Economics Reporting Review
Week of January 20 - January 26
Dean Baker is co-director of the Center for Economic and Policy Research.
OUTSTANDING STORIES OF THE WEEK
"Independent Plants a Factor In the Latest Energy Crisis," by Richard A. Oppel, Jr., in
the New York Times, January 23, 2001, page A1.
This article examines the factors that have led to the current energy crisis in
California. It points out that in a deregulated system, no one is empowered to look
ahead and ensure that sufficient capacity exists to meet future energy needs.
Private suppliers will add capacity when and where it increases their profits, which is
not necessarily where it is most needed.
"Las Vegas Bet on Growth But Doesn't Love Payoff," by Timothy Egan in the New
York Times, January 26, 2001, page A1.
This article reports on the environmental problems created by the largely
uncontrolled pattern of growth in Las Vegas.
"If Earnings Depend On Investing, Watch Out," by Gretchen Morgenson in the New
York Times, January 21, 2001, Section 3, page 1.
This article reports on the accounting practices of many firms, which were counting
income from stock holdings in their earnings figures. While this had the effect of
increasing profits during the period where stock market was rising rapidly, it could
drastically cut profits now that the market appears to be sliding downward. For
example, it notes that Dell Computer had been selling options on its own stock. As
long as its stock kept rising, this was a virtually costless way to increase profits. Its
stock has now fallen close to 50 percent from its peak. If the price stays at this
level, the article estimates that the exercise of these options will reduce its profit by
close to 60 percent.
"New Money for HMOs Isn't Going as Congress Intended," by Robert Pear in the New
York Times, January 26, 2001, page A15.
This article reports on the fact that the additional money that Congress approved for
HMOs that serve Medicare beneficiaries is largely being used to increase payments to
doctors and hospitals, instead of increasing benefits, as Congress had intended.
"New Corporate Perk: If the Stock Falls, Cancel Purchase," by Floyd Norris in the New
York Times, January 26, 2001, page C1.
This article reports on a new practice at some high tech companies which have seen
large declines in the value of their stock. They are allowing top executives to cancel
purchases of stock through options, in cases where these purchases would end up
losing them money.
"Aid Abroad Is Business Back Home," by Michael Dobbs in the Washington Post,
January 26, 2001, page A1.
This article examines a project for Poland by the Agency for International
Development. It shows how much of the money designated for this project was
spent on consultants and for various businesses in the United States, with little
obvious benefit to Poland.
THIS WEEK'S ECONOMICS REPORTING REVIEW:
ELECTRICITY DEREGULATION IN CALIFORNIA
"California Avoids More Blackouts by Buying Power Directly," by Rene Sanchez and
William Booth in the Washington Post, January 20, 2001, page A3.
This article reports on the state government of California's efforts to prevent more
blackouts by purchasing power directly from electricity generators. At one point the
article comments on the cause of the current power shortage: "California is mired in
an energy crisis, many analysts agree, because it only partially deregulated its
energy markets." An article attributed to the same two reporters the previous day
contained nearly identical wording: "California, most experts now agree, finds itself in
a power crisis because it only partially deregulated its energy markets. It allowed
wholesale prices for power to rise, but it kept price caps in place for the utility
companies, which deliver the power to customers." ("Blackouts Hobble California for
2nd Day," by William Booth and Rene Sanchez, Washington Post, January 19, 2001,
page A1).
As was noted in last week's ERR (January 19, 2001), this statement is true, but it
would also be true if the word "only" were removed. In other words, most experts
would agree that California faces an energy shortage because it partially deregulated
its energy markets. Had it maintained the previous system of regulation, it could
have ensured that utilities were building sufficient capacity to meet the growth in
demand, as it had always done in the past. Full deregulation would eliminate the
current shortage by allowing the retail price of electricity to rise enough so that
some consumers could no longer afford to pay it. When these consumers cut back
their demand, the supply would be then be sufficient. But few people would consider
this to be an equitable or even viable solution, with millions of consumers being
priced out of the market.
"Impact of California's Crisis Muted for Now, U.S. Officials Say," John M. Berry in the
Washington Post, January 20, 2001, page E1.
"California Crisis Hurst Businesses and Idles Workers," by Laura M. Holson in the New
York Times, January 20, 2001, page A1.
"Dark Days Send Chill Through Dairyville," by Evelyn Nieves in the New York Times,
January 21, 2001, Section 1, page 18.
These articles examine the impact that California's energy crisis is having on the
state and national economy. The Post article suggests that the impact has been
minimal, arguing that the power blackouts have not caused serious disruptions.
