Economic Reporting Review
December 26, 2001

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

OUTSTANDING STORIES OF THE WEEK

Enron Board Comes Under a Storm of Criticism
Reed Abelson
New York Times, December 16, 2001, Section 3 page 4

This article reports on the failure of Enron's board to play
an active role in overseeing the conduct of its business. It notes
that the directors were paid close to $400,000 a year in cash and
stock.

Equal Opportunity Recession: Almost Everyone Is Feeling It
David Leonhardt
New York Times, December 16, 2001, page A1

This article examines the impact of the recession. It shows
that the recession has affected many more higher income wage earners
than has been the case in previous recessions.


The Federal Reserve Board

For Policy Makers, the Question Is: How Much Is Enough?
Richard W. Stevenson
New York Times, December 17, 2001, Page C3

This article examines the likely course of Federal Reserve
Board policy in the near future. At one point the article notes the
fact that the interest rate on long-term bonds has risen almost back
to its level of last fall. It attributes this increase to the bond
market's expectation of a strong recovery.

While this is a plausible explanation of the rise in interest rates,
it is also possible that interest rates have risen because the market
anticipates a decline in the dollar. Currently the United States is
borrowing more than $400 billion (4 percent of GDP) a year from
abroad. Since this level of borrowing cannot continue indefinitely,
foreign investors might reasonably assume that the dollar is going to
depreciate. This would bid up long-term interest rates on US bonds,
since the real return to foreign holders of these bonds must
compensate them for losses due to the depreciation of the dollar.


Markets and Income Distribution

Grounded by an Income Gap
Alexander Stille
New York Times, December 15, 2001, Page A15

This article examines the sharp growth in income inequality
over the last two decades. It reports the views of several economists
who attribute the increase in inequality to the market.

It would have also been appropriate to report the views of
economists who attribute increasing inequality to policy measures that
have the effect of favoring higher income wage earners. For example,
trade policy has been centered on removing barriers to manufactured
goods. This has the effect of placing manufacturing workers in
competition with the lowest paid workers anywhere in the world. By
contrast, the federal government deliberately restricts the inflow of
foreign doctors in order to keep their incomes from falling ("Caught
in the Middle," by Lena H. Sun, Washington Post, March 19, 1996,
Health Section, page 10; "A.M.A. and Colleges Assert There is a
Surfeit of Doctors," by Robert Pear, New York Times, March 1, 1997,
page A7 and "U.S. to Pay Hospitals Not to Train Doctors, Easing Glut,"
by Elisabeth Rosenthal, New York Times, February 15, 1997, page A1).

The federal government is also willing to intervene in the
market to enforce copyright and patent protection, which has the
effect of disproportionately benefiting higher income workers. It has
also severely weakened protections for unions, so that firms are much
better positioned to extract concessions on wages and benefits. It is
arguable that these sorts of policy changes have been the major factor
leading to greater inequality in the last two decades. This viewpoint
should have been presented in the article.


Markets and Health Care

Replay of a War Over Health Care and Insurance
Robin Toner
New York Times, December 20, 2001, Page A20

This article examines the distinction between Republican
proposals for promoting health insurance coverage, which focus on
individual tax credits, and Democratic proposals, which would extend
coverage through maintaining employer insurance pools. It
characterizes the Republican proposals as a being based on faith in
"an unfettered private marketplace."

It is worth noting that in an unfettered private marketplace,
the most effective way for insurance companies to make money is to
avoid providing insurance to people who are likely to have large
medical bills. Insurance companies that do insure such people will be
driven out of business by lower-cost competitors.


Copyright Enforcement

U.S. Expands Investigation Into Piracy of Software
Phillip Shenon
New York Times, December 19, 2001, Page C5

This article reports on a series of raids of college
dormitories by law enforcement officers. The officials were trying to
gather information about the spread of unauthorized duplication of
copyrighted material, such as software, and recorded music and videos.

Cases such as this, with increasing use of the police and
criminal justice system to regulate commerce, would seem to vindicate
the warnings that economists have traditionally given against trying
to enforce monopolies (such as copyrights) and prevent competition in
the distribution of goods and services.


Japan

In Japan, a Lack of Political Will To Act Decisively on the Economy
James Brooke
New York Times, December 17, 2001, Page C14

This article discusses the current economic situation in
Japan. It notes the reluctance of the Japanese government to pursue
measures that would lead to more businesses going bankrupt and more
workers becoming unemployed.

This article, like most previous reporting on Japan, never
considers the possibility that the main cause of Japan's current
problems is its deflation, not the structure of its financial sector.
This position has been argued repeatedly by Princeton economist Paul
Krugman, one of the world's most respected economists.

Krugman points out that Japan's main problem at present is a
lack of demand, not a lack of supply. While the inefficiencies of its
financial system could cause misallocation of capital, and therefore
prevent the economy from being able to supply as many goods and
services as it otherwise could, inadequate supply is not presently a
problem in Japan. Krugman argues that Japan just needs some sector --
consumers, businesses, or government -- to spend large amounts of
money to boost the economy. This can best be accomplished by having
the central bank deliberately induce inflation by printing up large
amounts of money. This will encourage people to spend, rather than
have the value of their money eroded by inflation.

