Economic Reporting Review
December 3, 2001

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

OUTSTANDING STORIES OF THE WEEK

A Country on the Brink of Default? It May Not Hurt Much
Jonathan Fuerbringer
New York Times, November 18, 2001, Section 3 page 8

This article reports on the reaction of world financial
markets to Argentina's default on its currency. It notes that the
response to this default, and previous defaults by Russia and
Ecuador, appears to be relatively mild, especially compared to the
austerity conditions demanded by the I.M.F. for further loans
intended to prevent default.

As Fiscal Engine Stalls, the Mechanics Line Up
Louis Uchitelle
New York Times, November 24, 2001, page C1

This article examines various views on an appropriate
stimulus package to boost the economy out of recession.


Stock Promoters Are Sending E-Mail Ads to Users of News Sites to Push
Up Shares That Have Little Track Record
Floyd Norris and Gretchen Morgenson
New York Times, November 27, 2001, page C6

This article reports on two companies, whose stock has been
widely promoted by e-mail advertisers. Their prices have risen
rapidly even though neither has filed any financial statements with
the Securities and Exchange Commission.


The Recession

The World's Economies Slide Together Into a Recession
Joseph Kahn
New York Times, November 25, 2001, Page A11

This article reports on the fact the major industrial regions
of the world are sinking into recession simultaneously. At one point
it asserts that "the fact that a decline in trade and investment
appears to have a pronounced drag on global growth suggests that the
above-average expansion of the late 1990's had more to do with rapid
integration than critics acknowledged at the time."

There is no logical connection between the fact that a
decline in trade and investment slows growth and the claim that rapid
integration sparked an above average expansion. It is true that much
of the late nineties growth was in the form of expanded imports and
exports, but this does not establish that the growth would have been
slower had it taken another form. For example, in the late seventies,
residential housing grew very rapidly, but that doesn't mean that
aggregate growth would have been slower if the economy had been
driven primarily by purchases of new cars and other forms of
consumption. It is necessary to argue why such a counterfactual would
have led to slower growth.

The second claim in this sentence -- that a decline in
investment has led to slower growth -- has no obvious connection to
the importance of world economic integration.

The article's characterization of the late 1990's growth as
above average is also dubious. While this is true for the U.S.
economy, it is not true for the European Union, which had an annual
growth rate of less than 2.5 percent in this period, nor for Japan,
which had a growth rate of less than 1.0 percent.

The article also comments at the beginning that "recovery may
come more slowly than once expected." It would have been appropriate
to interview experts whose expectations have not been proven wrong,
for example Wynne Godley of the Levy Institute, rather than relying
exclusively on economists who have been surprised by the recent
behavior of the economy.


Economists Make It Official: U.S. Is in Recession
Richard W. Stevenson
New York Times, November 27, 2001, Page C1

This article reports on the certification of the current
downturn as a recession by National Bureau of Economic Research's
business-cycle dating committee. The article refers to the just ended
cycle as "a remarkable period of economic vibrancy." The data does
not support this view. Annual GDP growth averaged 3.11 percent in the
last decade, only slightly higher than the 2.94 percent average of
the eighties cycle, and below the 3.25 percent average of the
seventies, and 4.37 percent growth rate of the sixties.

Comparisons based on net domestic product (NDP), the Commerce
Department's measure of usable output, make the nineties look even
worse. The 2.78 percent annual growth rate is virtually identical to
the 2.74 percent rate of the eighties, and well below the 4.36 and
3.13 percent growth rates of the sixties and seventies, respectively.
It is arguable that NDP is the better measure for this comparison,
since depreciation -- which does not contribute to people's well-
being but is included in GDP -- was unusually high in the nineties.


Consumer Confidence Fell Again in Nov.
John M. Berry
Washington Post, November 28, 2001, page E1

This article reports on the decline in Conference Board's
index of consumer confidence in November. At one point it notes that
many economists question the usefulness of the consumer confidence
indexes as measures of economic sstrength. The economist cited in the
article notes that economy usually drives the consumer confidence
indexes, not the other way around.

