Economics Reporting Review
Week of January 27 - February 2

Dean Baker is co-director of the Center for Economic and Policy Research.

OUTSTANDING STORIES OF THE WEEK 

"Doctor Caught in Middle," by Melody Petersen in the New York Times, January 31,
2001, page C1. 

This article discusses an ad campaign by MedImmune, a biotech drug manufacturer,
which encourages parents to request that doctors prescribe one of its drugs for their
children as a treatment for respiratory diseases. The article points out that the drug,
Synagis, while extremely expensive, will provide no benefit in the vast majority of
cases. But the ad campaign is intended to spread fear among parents that their child
could be one of the few at-risk children who could benefit from Synagis. 

"Rights Group Scores Success With Nike," by Steven Greenhouse in the New York
Times, January 27, 2001, page B2. 

This article reports on Nike's agreement with the demand of a labor rights group. Nike
agreed to ask a Mexican sub-contractor to rehire hundreds of workers who had been
fired after going out on strike. The article reports that Nike agreed to use its
influence on behalf of the strikers after the rights group, the Workers Rights
Consortium, issued a report on working conditions at the factory. 

"A Tale Of 2 Totals In the Jobs Report," by David Leonhardt in the New York Times,
January 28, 2001, Section 3, page 4. 

This article examines the possible explanations for the large gap between the number
of new jobs in the 1990s reported in Labor Department's establishment survey, as
compared to the increase in the number of employed workers in its household survey.
The establishment survey shows about 4 million more jobs created over the decade
than in the household survey. 

It is worth noting that the Social Security Administration's data on the growth in the
number of covered workers is closer to the establishment survey's figures, showing
an increase of 18.1 million covered workers from 1990 to 1999, the most recent year
for which data is available. This compares to 19.4 million new jobs reported in the
establishment survey over this period and 16.1 million additional workers shown in the
household survey. 

"Amazing Amazon: Loses Grow as They Seem to Shrink," by Floyd Norris in the New
York Times, February 2, 2001, page C1. 

This article discusses the prospects of Amazon.com. The article notes that the
company expects to record a profit in the fourth quarter of this year. However, it
points out that its measure of profits does not take account of items like interest
payments, which would ordinarily be counted as costs. Since many corporations are
using similar types of ad hoc accounting, their reported profits often have little
meaning. 

"Questions Raised On New Bush Plan To End Estate Tax," by David Cay Johnston in
the New York Times, January 29, 2001, page A1. 

This article examines some of the loopholes that would be created if the estate and
gift taxes were eliminated without other changes in the tax code. For example, it
would be possible for a person with a large amount of unrealized capital gains in a
stock to pass the shares to a relative, and then have the relative return them a year
later. The person could then sell his or her stock and never pay any tax on the
capital gain.



THIS WEEK'S ECONOMICS REPORTING REVIEW 

STOCK MARKET BUBBLE 

"Greenspan Has Acted Quickly in Cutting Rates, But Whether He Can Prevent a
Recession Is Unclear," by Jonathan Fuerbringer in the New York Times, February 1,
2001, page C6. 

This article examines the question of whether the interest rate cuts by the Federal
Reserve Board have been fast enough to head off a recession. At several points the
article discusses the current situation as though a stock market bubble has already
burst. While some of the most over-valued stocks in the tech sector have
experienced sharp declines in prices, the stock market is still over-valued by close to
100 percent by historic measures (i.e. stock prices would have to fall by 50 percent
to restore historic price to earnings ratios). 

Over any long period, stock prices move in step with corporate profits. The latest
projections from the Congressional Budget Office (CBO), the agency whose
projections provide the basis for the federal budget debate, show corporate profits
growing at an average real (inflation adjusted) rate of just 1.0 percent annually over
the next decade. The current dividend yield is approximately 2.0 percent. This means
that if stocks grow from their current levels at the same rate as corporate profits
increase, then the total real return from stocks will be 3.0 percent a year on average
(1.0 percent capital gains plus 2.0 percent dividend yield). 

This is significantly less than the 3.6 percent return available on inflation-indexed
government bonds. Historically there has been a premium of approximately 4.0
percentage points for people holding stocks rather than government bonds. If the
CBO profit projections prove accurate, and stock prices grow at the same pace as
corporate profits over the next decade, it would be necessary for stock prices to fall
by close to two thirds from their current level. This would triple the dividend yield to
6.0 percent, bringing the total return on stocks to 7.0 percent. Just to restore a 2.0
percentage point premium over bonds, it would be necessary for stock prices to fall
by roughly 50 percent, which would double the dividend yield from 2.0 percent to 4.0
percent. 