Furthermore, since residential electricity prices are still controlled, consumers have
not been forced to pay more for electricity.
On the other hand, the first Times article indicates that the power shortages are
having a substantial impact on the state's economy. It gives the example of a
brewery that has already been forced to partially shutdown and layoff 200 workers,
since it had signed a contract where it agreed to forego its access to electricity in
the event of shortages. The article presents an estimate from the chief economist
for Los Angeles County that $1.7 billion in wages have already been lost in California
due to energy shortages (slightly less than 0.2 percent of the state's annual wage
bill).
This article also suggests that the state's electricity problems may already be having
an impact on investment decisions. Since it is a virtual certainty that electricity
prices will rise substantially in the near future, and power shortages are likely to
persist for some time, even under optimistic scenarios, many firms may choose to
locate new facilities elsewhere.
The second Times article reports on the impact that the electricity shortage has had
on the dairy industry. One of the major dairy processing plants also had a contract
that allowed its electricity to be cut in the event of a shortage. The article reports
on how this has led to a backup of trucks waiting to unload milk, and even delays in
milking cows on farms, since there is nowhere to store their milk.
"California Power Struggles Sap Electric Program," by Peter Behr in the Washington
Post, January 22, 2001, page A1.
This article examines the background to California's law on the deregulation of its
electric utilities. At one point the article notes the part of the law freezing electricity
prices at or below their 1996 level. It referred to this provision as "the other half of
the doomed marriage," noting that this rate freeze gave consumers no incentive to
conserve electricity.
The rate freeze was more than an incidental part of the deregulation legislation. The
vast majority of people in California had no particular interest in having their
electricity deregulated. The proponents of deregulation -- most of whom were
executives of corporations hoping to profit from it -- argued that deregulation would
lead to lower prices for consumers. The rate freeze was a way to prove to skeptical
consumers that they actually stood to gain from deregulation. If this was a ridiculous
proposition, as this article appears to suggest, then the proponents of deregulation
were either extremely ignorant, or deliberately misled the people of California.
GREENSPAN ON TAX CUTS
"Greenspan Supports a Tax Cut," by John M. Berry in the Washington Post, January
26, 2001, page A1.
"Bush's Hand Greatly Strengthened," by Glenn Kessler in the Washington Post,
January 26, 2001, page A1.
"Economic Realities Drove Greenspan," in the Washington Post, January 26, 2001,
page A4.
"In Policy Change, Greenspan Backs A Broad Tax Cut," by Richard W. Stevenson in
the New York Times, January 26, 2001, page A1.
These articles discuss the testimony of Federal Reserve Board Chairman Alan
Greenspan before the Senate Budget Committee. In this testimony, Mr. Greenspan
for the first time explicitly stated his preference for a significant tax cut, as opposed
to using nearly all of the surplus to pay down the debt.
The Washington Post article by Berry reports that one of the reasons that Greenspan
gave for this change of position is that the government could pay down the debt too
rapidly, leaving it in a situation where it would be forced to acquire large amounts of
private assets (e.g. stocks and bonds) since there was little outstanding debt left to
buy back. It is worth noting that this concern could not be the real motivation for
the change in Greenspan's position on tax cuts, since there have been no significant
revisions to the projected rate at which the government will pay down the debt since
his last testimony on this topic. In other words, if the prospect of the government
paying off the debt too rapidly is troubling to Mr. Greenspan, he should have raised
the issue at least a year ago.
Both the Post article by Kessler and the unattributed Post article (which is written in
the form of questions and answers) assert that the slowdown in the economy in the
last six months was a major factor in changing Greenspan's opinion on tax cuts. They
argue that because of this slowdown, Greenspan is no longer worried that a tax cut
will cause the economy to overheat.
Greenspan, like many economists, has repeatedly stated that a tax cut is not a good
way of stimulating the economy when it is in a downturn, because it takes so long to
have an impact. If he actually holds this view, then the current state of the
economy should have little bearing on his attitudes towards tax cuts.
The unattributed article also includes an erroneous discussion of the problems
associated with the government holding private assets through the Social Security
trust fund and individual accounts. It claims that the projected accumulated surplus
of $6 trillion in the Social Security trust fund in 2025 would be equal to complete
value of several major corporations plus "45 percent of every other company in the
Standard and Poor's 500 stock index." This calculation is based on the current value
of these companies. If the value of corporate stock grows at the same rate as the
economy over the next twenty-five years, then it will be nearly four times as large in
2025. This means that the assets of the trust fund would be less than 15 percent of
the value of S&P index.
