in the New York
Times, December 23, 2000, page A1. 

"As An Energy Crunch Continues, California's Utilities and Their Customers Clash Over
Rates," by Laura M. Holson in the New York Times, December 28, 2000, page A10. 

These articles report on the problems that have afflicted California's power system
since electricity was deregulated earlier this year. Consumers in many areas have
seen soaring prices and been threatened with the prospect of blackouts. Both
articles imply that these outcomes were unforeseen. For example, the New York
Times article asserts, "Most people thought that new competition would lower prices
for consumers and businesses alike." The Washington Post article repeatedly asserts
that deregulation was "supposed to" lead to lower prices. 

In fact, the increased electricity rates and supply shortages were entirely predictable
responses to deregulation in this sort of market. Firms have very little incentive in a
deregulated market to build excess capacity, since this capacity will sit idle most of
the time. It is more profitable to deal with surges in demand by increasing prices,
which is precisely what has happened in California. 

Utilities were originally regulated to deal with exactly this problem. As M.I.T.
economist Paul Krugman noted in a recent Times column, the failure of electricity
deregulation in California was entirely predictable based on standard economic theory
(see "California Screaming," by Paul Krugman, New York Times, December 10, 2000,
Section 4, page 15). If the general public expected some other outcome, then it
must have been misinformed about the impact of deregulation in this sort of
monopolistic market. 


EUROPEAN SOCIAL SECURITY SYSTEMS 

"Europe's Love-Hate Affair With Foreigners," by Roger Cohen in the New York Times,
December 24, 2000, Section 4, page 1. 

This article reports on European attitudes towards immigrants. At one point, the
article notes the projected rise in the population that is over age sixty-five in Europe
over the next twenty-five years, from 15.4 percent to 22.4 percent. It then asserts
that "with birth rates low, Europe's already strained pension system faces collapse
unless the working population that supports these people is expanded through
immigration." 

Actually, Europe has been experiencing a consistent increase in the percentage of its
population that is over age sixty-five. This is due to fact that life expectancies are
increasing as a result of greater affluence and improving medical technology. In the
past, Europeans have always been willing to divert a portion of the gains of higher
productivity to higher taxes used to support a longer retirement. The article presents
no reason to believe that this would not happen in the future. 

A recent World Bank study on this topic projected that real wages in Europe would
rise on average 2.0 percent a year. This implies that in 2025 real wages will be on
average more than 60 percent higher than today. If Social Security taxes were
raised by a full 15 percentage points (an amount much larger than the necessary
projected tax increase in any country), after-tax wages would still be 40 percent
higher than at present. 

The article presents no reason to believe that European democracies, in which
retirees comprise a very large share of the electorate, would opt to have their Social
Security systems collapse rather than approve the tax increases needed to maintain
the system. In short, contrary to the article's assertion, there is no reason to believe
that the Social Security systems face collapse regardless of what happens to
immigration in Europe. 

"Europe Rethinks Its Pensions," by John Tagliabue in the New York Times, December
26, 2000, page C1. 

This article discusses various proposals across Europe to replace a portion of the
public Social Security systems with individual accounts. Near the beginning, the
article asserts that "as the number of workers shrinks and the pool of pensioners
grows, such plans [Social Security systems] are coming under increasing strain." Ever
since these programs were first established the ratio of workers to pensioners has
been declining. The article does not indicate why this should be more of a strain in
the future than it has been in the past. 

At one point the article claims that a restructuring of the public system in Sweden,
implemented by the Social Democratic government, "more close resemble[s] the
Social Security campaign proposal of George W. Bush, the Republican candidate,
than that of Vice President Al Gore." The Swedish system applies a tax rate of 16
percent of workers' wages towards a defined benefit system similar to the U.S. Social
Security system. By comparison, the tax rate used to support the U.S. system is just
12.4 percent (combining employer and employee contributions). 

In addition to a mandatory defined benefit system that is nearly one-third larger than
the U.S. system, the Swedish system also requires that Swedes pay another 2.5
percentage points of their wages into a government mandated savings account.
Vice-President Gore had also proposed a system of individual accounts as a
supplement to the Social Security system, but under his system, participation would
be optional. 

This article never discusses one of the largest problems with systems of individual
accounts: administrative costs. There is an extensive body of economic research
which shows that the administrative costs of these systems are 15 to 30 times as
high as the administrative costs of existing government-run Social Security system.
The diversion of tens of billions of dollars from workers' savings each year to the
financial industry to manage individual accounts would likely be considered an
important issue by many readers. 


THE STOCK MARKET 

"The End of the Party, Or Is It?" by Alex Berenson in the New York Times, December
24, 2000, Section 3, page 1. 

This article examines the future prospects for the stock market. It presents several
arguments or claims concerning stock prices that are illogical on their face. For
example, it presents the claim of Byron R. Wien, the chief United States investment
strategist at Morgan Stanley Dean Witter, that the overall market "was 40 percent
overvalued at the beginning of 2000, is now 10 percent undervalued." The overall
market has fallen by approximately 15 percent since the beginning of 2000. This
implies that it is still over-valued by approximately 20 percent if Mr. Wien's earlier
claim is correct. 

