Economic Reporting Review
January 18, 1999
By Dean Baker
"Sinking in Buoyant Waters"
David E. Sanger
New York Times, January 9, 1999, page B1
This story discusses the recent decline in the value of the dollar against the yen. It terms the
value of the dollar "a crucial indicator of foreign confidence in the United States government
and its economy" and asserts that "by all normal measures it [the decline in the dollar] should
not be happening."
In fact, most economic theories to not view the value of the dollar as a measure of foreign
confidence in the U.S. government and its economy. Economists usually seek to explain
movements in currencies by changes in relative interest rate and patterns of trade. When a
nation experiences a rise in its interest rates relative to that of other nations (as Japan has
recently), it is expected that its currency will rise in value as investors switch into that currency
to take advantage of the higher relative interest rates.
In the long run, it may be expected that trade flows will determine the value of a nation's
currency. It is reasonable to believe that a nation like that U.S., that consistently runs large
trade deficits, may eventually see a decline in the value of its currency, since the current value
of the dollar is too high to allow U.S. goods to compete effectively.
Both of these standard theories of currency value provide simple and straightforward
explanations of the dollar's recent decline against the yen. The article's "confidence" theory of
dollar valuation does not at all explain recent movements in the dollar against foreign
currencies. For example, the dollar fell by almost 50 percent against the yen in the period from
1982 to 1988. These were not years of obvious crisis in the United States. The dollar rose by
13 percent against the yen over the next two years, then plunged another 35 percent from
1990 to 1995 as Japan's economy fell into recession and the U.S. economy began its long
expansion. In short, the movements of the two currencies appear to have no relationship
whatsoever to the relative strengths of their economies.
Later the article asserts that the "huge budget deficit…once was blamed for undercutting the
value of the dollar." Actually, in most years, the budget deficit was not huge by most economic
standards. Except for the Reagan-Bush years, the nations' debt to GDP ratio has consistently
fallen in years when the economy was not in a recession. Furthermore, standard economic
theory holds that a deficit will raise, not lower, the value of the dollar.
According to standard economic theory, a large deficit raises interest rates in the United
States. This causes investors to switch into dollars to take advantage of the higher interest rates
in the U.S. This is exactly the dynamic that is used to explain the 64 percent rise in the value of
the dollar against other currencies in the years from 1980 to 1985, a period when the deficit
rose by close to 3.0 percentage points measured as share of GDP (an amount equal to
approximately $270 billion in today's economy). Usually, economists argue that one reason to
reduce the budget deficit is that a lower deficit will lead to lower interest rates. This will in turn
lower the value of the dollar and bring down the trade deficit. For some reason, this article
argues that reducing the budget deficit should have the opposite effect.
"The Flip Side of the Strengthening Yen"
Paul Blustein
Washington Post, January 13, 1999, page F1
This article discusses the recent rise in the value of the yen relative to the dollar. It suggests that
the rise in the yen is due to the lack of confidence in the Japanese government, as expressed by
a recent rise in interest rates on Japanese government bonds: "increasingly, financial markets
appear to be unsettled by rumblings that Tokyo is going a little too deeply in debt for comfort."
This claim seems self-contradictory. If financial markets are actually worried about the ability
of the Japanese government to repay its debt, then they should be equally worried about the
future value of the yen. Ultimately, the government can always repay its debt by simply printing
yen. (Since Japan currently has the lowest debt to GDP ratio of any major industrialized nation,
this is not likely to occur.) If Japan prints a huge number of yen, it would lead to inflation and a
decline in the value of its currency. This inflation would hit holders of yen and Japanese
government debt in exactly the same way.
"Hiring Last Month Kept a Brisk Pace"
Sylvia Nasar
New York Times, January 9, 1999, page A1
This article reports the release of employment data for December. At one point the article
asserts that "after a wave of corporate layoff announcements and a surge in first-time claims for
unemployment insurance in the last half of December, economists had expected job growth to
weaken and unemployment to edge up."
It is not clear why economists would have expected this. Many of the announced layoffs will
not take effect until next year. Workers are counted as being employed until they actually stop
working, not the point where the company announces layoffs. Also, the job in jobless claims at
the end of the month should not have been expected to affect December's employment survey.
The survey of households was taken in the week of December 5-12. The survey of employers
referred to payroll period that included December 12. In both surveys, someone who was laid
off in the middle or end of the month would have been counted as being employed in
December's data. In other words, if the surge in first-time unemployment claims did lead to a
rise in unemployment, it would not show up in the December employment numbers.
"4.3% Jobless Rate Lowest Since 1970"
Tim Smart
Washington Post, January 9, 1999, page G1
This article also reports on the Labor Department's release of employment data for December.
At one point it comments that "workers are finding the wherewithal to spend from a booming
stock market, which has swelled their retirement accounts…."
Actually, for most workers, the rise in the stock market has not been much of a windfall.
According to the Federal Reserve Board's most recent survey in 1995, only 43 percent of all
households owned stock in any form, including retirement accounts such as 401(k)s. Among
this group, the median holding was just $13,000. These figures suggest that typical working
families have not benefited much from the stock market's boom over the last three years.
"Focus on Impeachment Casts a Shadow on the Goals of Both Parties"
Richard W. Stevenson and John M. Broder
New York Times, January 11, 1999, page A11
"Medicare Growth In '98 Was Slowest Since Plan's Start"
Robert Pear
New York Times, January 11, 1999, page A1
The first of these articles discusses areas of policy that are not being addressed because of the
impeachment trial. The second article reports on data showing that Medicare expenditures
rose by just 1.5 percent in 1998.
