ECONOMICS REPORTING REVIEW
Week of February 3 - February 9

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

OUTSTANDING STORIES OF THE WEEK 

"Beatings and Other Abuses Cited at Samoan Apparel Plant That Supplied U.S.
Retailers," by Steven Greenhouse in the New York Times, February 6, 2001, page
A14. 

This article reports on the findings of a Labor Department investigation into the
working conditions in an apparel factory in American Somoa. The report found that
the workers at the factory were beaten for breaking rules, and that they were held
as virtual prisoners. The factory produced apparel goods for J.C. Penney Company
and other U.S. retailers. 

"Payroll Tax: The Burden Untouched," by Glenn Kessler in the Washington Post,
February 6, 2001, page A1. 

This article examines which groups will benefits most from the tax cuts proposed by
President Bush. It shows that payroll taxes are actually a larger burden than income
taxes for most middle income families. Payroll taxes will not be affected by the Bush
tax cut. 

"U.S. Brazil Clash Over AIDS Drugs," by Stephen Buckley in the Washington Post,
February 6, 2001, page A1. 

This article reports on U.S. efforts to block the production of generic anti-AIDS drugs
in Brazil. Brazil has implemented an effective anti-AIDS program which depends on
generic drugs. The price of these drugs is 80 to 90 percent less than what major
drug manufacturers charge for their products. The drug manufacturers charge as
much as $10,000 per person for a yearly supply of their AIDS drugs, an impossible
sum in developing nations where per capita income can be less than $1,000 per year.


"Indian Company Offers to Supply AIDS Drugs at Low Cost in Africa," by Donald G.
McNeil, Jr., in the New York Times, February 7, 2001, page A1. 

This article reports on plans by a major Indian pharmaceutical manufacturer, Cipla
Ltd., to supply generic AIDS drugs to sub-Saharan Africa. According to the article,
Cipla will be selling a "cocktail" of AIDS drugs for $350 per person per year. The same
combination sells for between $10,000-$15,000 in the United States. 



PROSPECTS FOR RECESSION 

"'Shape' of the Rebound Sparks Wall St. Debate," by Steven Pearlstein in the
Washington Post, February 6, 2001, page E1. 

This article discusses the likely course of the economy over the next several years.
It proposes three different scenarios, ranging from a relatively mild slowdown to a
severe downturn. In discussing the latter, it asserts that "no serous forecaster" is
predicting a serious slump. Actually, some serious forecasters do predict that U.S.
economics prospects are quite bleak. For example, Wynne Godley, a research fellow
at the Levy Institute with a long and distinguished academic career, has predicted a
severe downturn based on the current account deficit, the large budget surplus, and
the extraordinary build-up of private sector debt. 

In discussing the three scenarios, the article never makes an effort to assess one of
the central issues, the proper valuation of the stock market. Since agencies such as
the Congressional Budget Office make projections for corporate profits, it is possible
to assess whether the market is under or over-valued, if these projections are
considered plausible. 


CANADA 

"Canada Determined to Be First Neighbor to Bush," by James Brooke in the New York
Times, February 5, 2001, page A5. 

This article discusses the current political and economic situation in Canada in
advance of a meeting between Canadian Prime Minister Jean Chretien and President
Bush. At one point it refers to Canada's "towering debt." It is not clear by what
measure the article views Canada's debt as "towering." Its current level -- just over
50 percent of GDP -- is lower than the debt of most OECD nations and also lower
than the debt burden borne by the U.S. for most of the post-war period. 

The article also asserts that a capital gains tax rate of 23 percent is "lower than in
the United States." The top tax rate on capital gains in the United States is currently
20 percent. 


ELECTRICITY DEREGULATION IN CALIFORNIA 

"Governors Spurned on Power Price Caps," by William Booth in the Washington Post,
February 3, 2001, page A3. 

"California's Other Power Struggle," by Todd S. Purdum in the New York Times,
February 3, 2001, page A7. 

These articles discuss the political battles both nationally and within California
surrounding efforts to solve the state's electricity crisis. The articles explain the
origins of the crisis in almost exactly the same way, with the Times article asserting
that the deregulation plan, "turned out to be a disaster, because wholesale prices
were deregulated but retail rates were capped, and as demand for electricity
increased ... wholesale prices spiraled and left utilities near bankruptcy." The Post
article provides a nearly identical explanation for the crisis. 

This explanation implies that the current crisis would not have occurred if the retail
price had not been capped. This is not clear. In southern California retail prices were
not capped. This led to a doubling, or even tripling, of electricity prices for
consumers. This may have prevented shortages in the sense that people who were
willing and able to pay these prices could buy electricity, but prices increases of this
magnitude were viewed as crisis by the people in the area, many of whom refused to
pay their bills. 