Later, the article claims that the ratio of earnings to share prices and the yield on
government bonds should be approximately the same. The interest rate on
government bonds includes an inflation premium because the interest rate is fixed
over the life of the bonds. No comparable premium is necessary with stocks, since
dividend payments will typically rise in step with inflation and real GDP growth.
Therefore, there is no reason that the earnings to price ratio and interest rate should
be the same. They have often varied widely in the past, as would be expected. In
1992, for example, the earnings to price ratio for the S&P 500 was 4.2 percent. The
interest rate on long-term government bonds for the year averaged 7.7 percent. 


DEBT RELIEF 

"Rich Nations Will Forgive Debts of 22 Of the Poorest," by Joseph Kahn in the New
York Times, December 23, 2000, page A6. 

This article reports on an agreement by the industrialized nations to have the IMF
and World Bank forgive a significant portion of the debt owed by some of the world's
poorest nations. The article notes that the United States and other industrialized
nations will be paying these institutions to forgive the loans. Since these loans were
largely uncollectable in any case, the payments to the IMF and World Bank
essentially amount to additional funds for these organizations, not assistance to
developing nations. This fact should have been pointed out in the article. 


THE CLINTON PRESIDENCY AND THE ECONOMY 

"Striking Strengths, Glaring Failures," by Todd S. Purdum in the New York Times,
December 24, 2000, Section 1, page 1. 

"The Wisdom to Let the Good Times Roll," by Richard W. Stevenson in the New York
Times, December 25, 2000, page A1. 

"A War on Poverty Subtly Linked to Race," by Jason DeParle and Steven A. Holmes in
the New York Times, December 26, 2000, page A1. 

"A Revival and a Party Transformed," by Robin Toner in the New York Times,
December 27, 2000, page A1. 

"Economic Engine for Foreign Policy," by David E. Sanger in the New York Times,
December 28, 2000, page A1. 

This series of articles analyzes various aspects of the Clinton Administration's record.
At several points the articles' characterization of this history is questionable. 

For example, at several points the articles uncritically repeat one of President
Clinton's assertions. Clinton said that he realized that to make the economy healthy
it was important that "we both got rid of the deficit and invested more in education
and science and technology." In fact, investment in education and science and
technology stagnated in the Clinton years. In the last Bush Administration budget in
1993, the federal government spent an amount equal to 0.79 percent of GDP on
education and training. This had fallen to 0.57 percent by 2000, although the 2001
budget proposal would have raised it to 0.71 percent of GDP. Spending on general
science and research fell from 0.33 percent of GDP in 1993 to 0.25 percent in the
2001 budget request. There was a modest increase in spending on health research,
from 0.17 percent of GDP in 1993 to 0.19 percent requested in the 2001 budget. 

The Clinton administration did pursue deficit reduction, although not in a manner
consistent with the accounts in the articles. During his first campaign, Clinton
downplayed the importance of deficit reduction, arguing instead for public investment
and a middle class tax cut. After being elected, he set a target of reducing the
deficit by half in his first term. He only adopted the goal of balancing the budget
after the Republican Congress made it a central demand in 1995. If President Clinton
had realized the necessity of balancing the budget prior to this time, he kept it a
secret. The timing of President Clinton's version of the importance of balancing the
budget directly contradicts the claim made in the article by Stevenson that, "for the
most part, his economic policy was less subject than most other areas of his
presidency to the criticism that he had few convictions and was guided by polls and
his political needs." 

Research on the impact of deficit reduction on the economy also contradicts some of
the claims in this article. While the article asserts that deficit reduction stimulates
the economy by lowering interest rates and thereby promoting investment, a vast
amount of economic research shows the size of such effects to be quite modest. For
example, the models used by the Congressional Budget Office show that moving from
the mid-1990s deficit levels to a balanced budget would have raised the rate of GDP
growth by less than 0.1 percentage point annually. This increment to growth would
barely be visible to most people. 

The article also includes a number of other statements that are not supported by the
evidence. For example, it refers to the "troubled future" of Social Security, which it
asserts is going to "run short of money as the baby boom generation retires." In fact,
the latest projections from the Social Security Trustees show that the program will
be able to pay full benefits through the year 2037, with no changes whatsoever. At
this point, the youngest baby boomer will be six years past normal retirement age,
and the oldest will be ninety-one. 

At one point, this article notes the administration's strong dollar stance, which it
asserts "helped hold down inflation and attract foreign investment." It does not
mention that the high dollar has caused the United States to increase its foreign
indebtedness by approximately $2 trillion in the Clinton years, which will be a drain on
the living standards of future generations of workers. 

The article also does not note the economic impact of the Clinton Administration's
failure to reform the health care system. The United States spends more than twice
as much per person on health care as the average for the industrialized world, yet
has health care statistics (life expectancy and infant mortality rates) which place it
near the bottom of this group. The average annual increase in health care costs over
the last eight years imposed a far larger burden on workers than any increase in
taxes that might be needed to support the Social Security system in the foreseeable
future. Since this article attaches considerable significance to the potential shortfall
in Social Security thirty-seven years in the future, the problem of rising health care
costs should have been mentioned. 

