Economic Reporting Review
By Dean Baker
February 10, 2003

OUTSTANDING STORIES OF THE WEEK 

Critics Say School Funding Falls Short of Promises
Diana Jean Schemo
New York Times, February 5, 2003, Page A22

This article examines President Bush's education proposals in his 2004 budget. It points out that in many areas, the amount of spending specified for 2004 is far less than was proposed in the "No Child Left Behind Act," which Congress approved overwhelmingly last year.

Hiring In Nation Hits Worst Slump In Nearly 20 Years
David Leonhardt
New York Times, February 6, 2003, Page A1 

This article examines the current state of the labor market. It shows that by most measures, the recent recession and subsequent period of slow growth have been worse for workers than the 1990-91 recession.  

Layoffs Create Glut of Space in Boston Area
Susan Diesenhouse
New York Times, February 5, 2003, Page C6

This article reports on the large glut in office space in the Boston metropolitan area. According to sources cited in the article, the available supply of office space is not likely to be fully absorbed until 2008 or 2009. It is worth noting that Boston has also seen an extraordinary run-up in home prices over the last seven years. While it is expensive to do so, commercial space can be converted to residential space. This is a possibility in a situation where home prices are high and there is a large supply of vacant office space.

Cost-Conscious NASA Relies on Contract Firms
Greg Schneider and Ariana Eunjung Cha
Washington Post, February 3, 2003, Page A17 

This article reports on the ways in which NASA has increasingly come to rely on private contractors, ostensibly to reduce costs.
 

The Bush Budget 

Bush Budget Plan for '04 Has Higher Benefits for Many, Along With Deficits
Edmund L. Andrews and David Firestone
New York Times, February 2, 2003, Page A28 

This article discusses President Bush's proposed budget for 2004. The article begins by asserting that the budget will "energize the economy." The article does not indicate the basis for this assertion. The Bush Administration consciously decided not to include a stimulus package in its budget proposal, so there is no obvious basis for the claim that the budget would provide any substantial boost to the economy.  

The article also asserts that President Bush has proposed eliminating taxes on stock dividends. President Bush has only proposed eliminating taxes on the dividends on stocks held outside of retirement accounts. Most stockholders hold most of their stock in 401(k)s or other retirement accounts. Under the Bush proposals, the dividends earned on this stock would still be taxed as normal income after it is withdrawn. 

Bush's $2.2 Trillion Budget Proposes Record Deficits
Elisabeth Bumiller
New York Times, February 4, 2003, Page A1 

This article discusses some of the main features of President Bush's budget proposal. At one point it asserts that "a tidal wave of retiring baby boomers will tax the ailing Medicare and Social Security system." The Social Security trustees' report shows that the Social Security system can pay all scheduled benefits for the next 38 years, with no changes whatsoever. This puts the program in better shape than at any point in its first four decades of existence. The Medicare trustees' report shows that the program will be able to pay scheduled benefits for the next 23 years, without any changes. This puts Medicare in stronger shape than it has been at almost any point since it was created. The article presents no evidence for its assertion that - contrary to the reports of the programs' trustees - Medicare and Social Security are "ailing."  

For Republicans, Praise for President's Budget Is Selective
David Firestone
New York Times, February 4, 2003, Page A21 

Budget Sharply Boosts Defense
Amy Goldstein and Mike Allen
Washington Post, February 4, 2003, Page A1 

These articles discuss President Bush's new budget. Both articles include assertions that the proposed budget will lead to "record" deficits. While the deficit may reach unprecedented levels measured in dollar terms, it will not be close to a record when measured as a share of GDP, which is the only meaningful measure. The President's projections indicate that the deficit will be 2.9 percent of GDP in 2004. By contrast, it exceeded 6.0 percent of GDP in 1983. 

For some purposes it would be appropriate to add in the debt owed to the Social Security and Medicare trust funds. This is money that the federal government is borrowing, and will have to be paid back, although it provides no direct stimulus to the economy. Adding in this borrowing would raise the projected deficit for 2004 to 4.5 percent of GDP. 

