Economic Reporting Review
February 15, 1999
By Dean Baker
"January Gain in Jobs Doubled the Forecast"
Sylvia Nasar
New York Times, February 6, 1999, page B1
This article reports on the Labor Department's release of employment data for January. At one
point the article asserts that "half of the new jobs were in managerial and professional
occupations." This claim is not supported by the data. The employment data based on Labor
Department's survey of households in January showed that 107,000 more people were
working in managerial and professional occupations. While this is close to half of the 245,000
new jobs reported in the Labor Department's survey of establishments, these surveys are not
directly comparable. They often show very different patterns in monthly movements,
sometimes even going in opposite directions. In January, the household survey showed
employment growth of 814,000 jobs. This implies that just over one in eight new jobs were in
the managerial and professional category.
At one point, the article comments that "over all, the chief worry now is that things may be
getting too good." The article does not indicate who has this concern. Presumably, it is not
shared by most workers, who have only begun to see real wage gains in the last three years.
The typical worker in the economy has still not seen their wage rate return to the level it had
reached in 1989 prior to the recession.
"Faith Shifts Over Secure Retirement Funds"
Kevin Sack
New York Times, February 7, 1999, Section 1, page 12
"Flirting With a Buy Order for $1 Trillion in Stock"
David E. Rosenbaum
New York Times, February 7, 1999, Section 4, page 3
Both of these articles discuss the prospect of placing Social Security revenue in the stock
market, whether in individual accounts, or through the trust fund. Both articles wrongly assume
that, based on past experience, the stock market will provide far higher returns than
government bonds.
The only reason why the Social Security system is projected to eventually have a shortfall in
revenue is that the economy is projected to grow at less than half the rate over the next 75
years as it did over the last 75 years. Since the future is projected to be very different from the
past, it is absurd to assume that future stock returns will be the same as in the past.
The current dividend payout on stocks is slightly less than 2.0 percent annually. The projected
growth rate of profits is less than 1.5 percent a year. If stock prices rise at the same rate as
profits, this implies an average return of less than 3.5 percent a year on stocks, only slightly
better than the 2.8 percent yield projected on government bonds. Increasing the rate of return
on the trust fund by 0.7 percentage points would have very little impact on its long-term
solvency.
The first article also discusses the public's attitude towards the stock market and Social
Security. At several points the article badly misrepresents the Social Security system and the
state of public opinion. The most important misrepresentation is the claim that "ever since
Franklin D. Roosevelt signed the Social Security Act in 1935, that slow steady growth [the
rate of return on government bonds] has been sufficient to sustain the retirement system." In
fact, since the system was almost completely a pay-as-you-go system until the last decade, the
interest rate on government bonds was virtually irrelevant to the health of Social Security. It
had almost no accumulated assets, so it didn't matter what interest rate they earned.
More importantly, it was necessary to repeatedly raise taxes over the last six decades to
accommodate a continuous increase in the ratio of retirees to workers. By ignoring this past
experience, the article implies that the current situation, where shortfalls in funding are
projected more than thirty years in the future, is somehow unique.
The article also wrongly asserts that public opinion "has left politicians with few alternatives
beyond seeking to increase the yield on Social Security revenue." The enormous popularity of
the proposal put forward by the president in his state of the union address indicates one major
alternative, place general revenue in the Social Security trust fund. There is also another very
easy alternative: do nothing. The projections show that the program can pay all its bills for the
next thirty three years even if nothing is done, this means that a very realistic option is to do
nothing. This will allow for action to be taken at a point where the dimensions of the actual
problem are clearer.
"Clinton Vows Strong Drive to Win a House Majority, Advisers Say"
Richard L. Berke and James Bennet
New York Times, February 11, 1999, page A1
This article discusses President Clinton's plans to work to help the Democrats regain control of
Congress in the year 2000. At one point in discussing Clinton's potential legacy, it refers the
"rescue" of Social Security. Since the Social Security program is projected to be able to pay all
scheduled benefits, with no changes whatsoever, until 2032, it seems rather dubious to assert
as fact that Clinton would be "rescuing" the program.
"Schroder's New Politics Tripped Up by Hesse Voters"
Roger Cohen
New York Times, February 8, 1999, page A3
This article reports on an election in the German state of Hesse where it appears that
right-wing coalition will gain a narrow majority. While German Chancellor Gerhard Schroder's
Social Democratic party actually picked up votes in the election, the Social Democrats'
coalition partner, the Greens, had significant loses. At one point it asserts that Mr. Schroder
had been "embarrassed" by statements from his Finance Minister, Oskar Lafontaine, calling for
controls on international capital flows and lower interest rates in Europe. The article does not
indicate why such statements were embarrassing to Mr. Schroder.
Many, if not most, economists now view controls on international capital to be a necessary
step to prevent the sort of financial crises that have derailed the economies of developing
nations from Korea to Brazil. This group includes such distinguished figures as Nobel laureate
James Tobin and Joseph Stiglitz, currently the chief economist at the World Bank, and
formerly the head of Clinton's Council of Economic Advisors.
The call for lowering interest rates in Europe has also been supported by many of the world's
most prominent economists, most recently in a public statement signed by several Nobel
laureates. (See "An Economists' Manifesto on Unemployment in the European Union," BNL
Quarterly Review, # 206, 9/98.) It would not seem an obvious source of embarrassment
that Germany's finance minister shares the views of many of the world's leading economists.
