Economic Reporting Review
February 4, 2002

By Dean Baker, co-Director of the Center for Economic and Policy Research

OUTSTANDING STORIES OF THE WEEK

Enron's Way: Pay Packages Foster Spin, Not Results
David Leonhardt
New York Times, January 27, 2002, Section 3 Page 4

This article examines trends in pay for top executives over the last few years. It reports that most have managed to keep their salaries increasing even as the market began to tumble in 2000, and only experienced a relatively small decline last year.

'99 Deal Failed After Scrutiny of Enron Books
Neela Banerjee (researched by Edmund L.Andrews, Neela Banerjee, and Andrew Ross Sorkin)
New York Times, January 27, 2002, Page A1

This article reports the findings of an investigation into a failed 1999 merger between Veba, a German utility company, and Enron. The article reports that Veba apparently called off the merger after it became aware of Enron's hidden liabilities. It indicates that most of this information was apparently available to anyone who chose to scrutinize Enron's records.

State Lures Good Jobs, but Companies Worry About Workers
David Firestone
New York Times, January 28, 2002, Page A8

This article reports on Nissan's efforts to discourage the state of Mississippi from bringing other car factories into the state after it agreed to build a truck plant there in 2000. Nissan does not want to compete with other factories for workers.


The Budget

Security and Tax Cuts Win Bush's Protection
Richard W. Stevenson
New York Times, January 30, 2002, Page A27

This article reports on President Bush's intention to increase the defense budget by $48 billion next year, while doubling spending on homeland security to $38 billion in 2003. Since spending on homeland security was near zero prior to the September 11th article, virtually this entire figure of $38 billion can be seen as an increase against a pre-attack baseline. Under Bush's 2003 budget, the total increase in real spending in these categories, compared to pre-attack levels, is approximately 0.69 percent of GDP. According the most recent Social Security trustees' report, the tax increase that would be needed to balance the program over its seventy five year planning period would be equal to 0.7 percent of GDP over this period (table VI.E5), almost the exact amount as the additional spending associated with the war against terrorism.

While the prospective burden of Social Security has been a frequent topic of news stories, which have often asserted that the costs will be onerous or even unbearable, there was no indication in this, or other new stories, that the war on terrorism would be especially difficult for the nation to afford. If paying for Social
Security poses a terrible economic challenge to the nation, then it must also be the case that paying for the war against terrorism will be a great burden. Alternatively, if the costs of the war on terrorism can be managed without great difficulty, then the costs of Social Security are also quite manageable.

Brief Health-Care Remarks Draw Praise and Skepticism
Robin Toner
New York Times, January 30, 2002, Page A27

This article discusses the health care proposals that President Bush mentioned in his State of the Union address. At one point it refers to his plans to increase the involvement of private insurers in the Medicare program. The article comments that "this is anathema to many Democrats."

It would have been more informative to readers to point out that the current experiment with H.M.O.'s in Medicare has proven disastrous. More than one-third of the Medicare patients who enrolled in H.M.O.'s have been dropped by the H.M.O.'s, because the latter claim that they cannot make a profit from these patients. At the same time, studies by both the General Accounting Office and the Congressional Budget Office show that it costs the government more money to insure patients through H.M.O.'s than through the traditional Medicare system.


The Right in Europe

A Jumpy, Anti-Immigrant Europe Is Creeping Rightward
Steven Erlanger
New York Times, January 30, 2002, Page A3

This article discusses the growing support for conservative and far-right groups across Europe. At one point it notes the drive for privatization in Norway, and comments that this should be a warning to the British Labor government, which "has endured one scandal after another over trains, hospitals and subways."

It is worth noting that the scandal over trains in Britain concerns the failure of its privatization plan. Since the train system was privatized more than a decade ago, service has badly deteriorated, prompting much public anger. Similarly, the scandal over the subways was attributable to the fact that Prime Minister Tony Blair apparently intends to move ahead with the privatization of the subways in London, even though the consultant who evaluated the plans concluded that privatization would be a disaster. In two of the three cases noted, it is the failure of privatization that provides the basis for the scandals.


Canada

Canada's 'Loonie' Heading South
DeNeen L. Brown
Washington Post, February 1, 2002, Page A21

This article discusses the decline in the Canadian currency against the dollar. At one point it reports the assertion of a person identified only as a "Toronto resident," that the decline in the currency has led to a serious problem of inflation in Canada: "everything is at least 15 cents or 20 cents more." According to Canada's statistical agency, inflation has been less than 2.0 percent a year in Canada over the last decade, a somewhat slower rate than in the United States. It would have been more appropriate to report the actual data, rather than the apparently mistaken perception of a randomly selected individual.

It is also worth noting that the high U.S. dollar is causing the United States to borrow at an unsustainable rate. Currently it is borrowing approximately $450 billion a year from abroad.


France

French Greet Campaign With a Yawn
Keith B. Richburg
Washington Post, January 28, 2002, Page A16

This article discusses the economic and political situation in France as it prepares for its presidential elections in the spring. The article implies that there is some serious problem with France's current political and economic situation. For example, at one point it quotes the assertion of a French politician that, "France is in some ways stationary. Not totally but going slower than others." At another point it asserts that "many French, particularly young people, also feel the country needs to make major changes to maintain growth levels and stay competitive in the world economy." The article also decried the fact that France has "an ever- expanding social safety net." The article does not present any conflicting opinions.

It might have been worth noting that France just became the first country in the world to make a 35-hour workweek the national standard. Contrary to the prediction of many economists, this change led to a huge leap in productivity. This has led to marked improvement in living standards for French workers.

