Economic Reporting Review
By Dean Baker
January 27, 2003

OUTSTANDING STORIES OF THE WEEK

Banks Encourage Overdrafts, Reaping Profit
Alex Berenson
New York Times, January 22, 2003, Page A1
http://www.nytimes.com/2003/01/22/business/22BOUN.html?pagewanted=print&position\=top

This article reports on a new practice in which banks encourage customers to overdraw their accounts, promising them that their checks will be covered. The article points out that it charges large fees for this service, which can amount to an effective interest rate of several hundred percent on annual basis for the money being lent.

Bush Proposal May Cut Tax On S.U.V.'s For Business
Danny Hakim
New York Times, January 21, 2003, Page C1
http://www.corpwatch.org/news/PND.jsp?articleid=5329

This article reports on a clause in President Bush's tax cut proposal which allows millions of small business owners to get much larger tax breaks if they choose to buy an S.U.V. or other type of light truck. Many small business owners buy vehicles that are ostensibly for business use, but actually are used largely for personal consumption.


Bush Tax Cut

In the Debate Over Tax Cuts, Both Parties See a Chance to Score Points
John Tierney
New York Times, January 19, 2003, Page A15
http://www.nytimes.com/2003/01/19/politics/19MEMO.html

This article discusses the political battle over the Bush tax cuts. It reports that, while only a relatively small number of households are rich enough to get substantial benefits from the proposed Bush tax cuts, a very large percentage of households think that they may someday be rich enough to benefit from these cuts. To make this point it presents a quote from a Republican pollster that, "the Democrats are using arguments that would work in Europe, because it's more of a status quo society, but we're still the Wild West of economies."

Actually, by many measures European societies offer more opportunities for income mobility than the United States. For example, individuals in poverty are more likely to remain in poverty in the United States than in most European countries. People in the United States may believe that they are more likely to become rich than do people in Europe, but this is because they are more poorly informed about their economic prospects, not because their prospects of getting rich are better in the United States.

Democratic Showings Of Confidence in Iowa
Adam Nagourney
New York Times, January 20, 2003, Page A15
http://www.nytimes.com/2003/01/20/politics/campaigns/20ELEC.html?todaysheadlines

This article reports on the progress of the Democratic presidential candidates in Iowa. At one point the article asserts that President Bush is proposing to end the taxation of dividends. Actually, he is only proposing to end the taxation of dividends on stocks held outside of retirement accounts. Under the Bush proposal, dividends earned on stock held in retirement accounts will still be taxed as normal income when the money is withdrawn.

An Economist On a Mission
Jonathan Weisman
Washington Post, January 22, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A24538-2003Jan21.html

This article discusses the record of Glenn Hubbard, President Bush's chief economic advisor. At one point, it discusses the Bush tax cut as part of a process of moving to a tax system in which only consumption is taxed, rather than saving and investment, saying that such a system would remove "a primary impediment to growth." The article then asserts that "it is not easy to find economists who disagree with that theory."

The basis for this assertion is not clear. If income from saving and investment were not taxed, then it means that income from labor would have to be taxed at a higher rate. It is easy to draw up a long list of economists who do not think it would be beneficial to raise taxes on labor in order to lower or eliminate taxes on capital income. Taxes on labor also create economic distortions, which may be as large or larger than any distortions created by taxes on saving. It is worth noting that in the period from 1945-73, when the United States enjoyed its most rapid economic growth, it also had its highest tax rates on both corporate and individual income. (The top corporate tax rate was 50 percent and the top marginal tax rate on individual income was 90 percent over much of this period.)

Bush Pushes Tax Cut as Small-Business Aid
Elisabeth Bumiller
New York Times, January 23, 2003, Page A21
http://www.nytimes.com/2003/01/23/politics/23BUSH.html

This article reports on a speech by President Bush in which he touted the benefits of his tax cut package for small business. By far, the largest single part of the tax cut package is the reduction in the dividend tax. In principle this will reduce the cost of capital for large firms who issue stock and pay dividends. By raising the budget deficit, it would be expected that this tax cut will raise interest rates, which means that most small businesses will be forced to pay more for capital insofar as they have to turn to banks or other lenders. Thus, the predicted effect of this tax cut is to raise the cost of capital for small businesses and lower the cost of capital for large businesses. This should have been noted in the article.