The first article asserts that "Social Security and Medicare need to be overhauled before they
are driven into bankruptcy by the aging of the baby boom generation." Actually, the aging of
the baby boom generation is a relatively small factor in the long-term problems facing both
programs. The main factor in the projected long-term shortfall in the Social Security program is
the projected increase in life expectancy. Most of the baby boom generation's retirement is
already provided for with the existing schedule of taxes. Only small changes would be needed
to extend the program through the entire retirement of the baby boom generation.
Like the first article, the second article also warns that "Medicare will incur immense new
costs" due to the baby boom generation. In fact, the bulk of the projected increase in
Medicare expenses is attributable to rising per person health care costs, not the projected
increase in beneficiaries. These increases in health care costs are projected for both the private
and public sector. The Health Care Financing Administration projects that per person private
sector spending on health care will rise by $750 a year, after adjusting for inflation, between
now and 2007. This increase would amount to $3,000 a year in higher health care
expenditures for a typical family of four. By comparison, the tax increase needed to balance
the Medicare trust fund for the next 50 years would be just $450 a year for an average
worker. These numbers suggest that the growth in health care costs poses a far greater
financial threat to future living standards than Medicare expenditures on aging baby boomers.
"Brazil Devalues Its Currency 8%, Roiling Markets"
Larry Rohter
New York Times, January 14, 1999, page A1
"As an Economy Sinks, U.S. Sees Painful Choices"
David E. Sanger
New York Times, January 14, 1999, page A1
"Brazil Devalues Currency"
Paul Blustein
Washington Post, January 14, 1999, page A1
These article report on the devaluation of the Brazilian currency and the impact that it is likely
to have on the United States and the rest of the world. All three of these articles emphasize the
importance of Brazil as a market for U.S. exports. For example, the first Times article
comments at one point that "Brazil, the eighth largest economy in the world, is the locomotive
for Latin economies, which now absorb a fifth of United States exports." This comment also
appears in the article's subhead: "Engine of Latin Nations, Which Buy One-Fifth of Exports by
U.S."
While Brazil does have the largest economy in Latin America, and Latin America is the
destination of 20 percent of U.S. exports, Brazil itself is actually a very small buyer of U.S.
goods. The United States currently exports approximately $10 billion annually to Brazil, about
1.0 percent of total U.S. exports. While U.S. banks and wealthy individuals have invested
large amounts of money in Brazil, which is at risk in the current situation, there are relatively
few jobs in export industries that would be placed in danger by a downturn in Brazil.
The second Times article implies that the policies designed for Brazil by the Treasury
Department and the IMF were going to keep the nation out of recession, and that it was the
failure of Brazil to adhere to these policies that led to the current crisis. It comments that "only
by slowly decreasing the value of the real, the thinking went, could Brazil keep itself and the
rest of Latin America from descending into a nasty recession."
In fact, according to an earlier Times article ("IMF Cuts World Growth Outlook to 2.2%,"
Bloomberg News, New York Times, 11/ 22/98, page C4), the IMF had been anticipating
the Brazil would have a recession in 1999 because of its austerity program. This article
comments that IMF's projections "assume a recession next year in Brazil…as the Government
there tries to reduce spending and increase taxes to meet conditions of a $41.5 billion
international aid package."
It also worth noting that the failure of the IMF policy can be attributed to the decision to force
Brazil to maintain an over-valued currency, rather than a failure of the Brazilian government to
act responsible. This has been argued by many prominent experts on international finance, such
as Harvard Professor Jeffrey Sachs and M.I.T. Professor Rudiger Dornbusch. Comments to
this effect from both Sachs and Dornbusch can be found in "Brazil Swallows Another Bitter
Pill" by Michael M. Weinstein (New York Times, 1/14/99, page C1).
Outstanding Stories of the Week
"Alternative Minimum Tax, Though Aimed at Wealthy, Snags Many in Middle
Class"
David Cay Johnston
New York Times, January 10, 1999, Section 3, page 1
This article examines how the alternative minimum tax, which was intended to hit wealthy
people who used tax shelters to evade taxes, is increasingly hitting middle income families. This
is occurring because the maximum allowable deductions, before the alternative minimum tax
kicked in, was not indexed to inflation when the tax was put in place in 1986. As a result,
middle income people with deductions due to factors such as high medical bills or a large
number of kids often end up being subject to the alternative minimum tax.
"For the Fed, a Sideshow Takes Center Ring"
Louis Uchitelle
New York Times, January 10, 1999, Section 3, page 4
This article discusses how the Federal Reserve Board must now carefully consider the impact
that its policies on interest rates will have on the stock market, since it is considerably
over-valued by conventional measures. For example, it may be prevented from raising interest
rates in a situation where it would have otherwise, because of the fear that it would lead to a
stock market crash.
"Fever Pitch: Getting Doctors To Prescribe Is Big Business"
Abigail Zuger
New York Times, January 11, 1999, page A1
This article describes the ways in which pharmaceutical companies market their drugs to
doctors. For example, it presents an estimate from a consulting firm that the industry spent
more than $6.3 billion just through November of last year on visits to doctor's offices and
marketing events. It also notes that prescription drugs are the most rapidly growing category of
health care spending, costing the nation $78.9 billion in 1997. On a per person basis, this is
just under $300 a year. These numbers suggest the current system of developing new drugs is
extremely inefficient.
Dean Baker is a senior research fellow at the Preamble Center.
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