Economic Reporting Review
By Dean Baker
February 3, 2003

OUTSTANDING STORIES OF THE WEEK

China's Coal Miners Risk Danger for a Better Wage
Joseph Kahn
New York Times, January 28, 2003, Page A3 

This article reports on working conditions in Chinese coal mines. The fatality rate for Chinese coal miners, measured by deaths per ton of coal, is more than 100 times as high as in the United States.  

Drugs Sales Bring Huge Profits, And Scrutiny, to Cancer Doctors
Reed Abelson
New York Times, January 26, 2003, Page A1 

This article reports on the practice among cancer specialists of directly selling drugs to their patients. This creates a potential conflict of interest, since they can stand to earn large profits on certain drugs, even if the drugs chosen may not be the best treatment for their patients.
 

The Deficit and the Stock Market

Deficits Will Rise, All Agree, But Consensus Then Fades
Edmund L. Andrews
New York Times, January 30, 2003, Page A18 

This article reports on the new budget projections issued by the Congressional Budget Office (CBO). It reports that budget forecasts overestimated revenue for 2002 because they miscalculated the impact of the economic slowdown. While the slowdown was an important factor leading to a revenue shortfall, the failure to recognize the stock market bubble and its impact on capital gains tax revenue was also an important factor.  

At the peak of the stock bubble in 2000, CBO was still projecting that the ratio of capital gains realizations to GDP would be higher than its historic average, even as it was predicting that real corporate profits would fall over the next decade. If CBO had used its current projections for capital gains tax revenue in 2001, when the first Bush tax cut was being debated, it would have reduced its ten-year surplus projection by $516 billion.
 

GDP Growth and the Recession 

Is There Such a Thing as a Jobless Recovery
Alex Berenson
New York Times, January 26, 2003, Section 4 page 3 

This article examines the economy's growth since it sank into a recession at the beginning of 2001. It reports that the economy has grown at a reasonably rapid pace, 3.3 percent between the 3rd quarter of 2001 to the 3rd quarter of 2002, even though no new jobs have been created. It attributes this to rapid productivity growth.  

It is important to recognize that there has been a sharp divergence between growth in gross output and net output in recent years, as a much greater share of GDP is going simply to replace work out equipment. Since the first quarter of 2001, net domestic output has increased by just 1.2 percent, more than 1.6 percentage points less than the growth in gross output. Insofar as output increases simply due to an increase in depreciation, it is of no economic value. Given the sharp divergence in these measures, it would be more appropriate to focus on the trends in net output. 

Economic Growth Weaker in 4th Quarter
John M. Berry
Washington Post, January 31, 2003, Page A1 

Slim Growth for the Economy In the 4th Quarter
Daniel Altman
New York Times, January 31, 2003, Page C1  

These articles report the Commerce Department's release of data on economic growth for the 4th quarter. The Post article includes the assertion that, "last quarter, businesses reduced their inventories of unsold goods." Actually, the report showed that businesses increased their inventories of unsold goods at an annual rate of $3.3 billion (1996 dollars) in the 4th quarter. This was a drag on GDP in the quarter because it was a slower rate of accumulation than the $18.8 billion rate reported in the 3rd quarter. 

The Times article reported that "spending on computers and software jumped for the second consecutive quarter, this time by $12.1 billion." It is important to recognize that this increase was driven almost entirely by the Commerce Department's estimates of quality improvements in computers. Actual (nominal) spending on computers and software together increased by $0.9 billion in the 4th quarter, with spending on computers alone falling by $0.9 billion.   
 

The Trade Deficit and the Dollar

Snow Draws Little Fire From Senate Panel
Jonathan Weisman
Washington Post, January 29, 2003, Page E1

Bush Tax Cut Gets Backing Of Nominee
Edmund L. Andrews
New York Times, January 29, 2003, Page C1 

These articles report on the testimony before the Senate Finance Committee of John W. Snow, President Bush's nominee for Treasury Secretary. Both articles briefly note his support for a strong dollar. Most of the articles are devoted to his support for President Bush's tax cut and its implications for the budget deficit. 

This focus cannot be justified on economic grounds. The proposed tax cut is projected to increase the deficit by an average of approximately 0.5 percent of GDP over the next decade. In contrast, the strong dollar is leading the United States to borrow more than $500 billion a year from abroad, more than 5 percent of GDP each year. If the current account deficit remains at its current share of GDP, the United States will have a negative net international asset position of more than $10 trillion by 2013, the end of the budget forecasting period. This amounts to a foreign debt of more than $30,000 for every person in the country.  

