Economic Reporting Review
By Dean Baker
February 18, 2003

OUTSTANDING STORIES OF THE WEEK 

An Iceberg of Irate Investors
Gretchen Morgenson
New York Times, February 9, 2003, Section 3 page 1

This article discusses efforts by investors to sue brokers who steered them into risky investments without warning them of the risk involved.

As Cities Move to Privatize Water, Atlanta Steps Back
Douglas Jehl
New York Times, February 10, 2003, Page A14

This article reports on the problems that Atlanta encountered after it contracted out the operation of its municipal water system.

Plan to Shift Head Start to States' Control Worries Supporters
Diana Jean Schemo
New York Times, February 12, 2003, Page A24

This article discusses the potential impact on the Head Start program of President Bush's proposal to give states more authority over its structure.

Tax Moves By Enron Said To Mystify The I.R.S.
David Cay Johnston
New York Times, February 13, 2003, Page C1

This article discusses the loopholes that Enron developed to avoid paying taxes. It reports that some of them were sufficiently complex that the tax analysts at the Internal Revenue Service cannot determine what the company had done.


Trade

Performing a Free Trade Juggling Act, Offstage
Elizabeth Becker and Edmund L. Andrews
New York Times, February 8, 2003, Page B1

This article discusses the performance of Robert Zoellick, President Bush's trade representative. In referring to Mr. Zoellick's agenda, the article uses the expression "free trade" six times, including the headline. This is inaccurate. One of Mr. Zoellick's
main goals has been to increase protectionism by increasing the extent of copyright and patent protection in the developing world. He has also not pushed policies that promote free trade in professional services such as the services provided by doctors, lawyers, and accountants. It would be more accurate to simply assert that he is pursuing "trade agreements," rather than "free trade agreements."

The article includes an assertion that poor farmers in Asia and Africa say that U.S. agricultural subsidies are "ruining their livelihoods." It is worth noting that a recent study by the World Bank found that the removal of all U.S. subsidies for agricultural
products, as well as restrictions on merchandise imports, would have almost no impact on growth in Sub-Saharan Africa (http://econ.worldbank.org/files/1715_wps2595.pdf).

In discussing rules under which patents will extend monopolies in drug markets in developing nations, the article refers to the United States as extending "the privilege of buying low cost drugs" for certain diseases, meaning that poor countries may be
allowed to purchase generic drugs or to require licensing of patented drugs. Developing countries simply want the right to purchase drugs at a competitive market price, or something close to it. This would usually not be referred to as a "privilege."


U.S. Ready To End Tariffs On Textiles In Hemisphere
Elizabeth Becker
New York Times, February 11, 2003, Page C1

This article reports on the Bush Administration offer to end tariff barriers on textiles as part of a hemispheric trade agreement. It refers to the prospective agreement as a "free trade" agreement, even though it would actually increase some forms of protectionism.

The article also cites a Bush Administration estimate of the potential gains from trade liberalization as being $814 a year for a family of four. This estimate was made in reference to world wide trade liberalization. The implied impact of trade liberalization with Latin America alone would be about one-tenth this amount.

Even for the world wide estimate of the gains from trade liberalization, the Bush Administration's forecast is far higher than those from other sources. For example, the World Bank estimates that the gains to the United States from trade liberalization will be less than half as large, on average. It is also important to note that increased trade has been one of the main causes of growing wage inequality. Estimates of the impact of trade on wage inequality imply that most families have been net losers as a result of recent trade agreements, as the increase in inequality has hurt them more than any aggregate gains in output have helped them.



The Bush Agenda

Bush Seeks to Recast Federal Ties to the Poor
Amy Goldstein and Jonathan Weisman
Washington Post, February 9, 2003, Page A1

Bush Plan Keys on Growth To Solve Poverty Problem
Jonathan Weisman
Washington Post, February 9, 2003, Page A6

For Republicans, Deficits Are Nothing to Be Ashamed Of
Robin Toner
New York Times, February 9, 2003, Section 4 page 3

These articles discuss President Bush's proposed tax cuts, which will lead to large deficits, and his accompanying plans to reduce programs that benefit the poor. All three articles describe the proposal as part of an ideological commitment to small government and growth as the best way to reduce poverty. This is contrasted with
a liberal view that the government has the responsibility to redistribute income to benefit the poor.

