Economics Reporting Review
Week of February 10 - February 16

Dean Baker is co-director of the Center for Economic and Policy Research.

OUTSTANDING STORIES OF THE WEEK 

"California Panic Was Moneymaker For Energy Sellers," by Timothy Egan and Sam
Howe Verhovek in the New York Times, February 11, 2001, Section 1, page 1. 

This article reports that many energy producers have been able to significantly
increase their profits as a result of California's energy problems. It notes that in many
cases generators have cut back their supply of electricity, which has had the effect
of raising prices. 

"Migrants Plant Trees but Often Pocket Peanuts," by Steven Greenhouse in the New
York Times, February 14, 2001, page A16. 

This article reports on the growing number of Mexican migrant workers who are
employed planting trees in the United States. The article notes cases where
employers have short-changed workers and paid salaries that were often
considerably lower than the minimum wage. 

"Chasing Mexico's Dream Into Squalor," by Ginger Thompson in the New York Times,
February 11, 2001, Section 1, page 1. 

This article gives a detailed account of the living conditions in Ciudad Juarez, one of
the towns along the Mexican-United States border, which has boomed in the wake of
NAFTA. The article reports on the inadequate infrastructure and sanitation facilities
in this and other border towns. 

"Profits Raise Pressure on Border Factories," by Sam Dillon in the New York Times,
February 15, 2001, page A1. 

This article examines the wages and working conditions at factories owned by Alcoa,
which operate in Ciudad Acuna, on the Mexican side of the border. The article
reports that in spite of some recent improvements, most workers still earn very little,
and work and live in an unhealthy environment. 

"Calif. Pollution Laws Blamed in Crisis," by William Booth in the Washington Post,
February 10, 2001, page A4. 

This article examines President Bush's claim that pollution regulations have
contributed to the electricity shortage in California. The article points out that
regulators have actually been quite flexible in imposing environmental restrictions
during shortages. The headline is misleading, since the article actually suggests that
the pollution restrictions have not been a major factor in the crisis. 

"By One Measure, Nasdaq Stocks Are Pricey Despite Drop," by Floyd Norris in the New
York Times, February 12, 2001, page C1. 

This article reports on the fact that price-to-earnings ratios for Nasdaq stocks have
actually increased, even while prices have plummeted, because earnings have fallen
by an even larger amount. According to the article, the price-to-earnings ratio for
the stocks in the Nasdaq 100 index now stands at 811 to 1. 




TAX CUTS 

"Bush Sets Boundaries On Tax Cut," by Glenn Kessler in the Washington Post,
February 14, 2001, page A1. 

This article reports on testimony before the House Ways and Means Committee on
the merits of President Bush's tax cut proposal. At one point the article reports on
the testimony of Harvard Professor Martin Feldstein. Professor Feldstein claimed that
the cost of the tax cut has been overstated because it does not take account of
the additional economic growth that the tax cuts will stimulate. 

It is worth noting that Professor Feldstein's past predictions on this topic have not
proven to be very accurate. At the time the Clinton tax increase was being debated
in 1993, Professor Feldstein predicted that the proposed tax increase would generate
little or no additional revenue because it would discourage economic activity and
slow growth (see "Clinton's Revenue Mirage," Wall Street Journal, April 6, 1993). 


GREENSPAN ON TAX CUTS 

"Greenspan Tax Talk Not a Big Departure," by John M. Berry in the Washington Post,
February 10, 2001, page E1. 

This article is an attempt to explain Alan Greenspan's decision to support tax cuts in
his congressional testimony last month as a response to changed economic
circumstances, rather than a politically motivated effort to curry favor with the Bush
Administration. 

At one point the article poses the question: "Why the switch this year?" It then
answers: "because as he explained in his testimony last month, credible surplus
projections have become so large ... that most of the publicly owned national debt
can be paid off in a few years. At that point, the government will be faced with two
options: a large increase in federal spending or large acquisitions of private assets."
The article then explains that Mr. Greenspan views both routes as undesirable, and
that tax cuts are therefore his preferred policy. 

This account does not explain why Mr. Greenspan had never raised this concern in
prior testimony. He has been repeatedly asked his view of the merits of tax cuts
compared with debt reduction, and in the past he had always indicated his
preference for debt reduction. The increase in projected surpluses in the most recent
budget projections from the Congressional Budget Office was not a qualitative
change from earlier projections. If the increase in the projected surplus convinced
Mr. Greenspan that tax cuts were the best policy option, then he presumably would
have already been concerned about the possibility of paying down the debt too
quickly even before the most recent projections. He never publicly expressed this
concern prior to George W. Bush taking office. 


GREENSPAN ON FEDERAL RESERVE BOARD MONETARY POLICY 

"Fed Changes Procedures On Securities," by Jonathan Fuerbringer in the New York
Times, February 14, 2001, page C4. 

