Economic Reporting Review
By Dean Baker
November 12, 2002


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Outstanding Stories of the Week


Boom's End Is Felt Even at Wealthy Colleges
Kate Zernike
New York Times, November 5, 2002, page A1
http://www.nytimes.com/2002/11/05/education/05COLL.html

This article reports on the incompetent management of endowments at elite universities. According to the article, schools such Stanford and M.I.T. kept most of their endowments in the stock market, even as the bubble grew to unprecedented levels. Furthermore, they projected that the market would rise still higher, even from these inflated levels. As a result, these schools now have to cut back staff and capital improvements now that the bubble has burst.

Departing Chief Says the I.R.S. Is Losing Its War on Tax Cheats
David Cay Johnston
New York Times, November 5, 2002, page A1
http://www.nytimes.com/2002/11/05/business/05IRS.html

This article examines the ability of the I.R.S. to enforce the tax code. It reports the views of a number of experts, including Charles O. Rossotti, the retiring I.R.S. Commissioner, that the I.R.S. is being deprived of the resources it needs to enforce the law.


Pipeline to a Point Man
A Friend of Main Street or Wall Street?
Gretchen Morgenson
New York Times, November 3, 2002, Section 3 page 1
http://www.nytimes.com/2002/11/03/business/yourmoney/03OXLE.html

This article examines how Representative Michael Oxley has managed to present an image of himself as a leading reformer, even as he has been trying to protect the financial industry from increased regulation and supervision.


Trying To Overcome Embarrassment, Labor Opens Drive to Organize Wal-
Mart
Steven Greenhouse
New York Times, November 8, 2002, page A28
http://www.nytimes.com/2002/11/08/national/08WALM.html

This article reports on efforts to unionize at Wal-Mart and the steps that the company has taken to prevent workers from joining unions.


Brazil

Law and Politics Likely to Curb Power of Brazil's New Leader
Larry Rohter
New York Times, November 3, 2002, page A10
http://www.nytimes.com/2002/11/03/international/americas/03BRAZ.html

This article discusses the potential political agenda for Luiz Inacio Lula da Silva (Lula), Brazil's newly elected president. Near the end, the article discusses the views of party members who don't want Lula to negotiate with the IMF. It attributes this view to "hardliners."

Given the extraordinary debt levels run up by the current government, it is not clear that Brazil will be able to meet its debt obligations under Lula, regardless of his intentions ("see "Paying the Bills in Brazil: Does the IMF's Math Add Up?"). If this is the case, then anyone familiar with the economic situation would insist that Brazil change its stance towards the IMF, not just hardliners.


Climate Change

Climate Talks Shift Focus to How to Deal With Changes
Andrew C. Revkin
New York Times, November 3, 2002, page A10
http://www.nytimes.com/2002/11/03/science/03CLIM.html

This article reports on a round of negotiations over climate change that is focused largely on adapting to change rather than preventing it. It refers to this shift as suiting the agendas of many developing countries, since it will not require them to take steps to restrict their emissions of greenhouse gases.

The article implies that adjusting to the effects of global warming will be cheaper than trying to prevent it. It presents no evidence whatsoever to support this view. It also implies that poor nations can expect aid from rich nations in adjusting to global warming, noting minor efforts by the United Nations in this direction. No person in a position of power in any developed nation has suggested that poor nations should expect a significant amount of aid from rich nations to help them to adjust to the effects of global warming. It is reasonable to expect that developing nations will have to bear these costs almost entirely on their own.


Europe

Refusing to Follow Move by Fed, Europeans Hold Key Rate Steady
Mark Landler
New York Times, November 8, 2002, page C1
http://www.nytimes.com/2002/11/08/business/worldbusiness/08EURO.html

This article reports on the decision by the European Central Bank (ECB) to keeps it key interest rate at 3.25 percent, even though the Federal Reserve Board had lowered its rate to 1.25 percent on Wednesday. At one point the article refers to bank president Wim Duisenberg's refusal to take responsibility for the possibility that his high interest rate policy was causing unemployment in Germany. It comments that he disputed the charge that the bank's policy was "somehow responsible for the misery in Germany."

Standard economic theory predicts that there is a very direct relationship between interest rate policy and unemployment – lower interest rates increase growth and employment, higher interest rates slow growth and reduce employment. Yet the wording of the article implies to readers that the clear and direct link between interest rates and unemployment is instead a dubious proposition. This is somewhat misleading.

