Economic Reporting Review
January 28, 2002
By Dean Baker, co-Director of the Center for Economic and Policy Research
OUTSTANDING STORIES OF THE WEEK
How 287 Turned Into 7: Lessons in Fuzzy Math
Gretchen Morgenson
New York Times, January 20, 2002, Section 3 Page 1
This article examines some of the accounting gimmicks used by Enron to make it appear much larger and more profitable than it actually was.
Enron Case Offers Harsh Lessons
Glenn Kessler
Washington Post, January 21, 2002, Page A1
This article examines some of the accounting abuses carried through by Enron, as well as other companies, and discusses the implications for
capital markets if financial statements can't be trusted.
The Rich Are Different. They Know When to Leave
Louis Uchitelle
New York Times, January 20, 2002, Section 4 Page 1
This article compares the pensions that typical workers receive, in companies that
give pensions, with the retirement benefits provided to top executives. It indicates the top executives are generally shielded
from too much downside risk. For example, the former CEO of Lucent is receiving a pension of $700,000 a year, is
spite of the fact that he nearly led the company into bankruptcy.
'High Tide' of Labor Unrest in China
Phillip P. Pan
Washington Post, January 21, 2002, Page A1
This article discusses the labor unrest in China --focusing on a textile factory in Dafeng -- that has been provoked by a recent wave
of plant closings. In many cases, workers have received little or no notice of the closing and have lost both their pensions and health
insurance coverage.
More Subsidy Money Going to Fewer Farms
John Lancaster
Washington Post, January 24, 2002, Page A1
This article examines recent trends in farm subsidies. It notes that, in spite of efforts to eliminate them, annual expenditures on farm
subsidies continue to grow and are increasingly going to the biggest farms.
THE RECESSION
Daschle Hopes to Lead Senate Toward an Economic Recovery Package
Richard W. Stevenson
New York Times, January 23, 2002, Page A14
This article reports on a proposed stimulus package by Democratic Senate leader Tom Daschle. At one point the article notes that
"economists say the recession appears to be drawing to a close." It is worth noting that very few economists projected the recession in the
first place. For example, the Congressional Budget Office, as recently as last January, projected that the economy would grow 2.4
percent in 2001. Given the data known at present (4th quarter GDP is not yet available), the economy probably shrank slightly last year.
THE STEEL INDUSTRY
Parched, Big Steel Goes to Its Washington Well
Leslie Wayne
New York Times, January 20, 2002, Section 3 Page 1
This informative article examines the financial problems facing the major United States steel producers. The article neglects to mention
the over-valuation of the dollar against other major currencies. At present, the dollar is valued 20-30 percent above a sustainable level.
This is important to U.S. steel producers, since the effect is the same as giving a subsidy of 20-30 percent to imported steel.
Steel Users Campaigning Against Curbs on Imports
Joseph Kahn
New York Times, January 23, 2002, Page C2
This article reports on efforts by steel-using industries to block restrictions on steel imports, which would increase the prices they
pay. At one point the article refers to a study by the Institute for International Economics, a think tank that is strongly opposed to
restrictions on imports of manufactured goods, which showed that some of the measures under consideration would cost steel companies
$500,000 for every job saved. This sort of study is highly misleading for at least two reasons.
First, it ignores the fact that most of the $500,000 in this estimate is attributable to maintaining the wages and
benefits of the steel workers who remain employed. In other words, the implied savings to steel consumers comes largely at the expense of the
workers in the industry, even if they don't actually lose their jobs.
The second reason that this study is misleading is that several steel firms are likely to go bankrupt without some government support, and
pass on large liabilities to taxpayers in the form of government guaranteed pensions. A full analysis would have deducted the pension
costs that would have to be assumed by the government from the estimate of the costs of protecting the steel industry.
This article also neglects to mention the over-valued dollar as one of the factors causing problems for the industry. It is worth noting, in
another context, that the over-valuation of the dollar, and the resulting trade deficit, will have far more consequence for the
nation's ability to pay for the baby boomers retirement than the budget deficits currently projected by the Congressional Budget
Office. The nation is currently borrowing close to $450 billion a year from abroad.
If the dollar stays at its current level, then the trade deficit is likely to remain near 4 percent of GDP. This would imply that the net
foreign indebtedness will exceed 75 percent of GDP (which would be $7.5 trillion at present) within a decade. While the media has given
enormous attention to relatively small budget deficits, and distant projected shortfalls in Social Security, it has almost completely
ignored the far larger trade deficits that the nation is experiencing. This neglect cannot of the trade deficit and the resulting build-up of
foreign debt cannot be explained on economic grounds.
TAX CUTS AND THE BUDGET
Fed Chairman Hints at End Of Rate Cuts
Richard W. Stevenson
New York Times, January 25, 2002, Page C1
This article discusses Federal Reserve Board Chairman Alan Greenspan's testimony before the Senate Budget Committee. At one point, the
article reports Mr. Greenspan's statements that the tax cuts have led to higher real long-term interest rates. It is worth noting the Mr.