Successful politicians must rely on the support of powerful interest groups. The tax cuts that President Bush has proposed will provide substantial benefits to the wealthiest people in the country. By contrast, Democrats must rely to some extent on the support of lower income voters in order to get elected, hence their support for government programs that benefit the poor. While it is possible that ideology plays a role in these debates – and politicians certainly have incentive to claim that they are acting based on beliefs, rather than serving a narrow interest group like the rich -- it is reasonable to assume that politicians act primarily from political
motives, in the absence of any compelling evidence indicating otherwise. These articles present no evidence whatsoever that ideology is a key factor in the current budget debate.

The Post article by Weisman attempts to evaluate the Bush Administration's case that growth will benefit the poor. As evidence in favor of the Administration's view, it reports that income for the bottom 20 percent increased at annual rate of 0.39 percent from 1989 to 2001, for a total gain of 4.8 percent over this twelve-year
period. In fact, this is an extremely low rate of growth. It implies that a family of four earning $18,000 in 2003, approximately the currently poverty level, would see its income increase by $700 after ten years. This is approximately 20 percent of the income this family would be eligible to receive from the earned income tax credit at
present.

Growth is normal for an economy; the relevant questions are the rate of growth and how the gains are distributed.Even in the period of the growth slowdown, 1973-1995, productivity grew at a rate of 1.5 percent annually. This means that if the gains from growth were evenly distributed, and there were no changes in labor force participation, then incomes of all families should have risen at the rate of 1.5 percent annually. In the period of rapid growth in the fifties and sixties, income gains were far larger than in the recent business cycle. From 1950 to 1969, the median family experienced income gains of 3.3 percent each year. Since income distribution was becoming more equal during this period, it is likely that families in the bottom 20 percent gained even more.

An overview, like the Weisman article, should have examined more closely the case that the Bush tax proposal is likely to increase growth. In order for the tax cuts to even have the potential to increase growth, they must induce individuals to save an amount even larger than the size of the tax cuts, otherwise national savings would fall and interest rates and the cost of capital would rise – thereby slowing growth. It is also worth noting that the academic research of R. Glenn Hubbard, President Bush's chief economist, shows that reducing the cost of capital has very small effects on
investment and growth (e.g. "Investment Financing Decisions and Tax Policy," by S. Fazzari, R.G. Hubbard, and B. Petersen, American Economic Review, May 1988, pp 200-205). This means that even if the tax cuts do lead to a large increase in private savings, the resulting effect on growth is likely to be too small to be noticeable.


Bush Report Hints At New Tax System
Jonathan Weisman
Washington Post, February 8, 2003, Page E1

This article discusses President Bush's plans for changing the tax system. It raises the possibility that he will propose a consumption tax to replace the income tax, which it describes as "simpler."

While a consumption tax would almost certainly be more regressive than an income tax, it is not clear that it will necessarily be simpler. For example, a comprehensive consumption tax would have to tax the implicit rental value of owner occupied housing. There is no simple way to make this sort of assessment. Excluding owner occupied housing from the tax would presumably require excluding rental housing as well, which would mean that one-third of all consumption was being exempted from the tax.

There are many similar problems that would arise from an attempt to implement a consumption tax. As a result, there is little basis for assuming that a consumption tax will necessarily be simpler than an income tax.


Greenspan Likely to Back Dividend Plan
Jonathan Weisman
Washington Post, February 11, 2003, Page E1

This article discusses Greenspan's likely testimony before the Senate Banking Committee. It twice refers to the President Bush's dividend tax cut as eliminating "double taxation."

The proponents of this tax cut have used this terminology in the same way that they refer to the estate tax as the "death tax." In fact, there is no double taxation of dividends. The courts treat corporations as being legally distinct entities from the shareholders who own their stock. This is a very important and valuable distinction. It means, for example, that shareholders in Enron cannot have their assets seized to pay for its debts. Any shareholder who did not value this distinction would invest their money in a partnership, rather than a corporation, in which case income would
only be taxed at the personal level.


Climate Change

Emissions Reduction Plan Touted
Edward Walsh
Washington Post, February 13, 2003, Page A7

This article reports on an administration proposal for voluntary restrictions on greenhouse gas emissions. The article reports that the proposal would tie allowable emissions to economic output, rather than setting absolute levels of permissible emissions.

It notes that this proposal was criticized by environmental groups because it does not do enough to reduce emissions. It asserts that "much of the dispute between administration and environmental groups centers on how to measure progress in combating global warming."

In fact, the dispute is over the quantity of allowable emissions, not over measurement. Just as the same distance can be expressed in miles or kilometers, a given level of emissions can be expressed either as an absolute amount or in some ratio to GDP. The dispute is over the amount of acceptable emissions, not how they will be measured.



