Economic Reporting Review
February 14, 2000:
Clinton vs. Reagan; 'Saving' Social Security;
Medicare's Finances
By Dean Baker
CLINTON & THE ECONOMY
"The Battle of the Decades"
Richard W. Stevenson
New York Times, February 8, 2000, page C1
This article examines the current recovery and contrasts the argument that the Reagan tax cuts
were the main factor driving growth with the argument that it was Clinton's deficit reduction. At
several points the article misrepresents the recent history of the economy.
The most important of these misrepresentations is that the last two decades have been a period
of extraordinary growth which requires some explanation. In fact, the economy has grown less
rapidly on average in the last two decades than in previous decades. GDP growth has averaged
3.0 percent since 1979. It averaged 3.2 percent in the '70s, and 4.4 percent in the '60s. If
consistent measurements were applied, the gap would be even larger, since new measurement
techniques from the Bureau of Labor Statistics have added approximately 0.2 percentage
points to the annual growth rate in the years since 1978.
At one point the article touts financial innovations as one of the engines of recent growth. It
remains to be seen whether this is accurate. In the '80s, deregulation allowed Savings & Loans
to use tens of billions of dollars to support speculative real estate ventures that subsequently
went bankrupt. Currently financial markets are funneling tens of billions of dollars into Internet
start-ups, many of which have never shown a profit. If most of these companies turn out not to
be viable, then this investment will have been an enormous waste of capital.
The article refers to the tax increases and spending cuts instituted in 1990, and asserts that "the
deficits had continued to increase." The U.S. economy went into a recession in 1990. Deficits
always increase when the economy goes into a recession. As the economy began the recovery
in 1993, the deficit began falling sharply. Measured as a share of GDP, the deficit was 0.8
percentage points lower in 1993 than in 1992. This was before any of the Clinton tax increases
or spending cuts were put in place.
The article also appears to accept President Clinton's assertion that the United States is on a
"sustainable long-term growth path." Over the last four years, the trade deficit has increased
from 1.2 percent of GDP in 1995 to 2.8 percent of GDP in 1999. If it continues to increase at
this rate, the annual trade deficit would be over 5.0 percent of GDP in 2005, a level virtually
unimaginable for a major industrial nation. Even if the trade deficit stabilized at its current level,
it would cause the nation's foreign debt to rise to a level equal to 60 percent of GDP by 2010.
This level of indebtedness would also be without precedent for a major industrialized country.
The rate of growth of consumer debt is also unsustainable for any long period of time. For
these reasons, it is questionable whether the United States can really be said to be on a
sustainable long-term growth path.
"Administration Takes a Bow in Final Economics Report"
Joseph Kahn
New York Times, February 11, 2000, page C8
This article examines the final Economic Report of the President released by the Clinton
administration. The article notes that the Report predicts that productivity growth will average
2.1 percent annually over the next four years. The most recent Social Security Trustees Report
assumes that productivity growth will average 1.35 percent annually over the program's
75-year planning horizon. If productivity grew at a 2.1 percent annual rate over this period, the
fund would be fully solvent for almost 50 years with no changes whatsoever.
At one point the article notes that the U.S. government has gone from running large deficits to
large surpluses. It comments, "that reversal has freed hundreds of billions of dollars for
investment in more productive sectors." Actually, the increase in government saving implied by
this shift from deficits to surpluses has been almost completely offset by a decline in private
saving. As a result of this decline in private savings, the share of GDP available for private
investment was virtually the same as at the peak of the last business cycle in 1989, when the
government was running a large deficit.
"Clinton to Ask For Increase in Assistance to Industry"
Richard W. Stevenson
New York Times, February 5, 2000, page A10
This article reports on a new set of proposals by President Clinton which would assist firms in
competing internationally, and provide more assistance to workers displaced by trade.
According to the article, the proposals will cost $386 million next year. Of this sum, $215
million would go to increase the funds available to Export-Import Bank, and the rest would go
to support a variety of training programs. As a share of projected federal spending, the
additional money for the Bank is 0.012 percent, while the amount being requested for training is
0.010 percent.
The article refers to Vice President Al Gore as a supporter of free trade. This is inaccurate.