This article reports on testimony by Federal Reserve Board Chairman Alan Greenspan,
in which he discussed the possibility that the Federal Reserve Board may start buying
and selling the bonds of state and foreign governments as a means of conducting
monetary policy. This will become necessary if the federal government continues to
pay down its debt, since U.S. government bonds will become increasingly scarce. 

This issue received very little attention in this article. (It was not mentioned at all in
the Post coverage of the testimony.) The implications of this change in policy are
enormous. If it were instituted, the Federal Reserve Board could devastate a state or
foreign economy, if the Fed dumped their bonds because it disapproved of policies
they were pursuing. 

It is remarkable that Alan Greenspan would suggest that the Federal Reserve Board
should be allowed this power. Two weeks earlier he had testified that he supported a
tax cut because he felt the federal government should not be in a position where it
accumulated the assets of private corporations. He argued that this would allow
political interference in their operations. This testimony implies that he believes it is
appropriate that the Federal Reserve Board (a creation of the federal government)
should have the sort of power over state and foreign governments, which he believes
is inappropriate for the federal government to have over private corporations. If Alan
Greenspan and the Federal Reserve Board intend to assume this degree of power, the
issue deserves far more attention than it was given. 


NAPSTER AND COPYRIGHTS 

"Fighting Free Music, Europeans Take Aim at Personal Computers," by Edmund L.
Andrews in the New York Times, February 14, 2001, page A1. 

This article examines plans in Germany and other European countries to attach a fee
to the sale of computers and other devices that can be used to copy recorded
music. The revenue from this fee would then be distributed to recording companies
to compensate them for royalties lost due to unauthorized copying of their
copyrighted music. 

The article never examines the economic logic of this approach. In contrast to
mechanisms to ban Internet copying altogether, or to charge fees for each song
copied, the approach being pursued in Germany has the effect of making the price to
the consumer for downloading music zero. This means that the price would be equal
to the marginal cost, the standard of efficiency that is the basis of most economic
reasoning. 

While there are problems with the system devised by Germany, it should lead to vast
economic gains compared to the systems being developed in the United States. The
inefficiency associated with the traditional copyright is enormous in the Internet age.
The distortions created by copyright protection certainly dwarf protectionist
measures like tariffs or quotas, which rarely raise the price of goods by more than 10
to 20 percent. It is unfortunate that the reporting on this topic has largely ignored
the most important economic issues. 

"Hill Takes Notice of Napster Legal Fray," by Christopher Stern in the Washington
Post, February 16, 2001, page E3. 

This article reports on various proposals being considered in Congress to regulate the
transfer of music over the Internet. At one point the article refers to a proposal to
establish a system of compulsory licensing, under which material could be reproduced
without a copyright holder's consent, but they holder would be compensated with
some fixed fee. 

The article then comments: "entertainment industry executives are vehemently
opposed to such a license, saying the government should not have a role in setting
the prices paid for music." In fact, the industry has lobbied extensively to ensure
that the government plays a very large role in setting the price paid for music. A
copyright is a government created monopoly. In recent years the industry has
lobbied to have copyright monopolies extended from fifty to seventy-five years, and
more recently to one hundred years. It is now insisting that the government enforce
these monopolies in new realms -- the Internet -- that had never previously been
imagined. The entertainment industry clearly demands that the government play an
enormous role in setting the price paid for music -- its objections apparently only
concern government actions that could reduce its profits. 


ELECTRICITY DEREGULATION IN CALIFORNIA 

"Calif. Weighs Plan to Buy Power Grid," by Rene Sanchez in the Washington Post,
February 10, 2001, page A3. 

This article reports on a plan to have California take over the state's power grids in
exchange for bailing out its two major utilities. At one point the article attributes the
fact that the utilities are near bankrupt to "California's novel deregulation law, which
... prohibited them from passing on the cost of soaring wholesale electricity power
prices to consumers." Like other articles in the Post and Times, this statement
attributes the cause of the problems to the price caps in the deregulation bill. The
price caps were not an incidental after-thought, as much of this discussion seems to
imply. It would have been virtually impossible to approve deregulation without some
assurance that consumers would benefit. It is also important to note that
deregulation is the reason that wholesale prices are soaring. 


GERMAN LABOR POLICY 

"Germany Weighs Overhaul of 'Consensus' Capitalism," by Edmund L. Andrews in the
New York Times, February 14, 2001, page W1. 

This article reports on the debate in Germany over a measure that would shore up its
system of "co-determination," which gives workers at large firms a voice in the
company's policies. The article includes several comments that imply that this system
is antiquated or that there is a consensus among economists that it needs to be
eliminated or at least weakened. 

For example, it comments that when Germany experienced slow growth in the
nineties, the system of co-determination "suddenly seemed to represent inflexibility
and the inability to compete." The article does not indicate to whom
co-determination had this appearance. Many economists attributed Germany's slow
growth in this period primarily to the contractionary monetary policy pursued by its
central bank. It also is worth noting that, unlike the United States, which has
developed a huge trade deficit, Germany maintained near balanced trade through
most of the last decade -- suggesting that its goods compete quite well in world
markets. 

