ECONOMICS REPORTING REVIEW
Week of December 9 - December 15

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

ARGENTINA 

"When Nations Are Punished For Fiscal Discipline," by Joseph Kahn in the New York
Times, December 10, 2000, Section 3, page 10. 

This article discusses the economic problems facing Turkey and Argentina as they try
to implement fiscal austerity packages. At one point the article reports uncritically a
comment from Stanley Fischer, the deputy director of the IMF, that Argentina
"performed well for years before it ran into its latest difficulties." 

Earlier in the 1990s, Argentina adopted an austerity plan that had the full support of
the IMF. This plan included pegging Argentina's currency to the dollar. A predictable
outcome of this pegging was the sort of crisis that Argentina is currently
experiencing as result of the rise in value of the U.S. dollar and the Federal Reserve
Board's decision to raise interest rates in the United States. 

Argentina's growth rate over the course of the last decade has averaged
approximately 4.0 percent annually. This is well below the average growth rates of
East Asian nations such as Malaysia, South Korea, and Thailand, all of which
managed to average growth rates of more than 6.0 percent annually, in spite of the
1997 financial crisis. These East Asian nations have frequently been criticized for
their "crony capitalism." While Argentina's growth rate is healthy compared to some
other countries that have been pursuing policies favored by the IMF, like Mexico and
Russia, it has not been doing particularly well compared to developing nations that
have pursued economic paths condemned by the IMF. 


COPYRIGHTS IN CHINA 

"A Tale of Piracy: How the Chinese Stole the Grinch," by Craig S. Smith in the New
York Times, December 12, 2000, page A3. 

This article reports on the lack of copyright enforcement in the production and sale
of videodiscs in China. While the article notes that the authorized copies of
videodiscs can sell for six times as much as unauthorized versions, it never explores
the economic implications of forcing consumers to pay these higher prices. Given the
cost figures that appear in the article, if Chinese consumers purchase 500 million
videodiscs in a year, the additional cost to consumers from buying authorized
versions would be approximately $2.5 billion a year. This would be equivalent to a
cost of $25 billion to the United States. This would be a significant loss to consumers
and, since most of this money would leave the country, it would also be a significant
drain on the Chinese economy. 


FREE TRADE AND DEVELOPING NATIONS 

"Clinton Urges U.S., Other Rich Nations to Help Poor," by T.R. Reid in the Washington
Post, December 15, 2000, page A33. 

"Clinton, Winding Up Trip, Tells the Rich Not to Forget the Poorer Nations," by Marc
Lacey in the New York Times, December 15, 2000, page A18. 

"Getting Tough On Gangsters, High Tech and Global," by Joseph Kahn and Judith
Miller in the New York Times, December 15, 2000, page A7. 

The first two of these articles report on a speech that President Clinton gave in
England, in which he urged the industrialized nations to assist the world's poor. The
third article reports on a new study from the Clinton Administration that investigates
organized crime throughout the world. 

The articles on Clinton's speech note his claim that increased trade is the best way
to help developing nations. The Times article inaccurately refers to his trade policies
as a "free-trade agenda." The Clinton Administration has not consistently pursued an
agenda to promote free trade. For example, it has supported regulations that will
restrict the number of foreign doctors who can practice in the United States. This is
a clear barrier to the exchange of professional medical services. 

The Clinton administration also has made the extension of U.S.-type copyright and
patent laws to developing nations one of its top priorities. These are very costly
forms of protectionism, since they raise the price of goods like compact discs or
pharmaceuticals by several hundred percent above the free market price. The
imposition of copyrights and patents on developing nations will be an enormous
burden to their economies. 

The study mentioned in the second Times article reports on estimates that U.S.
businesses are losing $12 billion annually because their trademarks and copyrights are
not being enforced. Most of these losses are attributable to unauthorized sales in
developing nations. The implication of this study is that full enforcement of U.S.
issued copyrights and trademarks would cost the rest of the world an additional $12
billion a year. This sum dwarfs the amount of money that the U.S. sends in aid to
developing nations. It also dwarfs the gains to developing nations from expanded
trade that are predicted in standard economic models. 


