Economics Reporting Review
Week of February 17 - February 23

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

OUTSTANDING STORIES OF THE WEEK 

"By Listening, 3 Economists Show Slums Hurt the Poor," by Louis Uchitelle in the New
York Times, February 18, 2001, Section 4, page 4. 

This article discusses the research of three economists who examined the experience
of families who were able to escape poor neighborhoods by getting government
housing vouchers. The researchers found that, while there were no clear gains in
income or school performance, the families that left poor neighborhoods had better
health outcomes and their children had fewer behavior problems, as compared to the
families left behind. 

"Drop in Business Investment Big Factor in Economy's Stall," by Steven Pearlstein in
the Washington Post, February 20, 2001, page A1. 

This article examines the impact that a slowdown in investment spending is likely to
have on the economy, and the reasons that a slowdown may be prolonged. It points
out that because of over-investment in many sectors, investment may be depressed
for some time into the future. 

"Court Papers Depict Scheme in Drug Billing," by Melody Petersen in the New York
Times, February 20, 2001, page C1. 

This article describes a case brought by federal prosecutors against a doctor who
prescribed drugs for Medicare and Medicaid patients in exchange for kickbacks from a
drug manufacturer. This sort of kickback scheme is exactly the kind of behavior that
economists would predict from the monopoly pricing system created by patents.
Since patent monopolies allow drug companies to sell their products at prices far
above their cost, they have strong incentives to use both legal and illegal means to
increase sales of their drugs. 




THE TRADE DEFICIT 

"Price Index Rose 0.6% in January," by John M. Berry in the Washington Post,
February 20, 2001, page E1. 

"Inflation Index Jumps Due to Energy Costs," by Michael Brick in the New York Times,
February 22, 2001, page C1. 

These articles report on the release of January's consumer price index by the Labor
Department and the release of trade data for December and the whole last year by
the Commerce Department. The discussion of the trade deficit is very brief and only
appears at the very end of both articles. 

The trade data deserved far more attention than it received. The United States had
a record trade deficit in 2000 of 3.7 percent of GDP, or $369.7 billion. This brings the
nation's accumulated foreign debt close to $2 trillion, and the country is currently
accumulating debt at the rate of close to $450 billion a year. 

The impact of foreign debt on the economy is comparable to the impact of
government debt. In other words, accumulating foreign debt at the rate of $450
billion a year presents roughly the same problem as a budget deficit of $450 billion.
Both newspapers have devoted large amounts of space to spending or tax cut
proposals which could cause the federal government to run relatively modest deficits
five or ten years into the future. 

There is no economic reason that the possibility of modest budget deficits at some
point in the future should be seen as more important than the large trade deficits
that the nation is currently running. The record trade deficit reported for 2000 should
have been treated as one of the most important economic stories of the year.



TAXING STOCK OPTIONS 

"Stock Option Blues: Slide Leaves Little But a Big Tax Bill," by Matt Richtel in the New
York Times, February 18, 2001, Section 1, page 1. 

This article discusses a tax problem that has hit many people working at high-tech
companies. Under current tax law, workers are taxed on the gains on stock options
at the time they choose to exercise the options. This means that if their options give
them the right to purchase 1000 shares of stock at $10 per share, and they exercise
the option when the stock is at $50, then the difference between the price at the
time of purchase and the option price is taxable income ($40,000 in this case -- a
gain of $40 per share on 1000 shares). Since many workers continued to hold their
stock after exercising their options, and the stock prices subsequently plummeted,
many workers find themselves with large tax liabilities for near worthless shares of
stock. 

The article repeatedly presents this issue as a problem of the tax system not keeping
pace with changes in the economy. The article does not present any economists'
assessment of this problem, but it is unlikely that economists would agree with the
view presented in the article. 

The main problem for these workers is that they have chosen to place a large portion
of their earnings in extremely risky assets, including money that they should have set
aside to pay their taxes. They have run into trouble not because of the tax code,
but because of their risky investments. For example, imagine that a cab driver --
who is likely to owe taxes on his tips -- took all of his money and put it in a risky
land deal. If the cab driver then had trouble paying his taxes after the deal
collapsed, no one would consider this to be a problem caused by the tax code. 

This is exactly the situation being faced by these workers. If the tax code were to
be changed to accommodate these workers, not only would it be unfair to other
taxpayers, it would also encourage foolish risk-taking. In fact, the gamble being
taken by these workers is especially risky, since their jobs also depend on the
well-being of the company. In the situations described in the article, workers can
lose both their jobs and their savings if their company does poorly. As any economist
would almost certainly have pointed out, it would be extremely irresponsible to
structure the tax code in such a way as to encourage this sort of risk-taking.



PRODUCTIVITY GROWTH 

"More Gains in Productivity Likely, Fed Official Says," by John M. Berry in the
Washington Post, February 21, 2001, page E3. 

