Economic Reporting Review
January 17, 2000:
Greenspan and Wages; Entitlements and the Election;
France's Work Week
By Dean Baker
LABOR & THE FED
"Growth in Jobs at End of Year Beats Estimates" Richard W. Stevenson
New York Times, January 8, 2000 page A1
This article reports on the Labor Department's employment data for the month of December.
The article comments that the high job growth and low unemployment shown in the report are
"good news," but then adds the report "increased the likelihood that the Federal Reserve would
act to keep the economy from overheating by raising interest rates next month."
If the Federal Reserve Board raises rates, the proximate cause will not be evidence of
overheating in the labor market. Over the last quarter, the average hourly wage has increased
at a 3.3 percent annual rate. By contrast, from 1997 to the middle of 1999, hourly wages had
been rising at just under a 4.0 percent annual rate. The fact that wage growth has actually
slowed slightly in the last year suggests that tightness in the labor market is not leading to
inflationary pressures, as the article implies.
"Fed Chairman Discusses the 'Limits' to the Economy"
Richard W. Stevenson
New York Times, January 14, 2000 page C2
This article reports on a speech discussing the economy's growth limits by Federal Reserve
Board Chair Alan Greenspan. According to the article, Mr. Greenspan warned that if wages
start rising more rapidly, "companies face a choice between raising prices, which would be
inflationary, or accepting narrower profit margins, which Mr. Greenspan said would be a recipe
for recession."
It is not clear what economic theory Mr. Greenspan is using to support this assertion, but the
evidence shows that declining profit margins do not necessarily lead to recessions. For
example, in the '60s, profit margins peaked in 1965 and then declined through the rest of the
decade, with the capital share of corporate income falling from 23.9 percent in 1965 to 19.5
percent in 1969. The growth rate averaged 4.2 percent over this four-year period, with the
unemployment rate falling to 3.0 percent at its low point in 1969.
In the '90s, the profit share of corporate income has risen by approximately 3.0 percentage
points compared with the profit peak of the last cycle. This redistribution from wages to profits
has cost a typical full-time worker close to $1000 per year in wages. While there is no reason
that reversing this shift from wages to profits will cause a recession by itself, Mr. Greenspan
certainly has the power to induce one if he chooses to. The implication of his comments in this
speech could be that he is prepared to induce a recession in order to prevent the profit share of
income from falling.
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SOCIAL SECURITY
"Gore Attacks Bradley on Agriculture Votes and Medicare"
Katharine Q. Seelye and James Dao
New York Times, January 9, 2000, Section 1 page 12
"Health Care Bill Up 5.6 Percent On Higher Drug Costs"
Alice Ann Love
Washington Post, January 10, 2000, page A2
"McCain's Ideas on Taxes and Social Security Defy Conventional G.O.P. Wisdom"
Richard W. Stevenson
New York Times, January 10, 2000, page A14
"McCain and Bush Spar on Taxes"
Edward Walsh and David Maraniss
Washington Post, January 11, 2000, page A4
"McCain to Propose Middle-Class Tax Cut and Private Accounts"
Richard W. Stevenson
New York Times, January 11, 2000, page A21
"Clinton Plan Ignores '97 Budget Pact"
Charles Babington and Eric Pianin
Washington Post, January 14, 2000, page A1
These articles all refer to the projected depletion of the Social Security and Medicare trust
funds. The articles all imply that the programs are in imminent danger. Several use the term
"save" in reference to Social Security, either as an assertion by the reporter or in a candidate's
unquestioned statement.
According to the most recent projections from the Social Security trustees, the program will be
able to pay all scheduled benefits for the next 34 years with no changes whatsoever. This is 26
years beyond the constitutional term limit of office for the next president. It is also worth noting
that the changes that would be needed to keep the program fully solvent for its 75-year
planning horizon are approximately the same size as the changes that were made in each of the
four decades from the '50s to the '80s. These changes were made without any major political
or economic crisis, and did not have to be planned three decades in advance.
The Medicare trust fund is projected to be fully solvent for the next 15 years. By comparison,
in the last two elections, its projected date of depletion was less than ten years away. Based on
the trustees' projections, there is no reason that the future solvency of Medicare should be a
greater issue in this election than in previous elections.
Several of the articles imply or assert that Medicare's financial problems are due to the aging of
the population. For example, the Post article by Love asserts (of Medicare) "the costs are
expected to jump sharply once members of the nation's huge baby boom generation start to
become eligible for the retiree health insurance program after 2010." This is inaccurate.
According to the Medicare trustees report, the program's costs are projected to grow less
rapidly after 2010 than before. Costs are projected to grow at a 3.6 percent real (measured
against the overall CPI) annual rate from 2002 to 2010. By contrast, from 2010 to 2020 they
are projected to grow at a 3.2 percent real annual rate.
Costs are projected to rise more rapidly before 2010 because of projected increases in per
person health care costs over the next ten years. Even though the number of beneficiaries is
projected to increase more rapidly after 2010, this is more than offset by a projected
slowdown in the rate of growth of health care costs. Health care costs, which follow the same
pattern in the public and private sector, are at least as important a factor in determining the cost
of the Medicare program as the aging of the population.
"Smooth Entry of 2000 Is a Puzzle"
Barnaby J. Feder
New York Times, January 9, 2000, Section 1 page 18
This article discusses the reasons why there appear to have been so few problems around the
world related to the switchover from 1999 to 2000 in computers. The article notes several
estimates that put the size of U.S. expenditures on Y2K fixes at more than $100 billion in
1999.
