Economics Reporting Review
Week of January 6 - January 12
Dean Baker is co-director of the Center for Economic and Policy Research.
OUTSTANDING STORIES OF THE WEEK
"Equity Shrivels as Homeowners Borrow and Buy," by Louis Uchitelle in the New York
Times, January 19, 2001, page A1.
This article examines the declining amount of equity relative to market value that consumers
have in their homes. The article points out that this ratio now stands at 40 percent, its lowest
level ever. By contrast, it was 46 percent ten years ago. If the economy slows significantly and
housing prices fall, many homeowners could find themselves in a precarious financial situation.
"The Yoke of Capitalism," by Edmund Andrews in the New York Times, January 16, 2001,
page C1.
This article discusses the problems the Czech Republic faces in getting its economy back on
track. The article examines how a rushed privatization plan led to a situation in which many
profitable companies were stripped of assets and left with an unpayable debt burden.
"Tough Calls In Economic Forecasting," by Steven Pearlstein in the Washington Post, January
15, 2001, page A1.
This article examines the problems that economists face in forecasting a recession or even in
recognizing a recession after it has begun. It points out that very few economists have
successfully predicted the onset of prior recessions.
THIS WEEK'S ECONOMICS REPORTING REVIEW:
ELECTRICITY DEREGULATION IN CALIFORNIA
"Blackouts Hobble California for 2nd Day," by William Booth and Rene Sanchez in the
Washington Post, January 19, 2001, page A1.
This article examines how California is coping with a second day of rolling power blackouts. In
explaining the power shortage's cause, the article asserts, "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."
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
always had in the past.
Full deregulation would eliminate the current shortage by allowing the price 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.
"Negotiators Work on Plan for California Energy Trouble," by Michael Wald in the New York
Times, January 16, 2001, page A17.
This article reports on the plans being pursued by California's government to maintain a stable
supply of electricity. At one point it discusses a proposal put forward by the governor, under
which the state would sign long-term contracts with power generators and then resell the
power to the state's utilities.
It is worth noting that this is virtually the same system that existed prior to deregulation. From
an economic and legal standpoint, regulation is very similar to a long-term contract. The major
difference between the regulatory system and the one being proposed, is that under regulation
the state effectively set a price at which the utilities could sell their power to consumers, which
was supposed to guarantee them a reasonable return on their plants. In the deregulated system,
the state will enter in the same sort of relationship with the electricity generators (who have
been separated from the utilities that transmit the power to consumers), with the main
difference being that the state has much less market power in the current context.
"California's Energy Woes Look Dim," by Rene Sanchez and William Booth in the
Washington Post, January 14, 2001, page A1.
This article examines the possible solutions to California's current power shortage. Near the
end, it argues that deregulation cannot be given all the blame for the power shortages, noting
that California's rapid growth in the last decade also has contributed to the problem. While this
is true, it is important to recognize that in a regulated electricity industry, there is a state board
charged with monitoring the growth in demand and ensuring that supply keeps pace. In a
deregulated system, no entity that has this responsibility. Instead, the decision is left to private
power producers who must weigh the potential increment to profits from adding capacity, if it
is used, compared to the costs associated with building capacity that may sit idle. Since new
capacity lowers the fees they can get from the plants that already exist, if a shortage develops,
it is not surprising that many power generators apparently decided not to build additional
plants.
GOVERNMENT ACCOUNTING ERRORS AND FRAUD
"Financial Problems in Government Are Rife, Nation's Top Auditor Says," by Robert Pear in
the New York Times, January 18, 2001, page A12.
This article reports on the comptroller general's assessment of the federal government's
accounting and management procedures. Based on the comptroller's report, the article lists
some of the "biggest problems facing Mr. Bush and the new Congress." The first item listed in
the article is the money that is erroneously paid out, through the earned income tax credit, to
low income families who misreport either their earnings or the number of the number of children
in their family. The second item listed is the tax revenue that the IRS has failed to collect from
taxpayers who do not pay all the taxes they owe.
According to the article, problems with administering the earned income tax credit cost the
government "billions of dollars a year." By contrast, it indicates that the government has lost
over $100 billion by failing to enforce the tax code. Many conservative politicians have chosen
to make a major issue over the abuse of the earned income tax credit but, as this article
demonstrates, the government's lack of enforcement is clearly the more costly problem. It
would have been helpful if the article had made this more explicit.
IMMIGRATION
"Americans (a) Love (b) Hate Immigrants," by Eric Schmitt in the New York Times, January
14, 2001, Section 4, page 1.
This article examines public attitudes towards immigrants. It asserts that "in today's tight labor
market, America can't function without immigrants -- and there aren't enough legal ones --
from its agricultural fields to Silicon Valley to the apartments and houses where nannies care for
their children and clean their homes."
In the absence of immigrants, America's economy would obviously function differently,
however, the article presents no evidence for its assertion that the economy could not function.
For example, there would be probably be plenty of non-immigrants working in agricultural
fields if this work paid $20 an hour. It may not be profitable to work these fields, or at least not
in the same way, if farmers had to pay such wages, but that is exactly how a market economy
increases its productivity -- the less productive jobs cease to exist.