While he has supported the removal of trade barriers to imports of goods like cars and textiles,
he has not opposed barriers that protect doctors and other highly paid professionals from
foreign competition (see, e.g., "AMA and Colleges Assert There Is a Surfeit of Doctors," by
Robert Pear, New York Times, March 1, 1997, page A7; or "U.S. to Pay Hospitals Not to
Train Doctors, Easing Glut," by Elisabeth Rosenthal, New York Times, 2/15/97, page A1.)
At times Gore has also worked to try to increase protectionist barriers. For example, he tried
to force South Africa to apply patent protection to AIDS drugs sold within its borders.
See more on Clinton.
[Top]
SOCIAL SECURITY
"It's Official: First Lady Is Now Candidate Clinton"
Adam Nagourney
New York Times, February 7, 2000, page A1
"Hillary Clinton Makes It Official"
Lynne Duke
Washington Post, February 7, 2000, page A1
These articles discusses Hillary Rodham Clinton's official announcement that she is a candidate
for the United States Senate. Both articles quote a line from her speech in which promised to
work to "save Social Security."
It is questionable whether Social Security is in need of saving, since the most recent projections
from the Social Security trustees show that the program can pay all scheduled benefits, with no
changes whatsoever, through the year 2034. The projections from the non-partisan
Congressional Budget Office (CBO) show the program to be even stronger. (See ERR,
2/7/00.)
"A Sobering Surplus Scenario"
Eric Pianin and John M. Berry
Washington Post, February 8, 2000, page A1
"Clinton's Budget Stresses Surplus and Having It All"
Richard W. Stevenson
New York Times, February 8, 2000, page A1
These articles analyze President Clinton's proposed budget. Both articles refer to the
president's intention to use the Social Security surplus to pay down the debt. This proposal will
not directly improve the finances of the program at all: Social Security's finances are not
affected at all by how or whether the government spends the money it borrows from the
program. Indirectly, paying down the debt can have a modest impact on the future tax burden
facing workers; however, it does not qualitatively change the situation.
For example, if the government uses the entire projected Social Security surplus over the next
ten years to pay down debt, the national debt will be approximately $2.2 trillion smaller than if
the nation ran balanced budgets over this period. The projected real interest rate (the nominal
interest rate minus the inflation rate) is approximately 3.0 percent, which means that the
government would be saving $66 billion annually in real interest payments by 2010, as a result
of using the Social Security surplus to pay down the debt.
GDP is projected to be $15 trillion in 2010, which means that the interest savings would be
approximately 0.44 percent of GDP. Alternatively, if the economy grew by 0.2 percentage
points more rapidly than projected, by 2010 GDP would be 2.0 percent higher than current
projections show. A 2.0 percent increase in GDP would increase tax collections by an amount
equal to 0.4 percent of GDP, approximately the same impact as paying down the debt for 10
years. (It's worth noting that projected GDP growth for the next ten years has been revised up
by approximately 0.6 percentage points in the last three years.) In short, the impact of paying
down the debt on the government's ability to pay off its obligations to Social Security is very
limited.
See more on Social Security.
[Top]
MEDICARE & THE BUDGET
"Clinton, in Budget, Seeks to Bolster Medicare Program"
Richard W. Stevenson
New York Times, February 7, 2000, page A1
This article discusses President Clinton's proposals for the last budget of his administration. At
one point in discussing his plan to put more money aside to support Medicare, it refers to
"Medicare's deteriorating finances."
According to the projections issued by the Congressional Budget Office (CBO) last month, the
annual surplus in the Medicare trust fund is currently $22 billion and is projected to rise to $28
billion by 2002. In 2010, the last year for which CBO publishes explicit projections for the trust
fund, the annual surplus is projected to be $11 billion. The cumulative surplus in the fund at that
point is projected to be approximately $384 billion. According to these projections, the trust
fund is projected to be fully solvent for close to 20 years into the future even if no changes are
made.
The article also includes comments from Republican spokespeople who criticized Clinton's
proposal to adjust spending levels for inflation in his baseline budget. It is worth noting that
prior to the Republican takeover of Congress in 1994, baselines were routinely calculated with
the assumption that real (inflation-adjusted) spending levels would remain constant. CBO
stopped including inflation adjustments in its baseline projections only after being directed to do
so by the Republican Congress.
