Economic Reporting Review
January 14, 2002

By Dean Baker, co-Director of the Center for Economic and Policy Research

OUTSTANDING STORIES OF THE WEEK

Americans, Gradually, Feel Grip of Recession
Louis Uchitelle
New York Times, January 7, 2002, Page A1

This article examines how the impact of the recession is
gradually being felt by an ever larger segment of the population.

CBO Reports Rates Bush Economic Proposals Poorly
Glenn Kessler
Washington Post, January 5, 2002, Page A4

This article reports on a study by the Congressional Budget
Office which evaluates the likely impact of various stimulus packages
that have been put forward. The study found that the proposal being
advanced by President Bush and Republicans Congress would provide
very little stimulus to the economy.

All That Easy Credit Haunts Detroit Now
Danny Hakim
New York Times, January 6, 2002, Section 3 page 1

This article reports on the relatively high delinquency rates
on new car loans that have been issued by the financing divisions of
the major automobile manufacturers. The article reports that credit
losses may significantly reduce profits in the next few years.


December Employment Report

Joblessness Rises, but Some Positive Signs Seen
John M. Berry
Washington Post, January 5, 2002, Page E1

Nation's Unemployment Rate Rises to 5.8 Percent
Daniel Altman
New York Times, January 5, 2002

These articles report on the Labor Department's release of
employment data for December. Both articles note that the 124,000
decline in jobs measured by the establishment survey was less than
many analysts had expected. Neither article noted that private sector
employment fell by 187,000. For many purposes, the private sector
jobs numbers probably give a better measure of the current state of
the economy.

At one point the Times article reported that the rise in the
number of workers on temporary layoffs (176,000) was considerably
larger than the rise in the number of workers who reported that they
had permanently lost their jobs (60,000). It took this as an
indication that firms were increasingly using layoffs to trim their
workforce, rather than firing workers outright. This data is not
seasonally adjusted -- the seasonally adjusted data actually shows a
drop in both temporary layoffs and workers who have permanently lost
their jobs. More importantly, this data is very erratic (for example,
the seasonally adjusted number of workers who were temporarily laid
off was reported as falling by 131,000 in November, a month in which
close to 400,000 jobs were lost), so monthly changes are almost
meaningless.


December Retail Sales

Sales Exceed Expectations
Martha McNeil Hamilton
Washington Post, January 11, 2002, Page E3

Data Now In, Retailers Say Merry Holiday
Leslie Kaufman
New York Times, January 6, 2002, page C1

These articles report on data on December retail sales in
chain stores. The articles note that due to a strong last week,
chains stores reported an increase of approximately 2.5 percent in
year over year sales for the month. It is worth noting that the
holiday season in 2000 was an especially weak one, with year over
year sales increasing by just 0.3 percentage points. This means that
2002 holiday sales were less than 3.0 percent higher than 1999 sales,
before adjusting for inflation.



The Euro

On the Road, Euros Smooth the Way
Alan Cowell
New York Times, January 6, 2002, page A8

This article reports on how the euro is facilitating travel
across Europe, since people no longer have to change their currency
when they cross a border. At one point, it suggests that it may
produce a rush of bargain hunting, as consumers now recognize that
lower prices are available in nearby regions across the border.

The arithmetic needed to make currency conversions is simple
division that is taught in most elementary schools in the United
States in third and fourth grade. Students in European nations
generally perform better on standardized math tests than do students
in the United States. Therefore, it is unlikely that major price
differences were concealed from European consumers by the use of
different currencies. Also, under law, prices in the euro zone
nations have been posted in both the national currency and euros
since 1999.

The Budget

President Hits Back at Daschle's Criticism of Cut
Mike Allen
Washington Post, January 6, 2002, Page A1

Huge Decline Seen in Budget Surplus Over Next Decade
Richard W. Stevenson
New York Times, January 6, 2002, page A1

Partisan Politics Returns To Capital
Dana Milbank
Washington Post, January 7, 2002, Page A1

These articles discuss the current state of debate over the
national budget. All three articles present partisan claims without
giving readers the background information that would be needed to
accurately evaluate them. Since very few readers possess the time and
expertise to gather this information on their own, they would be
unable to assess the claims based on the information presented.

For example, the article by Allen reports President Bush's
attack that the Democratic Senate refused to pass his stimulus
package and adds that this bill provided $30 billion in aid to
workers who have recently lost their jobs. It would have been
appropriate to add that this bill also contained more than $60
billion in tax cuts for corporations and high income individuals.

The article also reports on the Democratic National
Committee's new advertising campaign, which claims that President
Bush's tax cuts are jeopardizing Social Security and Medicare, since
the government is now spending the surplus from these programs. It
would have been appropriate to remind readers that these programs are
not affected at all by whether the government saves or spends their
current surpluses. The programs will hold the exact same amount of
government bonds regardless in any case.

The article by Stevenson includes an assertion that Democrats
and Republicans are facing the painful choice "between cutting the
budget and abandoning any pretense of fiscal responsibility." The
article does not indicate whose definition of "fiscal responsibility"
it is using. Many economists have applied the criterion, that if the
government keeps the ratio of debt to GDP from rising, then it is
being fiscally responsible, since it can maintain this borrowing
stance forever.

Applying this standard to the gross debt, which includes the
bonds held by Social Security and Medicare, the government would be
able to run deficits of more than $100 billion a year. The article's
assertion implies that this budgetary rule is fiscally irresponsible,
but it provides no basis for this assessment.

The article also presents the claims of Democrats, that long-
term interest rates would be lower if the Republican tax cut had not
been passed. It would be helpful to give readers some measure of the
likely impact of the tax cuts on interest rates. Most evidence
indicates that even very large changes in the budget have only a
limited impact in interest rates.

