Economics Reporting Review:
The NYT and Washington Post Under the Microscope
Week of December 30 - January 5
Dean Baker is co-director of the Center for Economic and Policy Research.
OUTSTANDING STORIES OF THE WEEK
"How Did So Many Get It So Wrong?" by Gretchen Morgenson in the New York Times,
December 31, 2000, Section 3, page 1.
This article examines the record of several prominent stock market analysts -- many
of whom earned more than $10 million a year -- who completely missed the plunge in
Internet and tech stocks. These analysts continued to make "buy" or "hold"
recommendations on many stocks, even though the companies were losing large
amounts of money with no foreseeable prospects of becoming profitable. The article
points out that these analysts worked for investment banks and brokerage houses
that were underwriting the stock or bond issues of the companies that they were
following, creating a clear basis for a conflict of interest.
"HMOs to Drop Many Elderly and Disabled People," by Jo Thomas in the New York
Times, December 31, 2000, Section 1, page 14.
This article examines the experiences of Medicare beneficiaries who will be dropped
from HMO coverage at the beginning of the new year. The article points out that
many will have an extremely difficult time finding comparable coverage. Nearly a third
of the Medicare beneficiaries nationwide who have enrolled in HMOs have been
dropped by their insurers.
"Drug Shortages Become a Worry At Hospitals Around the Country," by Melody
Petersen in the New York Times, January 3, 2001, page A1.
This article reports that many hospitals are experiencing drug shortages. To some
extent, the shortages result from a conscious decision on the part of the hospitals to
minimize their inventories and avoid waste. But, in most cases it seems to be the
result of problems in manufacturing and distribution that limit the availability of many
drugs.
"Judge Finds Labor Law Broken at Meat-Packing Plant," by Kevin Sack in the New
York Times, January 4, 2001, page A14.
This article reports on an administrative law judge's ruling that a meat-packing plant
in North Carolina, Smithfield Packing Company, engaged in widespread violations of
labor laws in order to prevent the formation of a union. The judge found that the
company had fired workers and tried to promote racial tensions in order to defeat
organizing efforts.
RUSSIA
"A Fit City Offers Russia a Self-Help Model," by Michael Wines in the New York Times,
December 31, 2000, Section 1, page 1.
This informative article examines the relative success that one Russian city has
experienced in addressing some of its worst health care problems. At one point the
article refers to Russia as "the developed world's sick man." The article could have
cited some data to help its readers put Russia's economic situation in context. For
example, according to World Bank data, Russia's per capita GDP in 1998 was $4,120.
Some developing countries now have per capita GDP rates far exceeding Russia's.
World Bank data show that Mexico, Brazil, and Argentina have a per capita GDP of
$6,540, $8,840, and $10,620, respectively.
Later the article notes the rise in mortality rates "after Russia became independent in
1991, and again after the 1998 economic collapse." Russia experienced a financial
collapse in 1998, but not an economic collapse. Its stock market and currency both
plummeted in the summer of 1998, which led to large losses for many investors and
speculators. However, the damage to the real economy was far less severe. The
economy went into a recession immediately following the financial panic, but it began
growing again early in 1999. By the end of 1999, it had largely recovered from the
impact of the financial crisis. It would be more accurate to describe what happened
in Russia in the early 1990s as an economic collapse. After Russia's independence,
the IMF began a "shock therapy" program, which ultimately caused a 50 percent
contraction in the economy. The effects of that contraction will not be reversed for
at least another decade, even in the most optimistic scenario.
SOUTH KOREA
"Business in Brief," compiled from reports by the Associated Press, Bloomberg News,
Dow Jones News Service and Washington Post staff reporters in the Washington Post,
January 2, 2000, page E2.
This short note reports on South Korea's plans to move ahead with a series of
economic reforms advocated by the IMF and the Clinton Administration. It reports
that "the economy is expected to grow 5 to 6 percent in the second half as the
restructuring begins to bear fruit." South Korea's economy grew by close to 9.0
percent in 2000. This article implies that its economy will be growing at a far slower
pace after the reforms "begin to bear fruit." IMF reforms have often resulted in
slower or negative growth, but it is not clear that this is their purpose, as this brief
article seems to imply.
TRADE
"Leftover Trade Issues on Bush's Plate," by Steven Pearlstein in the Washington Post,
January 2, 2000, page A13.
This article discusses the trade agenda as George W. Bush is about to take office. At
one point the article comments on U.S. approval of China's entry into the WTO,
which it asserts was "largely on the basis of geopolitical rather than economic
considerations." The actual agreement negotiated with China was designed with the
interests of specific industries in mind, as was widely reported at the time. Many
business groups also played an active role in pushing the agreement through
Congress. Therefore, the claim that economic considerations were secondary seems
questionable.