It also might have been worth noting that France has a large trade surplus. In contrast, the United States has a trade deficit that is close to 4 percent of GDP, or $400 billion annually. This indicates that the United States is having more much difficulty remaining competitive in the world economy than France.

The article also reports the results of a poll showing that 40 percent of respondents indicated their intention to either abstain or cast blank ballots in the presidential election. It presents this as evidence of the disaffection of the French population with their political system. In the last presidential election in the United States, nearly half of the eligible voters abstained.


Amazon.com

A Profitable Amazon Looks to Do an Encore
Saul Hansell
New York Times, January 26, 2002, Page C2

This article examines Amazon.com's prospects after its first quarterly profit ever. The article implies that having one quarter of profit has qualitatively altered Amazon's position. If Amazon can maintain the same profitability year round (the 4th quarter is always by far the best for retailers), then the price-to-earnings ratio of its stock would be approximately 300 to 1.

Any analysis of Amazon should also point out that a federal moratorium on applying state sales taxes to Internet retailers ends in October of 2003. Amazon must then compete with stores that already have to pay sales tax. Therefore sales taxes will likely come almost dollar for dollar out of Amazon's profits, since they will not be able to pass the cost on to consumers.

As was pointed out in an analysis of an article on Amazon.com printed in the Times last week (see ""A Surprise From Amazon: Its First Profit," by Saul Hansell, New York Times, January 23, 2002, Page C4; and ERR 1-28-02), the failure of the business press to seriously scrutinize corporate financial and press statements allowed Enron's stock to rise to levels that were far higher than could be justified by its profits. As a result many shareholders suffered large losses. This article on Amazon similarly fails to critically analyze the company's prospects.


Argentina

In Argentina, Peronism Vs. Pragmatism
Anthony Faiola
Washington Post, January 26, 2002, Page A1

This article examines the choices facing Argentina's new president, Eduardo Duhalde. The article twice asserts that Argentina will have to get support for its policies from the IMF, at one point calling such support "desperately needed." The article does not indicate how it has made this determination. The conditions that the IMF attaches to its loans may be more harmful than the benefits from the loans. This was the view of Malaysia in 1998, when it opted to forego IMF loans, with conditions attached. Malaysia subsequently suffered less economic damage during the crisis than the countries that accepted the IMF loan agreement.

It is worth noting that Argentina is currently running a large trade surplus equal to approximately 2 percent of GDP (the equivalent of $200 billion a year for the United States). This means that Argentina could finance its imports without any new loans, if it delayed repayment of its debt. It is possible that this would be the best route for Argentina to pursue.

The article also asserts that "overspending is blamed in part for Argentina's $142 billion national debt." Argentina's spending, measured as a share of GDP, remained almost constant through the nineties. The main reason that Argentina's debt rose over this period was the higher interest rates that it had to pay on its existing debt. Higher interest rates were a direct result of its decision to link its currency to the dollar. In 1994, when Alan Greenspan raised interest rates in the United States, he also effectively raised interest rates in Argentina. Later in the decade, as the debt begin to build up, interest rates rose further because investors demanded a risk premium. They feared that Argentina would devalue its currency. This eventually pushed interest rates over 20 percent, creating an unbearable burden for Argentina's government.

This article also includes a comment with no obvious meaning: "Argentina-- like other countries around the world in 2002--cannot ignore global trends toward economic integration." The issue in every developing country is the shape that this integration takes; neither Mr. Duhalde, nor any other credible political figure, has suggested ignoring recent economic trends.

Crisis Incites More Protests And Discord In Argentina
Larry Rohter
New York Times, January 27, 2002, Page A8

This article discusses the economic and political situation in Argentina. At one point it discusses the views of Argentina's former president, Carlos Saul Menem, who is apparently planning a political comeback. The article reports that Mr. Menem has argued that Argentina made "a fatal mistake by devaluing the peso." It would have been appropriate to note that virtually all economists, including those at the IMF, now claim that Argentina made a huge mistake by keeping its currency tied to the dollar as long as it did.


Japan

An Orange Grove Illustrates Japan's Economic Woes
James Brooke
New York Times, January 27, 2002, Page A6

This article discusses the Japanese government's assistance to its orange growing industry, which it presents as symptomatic of the nation's economic problems: "the political diversion of money to industries that are no longer doing well is often cited as one of the factors that has, over the last decade, hindered economic recovery."

While political motivated subsidies can create economic distortions, Japan's main problem over the last decade has been insufficient demand, not insufficient supply due to misallocation of resources. This point has been made by many of the world's most prominent economists, most notably Princeton University Professor Paul Krugman. This problem can best be addressed by expansionary macroeconomic policies -- most obviously inflationary monetary policy. While the Times (and Post) have both run numerous articles documenting examples of inefficiencies in particular sectors of Japan's economy, they have almost completely neglected the failure of Japan's central bank to run a more expansionary policy.

At one point the article notes that the government spent $307,000 per acre improving one particular orange grove. The article points out that this is "68 times the price of an acre of orange-growing land in Brazil, the world's largest orange juice exporter." The fact that Brazil, a very large country, is the world's largest orange juice exporter reveals nothing about the value of its land for orange production. The relevant issue is the output per acre, not the country's total output.

Japan Leader, Facing Crisis, Moves To Fill Minister's Job
James Brooke
New York Times, February 1, 2002, Page A8

This article reports on Japanese Prime Minister Junichiro Koizumi's plans to replace his foreign minister. At one point the article warns that a drop in popularity could block "Mr. Koizumi's attempts to adopt free market changes needed to help pull Japan out of its fourth recession in a decade." The article does not indicate how it has determined which policies will most benefit Japan's economy. As noted above, there are serious differences on this issue among economists.