This article also inaccurately implies that the problems of government interference in
the market do not arise with individual accounts. Virtually everyone in this debate
has indicated that they want any individual accounts created within the Social
Security system to be heavily regulated by the government. The regulation of these
accounts will create just as many opportunities to interfere in private markets as
would be created by outright ownership of stock through the trust fund.
This article also implies that some sort of saving for the future is the only way to pay
for the retirement of the baby boomers. Since the main reason that Social Security
will be costing more in twenty-five years is increasing lifespans, meaning that people
will be collecting benefits for more years, it is reasonable to believe that people may
also opt to pay for their longer retirements with higher taxes during their working
lives. This is what they chose to do during the 1950s, 1960s, 1970s, and 1980s.
Since Mr. Greenspan now believes that productivity growth, and therefore wage
growth, is on a permanently higher track, this means that future generations of
workers can afford to pay higher Social Security taxes and still enjoy vastly higher
after-tax wages than do current workers. It would have been appropriate to mention
this possibility rather than suggest that some form of increased savings is the only
conceivable option.
At one point the Times article discusses the impact that capital gains tax revenue,
attributable to the run-up in the stock market, has had on recent surpluses and
projections for future surpluses. It says that "analysts have been grappling" with the
impact on future projections if the market stays flat or goes down. It is relatively
easy to get a quick approximation of this impact. The projections assume that
revenue from capital gains will average close to $90 billion annually over the next
decade. The bulk of these gains come from stock or related assets, such as privately
held businesses. If the market flattened out or dropped, this sum could easily fall by
$70 billion a year.
WAGE GROWTH
"Wages Showed Strong Growth In 4th Quarter," by the Associated Press in the New
York Times, January 26, 2001, page C4.
This article reports on the release of the Labor Department's employment cost index
for the fourth quarter of 2000. Both the 0.7 percent rate of quarterly wage growth
and the 0.8 percent rate of compensation growth were the lowest since the first
quarter of 1999.
OIL DRILLING IN THE ALASKA WILDLIFE REFUGE
"Norton Confidently Makes Case for Alaska Oil Drilling," by Douglas Jehl in the New
York Times, January 20, 2001, page A12.
This article reports on testimony to a Senate committee from Gale Norton, President
Bush's nominee for Interior Secretary. At one point the article presents President
Bush's rationale for supporting oil drilling in the Arctic Wildlife Refuge: "the nation's
energy needs had made urgent the task of opening that land and other parts of the
West to new oil exploration."
It would have been appropriate to point out that there is effectively a single world
market for oil. Except for differences in transportation costs, everyone pays
essentially the same price for oil (before tax). Therefore, finding new oil in Alaska or
Wyoming is of no greater benefit to U.S. consumers than finding new oil in Uzbekistan
or Chad. Furthermore, even if there was an intention to preserve this oil for domestic
consumption, it would be impossible under trade agreements such as NAFTA and the
WTO, which would prevent the United States from restricting the export of oil
discovered in these states. In the very long term, drilling the oil from these regions
eliminates a reserve that otherwise would have been available to the nation in the
event of a crisis.
INFLATION IN IRELAND
"Booming Ireland Discovers the Downside of Being a Euro Nation," by T.R. Reid in the
Washington Post, January 20, 2001, page E1.
This article discusses the problems that Ireland is experiencing as a result of its rapid
growth, most importantly an increase in its inflation rate. The article asserts that
wages are not keeping pace with inflation, which it puts at 7.0 percent annually.
The article implies that the if Ireland were not in the euro zone, then its central bank
could fix this problem by raising interest rates. Higher interest rates reduce inflation
by throwing people out of work, thereby putting downward pressure on wages. It is
unlikely that many workers who are concerned that their wages currently may not be
keeping pace with inflation, would be more happy with the effects of an increase in
interest rates.
The article includes a chart that puts Ireland's growth rate for 1999 at 32.2 percent.
The OECD estimates its growth for the year at 8.5 percent.
TRADE
"U.S. Trade Deficit Down in November," by Martin Crutsinger in the Washington Post,
January 20, 2001, page E1.
This article reports on the Commerce Department's release of trade data for the
month of November. At one point the article asserts that "proponents of free trade
are concerned that as the U.S. economy slips and the unemployment level begins to
rise, protectionist arguments could gain ground." This statement is characterizing
proponents of recent trade agreements as supporters of "free trade" and their
opponents as "protectionist." These trade agreements have not necessarily
advanced free trade. These agreements have increased protection for copyrights
and patents, which are forms of protectionism that raise the price of goods by
several hundred percent and lead to enormous inefficiencies. It would be more
appropriate to simply identify the parties as supporters and opponents of recent
trade agreements than to apply labels like "free traders" and "protectionists."
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