The article also asserts that the fact that the U.S. is growing more rapidly than Europe means that the dollar will stay strong relative to the euro. Investors' choice between holding assets in different currencies is based on rates of return on the assets, not the growth rates of the economies. And there is no direct link between rates of return and growth. At present, investors in short-term deposits in the United States get a return of just over 1.0 percent, compared to more than 3.0 percent in Europe. The yield on long-term government bonds in the U.S. is less than 4.0 percent in the U.S. compared to more than 4.5 percent in Europe. Unless investors are willing to sacrifice returns to have the privilege of keeping their money in a fast growing economy, they will shift their holdings from dollar-denominated assets to euro-denominated assets, given current interest rate structures.

Productivity

Productivity Is Up Sharply In Good Sign For Long Term
Daniel Altman
New York Times, November 8, 2002, page C1
http://www.nytimes.com/2002/11/08/business/08ECON.html

This article reports on data showing that productivity grew at a 4.0 percent annual rate in the third quarter. It is worth noting that quarterly productivity numbers are extremely erratic and subject to large revisions. For example, productivity growth for the second and third quarter of 1994 were previously reported as -2.1 percent and 2.9 percent, respectively (Economic Report of the President 1994, table B48). After several rounds of revisions, the rates currently reported for these quarters are 1.6 percent and -1.1 percent, respectively.

It is also worth noting that there are two technical reasons that make the recent productivity numbers somewhat less impressive than this article implies. There has been a sharp divergence in the growth of net output and gross output over the last two years, with the growth rate of gross output exceeding the growth rate of net output by almost 0.8 percentage points. The difference between the two is the depreciation of worn out equipment. It is net output that determines living standards (no one can eat depreciation). Insofar as a higher measured rate of productivity is simply attributable to a larger share of output going to depreciation, this is of no benefit to anyone.

The current productivity data also show an extraordinarily sharp drop in the hours of supervisory workers and the self-employed over the last two years. This data is largely based on imputations and is very poorly measured. If the hours for these workers only declined at the same rate as hours for non-supervisory workers (which are much better measured), then rate of productivity growth over the last two years is about 0.3 percentage points less than is being reported.

The Economy

Economic Recovery Winding Down
John M. Berry
Washington Post, November 2, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A54531-2002Nov1.html

Fed Cuts Key Rate By Half a Point
John M. Berry
Washington Post, November 7, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A20265-2002Nov6.html

These articles discusses the prospects for an interest rate cut by the Federal Reserve Board and the implications of the cut after it was made. Both articles include assertions that most analysts do not expect the economy to fall back into a recession. It would have been worth noting that most economists had not anticipated the first dip to the recession, nor that the economy would be so weak that it would require additional rate cuts to sustain the economy (e.g. "U.S. Growth Sluggish in 2nd Quarter," by John M. Berry, Washington Post, August 1, 2002, Page E1; "Fed Shows No Sign of Another Rate Cut," by John M. Berry, Washington Post, July 25, 2002, Page E1; and "Fed Signals Point to No Rate Shift," by John M. Berry, Washington Post, September 20, 2002, Page E1). It would be useful to report the views of economic analysts who have not been surprised by the economy's weakness.

The four experts cited in this article are associated with Goldman Sachs, Prudential Securities, Wells Fargo & Co., and Merrill Lynch & Co. Readers would benefit from seeing the perspective of an expert who does not work for the financial industry.



Copyrights

Marketers Try to Turn Web Pirates Into Customers
Amy Harmon
New York Times, November 4, 2002, page C1
http://www.nytimes.com/2002/11/04/technology/04TUNE.html

This article reports on efforts by marketers to advertise on Internet services that are frequently used to transfer copyrighted material. The first paragraph asserts that the people who use these services "steal music." It is unusual to use this sort of pejorative description of individuals' conduct. For example, newspapers would
rarely refer to tax evaders as "stealing" revenue from the public. In addition, many of the legal issues involved in transferring music have yet to be resolved, so that it is not clear that the transfers even violate the law.



Computers and Copyrights

Europe's Microsoft Alternative
Ariana Eunjung Cha
Washington Post, November 2, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A59197-2002Nov2.html

This article reports on a decision by a province in Spain to adopt the Gnu-Linux operating system in its computers, instead of Microsoft Windows system. Unlike Windows, Gnu-Linux is free. The article treats this decision as one that is driven entirely by nationalism, rather than economics. The only reference to economics, in this lengthy article, is a comment from Microsoft's general counsel. He described the decision not to use Windows as being motivated by "theology" rather than economic analysis.

