Economic Reporting Review
January 7, 2002

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

OUTSTANDING STORIES OF THE WEEK

Recession, Then a Boom? Maybe Not This Time
David Leonhardt
New York Times, December 30, 2001, Section 3 page 1

This article examines the reasons why a recovery from the
current recession is likely to be weaker than previous recoveries.
Specifically, the fact that car purchases and home sales remained
strong through the downturn, as opposed to falling off sharply as they
had in prior recessions, is likely to dampen the strength of the
upturn.


Monsanto Hid Decades of Pollution
Michael Grunwald
Washington Post, January 1, 2002, Page A1

This article reports on Monsanto's dumping of PCBs in
Anniston, Alabama over a forty year period. The article quotes from
internal memos which showed that the company recognized the dangers of
the PCBs, but sought to hide them from the public.


The Euro

W. Europe Ready for The Euro
T.R. Reid
Washington Post, December 31, 2001, Page A1

This article examines the situation in the euro countries as
they prepare to replace their national currency with the euro at the
beginning of 2002. At one point it discusses the advantage of the
single currency and notes that it will make price differences across
nations more transparent. It then points out that the range of prices
for McDonald's Big Mac hamburgers has narrowed from 75 percent to 37
percent since the euro was first established as an accounting entity
three years ago.

While the euro may make it somewhat more difficult to maintain
large differences in prices between nations for expensive goods, like
cars, it is unlikely that many consumers would cross national borders
for a hamburger. The convergence in prices for Big Macs must be
attributable to factors other than the euro.

The article also notes the creation of a pact restricting
deficit spending, which it characterizes as ensuring that nations
"practice fiscal discipline, and thus preserve the international value
of the common currency, the euro." The pact restricts nations from
running deficits larger than 3 percent of GDP, even in a recession.
This requirement could force nations to cut spending or raise taxes in
a downturn, which would make the downturn worse. There are many
economists who consider this rule as a foolish policy, not "fiscal
discipline."

It is also not obvious that restricting national budget
deficits will support the value of the currency. In standard economic
theory, higher budget deficits will lead to higher interest rates,
which will raise the value of the euro. This is exactly what happened
in the eighties, when the United States ran large budget deficits and
the dollar soared in value against other major currencies. In deciding
where to place their money, investors care about the return it gets,
which is generally the rate of interest.

The Euro Takes Visible Shape: Pocket Change
Edmund L. Andrews
New York Times, January 1, 2002, page A1

Germans Say Goodbye to the Mark, a Symbol of Strength and Unity
Edmund L. Andrews
New York Times, January 1, 2002, page A6

These articles discuss the economic situation in Europe as the
euro comes into existence as a physical currency. The first article
includes assertions that the euro has made Europe more efficient and
that nations that "have put themselves through wrenching reforms" have
fared better than ones such as Germany and France, which have not
pursued the policies promoted in the article.

While Europe has become more efficient since the Maastricht
treaty setting the conditions for the euro was signed in 1992, this is
because economies almost always become more efficient through time, as
technology improves. The real issue is the rate of improvement.
According to data from the OECD, the rate of improvement slowed
significantly after the signing of the Maastricht treaty, with
productivity growth in the euro zone nations averaging 2.4 percent
annually in the eight years proceeding the treaty, compared to just
1.5 percent in the eight years since the treaty was signed (Economic
Outlook, Annex Table 13. Labour productivity in the business sector).
It is also worth noting that Germany and France have both maintained a
higher rate of productivity growth than the Netherlands and Spain, two
countries praised in the article for their wrenching reforms.

At one point, the first article describes the euro as "a
disappointment to those who expected it to challenge the dominance of
the dollar," and then adds that "it has not brought Europe's economic
growth up to that of the United States." The article does not identify
anyone who expected the euro to challenge the dollar, nor does it
identify anyone who thought it would have a large impact on Europe's
growth rate. There is no obvious reason to expect more than a modest
impact (less than 0.1 percentage point annually) on growth. It is
worth noting that the OECD projects that growth in the euro zone
nations will be virtually identical to growth in the United States
over the next two years, after being approximately half a percentage
point higher than growth in the United States in 2001.

The second article concludes by referring to the euro as being
as weak as the German mark. It is not clear what the article means by
referring to the euro as "weak." The euro has not consistently
declined in value, and in fact is approximately 5 percent higher
against the dollar than it was at its low in the summer of 2000. It is
likely that the euro will eventually rise against the dollar, because
the United States is currently borrowing at an unsustainable rate. The
relatively low value of the euro is more of a problem for the United
States than Germany and the euro zone nations.