While this point is well-taken, it is worth noting that this
warning about the meaningfulness of the consumer confidence indexes
did not appear in past articles in the Post, which reported rises in
the indexes. (See "Economic Reports Show Gains," by John M. Berry,
Washington Post, June 27, 2001, Page E1; "Reports Offer Positive
Economic News," by John M. Berry, Washington Post, April 3, 2001,
page E1; and "Consumer Confidence Up Sharply," by John M. Berry and
Caroline Mayer, Washington Post, March 28, 2001, Page A1.)


Social Security

Panel Agrees on Options for Social Security
Amy Goldstein
Washington Post, November 30, 2001, page A2

This article discusses the elements of the Social Security
privatization proposals put forward by President Bush's Commission.
At one point it asserts that private accounts "would not prevent the
program from collapsing under financial pressures in coming decades."
It then adds that the program will face "increasing strains" as a
result of the retirement of the baby boom generation.

The program is currently projected to be fully solvent for
the next 37 years, with no changes whatsoever. This means that it is
stronger financial condition than at any point in the fifties,
sixties, and seventies, when few people referred to an impending
collapse in coming decades. It is also worth noting that in 2038,
when the program is projected to run short of funds, most baby
boomers will have already died. The long-term problem facing the
program is simply that people are projected to live longer.

It is also worth noting that the only stock projections
derived from the Social Security trustees' projections for profit
growth show that the returns on stock will be only slightly higher
than the returns projected for government bonds
(http://www.cepr.net/Social_Security/letter_to_feldstein2.htm). Since
investing Social Security money in stock will not appreciably
increase returns, proposed privatization plans would not add
significant revenue to the system.


Pension Funds and Stock Returns

Cloning, Retirement Disputes Linger as Senate Winds Down
Helen Dewar
Washington Post, November 28, 2001, page A4

Senate to Consider Railroads' Plan to Invest on Wall Street
Richard W. Stevenson
New York Times, November 27, 2001, Page A13

These articles both discuss a proposal to invest publicly
controlled pension funds for railroad workers in the stock market.
Both articles imply that this change would necessarily raise benefits
for retirees and save the railroad companies money on pension
contributions.

This is not necessarily true. If stock prices rise at the
same rate that profits are projected grow over the next decade (1.0
percent annually in real terms, according to the Congressional Budget
Office), and the dividend yield stays roughly constant (2.0 percent),
then the real return on stocks will be approximately 3.0 percent.
This is almost the same as the real return on the long-term
government bonds currently held by the funds. If there are additional
management costs associated with holding stocks, then the companies
and workers could end up as losers from the change.


Copyrights and Counterfeits

Counterfeiters Turn Magic Into Cash
Elisabeth Rosenthal
New York Times, November 25, 2001, Page A10

This article reports on the widespread sale of unauthorized
copies of movies in China. In particular, it notes that copies of the
new Harry Potter movie were widely available on video disks within
days of its release in the United States.

The article fails to distinguish between counterfeit goods
and unauthorized copies of copyrighted material, using the
term "counterfeit" to apply to both. This distinction is important. A
good that is a counterfeit derives it value from the fact that people
believe it is something other than what it is. For example, a
counterfeit Seiko watch would derive its value from the fact that
consumers believe that the watch actually was made by Seiko.
Presumably its value as a Seiko watch stems from the fact that Seiko
has a reputation for making high quality watches. By selling a
possibly inferior product as a Seiko watch, the counterfeiter is
defrauding the consumer, not engaging in a mutually beneficial
transaction. (The issue is more complicated if the good is valued for
the status it conveys, in which case the buyer wants to convince
others that he has a Seiko watch, even if he knows that he doesn't.)

In the case of an unauthorized copy of a copyrighted product,
the consumer is not being deceived about the nature of the product.
He is purchasing a video or audio disk that contains the movie or
music he intend to buy. This is a mutually beneficial market
transaction. For this reason, a form of protectionism, such as a
copyright, which obstructs such transactions, will be very difficult
to enforce.