Later the article asserts that "business groups and economists" want to unravel the
system of co-determination. While many economists undoubtedly support the
dismantling of this system, many economists also consider it an important mechanism
to provide workers with a voice on their jobs. It would have been equally accurate
for the article to state that "labor unions and economists" want to strengthen the
system of co-determination. 


GLOBAL WARMING 

"Report to Endorse Expanding Forests To Fight Warming," by Andrew C. Revkin in the
New York Times, February 10, 2001, page A1. 

This article reports on the findings of a new study by the Intergovernmental Panel on
Climate Change, an international group of scientists working with the United Nations
on climate issues. The report found that protecting existing forests and planting new
ones can be an effective way to reduce greenhouse gases in the atmosphere. 

The article repeatedly asserts that this finding supports the U.S. position in a dispute
with European nations at the last meeting on a climate treaty in The Hague in
November. This finding actually has no direct bearing on that dispute. The findings of
this study imply that changes in the amount of land that is forested or farmed can
change the amount of greenhouse gases in the atmosphere. The implication of this
study is that the United States should be able to get credit for additions to its
forests and farmland since the 1990 base against which ceilings were set. 

The United States was demanding credits, against its emissions, for the forests and
farmlands that it will have in place between 2008 to 2012, the years in which the
treaty first sets emission ceilings, not its net addition of forest and farmlands.
Everyone at the Kyoto meeting (at which the ceilings were set in 1997) knew that
the United States has forests and farmlands. Therefore, the U.S. position at The
Hague meant that it wanted to unilaterally raise its ceilings. The study's findings also
would imply that the United States should be penalized for reductions, if on net the
country lost farmland and forests to suburban sprawl or excessive logging. 

The article also briefly discusses the prospect of industrialized nations, who are
subject to emission caps, purchasing emission credits by reducing emissions in
developing nations, which are not subject to ceilings. The article does not point out
the major difficulty in this process: there is no clear baseline in developing nations.
For example, many old polluting factories or power plants would be shut down simply
because of obsolescence. If the industrialized nations can get emission credits for
plant closings that would have taken place in any case, then the reduction in
emissions will be far less than had been anticipated in the Kyoto agreement. 


SOCIAL SECURITY AND LONG-TERM BUDGET PROJECTIONS 

"Balancing Long-Term Wants and Needs," by Richard W. Stevenson in the New York
Times, February 11, 2001, Section 3, page 4. 

This article discusses long-term budget forecasts by the Congressional Budget Office
(CBO). At one point it asserts that "even if the most optimistic fiscal projections
prove true, the surplus will be gone in 20 years, leaving the government ... facing
intense financial pressure." This conclusion assumes that there will be no tax
increases in the next twenty years, a scenario that has no precedent in recent U.S.
history. (It also misrepresents the latest CBO projections, which show the budget
remaining in surplus for more than a quarter century into the future.) 

For example, in the last twenty years there was an income tax increase in 1982, a
set of Social Security tax increases put in place in 1983, a set of income and other
tax increases in 1990 and another set of increases in 1993. If CBO had made similar
long-term budget projections, assuming no tax increases ever, the fiscal picture
would have appeared far more dire at most points in the last fifty years. 

It is also worth noting that the projections show that taxpayers will have 30 percent
more real income in twenty years than at present. They also show that the main
reason for the projected rise in expenditures is that people are projected to be
spending more years in retirement, because they will be living longer. CBO's implicit
assumption, that contrary to all prior history, future taxpayers will not be willing to
pay higher taxes to support a longer retirement, lacks any empirical support or any
obvious foundation in economic theory. Given the current problems facing the nation,
there is no obvious reason for the New York Times to be focusing attention on such
an implausible projection for the future. 


MEDICARE 

"Major Battle Looms Over Medicare," by Robin Toner in the New York Times, February
11, 2001, Section 1, page 28. 

This article examines the debate over the restructuring of the Medicare program. The
article includes numerous assertions that all health care experts agree that Medicare
must be transformed into a voucher type system as a way of reducing costs. It
implies that the opponents of this path are motivated by ideological considerations
rather than evidence. 

For example, it asserts that proponents of a voucher system want to create a "more
efficient and competitive Medicare." At two different points it reports claims that
there is a "consensus" among policy experts that this sort of system is necessary.
The Medicare program is currently experimenting with the system advocated in the
article by allowing beneficiaries to opt out of the traditional program, and sign up
with HMOs. 

The evidence from this experiment indicates that the switch to a voucher type
system will increase, not decrease costs, for the same level of care. The Medicare
system is paying the HMOs more per beneficiary than it costs to provide care for
them in the traditional program. Yet more than one quarter of the beneficiaries who
have opted out of the traditional program have already been dropped by HMOs, who
claim that they cannot make a profit serving these people. This experiment indicates
that HMOs are more costly than the existing system. This evidence from Medicare's
experiment with HMOs is almost completely ignored in the discussion in the article. 

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