Argentina

Argentine Leader Quits; So Does Successor
Larry Rohter
New York Times, December 31, 2001, Page A6

This article reports on the current political situation in
Argentina. At one point it notes concerns that there could be a run on
Argentina's banks as people try to withdraw their deposits. It points
out that deposits in the bank total approximately $61 billion, while
the cash they have on reserve is only about $13 billion. It would have
been worth noting that this is a normal banking practice. Banks only
keep a small fraction of their deposits on reserve, since it is
extremely unlikely that everyone would try to withdraw their money at
the same time. There is nothing unusual about the Argentinean banks in
this respect.

Argentina Drifts, Leaderless, as Economic Collapse Looms
Larry Rohter
New York Times, January 1, 2002, Page A3

Populist Argentine Senator Steps in to Fill Void, Becoming 5th
President in 2 Weeks
Larry Rohter
New York Times, January 2, 2002, Page A3

Argentina Gets a New President --Again
Anthony Faiola
Washington Post, January 2, 2002, Page A1

These articles report on the economic and political crisis in
Argentina. In discussing the origins of the crisis, none of these
articles notes the consequences of fixing the currency to the dollar,
which caused it to become seriously over-valued when the dollar rose
in the late nineties. Nor do any of the articles mention the
consequences of the budget cuts which the I.M.F. has demanded. Since
Argentina's economy is already in a deep recession, standard economic
theory would predict that the budget cuts would worsen the situation.
While these articles attribute Argentina's problems to its own bad
policies, many prominent economists, such as Princeton University
professor Paul Krugman, have harshly criticized the I.M.F.'s role in
guiding Argentina's economy in recent years.

Both of the January 2nd articles include disparaging comments
about Argentina's new president. For example, the Times article
comments: "though he acknowledged that 'we have no external or
domestic credit,' he nevertheless promised to run a government that
will carry out 'a more just distribution of riches.'" There is no
obvious contradiction implied by these statements. The government
could free up large amounts of revenue through a partial default on
its debt. The savings -- which would come largely at the expense of
foreigners and wealthy Argentineans -- could be used to fund programs
that benefit the working class and poor.

For IMF, Argentina Was an Unsolvable Puzzle
Steven Pearlstein
Washington Post, January 3, 2002, Page E1

This article examines the I.M.F.'s role in Argentina's
continuing financial crisis. It only presents the views of economists
who believe that the I.M.F. cannot be held responsible for Argentina's
problems. These economists argue that Argentina's government insisted
on maintaining the peg between its currency and the dollar, and the
I.M.F. could do little to force the country to change its policy.

The I.M.F. has often imposed policies on countries by
threatening to cut off its own loans, and also to block lending from
the World Bank and other international institutions, as well as
obstructing loans from private banks. If Argentina had been pursuing a
policy that the I.M.F. found to be seriously objectionable -- for
example nationalizing major industries or instituting wage-price
controls -- there is little doubt that the I.M.F. would have cut it
off from further lending. The fact that it did not take this step,
indicates that it gave at least tacit approval to what proved to be a
disastrous policy.

Many economists, such as Princeton University professor Paul
Krugman, have argued this position. Their views should have been
presented in the article.


Stock Market Projections

Wall Street's Prescriptions in a Convalescing Economy
Gretchen Morgenson and Floyd Norris
New York Times, January 2, 2002, page C5

This article presents the views of three prominent stock
market analysts on the prospects stock market and the economy in 2002.
It includes a statement from Abby Joseph Cohen, the lead analyst with
Goldman Sachs, that "there's not one country in Europe that doesn't
have a higher unemployment rate [than the United States]." According
to the most recent data from the OECD, the unemployment rate in the
United Kingdom is 5.1 percent, Sweden is 4.7 percent, in Portugal 4.4
percent, in Denmark 4.4 percent, in Austria is 4.0 percent, in Ireland
3.9 percent, in Norway 3.6 percent, in Luxemburg 2.5 percent, and 2.2
percent in the Netherlands. By comparison, the unemployment rate in
the United States was 5.7 percent when this interview took place.

A Sweeter 4th Quarter for a Sour Year
Jonathan Fuerbringer
New York Times, January 1, 2002, page W1

This article examines the prospects for the major world stock
markets in 2002. The article never reports the ratio of share prices
to corporate earnings in any of these markets. Trying to assess the
prospects for a stock market, without considering its current price to
earning ratio, would be comparable to placing a bid for commercial
real estate without any knowledge of the rent it could command.
Without this information, there is no way to make an intelligent
estimate of the proper value.