In short, simple arithmetic indicates that there is still a bubble in the stock market. If
optimism about the future of the economy pushes stock prices higher, it will simply
make the bubble larger, and the eventual correction more severe. 


EUROPE 

"Europe's Technological Elite Discretely Grins at U.S. Dot-Com Woes," by John
Markoff in the New York Times, January 31, 2001, page C1. 

This article discusses attitudes among European business people now that Europe's
economy appears to be growing at a healthy pace, even as the U.S. economy
falters. At one point, the article notes the current relative strength of Europe and
then adds that "significant areas of American superiority prevail." The first item it
lists is the greater willingness in the United States to take risk, as with the promotion
of Internet firms by venture capitalists. 

It is questionable whether this is really an area of superiority for the United States.
While it may be much easier for entrepreneurs with good ideas to get funding in the
United States than Europe, it is also much easier for entrepreneurs with bad ideas.
This has allowed caused tens and perhaps hundreds of billions of dollars of capital to
be mis-invested in ill-conceived Internet and communications ventures. The U.S.
system can only be seen as superior if, on average, a dollar of investment proves
more productive here than in Europe. The article provides no evidence to show that
this is the case. 


ELECTRICITY DEREGULATION IN CALIFORNIA 

"Mixing Profit and Policy And Stirring Concern," by James Sterngold in the New York
Times, January 29, 2001, page A12. 

This article examines the prospects for a proposal to solve California's energy crisis.
The proposed solution has the state owning stock options on its two biggest utilities.
At one point the article refers to the current crisis, asserting that "no one foresaw"
it. Actually, the energy shortage that has hit California was an entirely predictable
result of deregulation. Companies that generate electricity have little or no incentive
to build excess capacity, or even to necessarily use all of their available capacity. If
the people who were involved in the decision-making process never even thought
about this set of events occurring, then they were extraordinarily negligent. 

"Hot, Dark Summer Ahead for California," by Peter Behr and William Booth in the
Washington Post, February 1, 2001, page E1. 

This article discusses the near-term prospects for California's efforts to cope with
the crisis surrounding electricity deregulation. At one point the article refers to the
findings of an audit showing that Pacific Gas & Electric (PG&E) had transferred most
of its assets to its parent company, leaving it with virtually no reserves to draw on if
the prices that it paid for electricity increased. 

The article then informs readers that "such a transfer is not illegal or improper." The
article does not indicate how it made this determination. PG&E built up its assets
over decades in which the state of California effectively guaranteed it a market rate
of return on its investments. The transfer of its valuable assets to a parent
company, without any payment to the state, meant that shareholders of PG&E's
parent company were effectively being allowed to expropriate wealth that was
created through the state's regulatory system. While this transfer may have been
legal under the deregulation act passed in California, it is not obvious that it should
be viewed as proper. 


THE FEDERAL RESERVE BOARD AND THE ECONOMY 

"Consumer Confidence Plunges," by John M. Berry in the Washington Post, January
31, 2001, page E1. 

"Fed Cuts Key Rate by Half-Point," by John M. Berry in the Washington Post, February
1, 2001, page A1. 

These articles discuss the current economic situation and the Federal Reserve
Board's response. At one point the first article discusses the last time the Federal
Reserve Board raised interests to slow the economy in 1994 and 1995. It comments
that the Fed "sought to slow very rapid economic growth that was quickly driving
down the nation's jobless rate and threatened to re-ignite inflation." 

While the Fed's rate hikes in this period may have been motivated by a fear of
inflation, the subsequent evidence indicates that there was no real basis for this
fear. At the time, economists generally believed that the inflation rate would
accelerate if the unemployment rate fell below 6.0 percent. The Fed raised interest
rates as the unemployment rate began to approach this level in February of 1994.
The economy has now had an unemployment rate below 6.0 percent for more than
six years and an unemployment rate below 5.0 percent for more than three years.
During this time, the rate of inflation has been stable or even fallen slightly. This
evidence suggests that the Fed unnecessarily slowed growth and kept the
unemployment rate high by raising interest rates during the previous period. 

The second article refers to the GDP data for the fourth quarter of 2000 and
comments that "production cuts made only a little headway in reducing stocks of
unsold goods." Actually, the stock of unsold goods continued to rise in the fourth
quarter. The data showed inventories rising at $67.1 billion annual rate. Most of this
accumulation was probably unintended, which means that further cutbacks in
production are likely as firms try to pare back their inventories in coming months. 


GREENSPAN ON TAX CUTS 

"Greenspan Angers Tax-Cut Foes," by Glenn Kessler in the Washington Post, January
27, 2001, page E1. 

