Economic Reporting Review By Dean Baker December 9

Economic Reporting Review
By Dean Baker
December 9, 2002

OUTSTANDING STORIES OF THE WEEK

In Stormy Time, S.E.C. Is Facing Deeper Trouble
Stephan Labaton
New York Times, December 1, 2002, Page A1
http://www.nytimes.com/2002/12/01/business/01SEC.html?ex=1039323600&en=9f959409e2e66f0a&ei=5040&partner=MOREOVER

This article examines the ability of the S.E.C. to carry through its oversight responsibilities. It documents how its work load has vastly increased over the last two decades, even as the size of its staff has remained nearly the same.

Poor Rural Schools Must Strive to Meet New Federal Rules
Diana Jean Schemo
New York Times, December 2, 2002, Page A1
[Article available for $2.95 at http://query.nytimes.com/search/abstract?res=F6061EF9355C0C718CDDAB0994DA404482]

This article examines the difficulties that poor rural school districts are facing in attempting to comply with new federal mandates, without any additional funding.

Costs Are Important, But Revenue Is Crucial
David Leonhardt
New York Times, December 6, 2002, Page C1
http://www.nytimes.com/2002/12/06/business/06UNIT.html

This article examines the factors that led to the likely bankruptcy of United Airlines. It points out that the airline had over-expanded in response to the tech bubble because two of its hubs, Washington and San Francisco, were at the center of the bubble. The tech boom of 1996-2000 led to rapid growth in business travel from these cities. This travel has collapsed along with the tech bubble.

Social Security

Does Bush Have a Mandate on Social Security, Too?
David E. Rosenbaum
New York Times, December 1, 2002, Section 4 Page 5
http://www.nytimes.com/2002/12/01/weekinreview/01ROSE.html?pagewanted=print&position=top

This article discusses the likelihood that President Bush will attempt to restructure Social Security now that he has a Republican majority in both houses of Congress. At one point the article quotes Tom Ridge, the secretary-designate of the Homeland Security Department (who is also described as a confidante of President Bush), as saying that "the president believes there's not a snowball's chance in hell that Social Security is going to be around in fifty years if we don't do something."

This statement suggests the president is ill-informed about Social Security. The Social Security trustees' report shows that the program can pay all scheduled benefits for the next forty years with no changes whatsoever. It would take changes that are no larger than those implemented in the decades from the forties to the eighties to keep Social Security fully solvent for its seventy-five year planning period. These projections are extremely pessimistic, assuming just 1.6 percent annual productivity growth. If the trustees assumed the 2.0 to 2.75 percent growth that many economists now expect, then the projections would show the fund is fully solvent for almost its entire seventy-five year planning period. The fact that President Bush is apparently quite ignorant of the state of the Social Security program deserves a full story by itself.

The article later asserts that, "Democrats were also evasive during the campaign when they implied that big changes in Social Security were unnecessary. During the lifetime of most of today's workers the system will begin to run out of money." Since the projections in the Social Security trustees' report show that any changes needed to sustain Social Security are distant and small relative to past changes, there does not appear to be anything evasive about the Democrats' position during the campaign.

Kerry Blasts Bush's Tax Cuts, Offers Own Plan
Dan Balz
Washington Post, December 4, 2002, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A5477-2002Dec3.html

This article reports on a speech by Massachusetts Senator John F. Kerry, in which he criticized President Bush's tax cut. Senator Kerry is quoted as saying that, "'the largest cost of the Bush tax giveaway . . . will be paid by our children' because of the need to borrow from Social Security and Medicare to pay the government's bills."

The fact that the government borrows some of its money from Social Security and Medicare, rather than the general public, does not affect the burden faced by future generations at all. If Senator Kerry is actually confused on this issue, as this quote suggests, then it deserved more prominent attention in this article. In fact, since Mr. Kerry is preparing a run for the Democratic presidential nomination, if he really is as confused on budgetary issues as this comments suggests, then it would be appropriate to devote an entire article to the issue.

Media Concentration

Fewer Media Owners, More Media Choice
Jim Rutenberg
New York Times, December 2, 2002, Page C1
http://www.nytimes.com/2002/12/02/business/media/02MEDI.html

This article discusses the impact of concentration in the media industry in the context of the Federal Communications Commissions (FCC) re-examination of rules restricting concentration. The article reports that a series of studies commissioned by the FCC show that increased concentration increases diversity.

Actually, the studies (in spite of being poorly designed to address the issue) provide evidence suggesting that increasing concentration will lead to less diversity. For example, several studies showed that the rate of increase in media outlets has slowed substantially in the last two decades, even as technological breakthroughs were creating many new media opportunities. While most of the studies did not attempt to examine the extent to which this slower growth coincided with changes in rules on concentration (although one did show that a change in rules on radio ownership had this effect), these rule changes seem the most obvious explanation for the slowdown. A likely implication is that further concentration will further slow the rate of increase in media outlets, and could even lead to an absolute decline in the diversity of what is available to the public.