HEALTH CARE COSTS AND SOCIAL SECURITY 

"Steep Rise Predicted in Health Benefit Costs," by Bill Brubaker in the Washington
Post, December 12, 2000, page E1. 

This article reports on projected increases in health insurance premiums in the
coming year. The article reports that premiums nationwide were projected to rise by
an average of 11 percent in a recent survey. Given the average cost of health
insurance premiums, this would imply an increase of approximately $500. 

For an average worker, this increase in health insurance premiums would have
approximately the same impact on take-home pay as a 1.8 percentage point increase
in the Social Security tax. The prospect of this sort of increase in the payroll tax
(approximately the amount that would be needed to keep the program fully solvent
for seventy-five years, under current projections) has often been discussed as a
catastrophe that the nation must struggle to avert. 

This projected rise in insurance premiums will be just as painful to workers and
impose just as much harm on the economy as an increase in the payroll tax of the
same magnitude. The main difference is that the rise in the cost of insurance
premiums is likely to be repeated in future years, whereas the increase in the payroll
tax would only be needed once (if the projections prove accurate), and could be
phased in over a long period of time. 


THE ECONOMIC SLOWDOWN 

"The Landing Ahead: Hard or Soft?" by Steven Pearlstein in the Washington Post,
December 10, 2000, page H1. 

This article discusses varying views on the economy's future as the growth rate
slows from its pace earlier in the year. In several items, the article frames the debate
in inaccurate or misleading ways. 

For example, it presents conflicting views over the size of the wealth effect -- the
impact of higher stock prices on household consumption -- with one side arguing that
the wealth effect has been minimal since "consumer spending rose pretty much in line
with wages and salaries." A quick examination of the Commerce Department's data on
wage and salary growth compared with consumption growth shows that this is not
true. Since the last business cycle peak in 1989, wages and salaries grew by 85.0
percent. Consumption spending grew by 89.5 percent. This is a very large difference,
which would most obviously be explained by the rise in the stock market. 

The article also presents a claim that official savings measures don't accurately
report the savings rate since they ignore capital gains on stocks. The article
comments, "If you add that back in, then the household saving rate is about 10
percent." Actually, capital gains from stocks are left out of the official savings
measure for a very good reason: it would not be more accurate to include them. For
example, stock prices have been falling sharply in recent quarters. If the capital
gains on those falling stocks were included in the savings rate, then the savings rate
in recent quarters would be more than negative 20 percent of disposable income
(inabsolute terms). 

At one point the article discusses the prospective impact of a fall in the dollar. It
notes that the dollar fell sharply in 1987 and then asserts, "there was no big spike in
inflation." The rate of inflation as measured by the consumer price index was 1.1
percent from December 1985 to December 1986. The following year the December to
December inflation rate was 4.4 percent. Many economists would view this is a sharp
rise in the rate of inflation. The Federal Reserve Board has often raised interest rates
to combat considerably smaller increases. 


ELECTRICITY DEREGULATION 

"California Power Grid Is on Verge of Collapse," by William Booth in the Washington
Post, December 9, 2000, page A3. 

"After Summer of Power Woes, California Is Hurting Again," by Laura M. Holson in the
New York Times, December 9, 2000, page A8. 

These articles report on the continuing power shortages afflicting California's electric
system. Both articles imply that the current problems were unforeseeable. For
example, the Times article asserts that "no one foresaw such a predicament four
years ago, when California ... decided to deregulate its electricity industry." 

At one point the Post article comments that California's decision to deregulate its
electricity market, "was expected to produce lower prices and a steady supply." The
article does not indicate who had this expectation. The utilities that pushed for
deregulation did argue that this would be the outcome of deregulation, however, the
shortages that have occurred were entirely predictable based on standard economic
theory. 

