Economic Reporting Review
By Dean Baker
November 18, 2002


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Outstanding Stories of the Week


When Options Rise to Top, Guess Who Pays
Gretchen Morgenson
New York Times, November 10, 2002, Section 3 page 1
http://query.nytimes.com/search/abstract?
res=F20712FD3F550C738DDDA80994DA404
482

This article reports on a new study that examines the relationship between stock performance and the percentage of stock option grants that went to the top executives. The study found that the stock of the companies that concentrated the largest portion of option grants to the top five executives also had the worst performance.


Greenspan and the Bush Tax Cuts

Greenspan Throws Damper On Permanent Tax-Cut Plan
Jonathan Weisman
Washington Post, November 14, 2002, Page A6
http://www.washingtonpost.com/wp-dyn/articles/A51334-2002Nov13.html

Fed Chief Says He Backs Bush On the Tax Cut
Edmund L. Andrews
New York Times, November 14, 2002, page A1
http://www.nytimes.com/2002/11/14/business/14FED.html

These articles report on Federal Reserve Board Chairman Alan Greenspan's testimony before the Congressional Joint Economic Committee. They present directly opposite assessments of what Mr. Greenspan said. The Post article begins, "Federal Reserve Board Chairman Alan Greenspan yesterday splashed cold water on President Bush's argument for a quick vote to make last year's tax cut permanent." The Times article begins, "Alan Greenspan, the chairman of the Federal Reserve Board weighed in today in favor of President Bush's campaign to make last year's tax cuts permanent."

It would have been helpful if these articles reminded readers that Mr. Greenspan came out in support of President Bush's tax cut in January of 2001 because he was concerned that the government would pay off the national debt too quickly. Mr. Greenspan said that he did not want the government to be in a situation in which it would have to buy private assets with its surpluses, once the debt had been repaid in full.


Contracting Out Government Jobs

Government Plan May Make Private Up To 850,000 Jobs
Richard W. Stevenson
New York Times, November 15, 2002, page A1
http://www.nytimes.com/2002/11/15/politics/15PRIV.html

This article reports on a Bush Administration proposal to contract out to private firms much of the work currently being performed by the federal government. At one point it refers to the administration's claims that such contracting can save 20 to 30 percent, and then comments, "enough to save many billions of dollars a year in a $2 trillion federal budget." The vast majority of the current federal budget cannot be affected by this contracting policy since it involves either direct payments to individuals, such as Social Security, or is already contracted to private firms, as in the case of military purchases. The portion of the budget that could conceivably be affected by this policy would be approximately one tenth the total. This means that the savings would be an order of magnitude smaller than this comment implies, if the administration's unverified claims are true.

This article cites an expert from the Brookings Institution, which it identifies as a "liberal-leaning research group." Brookings has many conservative and centrist scholars. It would be more accurate to identify it as "centrist" or "non-partisan."



The Dollar and the Euro

Dollars and Euros: A Look Beyond the Parity Line
Jonathan Fuerbringer
New York Times, November 10, 2002, Section 3 page 6
http://query.nytimes.com/search/abstract?
res=F20E1FFE3F550C738DDDA80994DA404482

This article examines the likely course for the relative value of the dollar and the euro. At one point it notes that the dollar has been falling recently against the euro, and comments that this is strange, because growth prospects in Europe are actually worse than in the United States.

Investors decide between dollar-denominated assets and euro-denominated assets based on the expected return, not the relative growth rates of the economy. There is no direct relationship between growth rates and rate of return. At present, short-term euro accounts pay an interest rate that is approximately 2.0 percentage points higher than the rate on dollar denominated deposits. On long-term bonds, the premium for euro- denominated assets is more than 0.5 percentage points. Unless investors are willing to sacrifice returns to have the privilege of keeping their money in a fast growing economy, this difference in interest rates implies that the euro should rise against the dollar.




Productivity


A Sleeper Of a Statistic Could Lead An Awakening
Richard W. Stevenson
New York Times, November 10, 2002, Section 3 page 4
http://query.nytimes.com/search/abstract?
res=F70F17F93C550C738DDDA80994DA404482

This article notes the strong performance of productivity in the third quarter and discusses some of the implications of sustained strong productivity growth. It is worth noting that productivity numbers are extremely erratic and subject to large revisions (see ERR 10-11-02), so a longer perspective may show that productivity growth is not quite as robust as current data indicate.

