Economic Reporting Review
January 10, 2000:
"American Century 2.0"; Greenspan's renomination;
Yeltsin's Russia
By Dean Baker
U.S. ECONOMY
"As the 'American Century' Extends Its Run"
R.W. Apple Jr.
New York Times, January 1, 2000, page C2
"Economic Thinking Finds a Free Market"
Floyd Norris
New York Times, January 1, 2000, page C4
Both of these articles assert that the United States currently enjoys economic preeminence in
the global economy and will continue to do so in the future. For example, the first article
comments: "We, or most of us, expect United States dominance to continue for the foreseeable
future. We expect several more American Decades, if not an American Century, version 2.0."
The second article asserts that "as a means of creating wealth and material progress, American
capitalism seems to be clearly superior to the Asian variety, with its greater level of government
planning, or the European version, with its emphasis on social welfare and protection of
workers from losing their jobs."
Virtually all economists view productivity growth, the rate of increase in economic output per
hour of work, as the most important measure of material progress. By this measure, the United
States economy consistently lags behind the Asian and European economies. According to
data from the OECD, the Conference Board and the Bureau of Labor Statistics, most of the
nations of Western Europe and Japan have sustained rates of productivity growth of close to
2.0 percent annually over the last two decades. By comparison, productivity growth in the
United States has averaged just over 1.5 percent over this period.
Furthermore, many experts are predicting that productivity growth in the United States will be
even slower in the future. The Social Security Advisory Board's 1999 Technical Panel on
Assumptions and Methods just issued a report which projects that productivity growth in the
United States will average just 1.35 percent annually over the next 75 years. Since the absolute
levels of productivity in the United States and several West European countries (such as Italy,
France and former West Germany) are approximately the same at present, if the panel's
projection is correct and the European nations sustain their recent rates of productivity growth,
they will be nearly 40 percent richer than the United States by the middle of the next century.
"After the Boom, More of the Same? "
John M. Berry
Washington Post, January 2, 2000, page H1
This article examines the near-term outlook for the U.S. economy. It includes numerous
assertions that are inaccurate or misleading. In contrasting the present expansion with previous
expansions, for example, it asserts that consumers are not as sensitive to oil price increases as
in the past, noting that the price of home heating oil has risen by 20 percent over the last year
without any major consequences. The limited response in this case is largely due to the fact that
the price of home heating oil had fallen by approximately the same amount in the previous year.
So the price hike was just bringing oil prices back to their normal level.
The article also asserts that the economy is not suffering from any of the "excesses" that it had
in past expansions. The economy is currently running a trade deficit of approximately $300
billion a year, more than 3.1 percent of GDP. This level of foreign borrowing cannot be
sustained indefinitely. In addition, no economist in the country has been able to produce profit
growth projections that would make current stock prices appear sensible. These are two
extraordinarily large excesses compared to those that have appeared in previous expansions.
It also claims that when prior expansions came to an end, "it has been a straightforward matter
of overheating." It isn't clear that this describes any of the post-war business cycles. The
late-'60s inflation was largely fueled by the fact that a growing portion of GDP was used up in
fighting the Vietnam War instead of supporting domestic consumption or investment. The
late-'70s inflation was driven largely by the OPEC price increase. The modest uptick of
inflation in the late '80s was largely due to a 30 percent decline in the value of the dollar against
other major currencies.
[Top]
STOCK MARKET
"Toward Dow 3,000,000 and Other Millennial Ruminations"
Floyd Norris
New York Times, January 1, 2000, page B1
"Growing Number of Companies Choose Not to Offer Dividends"
Floyd Norris
New York Times, January 4, 2000, page A1
These informative articles look at historical trends in the stock market and the prospects for the
future. At one point the first article discusses the stock market's future prospects and presents
the view of market optimists, who argue that people should always keep their money in the
market. The article asserts that proponents of this view "implicitly assumed that the American
economy will continue to grow and prosper as it has in the past."