The availability of large pools of immigrants to fill low-paying jobs depresses the wages of
workers who compete with them for the same type of job. Typically, higher paid workers,
such as doctors, lawyers, or economists, are able to exert significant control over the flow of
immigrants in their fields. This prevents professionals' wages from being driven down by
immigrants in the same way that the wages of other workers have been.
At one point, the article states that "employers face penalties if they hire undocumented
workers." This is not really accurate. It was always extremely rare for the Immigration and
Naturalization Service to press for sanctions against an employer that was found to be hiring
undocumented workers. In the last year, it has virtually stopped this practice altogether.
CLINTON AND THE ECONOMY
"Indispensable Or Irrelevant?" by John F. Harris in the Washington Post, January 18, 2001,
page A1.
This article examines Clinton's legacy. At one point, it mentions a series of positive social and
economic trends during the Clinton era. It includes the tripling of the stock market that took
place during his term.
In principle, the stock market reflects the value of future after-tax corporate profits. If the
market accurately reflects the future value of profits, then it would only be good news for the
economy as a whole, if higher profits were attributable to more rapid growth. None of the
government agencies that produce long-term forecasts have increased their growth projections
by an amount that can come close to justifying the run-up in stock prices. (In fact, the Social
Security trustees significantly lowered their long-term growth projections during Clinton's term.)
This means that if these agencies' projections are credible, then the run-up in stock prices is
either attributable to the anticipation of a huge redistribution of income from wages to profits,
or to a speculative bubble. Neither scenario is positive for the vast majority of the public.
The article also discusses the role that the Clinton Administration's policies may have played in
supporting the strong economic growth of the last four years. It cites his deficit reduction
package and the impact that this had on interest rates. The impact of deficits and interest rates
on economic growth is one of the most heavily researched areas of economics. There is no
theory or evidence suggesting that Clinton's deficit reduction could have added more than 01.
or 0.2 percentage points to the annual rate of growth. In other words, only about a one-tenth
of the upturn in growth in the last four years could plausibly be attributed to deficit reduction.
The article makes the assertion that "universal health care proved unobtainable." While this
presumably refers to Clinton's failure to pass his health care bill, it does not logically follow that
universal health care was unobtainable. It is possible that with a better plan or a more sustained
political drive, President Clinton could have won approval of a universal health care bill. It is
worth noting that he was willing to use threats and promises of favors to get NAFTA passed
by Congress. He never made any similar effort in support of his health care proposal.
OFF-SHORE NATURAL GAS EXPLORATION
"Florida Natural-Gas Fight Flares," by Peter Behr in the Washington Post, January 16, 2001,
page E1.
This article covers the current dispute over natural gas drilling off a corner of Florida's Gulf
Coast. Florida's governor, Jeb Bush, has prohibited drilling in the area in order to protect to
the environment. His decision could be overturned by the federal government.
At one point the article states, "Adding urgency to the decision is an abnormally cold winter
that has drained natural gas reserves to threateningly low levels and sent gas prices to record
highs." There is no way that any natural gas from this area will enter the market in time to affect
the price and availability of supplies this winter. Therefore, it is not clear in what way the
current shortage adds to the urgency of the situation.
TRADE
"Bush Selection Zoellick Is a Free-Trader on a Mission," by Steven Pearlstein in the
Washington Post, January 13, 2001, page A2.
This article discusses the background of Robert B. Zoellick, Bush's nominee for trade
representative. At several points the article equates recent U.S. trade policy with "free trade."
For example, it refers to Zoellick as a "dogmatic free trader" because of his work in negotiating
recent trade agreements with Canada and Mexico.
The trade agreements that recent administrations have promoted, such as NAFTA or
permanent normal trading relations with China, cannot accurately be called "free trade"
agreements. While these agreements reduced some types of barriers to trade, they actually
increased other barriers. Most notably, they sought to extend U.S.-type copyright and patent
laws to other nations. These laws provide for a state guaranteed monopoly. The monopoly
status provided by these forms of protectionism can raise the price of goods like recorded
music or prescription drugs by several hundred percent above the free market price.
RUSSIA
"Focus Shifting in U.S.-Russia Relations," by Peter Baker and Susan H. Glasser in the
Washington Post, January 15, 2001, page A15.
This article examines the ways in which U.S. relations with Russia are likely to change under
the Bush Administration. At several points the article warns that, unlike the Clinton
Administration, the Bush Administration will probably not try to guide Russia's economy. At
one point it comments that "without U.S. pressure, some reformers worry whether Russia will
ever push forward with structural change."
It is almost universally acknowledged that Russia's economy is now dominated by a small
clique of politically connected businessmen. These people came to dominance through a
privatization program that was designed by the IMF and implemented with the support of the
Clinton Administration. Since the Clinton Administration's guidance resulted in the creation of
Russia's current system, evidence would seem to imply that the Administration either lacked the
competence or desire to direct Russia toward the establishment of a more democratic,
law-governed political and economic system. It is also worth noting that the privatization plan
led to a collapse of the Russian economy, which is now only about half its previous size.
It would have been appropriate to mention this history, since the failure of the Clinton
Administration's policy in Russia is one of the main reasons frequently given for discontinuing
such policies.
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