In a deregulated environment there is little incentive for anyone to build excess
capacity because it sits idle most of the time (see "California Screaming," by Paul
Krugman, New York Times, December 10, 2000; Section 4, page 15). It makes more
sense for firms to simply raise their prices at times when demand exceeds capacity,
as has happened on many occasions in the last six months. If consumers had been
made aware of basic implications of economic theory in a market with very limited
competition, like the electricity market, they would not have been surprised by their
experience with deregulation. 


NOVEMBER JOBS REPORT 

"U.S. Jobs Report Is Another Indication of a Slowing Economy," by David Leonhardt in
the New York Times, December 9, 2000, page B1. 

This article reports on the Labor Department's release of employment data for
November. At one point the article discusses the 0.4 percent rate of growth in the
average hourly wage for November. It comments that this rate is faster than earlier
in the year and is a "robust raise for workers -- and causes executives to worry
about inflation." 

There is a large element of random fluctuation in the rate of hourly wage growth
reported each month. For example, in August of 1999 the growth in the average
hourly wage was reported at less than 0.1 percent, while it was reported as 0.5
percent in September of 1999. It is not likely that wage growth accelerated sharply
from August to September. It is more likely that the August data understated wages,
while the September data may have overstated wages slightly. In order to avoid
being misled by monthly data it is best to take averages over slightly longer periods.
The average annual rate of wage growth over the last three months has been 4.1
percent, almost exactly the same as it has been over the last three years. 


STOCK AND BOND PROFITS 

"Clinton Considers Pardons For Milken and Others," by Neil A. Lewis and Don Van
Natta, Jr., in the New York Times, December 9, 2000, page A8. 

This article discusses the cases of various individuals for whom President Clinton is
considering pardons in his last weeks in office. One of the people reported to be
under consideration is Michael Milken, who was sentenced to jail after having been
convicted of several counts of securities fraud. 

The article notes that Milken played an important role in developing the junk bond
market and adds that he "made billions of dollars for himself and others." In some
cases, the junk bonds that he promoted ended up falling sharply in value, leading to
large losses for financial institutions and individual investors. For this reason it would
have been equally accurate to say that "he lost billions of dollars for others." 


OUTSTANDING STORIES OF THE WEEK 

"Studies Dispute Some Assumptions on Welfare Overhaul," by Nina Bernstein in the
New York Times, December 12, 2000, page A15. 

This article reports on a series of economic studies examining the effect of welfare
reform. The studies indicate that many people who left welfare rolls have not fared
well in the labor market, often returning to welfare a short time later. They also
found that states have made it more difficult to get on welfare originally, which
explains much of the decline in welfare rolls. 

"The Uniting Geeks of America?" by Carrie Johnson in the Washington Post, December
9, 2000, page E1. 

This article discusses efforts by workers at high tech companies to organize unions. 

"Failed Merger Said to Enrich Sprint Leaders," by Floyd Norris in the New York Times,
December 13, 2000, page C1. 

This article reports on a lawsuit, which alleges that Sprint executives changed the
terms on their stock options so that they were able to cash them early. According to
the suit, this change allowed these executives to cash in their options at a point
when the stock was at a temporary high due to a proposed merger with WorldCom.
The merger subsequently collapsed and the stock price plummeted. 

"When Good Drugs Go Gray," by Melody Petersen in the New York Times, December
14, 2000, page C1. 

This article reports on questions concerning quality control and improperly dated flu
vaccines which have been sold on a "gray market." This market exists because the
pharmaceutical industry often charges vastly different prices to different purchasers
in order to maximize their profits. This practice creates room for a secondary market
where drugs or vaccines can be sold at intermediate prices. Such a market would not
exist if patent protection did not create a monopoly and allow for price
discrimination. 

"Railways' Frightful State Is the Talk of Britain," by Sarah Lyall in the New York
Times, December 10, 2000, page A3. 

This article reports on the deterioration of the quality of Britain's rail service the train
system was privatized in the early 1990s.

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