The article reports President Bush's claim that the tax package will provide an average tax cut of $2,042 to 23 million small businessowners. This claim would be true if the tax package provided a break of $49,966 to 1 million small business owners, and nothing to 22 million small business owners. Giving the average benefit without providing any information on the distribution of the benefit provides almost no information about who gains from the tax cut.


Climate Change

U.S. Is Pressuring Industries To Cut Greenhouse Gases
Andrew C. Revkin
New York Times, January 20, 2003, Page A1
http://www.nytimes.com/2003/01/20/politics/20CLIM.html

This article reports on plans by Bush Administration to force firms to reduce greenhouse gas emissions. It notes that the administration is proceeding cautiously with these plans. At one point it comments that it does "not want to alienate voters in states like West Virginia, where the economy revolves around coal."

According to data from the Bureau of Labor Statistics, the coal industry accounts for 2.2 percent of West Virginia's non-agricultural employment. By comparison, restaurant employment is nearly three times as large, accounting for 6.2 percent of non-agricultural jobs. The primary and fabricated metal industries are almost as important to West Virginia as coal, together accounting for 2.0 percent of the state's non-agricultural jobs.

The importance of coal to the economies of other states is far less. In the rest of the nation the coal industry accounts for just 0.05 percent of non-agricultural employment.


Venezuela

Political Deadlock Bolsters Chavez
Scott Wilson
Washington Post, January 20, 2003, Page A15
http://www.washingtonpost.com/wp-dyn/articles/A15415-2003Jan19.html

This article discusses the political standoff in Venezuela between President Hugo Chavez and the opposition, which is demanding his resignation. At one point it refers to PDVSA, the state owned oil company, and comments that it was "once considered well-run."

PDVSA actually has not been well-run when measured by the standard of producing returns for its shareholder(s), the normal measure used for assessing business performance. In 2001, PDVSA paid its shareholder (the Venezuelan government) an amount equal to $8.34 for every barrel of oil produced in the country. By contrast, PEMEX, the state-owned oil company in Mexico, paid the Mexican government $24.00 for every barrel of oil produced in Mexico. PEMEX has consistently provided much more revenue for Mexico's government than PDVSA has for Venezuela's government, in spite of the fact that Venezuela produces more oil. Given the poor returns to its shareholder, the assessment that PDVSA is well-run is not accurate by standard methods of evaluation.


Argentina

I.M.F. Reprieves Argentina on $1 Billion Debt Repayment
Elizabeth Becker
New York Times, January 18, 2003, Page A5
http://www.nytimes.com/2003/01/18/international/americas/18ARGE.html

This article discusses an agreement between the I.M.F. and Argentina's government, under which the I.M.F. agreed to postpone a $1 billion debt payment owed by the Argentine government. The article presents the views of the I.M.F. and a sympathetic economist, as well as "conservative critics." It would have been appropriate to include the views of progressive critics of the I.M.F. as well.

As the article notes, the agreement imposes new conditions on the Argentine government without providing any new money. Since Argentina is currently running a large current account surplus, it actually does not need to borrow additional money from abroad. Also, the government can easily balance its budget if it does not have to repay its debt. Therefore, it is not clear that the country stands to gain from further negotiations with the I.M.F.


Trade

Production Falls and Trade Deficit Rises
Bloomberg News
New York Times, January 18, 2003, Page B2
http://www.tradealert.org/news_item.asp?NID=512597

This article reports on the Commerce Department's release of trade data for November. The reported deficit for the month was $40.1 billion, the largest ever. The article notes that economists were surprised by the size of the November deficit, with a survey showing that they expected a deficit of just $36.4 billion, a small increase over the $35.1 billion figure reported in October.

The size of the October deficit was held down by the impact of a lockout of west coast dockworkers. In August and September the trade deficit had been above $37 billion. It was reasonable to expect that goods that could not be unloaded in October would have been unloaded in November after the settlement of the dispute, therefore pushing the November deficit figure above its trend level by roughly the amount that the October figure was below trend. In other words, no economist should have been surprised by the size of the trade gap reported for November.

This report of a new record trade deficit is a wire service story on the inside of the business section in the Times. The Washington Post did not cover the trade data at all. As a result of the trade deficit, the United States is running a current account deficit of more than $500 billion a year. This has approximately the same impact on the economy in the long-run as a budget deficit of the same size. Both papers have regularly given front page coverage to budget deficits that were far smaller than the 2002 current account deficit. The decision to highlight the budget deficit, while virtually ignoring much larger current account deficits, is inconsistent with their relative economic importance.