The studies also provide evidence that there is relatively little substitution between the different media as news sources. One of the studies found that if people receive less news from one source (e.g. broadcast television or newspapers), they are less likely to seek it from another source (e.g. radio or cable). This issue is important because current regulations are focused on preserving a diversity of sources within each medium. Some policy makers have argued that it is only important to ensure that there is some diversity across media. The studies commissioned by the FCC do not support this view.

Immigration and Wages

Immigrants Account for Half of New Workers
D'Vera Cohn
Washington Post, December 2, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A61586-2002Dec1.html

Immigrant Education Levels Rise
Mary Beth Sheridan
Washington Post, December 5, 2002, Page A2
http://www.washingtonpost.com/wp-dyn/articles/A10590-2002Dec4.html

The article by Cohn discusses the findings of a new study that reportedly shows that large pools of immigrant labor have become increasingly important for U.S. economic growth. The discussion is peculiar, because there is no economic value to growth per se; economists usually look to growth per person or even growth in the rate of output per hour (i.e. productivity) as measures of economic well-being. If a more rapid rate of immigration allows the United States to maintain a more rapid overall rate of GDP growth, but doesn't increase per capita GDP, then there is no economic rationale for supporting it.

At one point the article asserts that immigrants have helped to fill a labor shortage at the low end of the labor market, which is attributed to the fact that many male high school dropouts have dropped out of the labor market. Economists usually attribute the decline in labor force participation by male high school dropouts to a reduced demand for their labor. One reason why there would be less demand for their labor is that a large number of immigrant workers have come into the United States to fill the sorts of jobs in which they might be employed.

For example, the article notes that immigrant workers have facilitated the rapid growth of 7-Eleven convenience stores over the last decade. Some of the jobs in these stores might have otherwise been held by native-born high school drop-outs. Of course, these workers may have commanded a higher wage in the absence of a large pool of immigrant labor, which would have slowed the growth of this sector.

It is worth noting that more highly skilled professionals have been able to largely protect themselves from competition from immigrants through government regulations. For example, in 1997 doctors raised concerns that increased inflows of foreign doctors were reducing their wages. In response, they lobbied for a change in regulations that imposed additional obstacles to foreign-trained doctors who wanted to practice in the United States. As a result of this change, the number of foreign residents entering the country each year was cut in half (e.g. "Fewer Foreign Doctors Seek U.S. Training," Washington Post, September 4, 2002, Page A7; "Caught in the Middle," Washington Post, March 19, 1996, Health Section, page 10; "A.M.A. and Colleges Assert There is a Surfeit of Doctors," New York Times, March 1, 1997, page A7 and "U.S. to Pay Hospitals Not to Train Doctors, Easing Glut," New York Times, February 15, 1997, page A1). Most other highly paid professionals have managed to secure similar protection from competition from immigrant workers.

The article by Sheridan notes a new report that finds rising levels of educational attainment among immigrants. The article asserts that the education levels of immigrants has become an important political issue because, "opponents of the large-scale immigration that began in the 1970s argue that poorly educated newcomers add to the poverty rolls." Actually, many opponents of large-scale immigration are concerned that immigrants with limited education are lowering the wages of the less educated portion of the U.S. born population, thereby increasing wage inequality. This situation could be partially alleviated by removing the labor market protections enjoyed by more highly educated workers.

Germany

Does Schroder Have Political Capital to Reform Economy
Mark Landler
New York Times, December 1, 2002, Page A3
[Article available for $2.95 at http://query.nytimes.com/search/abstract?res=FB0911FE3B5C0C738FDDA80994DA404482]

This article discusses Germany's current economic situation. It repeatedly asserts that Germany suffers from chronic economic problems, with high labor costs at the top of the list. It complains that strong unions, protection against layoffs, and generous unemployment benefits are destroying Germany's economy.

While the article claims that "there is general agreement" with this assessment, this assertion is contradicted by evidence presented in the article. For example, the article reports that the schedule of elections in the coming year makes it unlikely the government will take any steps to, "overhaul its hidebound labor market" any time soon. If there were general agreement on the need to overhaul the labor market, then the necessary steps would presumably make a political party more popular in elections. This is apparently not the case, since neither of the two major parties called for such measures in the last election. It is unlikely that the failure to overhaul the labor market, by weakening workers' protections, has been "the keenest disappointment for Germans" as the article claims.

