Economic Reporting Review
January 2, 2002

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

OUTSTANDING STORIES OF THE WEEK

Chills in the Balance-Sheet Shadows
Gretchen Morgenson
New York Times, December 23, 2001, Section 3 page 1

This article reports on debts that companies have incurred
which do not appear on their balance sheets. Enron was forced into
bankruptcy as a result of such off-balance sheet debt.


Copyright Enforcement

Trying To Keep Young Internet Users From a Life of Piracy
John Schwarz
New York Times, December 25, 2001, Page C1

This article reports on efforts to teach young people that it
is wrong to make unauthorized copies of copyrighted material. The
article is written from the standpoint that such unauthorized copying
is morally wrong. It does not give the ethical reasoning behind this
judgment.

It is worth contrasting the reporting on efforts to discourage
young people from reproducing copyrighted material to efforts to
encourage young people to respect the economic regulations of
countries such as those of the former Soviet Union. The latter were
routinely regarded as "propaganda" and destined to failure, since they
tried to get people to act against their own immediate self-interest.
Efforts to get young people to respect copyrights similarly rely on
persuading them to act against their own self-interest.


The Labor Market

Congress Acts to Stem National Nursing Shortage
Juliet Eilperin
Washington Post, December 22, 2001, Page A4

This article reports on a bill passed by Congress which is
intended to increase the number of students that receive training in
nursing. The article repeatedly refers to the existence of a nursing
shortage. According to standard economic theory, shortages only arise
if the price, or in this case wage, is prevented from rising. By this
view, if there are not enough nurses to fill all the vacancies then it
is due to the fact that employers are not willing to pay the market
wage.

It is interesting that Congress feels the need to intervene in
the labor market for nurses, keeping their wages down by increasing
the supply of nurses. In the case of doctors, it took the opposite
path. It deliberately restricted the number of students that go to
medical school and the number of foreign doctors that are allowed to
enter residency programs in the United States in order to keep the
wages of doctors from falling. The average wage of doctors is
currently about $200,000 a year, more than four times the average pay
of nurses. Since doctors' salaries in the US average more twice the
level of western Europe (the wages of nurses are comparable), by this
measure there is a much more serious shortage of doctors than nurses.


The Euro

Hoping a Euro in the Hand Will Be Worth More
Edmund L. Andrews
New York Times, December 26, 2001, Page A3

This article discusses the impact of the creation of the Euro
as a physical currency at the beginning of 2002. The article implies
that a higher valued currency is desirable, and that Europeans are
hoping that the existence of Euro notes will raise the Euro's value.
Having a more highly valued currency is not necessarily advantageous.
As a result of the dollar's high current value the United States is
running a large trade deficit. This trade deficit results in the loss
of relatively high-paying manufacturing jobs. It is also causing the
nation to borrow more than $400 billion a year from abroad, which will
lower living standards in the future.

In discussing the merits of the Euro, the article notes that
"it has failed to insulate Europe from outside economic shocks, like
the blow provided by the slowdown in the United States." There is no
obvious reason that the euro should have protected Europe from such
shocks and the article does not identify any experts who had held this
view.

At one point, the article offers the view that "the real
problem is that Europe continues to fall behind in other areas.
Job-protection laws remain rigid and taxes are high in many
countries." Europeans enjoy a much higher level of public services,
for example national health care insurance, which are supported by
their higher taxes. The article does not indicate why it should be
viewed as a problem that Europeans choose to pay higher taxes to have
these goods provided through the public sector.

Job protection laws also provide greater employment security to
workers. It is not obvious why this should be viewed as bad either.
There have been numerous studies that have attempted to link job
protection laws and other labor market rigidities to higher
unemployment. Many of the economists who have done research in this
area, such as M.I.T. professor Olivier Blanchard, acknowledge that the
evidence on this issue is ambiguous. It is worth noting that some of
the nations with the most well-developed social welfare systems and
high tax rates, such as Sweden and Denmark, have lower unemployment
rates than the United States.

The article also includes a comment that the Euro will make it easier
to compare profits across countries since they will be calculated in
the same unit. Converting profits between currencies requires a simple
act of division that can be done in a fraction of a second on any hand
calculator. It is therefore doubtful that the Euro would make any
difference in this regard.


Argentina

Argentina's Chaos Raises New Doubts On Monetary Fund
Joseph Kahn
New York Times, December 22, 2001, Page A1

Argentina's New Chapter In an Epic of Frustration
Clifford Krauss
New York Times, December 22, 2001, Page A8

Argentina to Suspect Debt Payment
Anthony Faiola and Steven Pearlstein
Washington Post, December 22, 2001, Page A1

Hardship Crushes Christmas Dreams in Argentina
Anthony Faiola
Washington Post, December 25, 2001, Page A23


These articles report on the situation in Argentina following
the resignation of its president and the installation of a new
government. All four articles include references to excessive
government spending or "skyrocketing" deficits. Argentina's budget
deficits were actually quite modest by most standards. Its projected
deficit for the current fiscal was 2.6 percent of GDP. Argentina is
currently in the middle of a severe recession, and recessions tend to
raise government deficits, since they reduce tax collections and
increase transfer payments such as unemployment benefits. By
comparison, in the last recession in the United States, the deficit
peaked at 4.7 percent of GDP. The articles provide no citations or
explanations for their characterizations of Argentina's deficits as
excessive.