It is also worth noting that the utilities were pushed so quickly to the edge of
bankruptcy because they had already divested themselves of most of their cash
reserves and valuable assets. As a state audit revealed, the cash was paid out in
dividends to shareholders, while the assets were turned over to parent companies.
This meant that the utilities had little cushion against unfavorable movements of
energy prices (see ERR 2-2-01). 

Both articles also attribute the current power shortages to a surge in demand.
Actually, the winter months are a relative low point for electricity demand in
California. The shortage has arisen because of a reduction of supply, as several
power plants have been taken out of service for maintenance (see "It's Greed
Stupid," by Wenonah Hauter and Tyson Slocum, Public Citizen). 

"Deregulation: A Movement Groping in the Dark," by Alex Berenson in the New York
Times, February 4, 2001, Section 4, page 6. 

This article examines the electricity crisis in California in the context of the general
world-wide movement to reduce government involvement in the economy. After
noting the global trend towards deregulation, and presenting an approving quote from
an economist with a financial firm, the article asserts, in reference to the situation in
California: "now, however, and possibly for the first time since deregulation began in
earnest, this dogma [faith in deregulation] faces a serious real world failure." 

Actually there have been many prominent examples of failures of deregulation in
recent years, both in the United States and around the world. At the top of the list
in the United States is the deregulation of the savings and loan industry, which led
to a federal bailout costing approximately $250 billion, in today's dollars. More
recently, the deregulation of cable television in 1996 led to large price increases in
many areas. Another failure has been the deregulation of inter-city bus travel, which
caused many communities to lose bus service altogether. 

Internationally, the privatization and deregulation of government industries and
services has led to a long list of disasters. The collapse of the Russian economy in
the early 1990s would top this list, but privatization has been associated with
cronyism and theft in Mexico, Argentina, Peru and virtually every other country
where a major sell-off of state assets has occurred. The privatized Social Security
systems in places like Chile and Great Britain have been very costly to administer,
and in the latter case led to a major scandal as insurance companies used fraudulent
claims to market their accounts. 

In short, there is a long list of failed efforts at deregulation and privatization over the
last two decades. The California electricity crisis is just one more item on this list. 


JAPAN 

"In Stagnant Japan, Economic and Social Ills Match," by Howard W. French in the
New York Times, February 6, 2001, page A1. 

This article discusses the economic and social problems facing Japan. Some of the
discussion is inconsistent with official statistics and standard economic theory. 

For example, the article notes the growing market in Japan for items made by
American producers or sold in stores owned by U.S. corporations. It then goes on to
note that Japan's share of world exports has declined over the last decade and that
exports as a share of GDP have remained stagnant since the 1950s. By contrast, the
article notes that, in the United States, exports have doubled as a share of GDP
during this period. 

An increasing export share of GDP is not necessarily a sign of a healthy economy. In
the case of the United States, many exports are parts that are assembled into a
finished product abroad, and then imported back into the United States. For example,
the United States exports car engines to Mexico. These engines go to assembly
plants, where a finished car is produced and is then imported back into the United
States. If the United States were able to increase the productivity of its assembly
plants, so that it no longer sent car parts to Mexico for assembly, it would reduce
U.S. exports. This reduction in exports would appear as a sign of weakening
competitiveness by the standard used in this article. 

The more typical measure of competitiveness used by economists is the trade
balance. The U.S. currently has a trade deficit that is close to $400 billion, or 4
percent of GDP. By contrast, Japan is running a trade surplus that is about 2 percent
of its GDP. The trade position of the United States is the one which is unsustainable.
If the U.S. trade deficit remains at its current share of GDP, by the end of 2010, its
foreign debt will be more than $9 trillion (in today's dollars), or more than $30,000 for
every person living in the country. By contrast, if current trade patterns continue, in
ten years Japan will have accumulated more than $20,000 in foreign assets for every
person living in Japan. 

The article wrongly predicts dire consequences from a projected decline in Japan's
population. As the article itself notes, Japan is a very densely populated country, so
a declining population should relieve some of its overcrowding. The standard
economic measure of a nation's wealth is per capita income. From an economic
standpoint, it is no better if a nation achieves 25 percent per capita income growth
by having its economy grow by 25 percent while its population remains constant,
than if its economy remains the same size, while its population shrinks by 20 percent.


Based on the projected decline in population, the article asserts that "today's
teenagers could ... expect 30 percent less in pension benefits." It does not indicate
where it obtained this figure. In fifty years, when today's teenagers are reaching
retirement age, the average wage will have increased by approximately 170 percent,
if recent trends in Japan's productivity and wage growth are sustained. This means
that even if Japan slashes its schedule of pension benefits by 50 percent, today's
teenagers will still receive pensions that are more than one third higher than what
current retirees receive. 