That Other Problem With 'Old Europe'
Floyd Norris
New York Times, January 31, 2003, Page C1 

This informative analysis points out how tight monetary policy has slowed growth and raised unemployment across the European continent over the last decade. It includes a chart that shows the U.S. trade deficit as a share of GDP. The chart shows the ratio of the trade deficit to GDP using 1996 dollars. This is not a meaningful number. The construction of 1996 dollars is only consistent within categories (e.g. investment, exports, etc.); it is not consistent across categories. As a result, the ratio would change depending on the base year chosen. The only meaningful ratio is the ratio of the nominal trade deficit to GDP. This hit a record of 4.3 percent in the 4th quarter, but it is somewhat lower than the 5.3 percent figure obtained using 1996 dollars.
 

Medicare 

President Vows Steps to Handle Domestic Woes
Robin Toner and Robert Pear
New York Times, January 29, 2003, Page A1 

This article discusses President Bush's domestic agenda. At one point it comments that President Bush "acknowledged the strains on the federal budget, the growing gaps in the health care system and the need to overhaul Medicare and Social Security before the baby boomers begin to retire."  

The article does not indicate the basis for its assertion that there is a need to overhaul Medicare and Social Security. While President Bush has indicated his desire to overhaul these programs, the reports of the trustees of the programs show that they are in very solid financial condition. They show that Medicare can pay all benefits for the next 23 years and that Social Security can pay all scheduled benefits for the next 38 years, with no changes whatsoever. This implies that the programs are on better financial footing at present than they have been for most of their existence.  

The article also refers to President Bush's plans to promote H.M.O.s within Medicare, which it attributes to "his philosophical position, in favor of market-oriented solutions." The insurance industry, which has close ties to President Bush, stands to make large profits if more Medicare beneficiaries are forced to get benefits through them. This is at least as plausible an explanation of the president's actions as his philosophy, especially since it is not apparent that his solution relies any more on the "market" than does the current system.
 

Taxing Online Sales 

So Many Online Sales, So Little in Tax Revenue
Norm Alster
New York Times, January 26, 2003, Section 3, page 4 

This article discusses efforts to apply state sales taxes to online sales. The article presents the views of opponents of taxing online sales, one of whom argued that the multiple tax rates applied by state and local jurisdictions would make it difficult to collect sales taxes.  

The different tax rates imposed by various jurisdictions would require a one-time coding. This would have been a very simple process with the computer systems available three decades ago. Any Internet retailer that has difficulty with this process probably would not survive in any case.
 

Mexico 

As U.S. Growth Goes. So Does Mexico's
Elisabeth Malkin
New York Times, January 25, 2003, Page B3 

This article reports on the impact that slow U.S. growth is having on Mexico's economy. At one point the article asserts that Mexico's President Vicente Fox cannot take measures to stimulate its economy because, "he cannot risk losing Mexico's coveted investment-grade rating, earned through years of prudent fiscal discipline and debt reduction."  

According to World Bank data, in the last decade, Mexico's per capita GDP has grown at a rate of less than 1.0 percent a year. By contrast, its per capita output grew at an annual rate of more than 4.0 percent annually between 1960 and 1980. While economic growth is a commonly used measure of economic performance, investment grade status is not. If maintaining investment grade status for Mexico's debt is impeding its economic growth, then there is little economic rationale for maintaining investment grade status. 

With Mexican Peso Falling, Officials Search for Answers
Elisabeth Malkin
New York Times, January 31, 2003, Page W1  

This article reports on the decline of the Mexican peso in recent months and the steps, including raising interest rates, that the Mexican central bank is carrying through to stop the decline. The article notes that higher interest rates slow growth, then concludes by presenting the assessment of the chief economist at a Mexican bank, who supports the decision to raise interest rates: "what is more dangerous, inflation or delaying growth a bit?"  

The slowdown in growth translates directly into fewer jobs and higher unemployment. In a country like Mexico, with large numbers of poor people and a weak welfare state, higher unemployment is likely to lead to more deaths as a result of malnutrition and inadequate medical care. By contrast, there is little evidence that modest increases in the rate of inflation (1-2 percentage points) cause much damage. Given these trade-offs, it is likely that many Mexicans would have a different political view of the relative dangers of inflation and slow growth than that held by the bank economist. 
 