See more on health.
[Top]
THE IMF
"An Optimistic Farewell at the IMF"
John Burgess
Washington Post, February 9, 2000, page E1
This article reports on the last news conference held by Michel Camdessus in his capacity as
managing director of the IMF. At one point the article quotes Camdessus as saying "There are
still people around the world…saying that the IMF kills babies." The article then adds that
Camdessus was "alluding to radical critics who argue that austerity programs that the IMF
imposes on borrowing countries can force cutbacks in crucial social services." The article then
goes on to quote Camdessus referring to such criticism as "demagoguery."
It is worth noting that some of the most prominent economists in the world have made these
sorts of criticisms, most notably Jeffrey Sachs, a Harvard economics professor, and Joseph
Stiglitz, the former chief economist at the World Bank and one time chair of the President's
Council of Economic Advisors. Both have argued that some of the IMF austerity programs in
recent years have actually worsened the economic situation in the countries they were designed
for, and led to unnecessary suffering for their people.
[Top]
JAPAN
"Japanese Economy Shrinks Again"
Clay Chandler
Washington Post, February 7, 2000, page A5
This article reports on new economic data which shows that the Japanese economy shrank in
the fourth quarter of 1999. At one point the article asserts that the ratio of Japan's debt to GDP
is now more than 130 percent. While this figure is accurate by one measure of Japan's debt, the
more standard "net debt" measure calculated by the OECD shows a debt to GDP ratio of
approximately 40 percent (Employment Outlook, 6/99, Annex Table 35).
See more on Asia.
[Top]
RUSSIA
"IMF Cites Concerns, Withholds Russia Loan"
Sharon LaFraniere
Washington Post, February 6, 2000, page A25
This article discusses the International Monetary Fund's decision not to release a $640 million
loan to Russia. The official reason was the government's failure to make acceptable progress in
following the IMF's economic program. According to the article, Russia's economy grew by
3.2 percent last year. By contrast, in the eight years after the collapse of the Soviet Union,
when Russia's government was receiving IMF assistance, its economy contracted by close to
50 percent. Russia never attained a growth rate close to its 1999 level in any of the years when
the IMF deemed Russia to be in compliance with its economic program.
"Tight Space. No Privacy. Soviet Decor"
Michael Wines
New York Times, February 5, 2000, page A1
This article reports on the cramped housing conditions for many Russians living in Moscow.
According to the article, it is common for four or more families to share a single apartment. At
one point the article purports to give "a little history." It then traces the current cramped housing
situation to the decision of the Communist government in 1918 to divide up churches, mansions
and private apartments in order to provide new living quarters to peasants and factory workers.
The article attributes this decision to a desire "to erase all vestiges of class in the new
Communist paradise."
Whatever ideological motivations the government may have had in creating communal living
quarters, the decision also had the effect of vastly improving the housing situation for tens of
thousands of Russian workers and peasants who were either homeless, or lived in even more
cramped facilities previously. The article only notes that this measure was a "tightening up" for
the relatively wealthy segment of the population that had previously enjoyed comfortable living
arrangements. It doesn't acknowledge the gains to the rest of the population from this policy.
See more on Russia.
[Top]
SOUTH AFRICA
"Former Allies Clash Over South African Economy"
Rachel L. Swarns
New York Times, February 5, 2000, page A6
This article discusses disputes between South Africa's trade unions and the government over
the direction of economic policy. At one point the article refers to South Africa's public sector
as "bloated." It does not indicate the basis for this characterization.
[Top]
Outstanding Stories of the Week
"Experts Strongly Dispute Consumer Savings Claim"
George Lardner Jr.
Washington Post, February 10, 2000; Page A6
This article examines Texas Gov. George W. Bush's claim his tort reform measures have saved
Texans billions of dollars in insurance fees. The article presents the assessments of regulators
and consumer groups that most of the savings from paying lower damage claims has gone to
increased profits rather than being passed on in lower premiums.
[Top]
Dean Baker is an economist and the co-director of the Center for Economics and Policy
Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The
Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.
ERR is edited by Jim Naureckas.