Economic Reporting Review
December 10, 2001

By Dean Baker, co-Director of the Center for Economic and Policy Research

OUTSTANDING STORIES OF THE WEEK

A New Health Plan May Raise Expenses for Sickest Workers
Milt Freudenheim
New York Times, December 5, 2001, Page A1

This article examines a new type of health being adopted by
many firms, under which families receive a limited allowance for
health care expenses ($2,000-$3,000 a year), but then are responsible
for all expenditures up to a certain level (e.g. $5,000), after which
the plan pays most expenses. The article explains how this sort of
arrangement has the effect of substantially increasing payments of
unhealthy workers.

After Enron, New Doubts About Auditors
David S. Hilzenrath
Washington Post, December 5, 2001, page A1

Auditors Face Scant Discipline
David S. Hilzenrath
Washington Post, December 6, 2001, page A1

These articles examine current accounting practices. They
point out that independent auditors have little incentive to uncover
and report deceptive or illegal bookkeeping practices by the
companies for whom they work.

Guaranteed Profits: The Fiction of Pension Accounting
Floyd Norris
New York Times, December 7, 2001, Page C1

This article examines how pension accounting rules give
pension funds a strong incentive to be holding stock at the end of
the year, even if they do not consider it a good investment.


Consumers and the Economy

An Up and Down Recession
Daniela Deane and John M. Berry
Washington Post, December 4, 2001, page A1

This article reports on new data that shows that the
percentage of homeowners who are facing foreclosure on their mortgage
reached a ten-year high in October. At the same time, it notes that
consumer spending took a sharp jump in the same month, driven by a
record pace of new car purchases.

While the article implies that these facts are presenting
conflicting pictures of the economy, they are actually easily
reconciled. The nineties expansion was driven primarily by a
consumption boom. The savings rate fell to almost zero in 2000, and
the ratio of debt to disposable income reached record highs. Under
these circumstances, it is not surprising that many households got
too deeply in debt, and now find themselves unable to meet their
payments as a result of losing a job or experiencing large losses in
the stock market. Given the run-up of debt in the last decade, a
large rise in personal bankruptcies and mortgage foreclosures was
virtually inevitable. If consumers continue to outspend their income,
as appears to be the case at present, then the number of personal
bankruptcies and mortgage foreclosures is certain to rise.



The Steel Industry

Steel Producers Seek a Merger, With U.S. Help
Leslie Wayne
New York Times, December 5, 2001, Page A1

This informative article examines the problems facing the
United States steel industry. The article does not mention the impact
of the overvalued dollar. As a result of the rise in the dollar
relative to other currencies in 1997 and 1998, U.S. producers must
compete with imports that are selling at prices that are 20-30
percent lower than what they would be if the dollar was valued at a
more sustainable level.



Medicare and H.M.O.'s

H.M.O.'s Flee Medicare Despite Rise in Payments
Robert Pear
New York Times, December 4, 2001, Page A16

This article reports the findings of a new study by the
General Accounting Office (GAO), that increased payments to H.M.O.'s
that serve Medicare beneficiaries are not increasing their
involvement in the Medicare program. The article notes the Bush
Administration's plans to significantly increase the percentage of
Medicare beneficiaries enrolled in H.M.O.'s and also discusses plans
before Congress to further increase the payments received by
H.M.O.'s.

In this context, it would have been appropriate to mention
the finding of an earlier GAO study, that Medicare already pays more
to the H.M.O.'s for the beneficiaries they serve, than it would cost
to keep them in the traditional Medicare program. The implication of
this finding is that efforts to increase the number of beneficiaries
enrolled in H.M.O.'s are likely to be extremely costly to the
Medicare program.


Venezuela

Venezuela's New Oil Law Is Seen as a Risk to Growth
Juan Forero
New York Times, December 5, 2001, Page A10

This article discusses the expected impact of a new law
regulating the oil industry in Venezuela. According to the article,
one of the main features of the law is to double the amount of
royalty payments received by the Venezuelan government for each
barrel of oil. The article includes several comments from analysts
claiming that this increase would hurt growth since it would provide
the oil industry with less incentive to dig new wells.