For example, real interest rates on mortgages and corporate
bonds fell by just 0.8 percentage points from the business cycle peak
in 1989 to the 2000. During this time, the budget shifted from a
deficit of nearly 3.0 percent of GDP to a surplus of more than 2.0
percentage points -- a total shift of 5 percentage points of GDP,
which is more than $500 a year at present. Given this history, the
much smaller shift to deficits implied by the Republican tax cuts
would only be expected to raise interest rates by no more than 0.2-
0.3 percentage points.


Argentina

Argentine Unlinks Peso From Dollar, Bracing for Devaluation and Even
Harder Times
Larry Rohter
New York Times, January 7, 2002, Page A6

This article discusses Argentina's plan to delink its
currency from the dollar. At one point it discusses the fiscal record
of Eduardo Dehalde, the country's new president, when he was governor
of Buenos Aires Province. It notes that the budget deficit grew
tenfold to $1.6 billion. This information tells readers almost
nothing about Mr. Duhalde's record. Without knowing the size of the
total budget, there is no way for a reader to assess whether a $1.6
billion deficit is large or small. Also, the fact that the deficit
increased by a factor of ten is meaningless, if the original size of
the deficit is small. The discussion in the article implies that this
deficit was irresponsible, but it is impossible to determine this
based on the evidence presented.

At one point the article asserts that Argentina must borrow
from foreign lenders. Actually, it can borrow domestically as well,
although it may have to pay a higher interest rate if it is forced to
rely exclusively on domestic investors.


No Relief for Argentine Exporters
Anthony Faiola
Washington Post, January 9, 2002, Page E1

This article examines the prospects of Argentina's exporters
in the wake of the devaluation of the nation's currency. At one point
it presents the view of Hernan Tevez, the head of a major dairy
exporter, that his company would greatly benefit from increased
access to the U.S. dairy market.

It is not clear that Mr. Tevez's view is accurate. Presently,
U.S. dairy prices are kept above world market levels by a system of
quotas on both imports and domestic production. If this system were
relaxed, or eliminated altogether, then dairy prices in the United
States would fall. This may allow foreign producers, like Mr. Tevez,
to sell more products in the United States, but at a much lower
price. On net, this could lead to a fall in profits. A recent paper
by three prominent trade economists ("CGE Modeling and Analysis of
Multilateral and Regional Negotiating Options," by Drusilla Brown,
Alan Deardorff, and Robert Stern) found that most developing nations
were net losers from the last round of agricultural trade
liberalization.


Argentina's Plan Stirs Worries Elsewhere
Paul Blustein
Washington Post, January 9, 2002, Page E1

Argentina Told of Conditions for Aid
Paul Blustein and Anthony Faiola
Washington Post, January 10, 2002, Page E1


These articles discuss aspects of Argentina's recovery plan
and the reactions it is receiving. The articles indicate that the IMF
may not approve of the plan and may refuse to lend Argentina money.
The second article makes this point quite explicitly, reporting that
the IMF and the Bush Administration will not support new loans to
Argentina if it does not adopt. policies that they approve.

Recent coverage of the role of the IMF (and Bush and Clinton
administrations) in Argentina has often implied that it acted
passively in the situation and had no chose but to go along with
policies that it recognized as misguided (e.g. "For IMF, Argentina
Was an Unsolvable Puzzle, by Steven Pearlstein, Washington Post,
January 3, 2002, Page E1). These articles clearly show that the IMF
has no problem refusing to assist countries pursuing policies that it
considers wrong.



Interest Rates

Rates Remain High. Blame Bush Or Big Expectations?
Daniel Altman
New York Times, January 9, 2002, Page C1

This article examines competing explanations for the
relatively high long-term interest rates in the United States. It
reports that Democrats have pointed to the impact of smaller surplus
projections as a result of President Bush's tax cut. Republicans have
argued that the main cause is the market's expectation that the
economy is about to experience a strong recovery.

The article neglects a third obvious explanation. Thee United
States is running an unsustainable trade deficit. If the trade
deficit remained at its current share of GDP, the net foreign debt of
the U.S. would exceed 60 percent of GDP by the end of the decade -- a
level of indebtedness far higher than any industrialized country has
ever experienced. In order to reduce the deficit to a sustainable
level, the dollar will have to fall by 20 to 30 percent. If investors
anticipate that the dollar will fall, then they will demand an
interest rate premium to hold debt denominated in dollars, rather
than other currencies. This could easily explain the relatively high
long-term rates the United States is currently experiencing.


Health Care

Part Battles Looming Over Costly Old Issue: Health Care Coverage
Robin Toner
New York Times, January 11, 2002, Page A16

This article discusses prospective debates in Congress on
measures designed to extend insurance coverage. It would have been
appropriate to note that the United States spends more than 14
percent of its GDP on health care, approximately twice the average
for industrialized nations. In spite of this higher level of
spending, the United States generally ranks near the bottom of this
group in health outcomes, such as life expectancy and infant
mortality rates.


Japan

Bad News Keeps Coming For Japanese Economy
James Brooke
New York Times, January 10, 2002, Page W1

This article reports on the decision of Merrill Lynch to
scale back its operations in Japan, laying off workers and closing
most of its offices. At one point it comments that because interest
rates are near zero and the government already has a large debt, "the
only macroeconomic tool left" is devaluing the currency. Actually,
the central bank could deliberately try to produce a modest rate of
inflation (2-3 percent), which would lower real interest rates and
increase the incentive to invest and consume. Many prominent
economists, such as Princeton University professor Paul Krugman have
advocated this policy.