This article examines attitudes toward Alan Greenspan's recent testimony among
political figures who oppose the Bush Administration's tax cut proposal. At one point,
it presents the view of Robert Matsui, a congressman from California, that
Greenspan's support of a tax cut will force the privatization of Social Security, since
there won't be enough money to pay benefits. 

The tax cut actually would not affect the finances of Social Security at all, since the
system has a separate fund. It could only create a problem for the system if the
federal government were to default on the bonds held by the Social Security trust
fund, while still paying its other bills. To date, not a single member of Congress has
openly come out in support of defaulting on the government's debt to Social
Security, so at present there would seem to be little basis for Representative
Matsui's claim. 

The article also includes several comments implying that the concern raised by Mr.
Greenspan about shortages of government bonds, as the debt gets paid down, will
only occur in the distant future. Actually, evidence of this problem is already
appearing. The spread between the interest rate on government bonds and other
types of debt, such as municipal bonds or high grade corporate bonds, has already
increased significantly. The yield on thirty year government bonds is currently about
1.7 percentage points less than on AAA corporate bonds and only about 0.2
percentage points higher than for tax exempt municipal bonds. By contrast in 1995,
the spread with AAA bonds was just 0.8 percentage points, while tax free municipal
bonds paid 1.2 percentage points less interest than government bonds. This means
that banks, including foreign central banks, and other financial institutions that hold
U.S. government debt as a liquid asset are already paying more of a premium in the
form of foregone interest. 


GLOBALIZATION 

"Foes Take Moderate Tack on Globalization," by Stephen Buckley in the Washington
Post, January 27, 2001, page A15. 

This article examines the views towards globalization of people taking part in the
World Social Forum in Brazil. At one point it reports that the "targets of forum's wrath
are ... multilateral lending organizations such as the International Monetary Fund and
the World Bank, and governments that allegedly sacrifice their citizens' human rights
for economic growth." 

Whether or not these lending agencies sacrifice human rights, they have in general
not been successful in producing economic growth. According to data from the World
Bank, most nations in the world have experienced much slower per capita GDP
growth in the period of globalization (1980-2000), than in the previous two decades.
For example, per capita GDP in Latin America grew by 75 percent from 1960 to 1980,
as compared to 6 percent from 1980 to 1998. In sub-Saharan Africa per capita GDP
grew by 36 percent from 1960 to 1980, but has fallen by 15 percent in the last
twenty years. 


THE ARCTIC WILDLIFE REFUGE 

"President Offers Plan to Promote Oil Exploration," by Joseph Kahn and David E.
Sanger in the New York Times, January 30, 2001, page A1. 

"Spread of Calif. Crisis Concerns Bush," by Mike Allen and William Booth in the
Washington Post, January 30, 2001, page A2. 

Both of these articles discuss President Bush's plans to allow oil exploration in the
Arctic Wildlife Refuge (ANWR) in the context of the power crisis in California. It is
worth noting that there is no logical connection between the two. If oil is found in
the refuge, it will increase the world supply and have some downward impact on
world oil prices, insofar as it is not offset by a decrease in the supply of oil from
OPEC nations. The additional oil from Alaska offers no greater benefits to consumers
in the United States than additional oil from anywhere in the world. In fact, trade
agreements like NAFTA make it all but impossible for the United States to get any
special benefits from oil found within its boundaries, since the United States could
not prohibit its export to anyone willing to pay a higher price for it. In other words, it
is possible, if not likely, that oil found in the ANWR would be exported to Japan or
some other nation, rather than consumed in the United States. 


MEDICARE 

"Bush to Send Congress Prescription Drug Plan," by Mike Allen in the Washington Post,
January 29, 2001, page A12. 

"Prescription Drug Plan Sent to Skeptical Congress," by Amy Goldstein in the
Washington Post, January 30, 2001, page A8. 

Both of these articles discuss Medicare in the context of President Bush's proposal to
pay for prescription drugs for lower income senior citizens. The article by Allen claims
that "both parties support a broad overhaul of Medicare." Actually, Vice President
Gore, as well as many Democratic members of Congress, ran for office on platforms
that explicitly called for protecting the existing system. 

This article also asserts that President Bush's Medicare plan "would guarantee that
they [Medicare beneficiaries] would not lose any benefits of the current system." At
no point has President Bush ever made such a guarantee. Such a guarantee would
be virtually impossible to honor, since President Bush intends to save money by
restructuring Medicare. 

The article by Goldstein refers to a statement by Representative Bill Thomas, the
chairman of the Ways and Means Committee, that Congress should work on plans to
modernize Medicare and "keep it solvent." It is worth noting that Medicare is
completely solvent at present, and projected by the Medicare trustees to be fully
solvent for twenty-five years into the future, with no changes whatsoever. 


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