Argentina

Argentina Struggles to Meet Debt-Relief Terms
Larry Rohter
New York Times, February 11, 2003, Page A8

This informative article examines the state of negotiations between Argentina and the I.M.F. on the conditions for a loan passage. At one point it notes the I.M.F.'s demand that Argentina balance its budget in 2001 and the cutoff of support when it failed to do so.

It is worth noting that Argentina had a deficit equal to approximately 2.5 percent of GDP in 2001. It was also in a recession. The demand that Argentina balance its budget that year would have been comparable to demanding that the United States raise taxes and/or cut spending by $275 billion last year. There were no economists who advocated this as a way for the United States to deal with its recession.


The Canadian Health Care System

Long Lines Mar Canada's Low-Cost Health Care System
Clifford Krauss
New York Times, February 13, 2003, Page A3

This article discusses the state of Canada's health care system. At one point it comments that, "Canada spends $66 billion a year on health care – only the United States, Germany, and Switzerland spend more as a proportion of total economic output."

It is worth noting that there is a very large gap between the cost of the U.S. health care system and the cost of the health care system in Canada. According to data from the United States Centers for Medicare and Medicaid Services, the health care system in the United States cost 14.1 percent of GDP in 2002. By contrast, the
system in Canada costs approximately 9.5 percent of GDP. While the average for other industrialized nations is slightly over 8.0 percent, Canada's health care costs are far closer to those of other industrialized nations than to those of the United States.


Venezuela

Venezuelan Oilman: Rebel With a New Cause
Juan Forero
New York Times, February 9, 2003, Page A3

This article profiles Ali Rodriguez, the head of Venezuela's state owned oil company, PDVSA, and discusses his plans for the company. At one point the article describes the policies of Venezuela's President, Hugo Chavez, as having divided the country and left it "on the edge of economic collapse." The immediate cause of Venezuela's current economic crisis is a strike that was led by business owners and PDVSA managers and employees demanding the resignation of Chavez, not the policies pursued by Mr. Chavez.

The article reports Mr. Rodriguez's plans to break the oil company into two divisions and to sell off some of its foreign assets. It then notes critics on the right who warn that such a scaled-down company "will generate far less wealth than before." Actually, the Venezuelan oil company has generated remarkably little
wealth for its shareholder, the government of Venezuela. Mexico's state owned oil company has consistently provided far more revenue to Mexico's government, even though it produces less oil than PDVSA. The assets purchased by PDVSA outside of the country have produced no obvious benefits for its shareholder; therefore there seems no obvious reason that they should not be sold off.


The Budget

Record Appropriations Bill is Approved
Jim VanderHei and Juliet Eilperin
Washington Post, February 14, 2003, Page A5

This article reports on Congressional approval for an appropriations bill for 2003. The headline refers to the amount being spent as a "record." Appropriations levels increase every year due to economic growth and inflation; therefore every appropriations bill could have been described as a "record."

The article also focuses on many of the small pork barrel items in the bill. It presents the dollar amounts appropriated for these programs. It would be more informative to express this spending as a share of the budget. For example, the $450,000 spent to promote soccer is equal to 0.000022 percent of the total budget. The $50,000 spent to study shitake mushrooms is equal to 0.000005 percent of the budget.


January Unemployment

Unemployment Down Slightly To 5.7% in January
Neil Irwin and Kristin Downey
Washington Post, February 8, 2003, Page E1

This article discusses the Labor Department's report on January employment data. At one point it notes that hourly wages were reported as being flat in January, and comments that wages have generally risen through the economic slump, "as productivity gained strongly."

Nominal wages almost always grow, even in periods of poor productivity growth. The more important issue is growth in real wages – the difference between nominal wage growth and the inflation rate. Real wages had been growing at a 1.5 percent to 2.0 percent annual rate from 1997 to 2000. Over the last year, the growth rate
has fallen to less than 1.0 percent, and to virtually zero over the last three months.

The monthly wage data are very erratic. The fact that the data showed zero wage growth for January is almost meaningless. However, the slowdown in real wage growth over the longer period means that workers are no longer receiving the benefits of productivity growth.


Oil and the Economy

War Worries Compound Energy Woes
Peter Behr
Washington Post, February 8, 2003, Page E1

This article discusses the potential impact of an Iraq war on oil prices and the impact of higher oil prices on the economy. It is interesting to note that in the recent past, before the collapse of the stock market bubble, many economic analysts argued that oil prices no longer mattered much to the economy. According to this view, the "new economy" was less dependent on oil, so fluctuations in oil prices had little economic impact (e.g. "After the Boom, More of the Same?" by John M. Berry, Washington Post, January 2, 2000, page H1).