This is incorrect. In order for it to be sensible to continue to hold stocks for the indefinite future,
the economy would have to do far better in the future than it has in the past. In the past, profits
have grown at approximately the same pace as overall GDP. The average annual rate of GDP
growth for the last 75 years has been approximately 3.0 percent. Assuming that stock prices
rise at the same pace as corporate profits (no economist has ever argued that stock prices can
indefinitely rise faster than corporate profits), then the expected return on stocks would be
equal to the rate of growth of the economy, plus the dividend yield.
Since the current dividend yield is less than 1.5 percent (as noted in the second article), this
implies a rate of return of 4.5 percent (3.0 stock price gain, plus 1.5 percent dividend yield).
By comparison, it is possible to buy an inflation-indexed government bond that also provides a
4.5 percent return. Since, in contrast to stock, an inflation-indexed government bond has
absolutely no risk, it would never make sense to hold stock that was expected to provide only
the same rate of return. This means that people who advocate holding stock either expect the
economy to do much better in the future than in the past, or don't really understand basic
economic relationships.
The second article reports on the increasing importance of stocks that do not pay dividends.
The article notes that the average dividend yield on the S.& P. 500 has fallen from more than
4.0 percent in the early '80s to slightly over 1.0 percent at present. It is worth noting that this
decline in dividend yields has gone in step with soaring price-to-earnings ratios. In the early
'80s, the price-to-earnings ratio for the S.& P. 500 was approximately 10 to 1, somewhat
below its historical average. Currently the price to earnings ratio is close to 35 to 1, more than
twice the historical average. Corporations generally pay out close to half their earnings in
dividends; this was true both in the early eighties and at present. Therefore, the huge increase in
the price-to-earnings ratio in the last two decades implies the decline in dividend yields noted in
this article.
[Top]
FEDERAL RESERVE
"Greenspan Nominated for Fourth Fed Term"
John M. Berry
Washington Post, January 5, 2000, page A1
"Rational Exuberance for Greenspan"
John Burgess
Washington Post, January 5, 2000, page E1
"Greenspan Named to a Fourth Term as Fed Chairman"
Richard W. Stevenson
New York Times, January 5, 2000 page A1
These articles report on President Clinton's decision to reappoint Alan Greenspan to a fourth
term as chair of the Federal Reserve Board. All three articles include statements that are wrong
or misleading.
For example, the Post article by Burgess describes inflation as "a force that robs every
American by making paychecks and pensions worth less and ultimately destabilizes the
economy." Inflation does not rob every American. Insofar as workers anticipate inflation, they
will have incorporated it in their pay demands, and will not be in any way made worse off by it.
When inflation is unanticipated, it redistributes wealth, primarily from lenders to borrowers. The
inflation in the '70s was an enormous boon to millions of families that had taken out low-interest
mortgages in the '60s. An unanticipated decline in the inflation rate has the opposite effect. This
was one of the factors that led to the farm crisis in the '80s in which hundreds of thousands of
farmers lost their land. Inflation also does not necessarily destabilize the economy, since many
economies have continued to grow with moderate and even high rates of inflation for long
periods of time.
The Post article by Berry asserts that, under Greenspan, the Fed "has gained credibility with
investors that it can be trusted not to allow a return to the boom-and-bust business cycle that
have marked much of the nation's history." There are few, if any, economists who believe that
Greenspan has ended the business cycle. If this claim is true, then he has managed to badly
mislead the nation's investors.
Both the articles by Burgess and Stevenson turn to C. Fred Bergsten, the director of the
Institute for International Economics, for comments on Greenspan's decision to allow the
unemployment rate to fall below 6.0 percent. Prior to 1994, most mainstream economists
believed that 6.0 percent unemployment was the economy's NAIRU, which meant that if
unemployment fell below this level inflation would begin to accelerate. Bergsten is one of the
economists who was proven to be completely wrong by the subsequent decline in the
unemployment rate, which led to no increase in inflation. It might have been more appropriate
to interview one of the economists who was proven right on this crucial issue.
[Top]
GLOBAL ECONOMY
"Audis and Cell Phones, Poverty and Fear"
Roger Cohen
New York Times, January 1, 2000, page C28
This article discusses the prospects for Brazil's economy in the next century. Referring to the
waste and fraud that pose major obstacles to Brazil's development, it comments: "An
advantage of the open global economy is that such waste becomes untenable. Markets demand
fiscal discipline."