Measured as a share of GDP, this is approximately the same amount of additional spending
that would be needed each year to keep the Social Security trust fund solvent over its 75-year
planning horizon. This means that the growth in Social Security spending should impose
approximately the same drag on future living standards as the fixing of Y2K problems did in
1999.
More about Social Security.
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HEALTH INSURANCE
"Effort to Insure Children Stepped Up"
Amy Goldstein
Washington Post, January 11, 2000, page A2
This article reports on a proposal by President Clinton to increase funding for his Children's
Health Insurance Program. The article notes that enrollment in the program has doubled over
the past year. Unlike the New York Times article on this new measure ("Clinton to Broaden
Effort in Children's Health Coverage," by Robert Pear, 1/11/00), the Post article does not
point out that the number of uninsured children has actually risen since this program was
created two and a half years ago.
More about health.
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ECUADOR
"Ecuador's 3 Top Central Bankers Quit Over Dollarization"
Larry Rohter
New York Times, January 12, 2000 page C4
This article reports on the attempt by Ecuador's President Jamil Mahuad to impose a plan
linking the nation's currency to the dollar. The article refers to a recent comment from a former
finance minister that dollarization was not an option. It then adds, "even though the sucre
[Ecuador's currency] lost 67 percent of its value against the dollar in 1999 and a few
percentage points more in the early days of the new year."
The fact that Ecuador's currency has fallen a great deal against the dollar does not in any way
imply that dollarization is a necessary or desirable policy. There are many problems created by
tying a nation's currency to the dollar. Most obviously, it can no longer have an independent
monetary policy. This means that it cannot use monetary policy to attempt to stimulate its
economy when it is in a recession. Even worse, if the Federal Reserve Board decides to raise
interest rates to slow the U.S. economy, it will have the same effect of Ecuador's economy,
even if Ecuador's economy is already in a recession.
In addition, having its currency tied to the dollar can lead to serious trade imbalances if
Ecuador's major trading partners devalue their currency. This is exactly what happened to
Argentina last year after Brazil let its currency decline by approximately 40 percent against the
dollar. Since Argentina's currency is tied to the dollar, its goods suddenly became far less
competitive with Brazil's, and its trade deficit soared.
More about Latin America.
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FRANCE
"In Protest, French Truck Owners Blockade Borders"
Suzanne Daley
New York Times, January 11, 2000 page A4
This article reports on a strike by truck owners in France against a new law giving workers a
35-hour workweek. At one point the article asserts that "few experts believe that the shorter
workweek…will create the hundreds of thousands of jobs promised." It then adds: "In some
areas of commerce, the policy has been seen as successful by some simply because
negotiations to get a 35-hour week forced the elimination of antiquated work rules and created
a more flexible workforce."
The implication of this statement is that the reduction in the length of the workweek is not
creating very many new jobs. Instead, changes in workplace organization are allowing firms to
produce roughly the same amount of output with fewer hours of work. If this is true, it would
mean that the 35-hour law has led to an astounding increase in productivity. If workers can
produce the same amount of output in 35 hours as they had previously in 39 hours (the
previous standard workweek), it would imply an increase in productivity of approximately 10
percent.
Ordinarily, economists view it as very difficult to raise productivity by even small amounts. For
example, conventional estimates of the productivity gains that would result from paying off the
U.S. national debt over the next 15 years are about one percent. If France was able to
accomplish gains that are ten times this magnitude in a single year, while also giving its workers
more leisure time, the policy would have been remarkably successful.
More about Europe.
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AFRICA
"Gore Vows Aids Initiative"
Colum Lynch
Washington Post, January 11, 2000, page A11
"Gore Presides Over Rare Security Council on AIDS"
Barbara Crossette
New York Times, January 11, 2000 page A3
These articles report on Vice President Al Gore's announcement to the U.N. Security Council
that the United States would commit another $150 million a year to combating AIDS in Africa.
Both articles provide some information on the magnitude of the AIDS epidemic in Africa,
where tens of millions of people have been infected.
It is worth noting that the additional money promised by the vice-president would amount to
less than $10 for each infected person. By contrast, the Clinton administration has been pushing
to have U.S. patent laws apply to the distribution of AIDS drugs in Africa. Patent protection
raises the price of these drugs by several hundred or thousand percent above the free market
price. According to the pharmaceutical industry's trade group, the patent-protected price of the
most effective combinations of AIDS drugs is between $10,000-$16,000 per year. This means
that if just 10,000 African AIDS patients are able to afford this treatment, the flow of money to
the pharmaceutical industry will be approximately the same size as the additional aid promised
by the vice-president.
[Top]
OUTSTANDING STORIES OF THE WEEK
"Online Sales Spur Illegal Importing Of Medicine to U.S."
Robert Pear
New York Times, January 10, 2000 page A1
This article reports on the growing practice among consumers of buying pharmaceuticals from
foreign sellers. This often provides large savings, since U.S. patent law keeps drug prices far
higher than in the rest of the world. This is an excellent example of how the Internet can
undermine protectionism.
"The Artist's Friend Turned Enemy: A Backlash Against the Copyright"
Paul Lewis
New York Times, January 8, 2000 page A17
"MP3.com Plans to Let Users Store Files on Its Site"
Sara Robinson
New York Times, January 12, 2000 page C3
Both of these articles discuss ways in which copyrights are impeding artistic work or technical
progress. The first article notes how the extension of the duration and scope of copyright
protection can stifle creative work, since it increases the likelihood that new works of art or
writing can be seen as infringements on existing copyrights. The second article reports on a new
technology that will allow consumers to store their music on the Internet and retrieve from any
location they choose. The recording industry is considering going to court to prevent this
technology from being used, since it could facilitate the sharing of recorded music.
[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.
Back to CEPR's Economics Reporting Review website.