This article reports on a talk on productivity growth given by Edward Gramlich, one of
the governors of the Federal Reserve Board. At one point the article refers to an
analysis presented by Gramlich showing that productivity growth has been slowing in
most European countries in recent years, while it has been accelerating in the United
States. It is worth noting that according to OECD data, most European nations
enjoyed far more rapid productivity growth than the United States, until the last few
years. Over the period from 1980 to 1995, the OECD reports that the annual rate of
productivity growth averaged just 1.2 percent in the United States compared to 2.1
percent in Germany and 2.2 percent in France and Italy. It is not uncommon for
there to be erratic movements in productivity growth for a few years, so it may be
too early to draw any conclusions about the recent speed-up in productivity growth
in the United States. 

In this respect, it is also worth noting that after adjusting for measurement changes,
over the last four years the Social Security trustees have actually lowered their
projections for long-run productivity growth by approximately 0.2 percentage points.



OIL IN THE ARCTIC NATURAL WILDLIFE REFUGE 

"The Void Without the 'Great Beyond,'" by Sam Howe Verhovek in the New York
Times, February 18, 2001, Section 4, page 1. 

This article discusses the importance of the Arctic Natural Wildlife Refuge (ANWR) as
one of the country's few relatively untouched regions. At one point it presents an
argument by proponents of oil drilling: that the oil which comes out of ANWR will
enhance national security by reducing the nation's dependence on foreign oil. This is
a peculiar argument, since it is only true as long as the oil is in the ground. 

At present, and in almost any foreseeable future scenario, the U.S. can buy all the
oil it chooses to buy on world markets. If it drains the oil from ANWR during a period
in which oil is readily available, then it has eliminated a reserve that may be
important at some point when oil is not available. The national security argument on
ANWR would seem to be that the oil should be left there, to protect against the
possibility that the U.S. will be unable to get foreign oil at some future date.



EUROPE 

"Old World, New Economy," by William Drozdiak in the Washington Post, February 18,
2001, page H1. 

This article examines the current economic situation in Europe. It contrasts the
relatively strong growth of the last year with what it portrays as European
stagnation in prior years. For example, the article includes a quote from a Harvard
business professor who asserts: "the mystery is why, with all these strengths,
Europe has fallen so short of the United States." 

The image of stagnant European economies presented in this article sharply conflicts
with data from the OECD. According to these data, until the last few years,
European nations regularly maintained far more rapid rates of productivity growth
than the United States. In the period from 1980 to 1995, productivity growth
averaged growth in the United States averaged 1.2 percent annually. By contrast, it
averaged 2.1 percent in Germany, and 2.2 percent in Italy and France over this
period. In the years since 1995, productivity growth in the United States has been
somewhat more rapid than in Europe, but not nearly so much as to reverse its
relative weakness over the prior period. Economists view productivity growth as the
main determinant of living standards in the long-run. 

The article also refers to a general disenchantment in Europe with what it terms
"socialism," referring to the social welfare systems that exist across the continent.
The article interviews a number of business executives who appear to express this
disenchantment. However, it is worth noting that the elected governments in every
country in Europe, except Spain, include Socialist or Social Democratic parties in
their governing coalitions. The major shift in public sentiment, as expressed by its
votes, has been away from the conservative, more market-oriented parties that held
power in many countries in the eighties.



DOLLAR POLICY 

"O'Neill Reaffirms Strong-Dollar Policy," by William Drozdiak in the Washington Post,
February 18, 2001, page A3. 

This article reports on Treasury Secretary Paul O'Neill's statements that the Bush
Administration is committed to a strong dollar. The article includes no analysis of the
impact or desirability of a strong dollar. 

It is worth noting that in the 1980s most economists viewed a strong dollar as highly
undesirable. The conventional view of the impact of the Reagan era budget deficits is
that the deficits led to high interest rates. This in turn encouraged a large in-flow of
foreign money, as foreign investors sought to take advantage of the high interest
rates available in the United States. The in-flow of money raised the value of the
dollar. This had the negative effect of making U.S. goods less competitive in world
markets, which led to record setting trade deficits in 1986-1987. It is also worth
noting that the money pulled into the U.S. by high interest rates might otherwise
have been invested in developing nations, a point often argued by economists who
favored reducing the federal budget deficit. 

The current high dollar policy has led to even larger trade deficits than those of the
1980s, measured as a share of GDP (3.7 percent in 2000, compared to a peak of 3.0
percent in 1987). As a result, the United States is currently accumulating foreign
debt at the rate of more than $400 billion annually. If the trade deficit stays at its
current size in relation to GDP, the foreign debt will exceed $10 trillion by the end of
2010. Since it is not apparent that large U.S. trade deficits and foreign debt are
positive, it would have been helpful if this article presented some analysis as to why
a strong dollar would be viewed as desirable. 

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