Actually, the evidence of the last decade seems to suggest the opposite. International financial
markets have showered money on many countries whose economies have been characterized
by large-scale corruption. This list would include Mexico prior to the 1995 peso crisis,
Indonesia prior to the East Asian financial crisis, and Russia prior to the collapse of the ruble in
the summer of 1998. In these and many other instances, international financial markets have
been quite willing to tolerate widespread government and private sector corruption.
"In Leading Nations, a Population Bust?"
David E. Sanger
New York Times, January 1, 2000, page C8
This article examines projections showing that the populations of many nations will stabilize or
decline in the next century, which it presents as a major economic problem. For example, in the
case of China, it asks: "What happens if China runs out of the people it needs to keep growing?
Will it have enough well-trained workers and credit-card-armed consumers to sustain an
economy that befits its size?" It then adds: "Clearly such concerns are on the minds of China's
leaders."
It is unlikely that such concerns are on the minds of China's leaders, since the country is still
pursuing policies intended to discourage people from having large families. Furthermore, there
is no economic theory that suggests that China, or any country, needs to fear a stagnant or
declining population. Economists' standard measure of well-being is per capita GDP. Low or
negative population growth is likely to lead to higher per capita GDP, since it is likely to
increase the amount of physical capital per worker, which will increase output per worker.
In addition, it will be easier to provide a good education to future generations of children if
there are fewer of them. Since better-educated workers are more productive workers, this is
another reason that a stagnant or declining population should lead to higher per capita GDP.
And a declining population should lead to large environmental benefits, which will improve the
quality of life for future generations in ways that are not counted in GDP.
The concern expressed in the article, that a nation's economy cannot grow without population
growth, ignores the fact that productivity is a far more important factor in growth. The concern
that a country may lack a sufficient numbers of consumers completely contradicts standard
economic theory, which assumes that under-consumption is never a problem. In standard
theory, less consumer demand implies more saving and more investment. This will lead to
higher productivity growth and a wealthier nation. By this view, a nation should never be
concerned about too little consumption over the long-run.
[Top]
JAPAN
"In Japan, Reviving an Ailing Economy" Clay Chandler and Kathryn Tolbert
Washington Post, January 3, 2000, page A1
"Japan Inc. Workers Get Harsh Dose of Economic Reality"
Doug Struck and Kathryn Tolbert
Washington Post, January 3, 2000, page A14
"Tradition of Equality Is Fading in New Japan"
Stephanie Strom
New York Times, January 3, 2000, page A1
These articles report on the structural changes taking place in Japan's economy. All three
articles include comments or assertions that Japan's economy requires a major restructuring to
sustain growth since its existing economic structure is fundamentally flawed. (In the second
article, this assertion appears only in the headline. The article itself describes the effects of the
political decision to allow unemployment to rise without creating an adequate safety net. This
has led to rising poverty, homelessness and a soaring suicide rate. The headline inaccurately
attributes the effects of these policies to "economic reality.") As noted explicitly in the Times
article, the restructuring envisioned involves a much greater degree of inequality than currently
exists in Japan.
None of the articles presents any evidence to support the need for this sort of restructuring.
Nor do any of the articles present the views of any economists, labor leaders or political figures
who question the need for this sort of restructuring.
Over the last 50 years, Japan's economic model produced much more rapid productivity and
GDP growth than the U.S. model. Over the period from 1960 to 1994 Japan averaged per
capita GDP growth of 4.9 percent annually, more than twice the rate of the United States
through this period. Even in the years since the Japanese stock market crash of 1990, the
immediate cause of the current slump, Japan has managed to maintain a more rapid rate of
productivity growth than the United States.
According to OECD data, productivity grew an average of 2.3 percent annually from 1990 to
1994 (the most recent years for which data is available). Productivity growth in the United
States has averaged just 1.9 percent from 1989 to 1999. (From 1990 to 1994, it averaged
about 1.2 percent.) The Bureau of Labor Statistics data on productivity growth in
manufacturing also shows that Japan has continued to outpace the United States in the last
decade, with average annual productivity growth from 1989 to 1998 of 3.4 percent, compared
to 3.0 percent in the United States. Economists usually view productivity growth as the best
measure of an economy's dynamism.