Greenspan appears to be differing from the Congressional Budget Office (CBO) in this assessment. CBO's new ten-year
projections show approximately the same long-term real interest rates as the projections that it made in January of 2001, prior to the passage of
the tax cuts. This means that CBO does not view the tax cuts, and resulting budget deficits, as having any meaningful effect on interest
rates.
THE BUDGET AND SOCIAL SECURITY
Don't Attack Bush on Taxes Yet, Democrats' Leader Tells Party
Adam Clymer
New York Times, January 19, 2002, Page A10
Democrats Say Bush Aide Uses War for Political Gain
Alison Mitchell
New York Times, January 20, 2002, Page A18
Congressional Budget Battle Centers on Older Americans
Robin Toner
New York Times, January 21, 2002, Page A1
President To Seek $48 Billion More For the Military
Richard W. Stevenson and Elisabeth Bumiller
New York Times, January 22, 2002, Page A1
These articles discuss the political strategy that Congressional Democrats plan to pursue in the coming year. They indicate that the
Democrats intend to blame the Republicans for jeopardizing Social Security with their tax cut. For example, the article by Mitchell
presents a portion of a speech by Richard Gephardt, the House Democratic leader. In the speech, Mr. Gephardt asks rhetorically "how
are we going to save Social Security?"
It is worth noting that Social Security's finances are not directly affected by the tax cuts. It is also worth noting that the Social
Security trustees' report shows that Social Security can pay all future benefits for the next 36 years with no changes whatsoever. Even
after it is projected to run short of funds in 2038, the projected shortfall is not qualitatively different than shortfalls the program
experienced in each of the decades from the fifties through the eighties. In short, while raising concerns about the future of Social
Security may be good politics for Democrats, there is little economic basis for these concerns.
ALAN GREENSPAN
Greenspan Speech Was Misjudged, Aides Say
John M. Berry
Washington Post, January 18, 2002, Page A20
This article presents the views of "Fed sources," that the media and the financial markets had widely misinterpreted a speech given the
previous week by Federal Reserve Board Chairman Alan Greenspan. The article says that the speech was not intended to be as pessimistic as
it has generally been reported.
None of the "Fed sources" who provided information for this article are mentioned. This means that the reader has no way of assessing its
accuracy and truthfulness. Assuming the article is accurate, these sources would have to be individuals who are very close to Alan
Greenspan, and presumably speaking to the media with his permission, and/or Mr. Greenspan himself.
An economics reporter should not be acting as a conduit for the Federal Reserve Board chairman's views. This work is more
appropriately carried out by the Federal Reserve Board's public affairs office.
JAPAN
Japan's Leader Backs Bailout of Retailer
Clay Chandler
Washington Post, January 19, 2002, Page A18
Japanese Leader Defying the Political Odds
Clay Chandler
Washington Post, January 20, 2002, Page A21
These article discuss the difficulties that Japanese Prime Minister Junichiro Koizumi has encountered in trying to restore economic
growth. Both of the articles imply or assert that the main failing has been Mr. Koizumi's reluctance to tolerate widespread bankruptcies and
large increases in the unemployment rate. For example, the second article asserts that "many fear that in his new eagerness to stretch a
safety net under Japan's financial system, Koizumi is limiting long-term economic growth."
While there are economists who hold this view, there are also economists who believe that the most important step Japan can take to
restore economic growth is to pursue an inflationary monetary policy that would reverse the deflation the country has experienced in the
last four years. The most prominent proponent of this position is Princeton economist Paul Krugman.
The Post's coverage of Japan (like the Times) has almost exclusively presented the view of economists who believe that Japan must go
through a long period of high unemployment before it can restore itself to a path of healthy growth. It has often presented this view
as though there is no alternative position among economists. Since there are few, if any examples of a country successfully completing
the sort of transition advocated in these articles (Russia is one example of a recent and
disastrous failure), it is wrong to present this view without pointing out that many
economists disagree with this assessment.
AMAZON.COM
A Surprise From Amazon: Its First Profit
Saul Hansell
New York Times, January 23, 2002, Page C4
This article reports on Amazon.com's earnings statement for the 4th quarter of 2001, which showed a profit of $5 million, its first ever.
It asserts that by showing a profit, Amazon.com is "validating at least in part its strategy to grow rapidly first and worry about
profits later."
If Amazon.com had sustained the 4th quarter's level of profit for a full year (it still showed a large loss for the whole year), its
price-to-earnings ratio would still be almost 250 to 1. The company's growth prospects are likely to be severely limited because most states
will probably start applying sales taxes to Internet sales when a federal ban ends in October of 2003. Sales tax will be deducted almost
dollar for dollar out of Amazon's profits, since traditional retailers are already subject to the tax, and will have no need to raise their
prices. This means that Amazon.com will probably have to absorb the tax in order to remain competitive.
The failure of the financial press to seriously scrutinize Enron's statements was an important factor in allowing its stock price to get
so completely out of line with its profits. It is important that business reporters not accept the financial and press statements of
companies uncritically.