Nothing Like Big Deficits To Hearten Bond Traders
Jonathan Fuerbringer
New York Times, February 5, 2003, Page C1

This article discusses the implications for the bond market of the new budget projections, which show large deficits for the indefinite future. The article includes a chart showing the shift in projections from large surpluses to large deficits. When listing the reasons for this shift, it doesn't mention the stock market crash. As a result of the crash, capital gains tax collections are now projected to be more than $500 billion lower over the 2001-2011 time-frame than had been projected for this period in 2001.  

With Rise in Foreign Aid, Plans for a New Way to Give It
James Dao
New York Times, February 3, 2003, Page A6 

This article discusses President Bush's plan to increase spending on foreign aid to $18 billion next year. It would be helpful if this sum were expressed as a percentage of total spending. If the increase is approved, foreign aid will be just over 0.8 percent of total spending next year.
 

The Bush Saving Proposals 

New Tax-Free Savings Plans Proposed
Jonathan Weisman
Washington Post, February 1, 2003, Page A1 

Accounts Chock-Full, Or a Plan Half Empty?
Daniel Altman
New York Times, February 1, 2003, Page B1

These articles examine President Bush's plans for a series of changes to the rules on existing retirement accounts, as well as his plan to create a new "Lifetime Savings Account," which would allow tax free accumulations for purposes other than retirement.

While both articles report that President Bush plans to abandon the traditional Individual Retirement Account (IRA) and replace it exclusively with Roth-type IRAs, neither notes the significance of this switch for workers. With a traditional IRA, the contribution to the account is not subject to tax at the time it is made. Instead, all the money that comes out of the account is taxed at the time it is withdrawn. By contrast, with a Roth-type IRA, the contribution is subject to tax, but all the money that is accumulated through interest, dividends, or capital gains is tax-free. 

The deferred taxation in a traditional IRA is advantageous to many middle income workers, since they would be in a higher tax bracket when they earn the money as opposed to when they withdraw it after retirement, and are working at relatively high-paying jobs. In this situation, the tax deferment allows these workers to have their money taxed at a lower rate. They would lose this option if forced to switch to a Roth-type IRA, as would be the case under the Bush proposal. This difference matters less to higher income people, since they are likely to be in a higher tax bracket both when they are working and when they are retired. 

These articles also should have noted the fact that the Bush proposal will give workers an incentive to switch from IRA accounts, which require that workers keep their money in the account until they reach age 59, to Lifetime Savings Accounts, which have no such requirement. Many workers already find it difficult to avoid spending their savings before retirement. If they hold more of their savings in accounts that carry no penalty for withdrawal before retirement, then it is likely that they will save even less for retirement.

GOP Not Backing Saving Proposals
JimVandeHei
Washington Post, February 6, 2003, Page A1 

This article reports on the opposition to President Bush's savings proposals by the Republican leadership in Congress. At one point the article asserts that the proposal would shift the tax burden to "wages and consumption." While the proposal will certainly shift more of the burden to wages - by reducing taxation of capital income - it may not affect the taxation of consumption at all. If the new proposal does not significantly increase total savings, then it will not increase the tax burden on the portion of income devoted to current consumption.  

GOP Seeks to Change Score on Tax Cuts
Jim VendeHei and Jonathan Weisman
Washington Post, February 6, 2003, Page A35 

This article reports on Republican efforts to use "dynamic scoring" to evaluate the budgetary impact of their tax cut proposals. In presenting the argument that dynamic scoring could incorporate the effects that the tax cuts could have on economic growth, the article presents a scenario in which consumers spend their new tax cuts, creating new demand and jobs.  

This is the exact opposite of the supply-side effect that the Republicans claim for their tax cut. According to standard economic theory, if the tax cuts are to have a long-run positive effect on growth, consumers will have to actually increase their savings by an amount that is larger than the size of the tax cut. This would lead to an increase in total savings in the economy, which would in turn lower interest rates, and thereby spur investment.  