The article repeatedly asserts that Germany has high unemployment. While the overall rate for Germany is over 8.0 percent, this figure is pushed up by the unemployment rate in former East Germany, which is still close to 20 percent. The unemployment rate in the areas that were formerly West Germany is a round 6.5 percent, not very much higher than the 5.7 percent unemployment rate in the United States.

Remarkably, this article never once mentions the contractionary monetary policy pursued by the European Central Bank (ECB) as one of the factors leading to slow growth and high unemployment in Germany. While the Federal Reserve Board has lowered it short-term interest rate to 1.25 percent, the ECB has kept its short-term rate at 3.25 percent, even though inflation in Europe is virtually the same as in the United States. (It was just lowered to 2.75 percent last week). Many prominent economists, such as Nobel Prize winner Robert Solow and Princeton University professor Paul Krugman, have cited the policies of the ECB as a main cause of high European unemployment. Even the IMF has criticized the ECB for its contractionary policies. A discussion of Germany's economic problems should include the ECB's monetary policy.

The article also includes criticisms of the German government for raising taxes in violation of an election promise. This decision was necessitated by the "stability pact" for the countries in the euro zone. This pact includes a provision that prohibits countries from running deficits of more than 3.0 percent GDP. This leads to a perverse situation in which countries are forced to run pro-cyclical fiscal policy -- either raising taxes or cutting spending -- when the deficit starts to rise due to the effects of a recession. Both tax increases and spending cuts (which would have also violated campaign pledges) will have the effect of worsening a recession.

At one point the article asserts that, due to its high taxes, Germany has an underground economy equal to 15 percent of its reported GDP. If this is true, then Germany's actual GDP is approximately 15 percent higher than is conventionally believed. This would place Germany much higher in international comparisons than it is currently ranked. Adding in this 15 percent, Germany would be the richest large country in Europe and essentially even with the United States in per capita income.

Martin Feldstein

Scholarly Mentor To Bush's Team
David Leonhardt
New York Times, December 1, 2002, Section 3 Page 1
http://www.nytimes.com/2002/12/01/business/yourmoney/01FELD.html

This article discusses the career of Martin Feldstein, the President of the National Bureau of Economic Research, and one-time chief economic advisor to President Reagan. The article includes a quote from Robert Reich, a labor secretary during the Clinton administration, who states that "basically [Feldstein] is an honest intellectual."

Contrary to the norms of the economics profession, Feldstein does not make his data available to other researchers. This is one reason why it took many years for economists to find the computational error in his famous article on the link between Social Security and private saving ("Social Security, Induced Retirement and Aggregate Capital Consumption [Journal of Political Economy, V 82, #5]). This article purported to show that Social Security reduced private saving. When other researchers eventually had the opportunity to examine Professor Feldstein's data, they discovered that this result was attributable to a programming error. When the data was entered correctly, the relationship between Social Security benefits and private saving was found to be statistically insignificant.

Mexico and NAFTA
Mexican Farmers Cry Foul Over NAFTA's Effect on Chicken Tariff
Mary Jordan and Kevin Sullivan
Washington Post, December 1, 2002, Page A26
http://www.washingtonpost.com/wp-dyn/articles/A58167-2002Nov30.html

This article discusses the impact that NAFTA is having on Mexico's chicken industry and Mexico's economy as a whole. It notes that Mexico's chicken farmers are worried about losing much of their market when Mexico's 49 percent tariff on imported chicken falls to zero at the start of the new year. The article reports that Mexico's government is planning a $10 billion aid program for farmers who are hurt by NAFTA. The article should have indicated the time period over which this money is scheduled to be paid out -- it makes an enormous difference whether this amount will be spent in a single year or over 10 years.

It also reports on the increase in Mexico's trade with the United States as a measure of NAFTA's success. The better measure would have been the increase in Mexico's GDP. Its per capita GDP has grown at the rate of approximately 1.0 percent annually since NAFTA took effect in 1994. By comparison, its per capita GDP growth averaged just under 4.0 percent annually from 1960 to 1980.

Patents

In China, AIDS Crisis Is at the Mercy of Global Commerce
Peter S. Goodman
Washington Post, December 5, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A11021-2002Dec4.html

This article discusses how China is responding to the AIDS epidemic. It repeatedly discusses the possibility that China might allow the production of generic versions of drugs that are patented by western pharmaceutical companies under a compulsory license. It refers to this as "breaking" the patents and describes this as a violation of international trading rules.

It is not clear that compulsory licenses of this sort are a violation of current WTO rules. This issue is currently being negotiated. Many legal experts believe that countries have the right to issue compulsory licenses under the TRIPS agreement. It is also worth noting that compulsory licenses limit a government-sanctioned monopoly, and bring the drug sector closer to free market outcomes.