The discussion of the Clinton Administration's anti-poverty agenda in the DeParle and
Holmes article presented several numbers which should have been placed in context.
For example, this article notes that spending on the earned income tax credit nearly
doubled in the Clinton years. Since nominal GDP rose by nearly 60 percent over this
period, this increase is somewhat less impressive than it may otherwise appear. 

The article also notes that poverty rates among African-Americans hit an all-time low
in the Clinton years. Typically income rises year by year. This means that if gains are
shared equally, some portion of the people who are below the poverty line should rise
above it each year, lowering the poverty rate. In other words, we should expect that
poverty for all groups should be hitting a record low each year. It is striking that
because of increasing income inequality, the poverty rate actually rose from 1979 to
1996. While it is a positive development that the poor once again appear to be
sharing in the gains from economic growth, this simply means that the economy is
functioning in its normal mode. 

The article by Toner on the impact of the Clinton years on the Democratic Party also
includes many questionable assertions. It repeatedly equates balancing the budget or
paying down the debt with "good economic stewardship." While some may hold this
view, it is not obviously true. For example, a person who neglected his children's
health and education in order to pay off his mortgage early would not have obviously
engaged in "good economic stewardship." There is no apparent justification for
extolling this particular approach to the economy. 

The article also includes an unsupported assertion about the need to "overhaul
Medicare and Social Security for the coming onslaught of the baby boomers." The
latest projections from the trustees of both programs show that no such need exists.


The article by Sanger accepts at face value the Clinton Administration's rhetoric
concerning the goals of its trade policy. It repeatedly asserts that President Clinton
attempted to expand trade with nations around the world in order to promote
democracy. It never considers an alternative explanation: powerful business
interests, many of whom were large campaign contributors, saw opportunities for
profit through expanded trade. It is certainly plausible that President Clinton was
more concerned about advancing the interests of his allies in the business community
than the cause of democracy. 

At one point, the article asserts that, "job No. 1 was using diplomatic power to open
markets for American goods, helping to create jobs and lift the United States out of
a recession." If this was the goal, then the policy failed completely. Imports, which
displace domestic jobs, grew far more than exports. The annual trade deficit rose
from less than $30 billion in1992 to close to $350 billion in 2000. 

This article also includes a short discussion of the East Asian financial crisis. It claims
that the Clinton Administration used the IMF to finance a bailout rather than doing it
directly, in order to avoid having to put U.S. money on the line. It is worth noting
that the Clinton Administration moved quickly to block an East Asian bailout fund, led
by Japan and Taiwan, which would have required no U.S. money. By using the IMF,
which is generally recognized to be under the control of the U.S. Treasury, the
Clinton Administration was able to impose conditions on the nations of the region, in
a manner that was less open to public scrutiny than if it had set them down directly.


It is also worth noting that the article complains that Japan and South Korea have
not followed the "reform" agenda laid out for them by the IMF South Korea
maintained an average rate of per capita GDP growth of more than 6.0 percent from
1960 to1997. Japan had an average per capita growth rate of more than 4.0 percent
over this period. There is no country which has followed the IMF's guidance which
has sustained a growth rate close to these levels. Therefore, it is understandable
that these nations would be reluctant to follow the IMF's advice. 


RUSSIA 

"For All Russia, Biological Clock Is Running Out," by Michael Wines in the New York
Times, December 28, 2000, page A1. 

This article discusses the declining birth rate in Russia in the wake of its economic
collapse. At one point the article warns that this will lead to "a shrinking, aging
population when there is a crucial need for young people to rejuvenate Russia's
farms, re-energize industry and rebuild the economy." 

It's not clear that Russia's declining population will present any serious economic
problems. The fact that the nation has fewer children means that it will be easier to
educate them well. Russia's economy is more likely to be in need of educated workers
than large numbers of uneducated workers. Furthermore, it will always be possible to
obtain more workers through immigration, if there is a shortage in an otherwise
vibrant economy. In addition, Russia has a severe housing shortage, which can be
alleviated by a decline in population. 


SUPPLEMENTAL SECURITY INCOME 

"Fugitives Get Millions In Improper SSI Benefits," by David Page in the Washington
Post, December 28, 2000, page A21. 

This article reports on the failure of the Social Security Administration to screen out
fugitives from the list of SSI beneficiaries. It reports estimates that this could be
costing the program $30 million annually in improper payments. The article even
presents an African-American child rapist (with photo) as an example of the fugitives
that wrongly have been receiving SSI benefits. 

It would have been appropriate to note that the amount of improper benefits is
approximately 0.1 percent of annual spending on the SSI program. It is questionable
whether an error in spending, which has so little impact on a program, is worthy of
the attention given it by this article. Estimates of the frequency of tax avoidance or
fraud are generally over 10 percent of tax obligations. 

While the finances of the SSI program are completely separate from the Social
Security program, many people confuse the two. By giving such high profile to
small-scale abuses, this article is likely to have the effect of undermining confidence
in the Social Security program. 

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