"German Unemployment Climbs to 11.5% Rate"
Associated Press
New York Times, February 10, 1999, page C4
This article reports on an increase in Germany's unemployment rate from 10.9 percent in
December to 11.5 percent in January. The article does not point out that these numbers are
not seasonally adjusted. It is standard practice in the United States to only report seasonally
adjusted data for unemployment. Otherwise changes dues to seasonal factors would dominate
movements in the unemployment rate. For example, while the seasonally adjusted
unemployment rate remained constant at 4.3 percent in December and January, the unadjusted
rate rose from 4.0 percent to 4.8 percent.
"With German Craft Rules, It's Hard Just to Get to Work"
Edmund L. Andrews
New York Times, February 7, 1999, Section 1, page 8
"Possible Legal Software Ban Raises Free Speech Issue"
Barbara Whitaker
New York Times, February 7, 1999, Section 1, page 12
The first of these articles discusses regulations in Germany governing work practices in a wide
variety of crafts. The article indicates that complex regulations often prevent workers from
getting many jobs for which they are qualified, but lack the appropriate certification. The article
implies that this system of regulation might protect workers in various crafts, but it is a major
source of waste and inefficiency for the German economy. The second article reports on a
ruling by a judge in Texas, that a software package designed to provide legal assistance is an
unauthorized practice of law. This ruling may cause the sale of the software to be banned in the
state.
The law in Texas, on the unauthorized practice of law, is exactly comparable to the German
craft restrictions that were ridiculed in the first article. There are comparable restrictions on the
practice of law in most states in the United States. Government enforced restrictions also exist
in other professions, such as medicine and accounting. One goal of these restrictions is to
provide quality protections to consumers, just as is the case with the German craft restrictions.
However, since the restrictions are usually enforced primarily by the profession being
regulated, they often serve to limit competition. The major difference between the United
States and Germany in this respect is that only a relatively small group of highly paid
professionals are able to benefit from these occupational restrictions in the United States. In
Germany, a far broader segment of the work force is able to use government regulation to
protect their position in the labor market.
"Productivity Gains Give Wages a Boost"
John M. Berry
Washington Post, February 10, 1999, page E1
This article reports on the release of the productivity growth numbers for the 4th quarter of
1998. The article notes that at present there is a significant difference between the employment
cost index (a measure of nominal wage growth) minus productivity growth, and the inflation
rate as measured by the producer price index. The article then quotes from Economic Report
of the President, which is written by the Council of Economic Advisors: "The historic pattern
suggests that this gap will close, and it could do so through either higher price inflation, lower
wage inflation or higher trend productivity growth."
This claim is peculiar for several reasons. First, the most obvious measure of labor costs to use
in connection with productivity data is the hourly compensation series that the Bureau of Labor
Statistics releases along with the productivity numbers. The methodology used to construct this
series parallels the methodology used to construct the productivity data, so the relationship
between these two series would give a far more meaningful number than if the employment
cost index were used as a wage series. If the hourly compensation series is used, the difference
between labor costs and productivity growth has been virtually constant over the last two
years. In 1997, it was 2.1 percent, in 1998 it fell slightly to 2.0 percent.
Whether this creates a gap with the inflation rate also depends on which measure of inflation is
used. The article uses the producer price index as a measure of inflation. This index only
includes goods, which have a lower rate of inflation than services. A more appropriate index
would be the core consumer price index includes all goods and services bought by consumers,
but which excludes energy prices (a significant portion of which is the price of imported oil)
and agricultural goods, which are not counted in the non-farm productivity measure that is the
focus of the article. This index rose by 2.4 percent last year. This increase is actually greater
than the 2.0 percent difference between labor costs and productivity growth.
Finally, it is important to note that there is a fourth way the alleged gap noted in the article
could be filled: The profit share could fall. The capital share of business sector income (profits
plus interest) has risen by more than 3 full percentage points from the profit peak of the last
business cycle in 1988 to 1997. This is an extraordinary increase in profits. It would not seem
unreasonable that labor might be able to recover at least part of its historic share of income at a
time of low unemployment.
"World Bank Beats Breast for Failures in Indonesia"
David E. Sanger
New York Times, February 11, 1999, page A14
This article discusses a World Bank report which concluded that the Bank and the I.M.F. had
tolerated corruption, repression and financial abuses in Indonesia for the last 33 years. The
report notes that the Bank had spent more than $25 billion in Indonesia during this period,
which helped to support these practices. The headline appears to belittle the significance of the
report's findings.
Outstanding Stories of the Week
"Suburban 'Sprawl' Takes Its Place on the Political Landscape"
Todd S. Purdum
New York Times, February 6, 1999, page A1
This article reports on increasing public concern about the impact that suburban sprawl is
having on the environment. It reports the results of a poll that indicated that more than one
quarter of Californians view population growth and development as a major problem in their
region.
The concern noted in this article, about the negative effects of population growth, provides an
interesting contrast with the attitude toward population growth in the context of the Social
Security debate. More rapid population growth would be a major factor extending the
solvency of the Social Security system. Therefore more rapid population growth is often
presented as a desirable outcome in this debate. This is ironic, because the implication is that
most people would rather live in a degraded environment and receive lower wages (other
things equal, an increase in population lowers average wages) just to avoid a tax increase to
pay for Social Security. It seems unlikely that most people would actually be willing to endure
these costs just to avoid a tax increase.
"States Declining To Draw Billions In Welfare Money"
Robert Pear
New York Times, Febraury 8, 1999, page A1
This article reports on the fact that most states have not drawn down federal welfare funds that
were made available to them to assist welfare recipients in getting and holding jobs under the
welfare reform act passed in 1996. The article indicates that, in several cases, states have not
drawn on the funds because they have been unable to set up programs for assisting welfare
recipients in holding jobs.
Dean Baker is a senior research fellow at the Preamble Center.
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