Deficits and Social Security

Democrats Plan to Tie GOP to Deficits
Thomas B. Edsall and Juliet Eilperin
Washington Post, January 2, 2001, Page A2

This article reports on Democrats' plans to blame Republican tax cuts
for the fact that the government will be spending the Social Security
surplus. It is worth noting that this is only a political issue not an
economic one. The decision to spend, rather than save, the Social
Security surplus has no effect whatsoever on the program's finances.


The Economy

Reports Suggest Economic Recovery
John M. Berry
Washington Post, December 29, 2001, Page A1

Positive Reports Hint at Swift Recovery
Daniel Altman
New York Times, December 29, 2001, Page C1

These articles report on the release of several new pieces of
economic data, and draw the conclusion that the recession is almost
over. The evidence in these new releases is actually far more
ambiguous than the articles imply.

For example, the Commerce Department released a report on
durable goods orders and shipments for the month of November. Both
articles chose to highlight the increase in orders of equipment,
excluding transportation, which rose by 2.7 percent in November
following a 4.8 percent rise in October. It is worth noting, that even
with these two increases, orders in the month of November were still
3.0 percent below their August level and 13.4 percent below their year
ago level.

The Times article correctly notes that housing and car sales
never fell significantly in this recession (car sales typically drop
by 15 percent in a recession, while housing sales fall by close to 40
percent), therefore demand in these areas is unlikely to surge and
provide the basis for a strong recovery, as has been true in prior
recessions. The Post article ignores this distinction between current
and past recessions, quoting one analyst: "the U.S. economy is often a
thing of beauty as it comes out of recession and renews expansion ...
we expect to see such a transition during 2002's first half, leading
to very strong growth by year's end."

The Post has run numerous articles reporting that immediate
economic prospects appeared bright. The experts cited in its stories
completely missed the coming of the downturn and its severity (see
e.g. "Economy Gains As Consumers Keep Spending," Washington Post, July
14, 2001, Page E1 and ERR 7-23-01; "Economic Reports Show Gains,"
Washington Post, June 27, 2001, Page E1 and ERR 7-2-01; "Economy Beats
Expectations," Washington Post, April 28, 2001, Page A1 and ERR
5-7-01; and "Reports Offer Positive Economic News," Washington Post,
April 3, 2001, page E1 and ERR 4-9-01). Given this track record, it
would be appropriate for its reporters to rely on a broader range of
sources.

The Post article also includes the assertion that, "if firms
just stopped cutting inventories -- without rebuilding them -- it
would add 4 percentage points to the growth rate, if that happened in
a single quarter." In fact, an end to inventory cuts would add just
over 2 percentage points to the growth rate, as can be easily seen
from examining the Commerce Department's third quarter GDP report.
This reports shows that inventories declined at an annual rate of
$57.8 billion in the third quarter, when the GDP was reported as
$10,224.9 billion. If inventories stopped falling in a single quarter,
it would add approximately $231.2 billion ($57.8 billion multiplied by
four), or 2.3 percent, to the annual rate of GDP growth.

The identical mistake appeared in an earlier Post article ("Rebound
Expected Soon, but Strength Is Unclear," by John M. Berry, Washington
Post, November 22, 2001, page E1), although in that article it
appeared in a quote attributed to an expert.

The Times article includes, without comment, a graph showing a
very ominous trend in recent data. The graph shows that the median
price of a new single family home fell to $155,400 in November, nearly
14 percent below the peak value reached earlier this year, and close
to 8 percent below its average of the prior two years. Rising home
prices have been one of the factors driving consumption in the last
few years, as Alan Greenspan and others have frequently noted. If
housing prices are now following the stock market downward, then this
could be a significant drag on consumption spending in the coming
year. Also, since consumers have borrowed heavily against their homes,
pushing the mortgage to value ratio near historic highs, many
homeowners may soon find themselves with negative equity in their
homes (the mortgage exceeds the value of the house), if this drop in
housing prices continues.


Government Bailout of Airlines

U.S. to Back Loans to Struggling Airline
Caroline E. Mayer and Frank Swoboda
Washington Post, December 29, 2001, Page A1

More Strings On U.S. Deal For Airline
Laurence Zuckerman
New York Times, December 29, 2001, Page C1

These articles discuss the conditions that the federal
government imposed on America West airlines in exchange for
guaranteeing its debt. The Times article reports that the board
overseeing these guarantees required America West to give assurances
that its labor costs would "remain under control." Neither this
article, nor the Post article, provide any information on the nature
of these assurances.

Since these assurances appear to involve the government in
directly holding down workers' wages, it would have been appropriate
to inform readers of the terms it had imposed on the airline. Since
there is no obvious public interest served by these loans (bankrupt
airlines continue to operate), it appears that one of the main effects
may be to assist management and shareholders in their efforts to keep
wages low.