Krugman's views have been accepted by many economists and many
people in Japan's government. They should at least occasionally be
presented in news reporting on Japan. It is inappropriate for this
coverage to flatly assume that such views are wrong, as this article
implicitly does.


Korea

South Korea Slips Away From Changes Imposed in Bailout
Don Kirk
New York Times, December 17, 2001, Page C14

This article examines the economic situation in South Korea.
At one point it notes South Korea has not followed through on all the
commitments it made in exchange for an I.M.F. loan, adding "the danger
exists of reversion to some of the bad habits of the decade before the
financial crisis."

It's not clear that the behavior which the I.M.F. sought to
discourage should be characterized as "bad habits." South Korea
managed to maintain one of the fastest growth rates in the history of
the world. As a result, it went from being one of the world's poorest
to nations in 1960, to having a living standard comparable to Portugal
and Greece at present. No nation that has followed the I.M.F.'s advice
has ever made comparable progress.


Economic Stimulus

Inaction on Stimulus Costs Jobs, Bush Says
Mike Allen
Washington Post, December 16, 2001, Page A4

This article presents the findings of a study by President
Bush's Council of Economic Advisors, which shows that the economy may
lose 300,000 jobs in 2002 if Congress does not pass the
administration's stimulus proposal.

This study should not have been presented without putting
these figures in some context. First, this number of jobs is not very
large for the U.S. economy as whole. It would correspond to an
increase in the unemployment rate of approximately 0.2 percentage
points. By comparison, the economy lost a total of 799,000 jobs in
September and October. It is also worth noting that a stimulus package
that puts more emphasis on spending could easily have a much larger
and more immediate impact on jobs.

Congress Gives Up On Deal This Year To Help Economy
Richard W. Stevenson
New York Times, December 20, 2001, Page A1

This article reports on the failure of Congress to pass a
stimulus package. At the end it reports the assessment of an economist
that the failure to pass a stimulus package will cause the
unemployment rate to peak at 7.0 percent next year, compared to 6.3
percent if a stimulus had been approved. It then adds that this
implies "140,000 additional workers will lose their jobs." The labor
force currently includes more than 140 million workers. If an
additional 0.7 percent are unemployed, it means that almost 1 million
additional workers will be without jobs.


Argentina

Argentina's Malaise, Ever Worsening; Could Infect Others
Clifford Krauss
New York Times, December 17, 2001, Page C16

This article examines the continuing economic crisis in
Argentina. At one point the article discusses the possibility that
Argentina would end the peg of its currency to the dollar and instead
let it float. It dismisses this possibility with the assertion that
"floating the peso would cause havoc with Argentine private industry,
which has about 80 percent of its $30 billion debt in dollars, causing
bankruptcies and more unemployment."

This is not a necessary outcome of removing the peg to the dollar.
Princeton University professor Paul Krugman has proposed a solution to
this problem. Professor Krugman's recommendation is that contracts
written in dollars be indexed in law, so that these debts would not be
increased by a decline in the value of the peso. While this may not be
a perfect solution, it is likely better than the cost Argentina will
bear from maintaining its currency peg.


Social Security and the Budget

Government Fiddles And the Economy Burns
Richard W. Stevenson
New York Times, December 16, 2001, Section 4 page 3

This article assesses the current budget situation in light of
the economic downturn. It makes several assertions concerning the need
to prepare the budget for the retirement of the baby boomers. It does
not indicate the basis for this assessment. The government's
projections show that the Social Security program will be fully
solvent for the next 37 years with no changes whatsoever, and that the
Medicare program will be solvent for the next 24 years. Even after
these dates, the projected shortfalls in these programs are not
qualitatively different than shortfalls that have arisen in prior
decades. The article provides no explanation for its view that these
distant projected shortfalls should be an important policy concern at
present.

The article also characterizes the Senate Democrats as
"big-spending" and refers to the government's "profligate past." It
provides no basis for either assertion. Since the United States debt
to GDP ratio has generally been well below the average for
industrialized nations, it is not obvious why its borrowing patterns
should be characterized as "profligate."

The article also refers to the view that paying down the debt
can lower interest rates and thereby spur additional investment and
growth. When mentioning this argument it would be appropriate to give
readers some estimate of the size of this effect. For example, the
Congressional Budget Office estimated that a move to surplus of
approximately 2.5 percent of GDP ($250 billion at present), would
raise GDP by only 1.6 percentage points after 30 years. This estimate
implies that any additional growth resulting from lower interest rates
will not qualitatively improve the nation's ability to deal with its
aging population.


Germany

O Brave New Bavaria! So Much More Than Beer
Steven Erlanger
New York Times, December 16, 2001, Page A3

This article discusses the relative prosperity of the German
state of Bavaria, which it attributes to its pro-business policies. At
one point, the article notes that the unemployment rate in Bavaria is
"just under 6 percent," which it compares to a rate of more than 9
percent in Germany as a whole.

As the article notes, the unemployment rate in the states of
former East Germany is 18 percent. By contrast, in the states of
former West Germany the unemployment rate is just over 6 percent,
almost the same as in Bavaria. It would have been more informative to
compare the unemployment rate in Bavaria to the rate in the rest of
former West Germany, rather than Germany as a whole.