The Bush Administration has been inconsistent in its explanation of how its tax cuts are supposed to help the economy. While it is possible that it can help the economy by either increasing consumption or by increasing total saving (public plus private), it cannot possibly do both. 
 

Germany 

Election Defeat May Move Schroder to Reform Economy
Mark Landler
New York Times, February 2, 2003, Page A3 

This article reports on the ruling Social Democrats' loss in two state elections in Germany, and the potential impact on German Chancellor Gerhard Schroder's government. The article argues that the defeat may lead Schroder to reduce the generosity of Germany's unemployment benefits and to weaken laws protecting workers from being fired. It notes that Mr. Schroder had previously been unwilling to follow this path: "what Mr. Schroder was not prepared to do ... was court disfavor with traditional leftist constituencies like labor unions by proposing to overhaul labor laws and the system of government benefits."  

While it may not be surprising that Mr. Schroder would not pursue policies that directly attack the interests of groups responsible for his election, it is worth noting that he also choose not to court disfavor with the financial industry by pressing the case for lower interest rates with the European Central Bank (ECB). There is very little, if any, evidence that reducing unemployment benefits and other worker protections will lower unemployment (see "Labor Market Institutions and Unemployment: A Critical Examination of the Cross-Country Evidence," [http://www.newschool.edu/cepa/papers/archive/cepa200217.pdf]).
 

Genetically Modified Food 

As Europe Simmers Over War, Some Push for a Food Fight
Justin Gillis
Washington Post, February 1, 2003, Page E1

U.S. Delays Suing Europe Over Ban on Modified Foods
Elizabeth Becker
New York Times, February 5, 2003, Page A6 

These articles discuss the dispute between the European Union and the United States over the importation of genetically modified foods. At one point the Post article discusses the fact that several African nations have refused genetically altered grain from the United States that was offered as famine relief. The grain was refused because these countries worried that it could impede their ability to export to Europe, which currently bans genetically modified food, if the seeds became intertwined with domestic crops.

It would have been appropriate to note that this is only a problem because the United States refused to mill the grain, which would have eliminated any possible problem. The cost of milling would have required very little additional funding from the United States, although it did represent a substantial cost to poor African countries. 

The Times article reports that the dispute is likely to center on labeling requirements that the European Union is expected to impose on genetically modified foods. The article asserts that such requirements would violate "American notions about free and unfettered trade."   

Actually, informational labeling is entirely consistent with a belief in "free and unfettered trade." Markets work best when the actors are well-informed. This is the reason that the federal government imposes extensive labeling requirements on food sold in the United States.  

As a matter of policy, the United States does not pursue "free and unfettered trade" internationally. In fact, it has been the leading proponent of the exact opposite in its promotion of stringent copyright and patent protection. These forms of protectionism are major impediments to trade, raising the price of protected goods by several hundred percent above the free market price.
 

Brazil 

Early Hurdles for New Brazilian Leader's Antihunger Campaign
Tony Smith
New York Times, February 2, 2003, Page A5 

This article discusses a program being established by Brazil's new president, Luiz Inacio Lula da Silva, aimed at eliminating hunger in Brazil. The article reports that the program will cost $1.5 billion over four years and that it will help 46 million people. It claims that an average family would receive $14 a month for food under the plan. 

The total spending figure implies that the program would cost $375 million a year. If it helps 46 million people, then the spending per person would average $8.15 per person per year. This would translate into $40.75 per year for a family of five, or less than $1 per week.
 

Medicaid 

Medicaid Plan Gives More Say to States
Amy Goldstein
Washington Post, February 1, 2003, Page A1 

Medicaid Proposal Would Give States More Say on Costs
Robert Pear
New York Times, February 1, 2003, Page 1 

These articles report on a Bush Administration proposal that would remove many of the state requirements associated with federal Medicaid money. Under the proposal, states would have far more leeway in choosing which populations to protect with Medicaid coverage. 

Both articles report that the proposal would provide an additional $12.7 billion in funding, compared with current law, over the next seven years. It is worth noting that this amounts to an increase of approximately 0.9 percent over the level of spending projected under current law.