Economic Reporting Review
December 17, 2001

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

OUTSTANDING STORIES OF THE WEEK

In the Failed Mills Shadow, the Workers Despair
Erik Eckholm
New York Times, December 8, 2001, Page A4

This article examines the plight of some of the workers who
have lost their jobs due to the closing of state owned factories in
China. It notes that many workers have had difficulty finding new
jobs, and that retirees are not receiving the pensions that they are
owed.

Is It an Enron Twin, or Just a Look-Alike
Gretchen Morgenson
New York Times, December 9, 2001, Section 3 page 1

This article examines the finances of the Calpine Corporation,
one of the largest energy trading corporations. It notes some
irregularities in its accounting, which could make the company appear
more profitable than it actually is.

Recovery and the Reluctant Consumer
David Leonhardt
New York Times, December 10, 2001, Page C1

This article examines the prospects for a consumer led
recovery in the near future. It notes that high levels of
indebtedness, along with stagnating consumer incomes, makes a strong
surge in consumption unlikely.


November Unemployment

Unemployment at 6-Year High
John M. Berry
Washington Post, December 8, 2001, page A1

Unemployment Rate Jumped Last Month on Surge of Layoffs
David Leonhardt
New York Times, December 8, 2001, Page A1

These articles report on the release of data showing a large
jump in the unemployment rate in November. Neither article mentions
one of the most striking pieces of data in the employment report: the
unemployment rate for black teens rose to 32.2 percent, more than 10
percentage points higher than its year ago level. Looking at
employment rather than unemployment, a black teenager is 20 percent
less likely to hold a job now than in November of 2000.

The Post article reports that "a number of forecasters now
predict that the economy will start growing again in the first three
months of 2002." The Post has consistently presented views of analysts
who have turned out to be overly optimistic. When the economy first
began to slow last fall, Post articles cited analysts who predicted
that it would resume growing strongly in the second quarter of 2001.
As events showed that this turnaround would not take place, the
analysts quoted in the Post began projected an upturn in the third and
eventually the fourth quarter of the year. For example, see "Economy
Gains As Consumers Keep Spending," by John M. Berry, Washington Post,
July 14, 2001, Page E1 and ERR 7-23-01; "Economic Reports Show Gains,"
by John M. Berry, Washington Post, June 27, 2001, Page E1 and ERR
7-2-01; "Economy Beats Expectations," by John M. Berry, Washington
Post, April 28, 2001, Page A1 and ERR 5-7-01; and "Reports Offer
Positive Economic News," by John M. Berry, Washington Post, April 3,
2001, page E1 and ERR 4-9-01. This pattern of unrealistically
optimistic reporting on the economy indicates the need for a broader
range of expert opinions in its coverage.

When presenting evidence for the view that the economy is
about to turn upward, the Post article notes that the University of
Michigan's consumer confidence index rose in November. The consumer
confidence index tends to follow the economy rather than lead it, and
therefore is not a good indicator of the economy's future direction.
This fact was pointed out in a recent Post article reporting on a
downturn in consumer confidence (see "Consumer Confidence Fell Again
in Nov.," by John M. Berry, Washington Post, November 28, 2001, page
E1).

The Post article also notes the recent rise in the stock
market, which it interprets as evidence that a recovery is expected to
begin soon. Stock prices are already at 25 times the peak corporate
earnings of 2000; the average price to earnings ratio over the last 70
years is 14.5 to 1. This indicates that the market is either
anticipating a faster rate of profit growth than the nation has ever
seen, or it is simply a case of a bubble re-inflating. A normal
recovery would not justify the current level of stock prices.

The Times article concludes by noting that the unemployment
rate is still below its average level for the eighties and early
nineties and adds "this relative tightness of the labor market allowed
hourly wages ... to continue rising at an annual rate of more than 3
percent. Nominal wages have a certain amount of momentum, which they
lose only slowly regardless of how much slack there is in the labor
market. In 1982, when the unemployment rate averaged 9.7 percent, the
nominal hourly wage still rose by 6.0 percent.


The Steel Industry

Doubts Arise About Need to Save All U.S. Steelmakers
Steven Pearlstein
Washington Post, December 8, 2001, page E1

U.S. Trade Panels Backs Putting Hefty Duties on Imported Steel
Joseph Kahn
New York Times, December 8, 2001, Page C1

These articles assess the current state of the United States
steel industry in the context of a recommendation from the
International Trade Commission that the Bush administration should
impose a series of tariffs and quotas on imported steel. Neither story
mentioned the impact of the over-valued dollar on the steel industry.
As a result of the high current value of the dollar, foreign steel is
selling at prices that are 15 to 30 percent lower than what they would
be if the dollar were trading at a sustainable level against other
currencies. This is a major reason for the troubles currently facing
the industry.