It is not clear that less drilling would necessarily be
disadvantageous to Venezuela at this time. Currently there is a world
oil glut, which could worsen with new sources coming on line soon in
central Asia. The oil producing nations have been struggling to
restrict supplies in order to maintain higher prices. If Venezuela's
ability to sell oil is going to be curtailed by production quotas in
any case, then it would be to its advantage to maximize the revenue
it receives from each barrel of oil it exports.



Argentina

Argentina Restricts Bank Withdrawals
Anthony Faiola
Washington Post, December 2, 2001, page A30

Argentine Economy: Postponing the Inevitable
Clifford Krauss
New York Times, December 5, 2001, Page A10

Argentina Economy Minister Tries to Maintain Optimism
Clifford Krauss
New York Times, December 6, 2001, Page A12

These articles discuss Argentina's current financial crisis.
Both of the Times articles blame Argentina's financial problems on
its budget deficit. For example, the December 5th article notes that
Argentina tied its currency to the dollar, and comments "but it did
not induce the kind of fiscal discipline on the government's part
needed to support such a move -- and hence, in part, the crisis
today."

Actually, the deficits run by Argentina have not been
especially large. It was recently projected to have a deficit equal
to 2.6 percent of its GDP in its current fiscal year. This is not
high for a country in the middle of a severe recession. By
comparison, the United States ran a deficit equal to 4.7 percent of
GDP in the relatively mild recession in 1992.

A more obvious cause of Argentina's problems is the decision
to link its currency to the dollar. When the dollar rose sharply
against other currencies in 1997, Argentina's currency rose with it,
making its goods uncompetitive in international markets. Furthermore,
since investors questioned whether Argentina would maintain the link,
the government was forced to raise interest rates substantially in
order to offset the risk of a devaluation. These two factors together
can explain the sharp economic decline that Argentina has experienced
over the last four years.

The Post article discusses the possibility that Argentina
could devalue its currency but then dismisses it, noting that
Argentines "have debts ranging from home mortgages to corporate loans
that are denominated in dollars, and analysts say a devaluation would
likely spark a massive wave of personal and corporate bankruptcies."
While having contracts written in dollars poses a problem, it is not
insoluble. As Princeton economist Paul Krugman has suggested,
Argentina's government can pass legislation that would index the
dollar obligations to peso obligations at some specified rate. While
this process would not be completely equitable, it may prove better
than any alternative solution to Argentina's financial crisis.

Globalization

Globalization Regaining Impetus
Steven Pearlstein
Washington Post, December 12, 2001, page A12

This article discusses the current state of conflicts over
international economic integration. It portrays this as a battle over
whether or not integration takes place, as opposed to what form this
integration will take.

The problem with this characterization is apparent in the
statement that "representatives of developing countries didn't cotton
to the idea that their environmental laws would be dictated by the
members of the National Wildlife Federation." International trade and
commercial agreements imply that there will be international rules.
The side identified in this article as "pro-globalization" has
attempted to impose such rules as U.S.-style patent and copyright
laws on developing nations. Representatives of developing nations do
not appear to be happy to have their domestic laws on these matters
dictated by Galxo Wellcome and Disney, but the governments of the
high-income nations have used their power to ensure that there is
little choice.

These agreements also include extensive provisions on
investment and other important areas of economic activity. The pro-
globalization forces are at least as eager as their critics, if not
more, to have interest groups impose rules on developing nations.


Trade Promotion Authority

As Vote Nears, Bush Presses for New Trade Powers
Joseph Kahn
New York Times, December 5, 2001, Page A18

G.O.P. Seeks Votes for Trade Bill
Juliet Eilperin
Washington Post, December 6, 2001, page A8

These articles discuss the Bush Administration's efforts to
expand its trade negotiating power. Both articles repeat without
comment claims by the Bush Administration that this expanded power is
necessary for the negotiation of new trade agreements. For example,
the first paragraph of the Times article quotes President Bush's
assertion that "no one will negotiate" with the United States on
trade, if Congress does not give him expanded authority.

It would have been worth noting that nations around the world
have been quite willing to negotiate with U.S. presidents who have
lacked expanded trade negotiation authority over the last four years.
The United States has taken part in multi-lateral talks at the W.T.O.
and over plans for a hemispheric trade agreement. It also negotiated
the multi-lateral agreement on investment (MAI), a far-reaching
agreement on investment rules, among the 29 OECD countries, that has
never been signed and ratified. In addition, the United States
negotiated and approved bilateral tradee agreements with Vietnam and
Jordan.