The article asserts that strong productivity growth allows wages to increase without diminishing corporate profits. Actually, any productivity growth allows wages to increase without diminishing corporate profits. Stronger productivity growth simply means that the rate of wage growth can be faster. The article also comments that more rapid productivity growth can help to deal with projected shortfalls in Social Security. It is worth noting that the current Social Security projections assume productivity growth of just 1.6 percent annually. If this projection were raised to just 2.0 percent, rather than the 2.5 percent rate suggested in the article, the program would be able to pay full benefits for almost fifty years into the future (compared to 39 years in current projections), with no changes whatsoever.


The 2002 Election

In GOP Win, a Lesson in Money, Muscle, Planning
Jim VandeHei and Dan Balz
Washington Post, November 10, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A33441-2002Nov9.html

This article examines some of the implications of the 2002 election. At one point the article says that "Republicans pulled a page from former President Bill Clinton's playbook, co-opting issues such as Social Security and Medicare that typically favor Democrats… [T]hey offered their own solutions that left many voters unsure which party would best serve their interests."

The Republicans did not follow the same path as Bill Clinton. Clinton actually did adopt the Republican positions on many key issues. For example, President Clinton supported and signed legislation that set strict limits on welfare benefits, cut education and other social spending, and imposed harsh penalties on non-violent drug offenders. The Republicans employed different tactics, such as denying previously held positions during the election campaign. For example they denied that they supported "privatizing" Social Security, even when they supported the policy of replacing a portion of the guaranteed Social Security benefit with an individual account, exactly the policy that most voters have come to view as "privatization." In the case of Medicare, while the Republicans did support a senior prescription drug benefit, it was much less generous and applied to far fewer people than the one proposed by Democrats.

It is true that voters were often confused about which party would best serve their interests. This is partly attributable to poor media coverage of the campaign. The media gave far more attention to the polling data and election prospects than to any issues raised in the campaign. When the media did discuss these issues, they often distorted them -- probably unintentionally -- in ways that favored Republicans. For example, Republican support for the privatization of Social Security was reported as a partisan allegation of the Democrats, instead of an accurate representation of the party's position on the issue (e.g. "In a Race With Few Divisions, Candidates Search for the Right Closing Themes," by Adam Nagourney, New York Times, November 4, 2002, page A14; and "Iowa Could Tip Balance," by Jim Vandehei, Washington Post, October 28, 2002, Page A1). Similarly, almost no attention was given to the benefits that would be provided under competing Democratic and Republican prescription drug plans. Given this reporting, and the massive amounts of money spent on deceptive campaign ads, it would have been extremely difficult for most voters to get a clear understanding of which party's platform would better serve their interests.


Prescription Drugs

Republicans Plan to Push Through Prescription Drug Coverage for the
Elderly
Robert Pear
New York Times, November 10, 2002, page A26
http://query.nytimes.com/search/abstract?
res=F50F14FC39550C738DDDA80994DA404482

This article examines the likelihood of a senior prescription drug benefit being passed in the next session of Congress. At one point it contrasts Democratic plans for a larger benefit that would provide a substantial subsidy and restrict the pricing power of the pharmaceutical industry, with plans by the Republicans to work through the existing health plans and the pharmaceutical industry. It attributes this difference to "philosophical differences," with the Democrats preferring a bigger role for government and the Republicans preferring the market.

This distinction is wrong. The Republican proposal requires at least as large a role for government as the Democratic one, since it depends on the government's continued enforcement of a patent monopoly. This has necessitated restricting the flow of pharmaceuticals across international borders as well as crackdowns on firms that attempt to produce generics. The more obvious philosophic difference is that the Republican proposal is likely to be more beneficial to large corporations.




The New Economy

In a Bubble Economy, Recognition Comes Too Late: In Euphoria Key
Players Looked Away
Steven Pearlstein
Washington Post, November 10, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A31973-2002Nov9.html

This article provides an overview for a six part series in the Post on the rise and fall of the new economy. The article notes the stock market bubble of the late nineties and then asserts that "nearly everyone thought it was a marvelous thing." This is not true. There were articles and books written warning of the imminent collapse of the bubble, which was easy to see given the basic arithmetic (e.g. Irrational Exuberance, by Robert Shiller, or "Bull Market Keynsianism," [http://www.prospect.org/print/V10/42/baker-d.html] and "Double Bubble: The Over-Valuation of the Stock Market and the Dollar," by Dean Baker.  The basic logic of the bubble is explained in "Stock Returns for Dummies,"). The media largely chose to ignore the voices of those who pointed out the unsustainability of the stock market bubble.

This article does note that business and financial reporters were one of the groups that had not done their job, thereby allowing the bubble to persist and grow larger. This is certainly true, since all of the information and analysis that was needed for them to explain the bubble to their audiences was readily available to them.