The article should have included an analysis by an independent expert. The fee that Microsoft charges for its operating system can amount to 15 percent to 20 percent of the price of lower cost computers. This has the same impact as a tariff of this size.

Economic theory indicates that there would be significant benefits from avoiding such costs on a product that is so essential to the economy.


Microsoft and Monopoly

Regulation Vs. Competition: No Winner Yet
Steven Pearlstein
Washington Post, November 2, 2002, Page A14
http://www.washingtonpost.com/wp-dyn/articles/A54561-2002Nov1.html

This article examines current views towards regulation in light of the settlement of the Microsoft anti-trust case. At one point it describes Microsoft as having gained its monopoly "fair and square."

This is not true. In the late eighties and early nineties, Microsoft adopted a sales practice in which computer makers would get a discount if they agreed to pay Microsoft a per unit fee on every computer they shipped, regardless of whether or not it used Microsoft's operating system. This meant that computer manufacturers
had to pay Microsoft every time they used a competitor's operating system. Such a contract provided a major obstacle to alternative operating systems which may have sought to develop a niche in the market that they could build upon. The Justice Department investigated this practice and got Microsoft to agree to stop it,
although it did not apply any sanctions. It would be difficult to design a more classically anti-competitive practice than this form of contracting.

The Labor Market

Pool of Unemployed Hardly Stagnant, Study Says
John M. Berry
Washington Post, November 6, 2002, Page A8
http://www.washingtonpost.com/wp-dyn/articles/A9400-2002Nov5.html

This article reports on a new study of labor market turnover by the Labor Department. The article comments that the labor market, "described in recent months by many economists and policymakers as stagnant, has instead been a churning cauldron of change, with millions of people each month getting hired and fired."

The article does not identify any economists who had viewed the labor market as stagnant. It is widely recognized that the U.S. labor market has a great deal of job churning. Even though the length of unemployment spells has risen in the recession, the median duration of unemployment spells is still only 9.6 weeks. This means that half of all unemployed workers either find new jobs or give up looking in less than 10 weeks. The fact that most spells of unemployment are relatively short would not be a surprise to a knowledgeable economic analyst.


Social Security

In a Race With Few Divisions, Candidates Search for the Right Closing
Themes
Adam Nagourney
New York Times, November 4, 2002, page A14
http://www.nytimes.com/2002/11/04/politics/campaigns/04ELEC.html

This article discusses the last days of the congressional election campaigns. At the end, the article refers to an attack by Mark Pryor, the Democratic candidate for Senate in Arkansas, that his opponent favors changes to Social Security "that could have resulted in what Democrats call its privatization." These changes are what everyone, including Republicans, had referred to as "privatization" prior to this election campaign. Republicans have sought in this election to conceal their support for Social Security privatization after their polling showed it to be unpopular.

Bio-Engineered Food in Oregon

Candidates Share Space With Issues Like Health care and Marijuana Laws
Christopher Marquis
New York Times, November 6, 2002, page B8
http://www.nytimes.com/2002/11/06/politics/campaigns/06BALL.html

This article reports on a series of ballot initiatives that were voted in the November elections. One of the initiatives it discusses was a proposal in Oregon that would have required that bio-engineered food be labeled. According to the article, Oregon's department of agriculture estimated the cost at $11.2 million a year.  It also reports that the industry claimed that the measure would add $550 a year to the food bill for a family of four.

It would have been helpful to put these numbers on a common metric so that readers would know the difference between the government's estimate and the industry's claim. Oregon has a population of approximately 3.5 million. This means that the government's estimate implies a cost of less than $13 a year for a family of four. Alternatively, the industry's estimate implies a cost of $481 million a year, more than 40 times higher than what the government estimated.



Trade

Hemisphere Free Trade Pact Inches Forward
Edmund L. Andrews
New York Times, November 2, 2002, page A4
http://query.nytimes.com/search/abstract?
res=F6091EFA3D5A0C718CDDA80994DA404482

This article reports on a new round of negotiations over the Western Hemispheric trade pact. It repeatedly refers to such a pact as a "free trade" pact. This is inaccurate, since the pact will not reduce all trade barriers. A major goal of the United States is to increase copyright and patent protection for its products. It would be more accurate to simply refer to the prospective pact as a "trade" agreement.