The article also asserts that developing nations consider labor and environmental
standards "an unacceptable intrusion on their sovereignty." While many developing
nations have made this assertion, it is not clear that this is a deeply held belief as
opposed to a negotiating position. Developing nations have been willing to accept far
greater intrusions on their sovereignty, most obviously in the TRIPS agreement on
patents and copyrights. This agreement will require developing nations to limit the
sale of items such as drugs, videos and compact disks within their own borders.
Labor and environmental standards would only apply to goods sold in other countries.
ALAN GREENSPAN
"Greenspan Is Determined to Avoid Repeating the Mistake of 1990," by Richard W.
Stevenson in the New York Times, January 5, 2001, page C1.
This article discusses Alan Greenspan's decision to cut interest rates earlier in the
week. The article repeatedly praises Greenspan's performance at the Federal Reserve
Board and characterizes his failure to recognize the onset of the 1990 recession as
"one of the few times in his more than 13 years as Fed chairman that Mr. Greenspan
got it wrong."
This is a dubious assessment. For example, Mr. Greenspan raised interest rates and
deliberately slowed job growth in 1994 and 1995, in what now appears to have been
an unnecessary move to head off inflation. He also failed to take sufficient action to
curtail the growth of a bubble in the stock market or to prevent the dollar from
becoming substantially over-valued.
TAX CUTS
"The First Cut Is Not Taxes," by Richard W. Stevenson in the New York Times,
January 4, 2001, page A1.
"Hailing Move by Greenspan, Bush Presses for His Tax Cut," by David E. Sanger in the
New York Times, January 4, 2001, page A1.
"Contrarian of Boom Decade Put in Bush Inner Circle," by Joseph Kahn in the New
York Times, January 4, 2001, page C8.
"Wall Street Cheers Half Point Move: Nasdaq Index Gains a Record 14.2%," by Steven
Pearlstein in the Washington Post, January 4, 2000, page A1.
These articles all discuss President-elect Bush's tax cut proposal in the context of
the recent economic slowdown. The articles all display a considerable degree of
confusion about the purpose of the tax cut.
According to these articles, Bush is now promoting his tax cut as a way to boost the
economy when it is slumping -- effectively a demand-side tax cut. However, at
several points it is suggested that the tax cuts are intended to have a supply-side
effect by increasing savings. For example, the Kahn article refers to a claim by Bush
aide Lawrence Lindsey that the tax cut "will prompt consumers to save more."
These positions are directly in conflict. If the tax cut actually promotes saving, then
it will be of no use in getting the economy out of a recession. In standard economic
models saving means simply not spending. According to standard economic theory it
makes no difference whether it is consumers or the government that does not spend.
If consumers put their tax cut into the bank, the stock market, or under their
mattress, it will provide no additional stimulus to the economy as compared to a
situation where there was no tax cut, and the government paid down the debt.
Alternatively, if the purpose of the tax cut is to immediately stimulate the economy,
then Bush should want people to spend it. This would mean targeting it to low and
moderate income people who will be the most likely to increase their spending as a
result of a tax cut.
DECEMBER AUTOMOBILE SALES
"Carmakers End Year Dismally," compiled from reports by the Associated Press,
Bloomberg News, Dow Jones News Service and Washington Post staff reporters in the
Washington Post, January 4, 2000, page E2.
"Vehicle Sales Fall Sharply in December," by Keith Bradsher in the New York Times,
January 4, 2001, page C1.
These articles report on new vehicle sales in December. The Times article excluded
two important pieces of information that it ordinarily features in its reporting: the
breakdown between sales of new cars and trucks, and the portion of the auto
market captured by the big three U.S. producers. The brief item on this data in the
Post also didn't give this information, although it also left out much of the information
contained in the Times piece.
This was a particularly important release because the auto industry stands alongside
the housing industry as the most strongly cyclical sectors in the economy. Signs of a
slowdown are likely to be most visible in this sector. The breakdown between car and
truck sales is important because the industry's profits are far higher on trucks. The
domestic-foreign split is important since foreign manufacturers employ many fewer
U.S. workers even when they produce cars domestically, since their vehicles have
more imported parts.
ELECTRICITY DEREGULATION
"California Board Favors 90-Day Increase in Electricity Rates," by James Sterngold in
the New York Times, January 4, 2001, page A19.
This article reports on a proposal by California's Public Utility Commission to allow a
temporary increase in electricity rates. At one point it asserts that when the
legislature voted to deregulate electricity "consumers were expected to be the
beneficiary of strong price competition." It is not clear who had this expectation or
why. Standard economic theory would have predicted very limited price competition
as well as the sort of price spikes that the state has seen, since there is very little
incentive for electricity producers to build excess capacity in a deregulated market
(see ""California Screaming," by Paul Krugman, New York Times, December 10, 2000,
Section 4, page 15).