The World Bank recently calculated that enforcing copyrights
and patents in developing nations will transfer more than $20 billion
a year to the industrialized nations. This is a direct transfer of
wealth that results from these forms of protectionism. There is no
comparable transfer associated with the enforcement of laws against
counterfeiting, which protect consumers against fraud.


China

A Factory to the World
Clay Chandler
Washington Post, November 25, 2001, page A1

This informative article discusses the shift of manufacturing
jobs from Japan to China in the context of describing the situation
at a Chinese micro-motor factory that is owned by a major Japanese
manufacturer. At one point the article asserts that the plant
is "hardly a 'sweatshop'," claiming that it "has a solid safety
record .... and take-home pay --- about $84 a month with overtime ---
is high by local standards."

The article does not indicate how it determined that the
plant has a solid safety record. According to the article, the plant
hires almost exclusively young women on short-term contracts of 4
months to a year. The description of employment conditions in the
article suggests that workers who complain about injuries are likely
to lose their job. Also, as the article notes, workers do not stay at
the factory for long. The sort of high speed detail work described in
the article is exactly the sort of work that leads to repetitive
motion injuries. It is reasonable to believe that many of these
workers suffer permanent injuries of this sort.

It is interesting to note that the wage rates reported in
this article are far lower than the wage rates that the Post reported
were being paid by U.S. firms operating in China. That article ("In
Chinese Wages, a U.S. Bump," by Clay Chandler and Frank Swoboda,
Washington Post, May 23, 2000, page E1), reported that a General
Motors factory in Shanghai paid its workers $3.70 an hour, plus
another 89 cents an hour in benefits. It also reported that a U.S.
Chamber of Commerce survey showed that its members operating in China
paid its workers an average of $5.25 an hour, plus benefits. By
comparison the wage rate workers receive at this factory would be
just 42 cents an hour (assuming an average workweek of 50 hours),
less than one twelfth of what the U.S. Chamber of Commerce claims its
members pay (not counting benefits).

It is worth noting that the earlier Post article appeared the
day before the House of Representatives was scheduled to vote on
permanent normal trading relations for China. One of the major issues
in the debate over this measure was the wages and working conditions
at Chinese factories. On this topic, the Post article reported the
claims of employers without any obvious effort to verify them
independently.


Japan

Sons and Daughters of Japan, Back From Brazil
James Brooke
New York Times, November 27, 2001, Page A4

This article discusses the growing presence of Brazilians in
Japan. At one point it discusses the importance of immigration to
Japan in the context of its aging population. It reports that the
United Nations estimates that Japan will need 600,000 immigrants
workers a year to keeps its pension systems from collapsing.

This figure assumes that Japan never raises its tax rate for
its pension system. There is no obvious reason why anyone would make
this assumption. Over the last half century, social security taxes in
all the industrialized nations taxes have been raised repeatedly, as
longer life spans have raised costs and increasing productivity has
raised before tax income. It is not apparent why anyone would expect
the future to be different from the past on this issue.

New Bonds Pose a Problem For Japan's Troubled Banks
Ken Belson
New York Times, November 27, 2001, Page W1

This article discusses the prospect that interest rates on
Japanese government bonds may rise, which would lower their price and
lead to large losses for Japanese banks. At one point the article
quotes a Japanese economist who warned that if the Japanese central
bank deliberately tried to induce inflation to stimulate the
economy: "the banks will dump their bonds, which will provoke a
contagion and push the government's finances into a black hole."

There is no obvious reason that the banks decision to dump
bonds would provoke a contagion or lead to a black hole. The way in
which the central bank would attempt to generate inflation is through
large-scale purchase of government bonds. This means that if the
banks opted to dump their bonds, they would find a willing buyer in
the Japanese central bank. The melt-down scenario described in this
article is almost impossible.

It is worth noting that articles in the Times have repeatedly
included disparaging comments on the proposal to try to stimulate
Japan's economy by running moderate rates of inflation. They have
almost never included the views of any proponents of this position,
even though they include some of the world's most respected
economists, such as Paul Krugman of Princeton and Jeffrey Sachs of
Harvard.