Brazil   

Brazilian Leader Vows He Will Plead for the Poor in Davos
Tony Smith
New York Times, January 25, 2003, Page A4 

This article reports on Brazil's President Luiz Inacio Lula da Silva's plans for his visit to the World Economic Forum. At one point, it notes that Brazil's currency, and stock and bond markets, had fallen prior to Mr. da Silva's election. It attributes this decline to fears that, "Mr. da Silva might steer Brazil off the free-market course that has plied for the past decade."  

In the prior decade, Brazil's debt rose by more than 30 percentage points of GDP. If it continues to rise at the same rate, it will quickly become impossible for Brazil to pay debt service, and it will be forced to default, as can be easily shown with simple arithmetic (see "Paying the Bills in Brazil: Does the IMF Math Add Up? [http://www.cepr.net/paying_the_bills_in_brazil.htm]). The understanding of this arithmetic in financial markets may have caused the pre-election crisis, more than fears that Mr. da Silva would pursue new policies.
 

Argentina 

IMF Approves $3 Billion Loan for Argentina
Paul Blustein
Washington Post, January 25, 2003, Page E3 

This article reports on a new loan agreement between Argentina and the IMF. The article presents the views of backers of the agreement and conservative critics; it does not present the views of any progressive critics of the IMF.  

It is worth noting that the agreement provides no new money for Argentina, it simply provides loans that will allow Argentina to meet its debt payments to the International Financial Institutions. Since it was forced to default on its debt in December 2001, Argentina's economy has shrunk by more than 10 percent and its unemployment rate rose to more than 20 percent. Its economy is now growing again, with its exports extremely competitive, now that its currency has lost much of its value. It is not clear that Argentina has anything to gain by further dealings with the IMF.  

Any agreement with the IMF will undoubtedly lead to commitments to repay tens of billions of dollars of debt, which otherwise could be ignored. It is also likely to lead to the imposition of conditions that will impede economic growth. Prior to its collapse in 2001, Argentina had often been touted as a model developing nation in the business media because of its adherence to IMF-World Bank policies. If Argentina had not followed these policies -- especially linking its currency to the dollar and privatizing its Social Security system -- it is unlikely that it would have experienced the sort of economic collapse it faced in 2002.
 

Bush Tax Cuts  

Democrats Seek A Tax Rebate In Growth Plan
David Firestone
New York Times, January 25, 2003, Page A1 

Bush Tax Plan Gives Pelosi an Opening
David Firestone
New York Times, January 26, 2003, Page A19 

Bush's Words Reflect An Eye Toward 2004
Adam Nagourney
New York Times, January 29, 2003, Page A14

Obstacles to Bush Agenda Loom in Senate
Jim VandeHei
Washington Post, January 30, 2003, Page A8 

These articles all discuss President Bush's tax cut proposal. All four articles assert that the proposal would end the taxation of dividends. In fact, the proposal would only end the taxation of dividends on stock held outside of retirement accounts. The vast majority of stockholders own most of their stock in retirement accounts. These people would still have to pay tax on their dividends when they withdraw their money. The President's proposal does not reduce their tax liability on this money at all. 

The article by VandeHei repeatedly refers to the taxation of dividends as "double taxation." While President Bush has chosen to characterize the tax in this manner in order to gain political support for his proposal (in the same way that he dubbed the estate tax, the "death tax"), it is not an objective description of the dividend tax. It is an important and longstanding legal principle that a corporation is a separate entity from the individuals who own its stock. Therefore, it does not follow that taxing income at the corporate level and then taxing dividends paid to shareholders amounts to "double taxation."  

In fact, shareholders who felt that the tax burden outweighed the benefits of incorporation have the option to establish a partnership, under which all income would be taxed only as individual income. The fact that they have opted to invest in corporations instead demonstrates that they view the legal benefits of corporate status to be greater than the additional tax burden.

Doctors and Medical Malpractice  

Doctors in Fla., Miss. Protest Insurance Rates
Associated Press
Washington Post, January 28, 2003, Page A2

This article reports on protests by doctors over high malpractice insurance premiums. It presents their argument that high insurance costs are being driven by a relatively small number of large jury awards, and that these awards should therefore be limited. The article should have presented the opposing view, that a relatively small number of doctors account for the bulk of malpractice suits. Since the medical profession does little to police itself, and state regulation is generally minimal, the threat of large law suits may be the only effective means of protecting the public from incompetent doctors.