ECONOMIC GROWTH
"Signs of Weakness Boost Recession Fears," by Steven Pearlstein in the Washington
Post, January 3, 2000, page A1.
This informative article reports on new economic data suggesting that the economy
is slowing further. At one point it considers whether the evidence is pointing to
slower growth, or an actual contraction. It then reports that retail sales during the
Christmas season are expected to be between 2 and 4 percent higher than last year,
which it cites as evidence of slow growth.
After adjusting for 2-3 percent inflation in goods' prices over the year, the real
increase in retail sales year over year would be approximately 1.0 percent. Since
there had been very strong economic growth in the first and second quarters of the
year, this figure would imply a contraction measured against the sales figures earlier
in 2000, not slow growth.
EDUCATION
"Bush Likely to Drop Vouchers," by Dana Milbank in the Washington Post, January 2,
2000, page A1.
This article discusses the agenda on education issues that President-elect Bush is
expected to pursue. It reports that he is expected to add $25 billion to baseline
education spending over the next five years. It would have been helpful to readers if
the article had expressed this increase over current spending in percentage terms.
The federal government is currently projected to spend approximately $350 billion
over the next five years on education and training, which means that the additional
spending would be an increase of approximately 7.0 percent. This increase will be
sufficient to keep federal spending on education roughly constant measured as a
share of GDP.
INFORMATION TECHNOLOGY AND GDP
"Missing the Mark in 2000, Stocks Look for a Steadying Hand Ahead," by Gretchen
Morgenson in the New York Times, January 2, 2000, page C1.
This article examines the stock market's prospects for 2001. At one point it presents
a statement by Stefan Abrams, the chief investment officer for asset allocation at
the Company of the West, that "capital spending for information technology now
amounts to 8 percent of GDP." In the third quarter of 2000, the last period for which
data is available, this category of capital spending was equal to just 5.5 percent of
GDP. Capital spending on information technology was $553.9 billion while GDP was
$10,063.3 billion.
STOCK PROJECTIONS
"Stocks Are Lower On The Final Day Of A Brutal Year," by Jonathan Fuerbringer in the
New York Times, December 30, 2000, page A1.
This article discusses the stock market's performance in 2000. At one point it quotes
William Rhodes, the chief investment strategist at the Williams Capital Group, as
saying that the decline in the stock market was good because it makes it "ready for
the next run." Over any long period, the stock market cannot consistently grow more
rapidly than corporate profits, unless it is possible for price to earnings ratios to rise
without limit. No economist has ever been willing to argue that an ever rising price to
earnings ratio is plausible.
The Congressional Budget Office (CBO), which makes the projections that have
formed the basis of recent budget debates, projects that real corporate profits will
decline by 10 percent over the next decade. Unless CBO is completely wrong in its
profit projections, it is implausible that there will be a sustained "next run" in the
stock market.
TURKEY
"Turkish Economy Shaken By Corruption Revelations," by Molly Moore in the
Washington Post, December 30, 2000, page A17.
This informative article reports on a series of corruption scandals associated with the
privatization of state owned industries in Turkey. At one point the article notes that
the scandal in Turkey is part of "a disturbing international trend among developing
nations, from Mexico to India to Russia. ... Government privatization and commercial
globalization have dramatically increased the spoils of corruption and cronyism."
It would have been appropriate to note that the policy of rapid privatization in
Turkey and dozens of other countries has been carried through at the urging of the
IMF, the World Bank and the Clinton Administration. Many economists, including
Joseph Stiglitz, the former chief economist at the World Bank, have warned of the
problems of privatization in countries that lack a solid legal structure and suffer from
high levels of corruption. However, the international financial institutions and the
Clinton Administration have largely ignored these warnings. It is worth noting that
last year Stiglitz was forced to resign from his position as chief economist at the
World Bank.
JAPAN
"Diploma at Hand, Japanese Women Find Glass Ceiling Reinforced With Iron," by
Howard W. French in the New York Times, January 1, 2001, page A4.
This article examines discrimination against women in Japan. At one point it refers to
projections that the number of Japanese in their twenties will shrink by a third by
2015 as a result of Japan's low birth rates. It then characterizes this decline as a
"problem." It is not apparent that a smaller population and labor force is a problem,
particularly in a densely populated country like Japan.
For most of the last four decades Japan has experienced productivity growth well in
excess of 2.0 percent annually. If the Japanese economy can maintain a 2.0 percent
rate of productivity growth over the next fifteen years, then the cohort of workers
who will be in their twenties in 2015 will be able to produce just as much as the
current cohort, even though the 2015 cohort will be one third smaller.