As another example of Japan's failings, the article notes that Sega, a computer game
manufacturer, has stopped producing its consoles. It is not clear what this indicates
about Japan's economy, since Sega's leading competitors are Nintendo and Sony,
two major Japanese corporations. The article then points out that the stock of two
new U.S. technology companies "already have more than half the market value of
Sony ... the most prestigious name in Japanese consumer electronics." At its peak,
the stock of Amazon.com had a higher market valuation than Sony does at present.
And ETOYs, which is about to fold, had a market valuation more than half as large as
Sony's. The fact that a bubble has caused many U.S. stocks to sell at ridiculous
prices does not have any obvious negative implications for the Japanese economy. 

It is worth noting that an article in the Washington Post this week ("U.S. Urgings
Perplex Japanese," by Doug Struck, February 7, 2001, page A12) presented a very
different assessment of the situation in Japan. Its sub-headline was "Talk of Raising
Standard of Living Falls on Affluent Ears." 


RUSSIA AND THE IMF 

"On the Class Warpath," by Steven Pearlstein and Paul Blustein in the Washington
Post, February 7, 2001, page E1. 

"O'Neill Offers a New Approach to Japan," by David E. Sanger in the New York Times,
February 6, 2001, page C1. 

These articles discuss the IMF's effort to support the Russian ruble in 1998 in the
context of eliciting Treasury Secretary Paul O'Neill's attitude towards the IMF. Both
articles imply that the IMF's policy failed because the ruble eventually collapsed
when the Russian central bank could no longer support it. In fact, once Russia got
through the initial fallout, the collapse of the ruble turned out to be a very positive
development for its economy. Nearly all economists now agree that the decline in the
ruble provided a major stimulus to the Russian economy, since its goods became far
more competitive in world markets. In other words, the IMF's policy of maintaining an
over-valued currency was hurting Russia's economy by pricing its goods out of the
market. In the context of an article in which O'Neill is reported as questioning the
IMF's judgement, it would have been appropriate to note how completely
wrongheaded the IMF's approach to Russia had been. 


TRADE 

"NAFTA Ruling Opens Border to Mexican Trucks," by Paul Blustein in the Washington
Post, February 7, 2001, page E1. 

This article reports on the Bush Administration's apparent willingness to accept the
ruling of a NAFTA tribunal, which allows Mexican trucks to be driven in the United
States. At one point the article reports the views of Public Citizen, which it identifies
as "an activist group founded by Ralph Nader that opposes free trade pacts." While
Public Citizen has opposed NAFTA and other recent trade agreements, it does not
have a policy of opposing free trade pacts. For example, it is unlikely that it would
oppose a free trade agreement that allowed AIDS drugs to be sold in developing
nations without being subject to patent protection or other licensing restrictions. 


TAX CUTS AND RECESSIONS 

"Bush Wants Tax Cut Sooner To Aid Economy This Year," by Richard W. Stevenson in
the New York Times, February 5, 2001, page A12. 

This article reports on efforts by President Bush to have the timing of his tax cut
moved forward so that it can have more of an immediate impact on the economy.
The article notes that an agreement in Congress on a tax cut is unlikely to be
reached until the summer, which means that workers would not see anything extra in
their paychecks until the late summer or fall. It then comments, "history suggests
that the economy is likely to be recovering by then." 

This claim is questionable. The last recession began in June of 1990, according to the
National Bureau of Economic Research. The unemployment rate continued to rise until
June of 1992. The recession that began in the second quarter of 1981 continued
until the second quarter of 1983. And, the recession that began in the third quarter
of 1973 lasted until the third quarter of 1975. If the economy is actually falling into a
recession, the pattern from the last three recessions indicates that it is likely to still
need some additional stimulus later this year. 


TAX CUTS 

"Tax Foes' Best of Times Equals Worst for Others," by David E. Rosenbaum in the
New York Times, February 5, 2001, page A18. 

"Bush Tax Plan Sent to Congress, Starting the Jostling for Position," by David E.
Sanger in the New York Times, February 9, 2001, page A1. 

These articles report on President Bush's tax cut proposal. Both articles refer to the
history surrounding the Reagan tax cuts in 1981 in order to provide background to
the current debate. Both imply that there is no way to determine whether this tax
cut succeeded or not. While it is always difficult to make definitive judgements on a
policy, there are fairly standard measures that economists use. By these measures, it
does not appear that the Reagan era tax cuts succeeded. 

First, the 1980s were a decade of relatively slow growth, with the growth rate
averaging just 3.0 percent, compared to 3.2 percent in the 1990s, and 3.3 percent in
the 1970s. Productivity growth shows the same patterns, with the average annual
rate being 2.1 percent, 1.4 percent, and 2.1 percent, in the 1970s, 1980s, and
1990s, respectively. A primary purpose of the tax cut was to stimulate investment.
The investment share of GDP fell from 12.9 percent at the business cycle peak in
1979 to 11.2 percent in 1989. It rebounded to 13.8 percent in 2000. In short, the
standard measures of economic performance imply that the 1980s were not a good
decade. 

Back to CEPR's Economics Reporting Review website.