Greenspan and the Stock Market Bubble

Fed Considered Move to Cool Economy in'97
Steven Pearlstein
Washington Post, January 24, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A35388-2003Jan23.html

This article reports on the release of transcripts of the 1997 meetings of the Federal Reserve Board's open market committee, which determines its monetary policy. The article asserts that, "all through 1997, however, Greenspan made no bones about his feeling that stock prices were unjustifiably high." It is worth noting that he was very careful not to voice this view in public. Even in 2000, as the market rose to levels that were nearly twice the 1997 levels, Greenspan refrained from publicly stating that the market was over-valued. Had he explained the market's overvaluation to the public, it is likely that the bubble never would have grown to the extent it did.


Medical Care

Bush Plan Would Redefine Medicare
Amy Goldstein
Washington Post, January 24, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A35396-2003Jan23.html

Bush Weighs Rules on Drug Coverage
Robert Pear
New York Times, January 24, 2003, Page A1
http://www.nytimes.com/2003/01/24/national/24MEDI.html

These articles describe a proposal that would seek to push more Medicare beneficiaries into H.M.O.'s by offering them limited prescription drug benefits if they leave the traditional program. Both articles assert that the purpose of this proposal is to reduce the costs of the Medicare program.

Medicare has been experimenting with the use of H.M.O.'s for more than a decade. There have been several studies, including one by the General Accounting Office, which found that H.M.O.'s raised, rather than lowered, the cost of Medicare.

The Bush Administration has maintained close ties to the insurance industry, a powerful interest group. In principle, insurance companies could earn substantial profits if more Medicare beneficiaries are forced to buy private insurance policies.

While it is possible that President Bush believes that relying more on private insurers will lower the cost of Medicare, in spite of evidence to the contrary, it is also possible he is simply trying to do a favor for the insurance industry. These articles provide no evidence that lowering costs is in fact the motive for this proposal.


The Budget

Senate GOP Wins Again on Spending Package
Dan Morgan
Washington Post, January 18, 2003, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A8477-2003Jan17.html

Republicans Fight Off More Amendments to Spending Bill
Sheryl Gay Stolberg
New York Times, January 18, 2003, Page A12
Article can be purchased for $2.95 at
http://query.nytimes.com/gst/abstract.html?res=F50916FE3C540C7B8DDDA80894DB40448\2

Democrats Seek Gains on Schools, Security at Home
Helen Dewar
Washington Post, January 19, 2003, Page A6
http://www.washingtonpost.com/wp-dyn/articles/A12199-2003Jan18.html

Bush Plans Little More Money For Bulk of Federal Programs
David E. Rosenbaum
New York Times, January 22, 2003, Page A19
http://www.nytimes.com/2003/01/22/national/22ECON.html

These articles discuss various aspects of the debate over the 2003 and 2004 budgets. They repeatedly make reference to budget amounts or requested increases in nominal dollars. For example, the article by Stolberg discusses a proposal to increase spending for Amtrak by $438 million and a proposal to spend an addition $150 million on airport security.

The vast majority of readers do not have a clear idea of the size of the federal budget nor the size of current appropriations for various items. In order for budget figures to be meaningful to readers they should be expressed as a share of the total budget, as a percentage increase or decrease (adjusted for inflation) from prior years, and/or relative to the size of the population being served (e.g. $1 billion for students from poor families may be equal to approximately $200 per student.) Given the limited knowledge that most readers have of budget numbers, the manner of presentation in these articles provides very little useful information about the budget debate.

Washington's Loudest Voice for Frugality
Michael Grunwald
Washington Post, January 20, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A15690-2003Jan19.html

This article discusses the role of White House Budget Director, Mitchell E. Daniels Jr., in setting the Bush Administration's budget priorities. The article includes numerous comments asserting that the budget is growing at a dangerous rate, for example referring to the "ballooning $2 trillion federal budget" and asserting that "since 1995, federal spending has skyrocketed."

The budget has actually been growing less rapidly than the economy through this period. From 1995 to 2003, total nominal spending has increased by 39.0 percent, while discretionary spending has increased by 43.5 percent. By comparison, the economy has grown by approximately 47.0 percent over this eight-year period. This means that both overall and discretionary government spending have been shrinking as a share of GDP over the last eight years. Economists usually would not characterize this as "skyrocketing" growth.