The Times article refers to calculations by Gary Hufbauer, an
economist at the Institute for International Economics, which indicate
that the trade barriers proposed by the commission would cost
consumers $326,000 for each job saved. This is an extremely misleading
figure for several reasons. First, it doesn't take into account the
higher prices that U.S. consumers would pay for other imports, if
steel imports were to increase. (More imports of steel will reduce the
value of the dollar -- holding everything else equal -- making other
imported goods more expensive.) Second, it ignores the fact that most
of the saving to consumers comes at the expenses of wages and benefits
that would have been received by workers in the steel industry. This
is especially important to note in this case because some of the
benefits -- workers' pensions -- are guaranteed by the government.
Therefore consumers will see some of their savings from cheaper steel
offset by higher taxes to cover the cost of bailing out the
steelworkers' pension funds. This point was noted in the Post article.


Endangered Species

Smuggling's Wild Side in Brazil
Anthony Faiola
Washington Post, December 9, 2001, page A38

This article reports on the trade in endangered species that
are being smuggled out of Brazil's Amazon rain forest. At one point it
quotes an official of an organization trying to protect endangered
species, who complains that Brazilian authorities have never been very
concerned about the animal trade. The article indicates that most of
these endangered animals are eventually sold in the industrialized
nations. The fact that smugglers are apparently able to bring these
animals into industrialized nations indicates that the authorities in
these nations are also not very concerned about the animal trade.


Argentina

Crisis Deepens In Argentina; Aid Is Sought
New York Times, December 8, 2001, Page C3

This article reports on the I.M.F.'s decision to deny
Argentina another installment of a loan. The article reports that the
loans from the World Bank and Inter-American Development Bank have
also been frozen. It is worth noting that these other banks do not
make independent evaluations of Argentina's creditworthiness. As a
matter of policy, they defer to the I.M.F. so that the I.M.F. can
effectively cut off almost all forms of multilateral lending, if it
disapproves of a country's economic program.

The article also refers to the claims of Argentina's president
that devaluing the currency will create serious economic problems for
country. It is worth noting that economists such as Princeton
University professor Paul Krugman have proposed solutions to the
problems created by devaluation. Professor Krugman's recommendation is
that contracts that written in dollars be indexed in law, so that the
devaluation can be carried through in an orderly manner.

I.M.F. Gives Budget-Cut Order to Argentina
Reuters
New York Times, December 10, 2001, Page A6

This article reports on the I.M.F.'s demands that Argentina
reduce its spending by approximately 10 percent in order to balance
its budget. It would have been appropriate to include some comment on
the economic impact of this sort of cutback. Argentina is in the
fourth year of a severe recession. The cuts demanded by the I.M.F.
would be equivalent to the United States cutting its budget by $200
billion in the middle of a recession.

The article also asserts that if Argentina devalued its
currency, it "would instantly bankrupt thousands of people." This
claim is not necessarily true, since contracts written in dollars
could be indexed, as noted above.


Brazil

Brazil's Effort to Overhaul Its Labor Code Stirs Heated Debate
Larry Rohter
New York Times, December 9, 2001, Page A9

This article discusses the debate in Brazil over the
government's attempts to change its labor law. The first paragraph
reports that these efforts are causing "a long-overdue debate." The
opponents of changing the labor laws apparently believe that the
current laws are satisfactory. The article does not explain how it was
able to determine that the laws are in need of change, or even that it
was necessary to debate changing the labor laws, as it asserts.


Chile

Chile's Leader Remains Socialist but Acts Like Pragmatist
Clifford Krauss
New York Times, December 10, 2001, Page A3

This article reports on the policies being followed by Chile's
president, Ricardo Lagos. At one point it notes that he cut government
spending, "therefore allowing the Central Bank to sharply cut interest
rates." The Central Bank had the option to cut interest rates, whether
or not Mr. Lagos cut spending. The decision to cut spending may have
made the Central Bank more comfortable with the decision to lower
interest rates, and there may even have been a formal arrangement
between Mr. Lagos and the Central Bank on this issue, but the Central
Bank could have chosen to cut interest rates regardless of Mr. Lagos'
budget policy.


Canada

Canada Relies On Discipline As Economy Slows
Bernard Simon
New York Times, December 9, 2001, Page A23

This article reports on plans by the Canadian government to
make budget cuts, even though its economy is in a recession, in order
to balance its budget. It would have been appropriate to point out
that budget cuts in a recession generally worsen the recession, since
they reduce demand in the economy. That is why economists generally
often favor increasing spending -- even at the cost of a budget
deficit -- in a recession.

The article also includes a comment that with balanced
budgets, or modest surpluses, the ratio of debt to GDP should decline
over time. The ratio of debt to GDP can decline even when a nation
runs modest budget deficits. In the 36 years from 1945 to 1981 the
U.S. government only had eight years of budget surpluses. Yet, the
debt to GDP ratio fell from 108.6 percent in 1946 to 25.8 percent in
1981.