The Post article by Pearlstein and Krauss includes an
assertion that a devaluation of the peso "would bring on a string of
bankruptcies," since many loans must be repaid in dollars. It is worth
noting that there are practical means of avoiding such an outcome, as
Princeton University professor Paul Krugman has pointed out. Krugman
notes that contracts written in dollars can be indexed in law, so that
the debt would be reduced in accordance in any decline in the value of
the peso. While this may not be a perfect solution, it is likely
better than the cost Argentina will bear from maintaining its currency
peg.

At one point the Times article by Kahn comments, "it is difficult to
place blame for Argentina's economic problems squarely on the fund
[the I.M.F.] when much of the policy was designed by Argentina itself,
sometimes over the objections of the fund's economists." While
Argentine did design its own policies -- sometimes with objections
from the fund -- the extent of these objections can best be gauged by
the fund's conduct. The fund continued to lend Argentina large amounts
of money over this period, implicitly endorsing its policies. Had
Argentina adopted policies that were strongly opposed by the fund, for
example nationalizing major industries or instituting wage-price
controls, it is unlikely that the fund would have provided the same
sort of financial support. While the fund may not have fully agreed
with all of Argentina's actions (and there were differences among
economists at the fund), its actions indicate general support for
Argentina's policies.


Japan

The Yen's Relentless Downhill Slide
James Brooke
New York Times, December 28, 2001, Page C1

This article reports on the recent decline in the yen against
the dollar, which appears to be part of a deliberate strategy to make
Japanese goods more competitive in world markets. The article notes
this impact, but adds that "a continued fall in the yen could
accelerate an exodus of foreign investors from Japan's stock markets."
Actually, Japan's stock markets should become more attractive after
the yen has fallen further. Once the yen has experienced a large
decline, it becomes less likely that it will fall still further. This
means that investors who hold Japanese stock can expect to gain both
from the returns on the stock itself and the future rise in the
currency. When a currency is falling in value -- and expected to
continue to fall -- it becomes less attractive to investors, but if it
has already fallen a great deal and appears to be under-valued by
standard measures (e.g. trade balances), then it is very attractive to
foreign investors.

At one point the article comments that Japanese politicians
"have shied away from taking painful measures to create future growth:
deregulation of the economy, large-scale privatizations or decisive
action against a rising mountain of bank debt." It is not clear that
these painful measures would create future growth -- while there are
many examples of nations that have followed this path with disastrous
consequences (e.g. Argentina and Russia) there are no examples of
nations that have carried through these policies and enjoyed growth
anywhere near as rapid as Japan did in the forty years prior to 1990.
Given the evidence of the past success of these policies, it is
understandable that Japan's leaders would be unwilling to risk their
nation's prosperity on the schemes drawn up by economists at the
I.M.F. and elsewhere.


The Economy

The Economy May Be Facing More Hurdles
Daniel Altman
New York Times, December 22, 2001, Page C1

This informative article examines the obstacles to a strong
economic recovery. At one point it notes that government budget is
being pushed back into a deficit after several years of surplus. It
warns that if deficits continue "businesses will have to offer higher
interest rates to compete for investors' financing." If deficits stay
relatively modest (less than 2 percent of GDP or $200 billion a year),
the impact on interest rates is likely to be very small. The shift
from deficits that were close to 3.0 percent of GDP, at the peak of
the eighties business cycle, to surpluses that exceeded 2.0 percent of
GDP in 2000 led to a fall in the real interest rate on corporate bonds
of just 0.8 percentage points. Smaller shifts from surplus to deficit
can be expected to have an even smaller impact on the interest rates
paid on business loans.


Spending Fell Only Slightly in November
Steven Pearlstein
Washington Post, December 22, 2001, Page E1

This article reports on the Commerce Department's data on
November retail sales. It reports that the November decline was minor.
Actually, the 0.7 percent falloff was quite large, translating into an
8.7 percent annual rate. While this drop followed a huge October sales
rise, this was preceded by a steep September plunge attributable to
the 9-11 attacks. Taking the three months together, retail sales have
risen at a very modest 1.8 percent annual rate since August.

At one point the article refers to the "consensus among
economists" that the economy will start growing again in the spring.
It is worth noting that at this time last year there was a consensus
among economists that the economy would not fall into a recession. The
average projected growth rate for 2001 was close to 3.0 percent. At
this point, it appears that the growth rate will be only slightly
above zero.

The article also cites the recent run-up in the stock market
as evidence that a recovery is imminent. The stock market is an
extraordinarily bad predictor of the economy. Japan's stock market hit
39,000 in 1989, nearly four times its current level. Japan's economy
has been mired in stagnation for the last twelve years.