It also worth noting that South Korea's economy, which continues to largely follow the
Japanese model according to its critics (see "Skepticism Over Korean Reform," by Stephanie
Strom, New York Times, 7/30/99, page C1; and "Asian Rebound Derails Reform as Many
Suffer," by David E. Sanger and Mark Landler, New York Times, 7/12/99, page A1; see
ERR, 7/19/99, 8/2/99), has been growing at a double-digit rate in the last half year.
As has been noted in the past (see ERR, 12/27/99), no economist has identified any factor
that suddenly made Japan's previously successful system dysfunctional. The more plausible
explanation is the economy simply needs a large demand stimulus to offset the depressing
effects of its real estate and stock market crash, as has been argued in a paper by M.I.T.
Professor Paul Krugman (see "Japan's Trap." 5/98,
http://web.mit.edu/krugman/www/japtrap.html.).
The Times article includes several assertions that are either unsupported or inaccurate. For
example, it characterizes Japan's inheritance tax as "exorbitant." It does not indicate how it has
reached this determination. When noting that Japan had one of the most progressive income
taxes in the world, the article asserts: "There was no point in striving to make more money. The
higher the remuneration, the more the government took away."
Japan's progressive income tax (like virtually all progressive income taxes) was a progressive
marginal income tax. This means that the higher tax rate only applies to the increment to
income. For example, if the tax rate for income under $100,000 is 30 percent, and the tax rate
for income over $100,000 is 60 percent, the 60 percent rate would only apply to income over
$100,000. This means workers will always have incentive to earn more money. In the '50s and
'60s, when the United States experienced it most rapid rate of growth, the top marginal tax rate
was 70 percent or higher.
The Times article also includes a comment from a Japanese economist arguing for more
inequality based on the English experience: "Look what happened in England. Income disparity
increased, but mostly people's incomes rose and everyone felt they were better off." According
to OECD data, productivity in England has grown at an average annual rate of 2.2 percent
from 1990 to 1996 (the most recent years available), slightly slower than Japan's 2.3 percent
rate. The growth rate of real compensation has lagged further behind Japan, 0.9 percent
compared to 1.8 percent. This data suggests that most English workers have not benefited in
any obvious way from the nation's increasingly unequal distribution of income.
More about Asia.
[Top]
RUSSIA
"Highlights of Yeltsin's Political Life" (Chronology)
Washington Post, January 1, 2000, page A30
"From the Urals to the Kremlin" (Chronology)
New York Times, January 1, 2000 page A19
"Heartened Investors Give Stock Market a Lift"
Neela Banerjee
New York Times, January 1, 2000 page A19
This article and the two chronologies report on the highlights of Boris Yeltsin's political career
in the wake of his resignation as president. In both the Times article and the accompanying
chronology, the ruble crisis in the summer of 1998 is referred to as an "economic collapse."
The Post article asserts that the ruble devaluation set off "a severe economic crisis."
Actually, the impact of the collapse of the ruble on the Russian economy was relatively limited.
Inflation did increase for a brief period, and the modest economic growth of the previous year
was reversed. But by the beginning of 1999 the economy was growing again, and by the
summer of 1999 it had largely recovered from the crisis of the previous summer.
The economic decline associated with the collapse of the ruble was trivial compared with the
economic losses Russia experienced earlier in the Yeltsin years. According to data from the
World Bank, the economy had already contracted by more than 40 percent in the eight years
prior to 1998. By comparison, the economy only shrank by 1.0-2.0 percent in the period
immediately following the collapse of the ruble.
More about Russia.
[Top]
OUTSTANDING STORIES OF THE WEEK
"Accounting Firm Is Said to Violate Rules Routinely"
Floyd Norris
New York Times, January 7, 2000, page A1
This article reports the findings of a report from the Securities and Exchange Commission. The
report found that PricewaterhouseCoopers, the nation's largest accounting firm, routinely
violates rules on conflicts of interest with the firms it audits.
[Top]
Dean Baker is an economist and the co-director of the Center for Economics and Policy
Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The
Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.
ERR is edited by Jim Naureckas.