On CNBC, Boosters for The Boom
Howard Kurtz
Washington Post, November 12, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A41103-2002Nov11.html

This informative article examines how some media outlets helped to propel the stock bubble by regularly broadcasting the views of bullish analysts, many of whom had no real basis for their optimism, and some of whom had material interests in promoting certain stocks. This article would have benefited if it had also included an analysis of the market coverage in the established media, such as National Public Radio, the Washington Post, the New York Times, and the Wall Street Journal, instead of focusing exclusively on the coverage in newer upstart shows and magazines.


Unions and Homeland Security

Terror Bill Stalemate Ends
David Firestone and Elisabeth Bumiller
New York Times, November 13, 2002, page A1
http://www.nytimes.com/2002/11/13/politics/13HOME.html

This article reports on a compromise over a plan for a homeland security department that denies its workers the right to collective bargaining, as President Bush had requested. The article notes that many Democrats had opposed this provision, which apparently hurt them in the election, since it allowed Republicans to portray them as being opposed to homeland security.

The article quotes a Republican who commented on the stupidity of the Democrats' position. If the position was stupid, it was largely attributable to the fact that the media did not portray the issue accurately. President Bush never produced any evidence that unions would in any way obstruct the ability of the new department to protect the nation. Many of the workers in the Defense Department, the F.B.I., and other security and law enforcement agencies are currently represented by unions. These unions have not impaired the nation's security in any obvious way.

President Bush's insistence on denying the right of collective bargaining to workers in the homeland security department appears to be a gratuitous attack on unions. It would be comparable to including a provision that allowed the President to discriminate against African-Americans. However, since the media gave this aspect of the issue so little attention, it allowed President Bush to imply that Democrats were obstructing national security, whereas a more obvious interpretation of events was that President Bush was using homeland security as a pretext to pursue an anti-union agenda.


Consumer Spending and Economic Growth

Fears Increase, But Consumers Keep Spending
David Leonhardt and Floyd Norris
New York Times, November 11, 2002, page A1
http://query.nytimes.com/search/abstract?
res=F00D10FD38550C728DDDA80994DA404482

This article discusses the prospect that the drop in the stock market and consumer confidence could cause consumers to curtail spending. The article implies that high levels of consumer spending, and implied low levels of savings, are desirable. While this can be true in the short run when the economy is facing a downturn, for
normal times and over longer periods this is the opposite of what most economists believe. Most economic policies, including both the Reagan and Bush tax cuts, were ostensibly designed to increase saving.

The article also contrasts the low savings rate of the eighties and nineties with the high rate of the seventies. It attributes the low savings rate of the last two decades to optimism about the economy, in contrast to the pessimism of the seventies. In fact, the savings rate was even higher in the sixties than in the seventies. The economy grew far more rapidly in the sixties than in the eighties or nineties. (The seventies saw more rapid growth than the eighties, and approximately the same rate of growth as the nineties.) The fact that the savings rate is currently so low, at a time when most of the baby boomers are nearing retirement, likely means that many baby boomers will not be able to enjoy comfortable retirements.

The article twice (once in the sub-headline) refers to an "eighties boom." Economic growth in the eighties was slower than in any decade in the post-war era.


Trade

Global Trade Looking Glass: Can U.S. Have It Both Ways?
Daniel Altman
New York Times, November 9, 2002, page
B1http://query.nytimes.com/search/abstract?
res=FA0C17FD3F550C7A8CDDA80994DA404482

This article examines the Bush administration's stance on trade. It notes that farm subsidies and other trade barriers "have led some of America's trading partners to doubt Washington's commitment to free trade." It is not clear why any of America's trading partners would believe that Washington has a commitment to free trade. A major U.S. goal in recent trade agreements has been to increase barriers to trade in the form of increased copyright and patent protection. The United States has also put up new barriers to trade in professional medical services by making it more difficult for foreign doctors to practice in the United States.

While the United States government may maintain a verbal commitment to free trade this is comparable to the administration's commitment to reducing pollution or increasing workplace safety. The expression "free trade" apparently has political value but has little to do with the reality of trade policy.

The article also discusses efforts to raise the living standards of African nations through removing barriers to market entry. According to the World Bank, the removal of market barriers would have only a trivial impact on living standards in Africa. The World Bank recently estimated that the removal of all barriers to goods exports by rich nations would raise per capita GDP in Sub-Saharan Africa by 0.6 percent, when the full effect is felt in about 15 years (World Bank, 2002. Global Economic Prospects and the Developing Countries 2002. Washington, D.C.: World Bank, table 6-1). This means that a nation that would have had a per capita GDP of $500 in 2015 if the barriers were left in place, would instead have a per capita GDP of $503 in 2015 if the barriers were removed.