The Post article also incorrectly identifies Representative
Robert Matsui as a "traditional supporter of free trade." While Mr.
Matsui has been a supporter of recent trade agreements, he has not
indicated any objections to protectionist measures, such as the
application of U.S.-style patent and copyright laws to developing
nations. Therefore, it is inaccurate to refer to him as a supporter
of free trade.




European Unemployment

Europe Toughens Up on Job Cuts
Edmund L. Andrews
New York Times, December 5, 2001, Page C1

This article reports on the increased willingness of European
firms to have large-scale layoffs of workers, as American firms have
done for decades. At one point it comments that "many economists
argue that Europe's intricate web of job-protection rules, rather
than helping increase employment, is a main reason that European
employment has remain doggedly high."

While it is true that many economists hold this view, there
are also many economists who attribute high European unemployment
primarily to the contractionary monetary policy of the European
Central Bank (ECB). The ECB, and the national central banks that
preceded its creation, have consistently had a far more
contractionary monetary policy than the Federal Reserve Board.
Currently the interest rate set by the ECB is 3.5 percent, compared
to the 2.0 percent rate set by the Fed. This is in spite of the fact
that the rate of inflation is lower in Europe than the United
States.

Japan

Moody's Lowers Debt Rating On Government Credit in Yen
Ken Belson
New York Times, December 5, 2001, Page W1

This article reports on Moody's lowering of Japan's credit
rating. The end of the article discusses the government's efforts to
reduce its deficit, noting that Prime Minister Junichiro Koizumi has
proposed a 3.5 percent cut in spending next year. It then adds "but
debt-service costs will claim 4.1 percent more revenue."

This comparison is confusing. The cuts refer to 3.5 percent
of total government spending. The 4.1 percent refers to the
percentage increase in spending on debt service. At present, debt
service comprises approximately 1 percent of Japanese government
spending. Therefore the projected increase in debt service costs
would be equal to 0.041 percent of total government spending.


Recession Saps Consumer Confidence in Japan
James Brooke
New York Times, December 6, 2001, Page A3

This article discusses the current economic situation in
Japan and the low level of consumer confidence. The article includes
several comments, which cannot readily be supported by the evidence,
that paint a very dire picture. For example, it quotes a statement of
a woman nearing retirement, that the nation's pension system would
not be able to support her and her husband if they live to be ninety.

This claim is true, if it is assumed that the country never
raises it taxes to support its aging population. The claim also would
have been true in the United States at any point in the forties,
fifties, sixties, and seventies. Repeated tax increases have been
needed in the United States and other industrialized countries to
support the longer lives -- and retirements -- of its workers. Since
productivity and average wages increase year by year (with rare
exceptions), these tax increases have never prevented the working
segment of the population from enjoying higher living standards
during their working lives than the generations that preceded them.
There are no projections that the future for Japan, or any other
industrialized nation, will be different in this respect. The article
should have also presented the views of an expert on the state of
Japan's retirement system, rather than simply printing, without any
correction, this woman's unsubstantiated assertion.

At one point the article contrasts the near zero interest
rate available on savings accounts in Japan with the modest interest
rates available in the United States. It would be more accurate to
compare the real interest rates, which are not very different. Japan
has been experiencing a rate of deflation of close to 1.0 percent
annually over the last three years. This means that a bank account
that earns an interest rate of 0.5 percent in nominal terms would be
getting a real interest rate of approximately 1.5 percent. (The real
interest rate is equally to the nominal interest rate, minus the rate
of inflation, which is currently negative in Japan.) Since the
inflation rate in the United States has been close to 3.0 percent, an
account in the United States would have to earn an interest rate of
approximately 4.5 percent to get the same real rate of return.


Japanese Consumers Revel In Deflation's Silver Lining
James Brooke
New York Times, December 7, 2001, Page C1

This article discusses the benefits to Japanese consumers as
a result of falling prices. At one point it reports that many
economists believe that prices are actually falling significantly
more rapidly than indicated by Japan's price indices. If this is
true, then Japanese growth has been significantly more rapid than
government data indicates. Real growth is equal to the nominal rate
of growth minus the deflation rate (or plus the rate of deflation).
If prices have actually been falling more rapidly than is shown in
the data, then growth has been more rapid by approximately the same
amount.