Economic Reporting Review
July 26, 1999
By Dean Baker
Tax Cuts | Microsoft | U.S. Economy | International Monetary Fund | Asia | Argentina | Outstanding Stories
Tax Cuts
"Clinton Calls GOP's Proposed Tax Cuts 'Bad Economic Policy'"
Associated Press
Washington Post, July 18, 1999, page A10
"Clinton Warns Against G.O.P.'s Tax Cuts"
Richard W. Stevenson
New York Times, July 18, 1999, Section 1 page 18
"Lott Takes Hard Line on Taxes"
Eric Pianin
Washington Post, July 19, 1999, page A8
"G.O.P. Leaders Try To Stem A Revolt Over Big Tax Cut"
Richard W. Stevenson
New York Times, July 21, 1999, page A1
"Hastert Pleads for GOP Unity on Taxes"
Eric Pianin and Juliet Eilperin
Washington Post, July 21, 1999, page A1
These articles, along with several others that appeared during the week, discuss the debate
over the tax cuts proposed by Republicans in Congress. The debate includes the assertion
from the Clinton Administration that the cost of the proposed tax cuts will "explode" after the
year 2010, costing $1.5 trillion in the following decade. The significance of this figure would be
far more understandable if it were expressed as a share of GDP of this period. According to
projections from the Congressional Budget Office, GDP is projected to exceed $170 trillion in
this decade. This means that the Republican tax cuts would be equal to approximately 0.9
percent of projected GDP, or approximately 5.0 percent of projected federal spending over
this period.
It is also worth noting that the there has not been a decade since World War II where there
has not been a change in the tax code of this magnitude or greater. This means that it is
extremely unlikely that any changes in the tax code implemented in 1999 will be in place in the
same form in the year 2020.
The first Times article includes a chart which discusses various aspects of the tax cuts
proposed by the Republicans. This chart has a section titled "Savings and Investment" where it
discusses Republican plans to increase the caps on income that can be placed in IRAs or
401(k) plans. The text characterizes these proposals as being "intended to stimulate more
retirement savings."
It is questionable whether this is the actual intention of these proposals. Very few people are
saving at the caps in place under current law. Most of those who do save at the limit are
relatively wealthy. Raising the caps provides no incentive to the vast majority of the population
who could already save more in these tax sheltered accounts under the current law. However,
it could provide a significant tax break to wealthy individuals who could have more of their
income sheltered from taxes.
"White House Attacks Tax Cut, Saying Huge Share Goes to Wealthy"
George Hager
Washington Post, July 23, 1999, page A6
This article reports on the Democrats' criticism of the Republican tax cut proposals. The article
comments that "Clinton and the Democrats, in turn, have leveled what amounts to
class-warfare attacks on the Republicans, accusing them of catering only to the rich."
It is not obvious that criticizing a bill which has dubious economic merits, and provides large
gains to wealthy people, amounts to "class-warfare." It is also worth noting that efforts to cut
benefits to low income people are rarely, if ever, characterized as class warfare.
The article also refers to the Brookings Institution as a "liberal-leaning think tank." The
accuracy of this characterization is questionable. Brookings staff includes people who have
worked in both Republican and Democratic administrations. While some of its staff
undoubtedly view themselves as liberal, there are probably at least as many who view
themselves as centrist or conservative. It would probably be most accurate to describe
Brookings as "centrist."
[Top]
Microsoft
"Gate's Firm is First To Hit $500 Billion"
David Streitfeld
Washington Post, July 17, 1999, page E1
"Gates Hits $100 Billion Mark, More or Less"
Amy Harmon
New York Times, July 17, 1999, page B1
These articles report on a jump in the price of Microsoft stock that placed its market valuation
at approximately $500 billion. Both articles compare the market valuation of Microsoft to the
annual GDP of nations around the world, with the Times article asserting that "if it were a
country it [Microsoft] would have the ninth-largest economy in the world, behind Spain." (It
ranks 11th in the Post article.)
This discussion confuses a wealth measure, the value of Microsoft stock, with an income
measure, the annual output of the nations. To make an appropriate comparison, it is necessary
to use the same categories. In principle, the wealth of each nation could be tabulated and
compared to the value of Microsoft's stock. This would include the value of all the houses,
factories, machinery and land possessed by a nation, as well as a value assigned for the
education and skills of its population. Such a measure would probably be at least 20 times
annual output.
Alternatively, the comparison could use the value added (profits plus wages) by Microsoft in a
single year. Wage data is not readily available for Microsoft, but its total revenue in 1998 was
$14.5 billion. If wages and profits accounted for 80 percent of revenue (the rest is payment for
materials and contracted services), then Microsoft's value added would have been
approximately $12 billion in 1998. If it grows by 25 percent this year, then its value added will
be $15 billion in 1999. According to World Bank data for 1997, this would place Microsoft in
70th place among the nations listed, behind Guatemala.
[Top]
U.S. Economy
"America Finds It's Lonely at the Top"
David E. Sanger
New York Times, July 18, 1999, Section 4 page 1
This article discusses the ostensible world-wide dominance of the United States in economic,
military and political matters. It includes many assertions that are wrong and many others that
are misleading.
For example, the article claims that "when foreign companies look at the pace of American
technological development, they see a gap far greater than a decade ago." Since the article
does not identify any sources for this claim, it is not easy to verify the extent to which this
perception actually exists among executives at foreign corporations.
However, the data on productivity growth suggests the opposite. According to data from both
the Bureau of Labor Statistics and the OECD, most other industrialized nations significantly
outpaced the U.S. in productivity growth over the last decade. For example, according to BLS
data, the annual growth rate of GDP per employed worker in Italy and Germany was 1.8 and
1.9 percent, respectively, between 1990 and 1996 (the most recent year available). In the
United States the growth rate was just 1.1 percent annually over this period. These numbers
actually understate the gap in productivity growth, since hour per worker in the United States
was increasing during this period, while it was decreasing in Germany and Italy.
The claim also does not appear to be reflected in trade data. If companies in the United States
are having so much success relative to their foreign competitors, it is reasonable to expect that
the U.S. would be selling more abroad, and that imports would be less competitive. The
United States trade deficit is expected to be approximately $240 billion in 1999, or about 2.7
percent of GDP. U.S. exports have been virtually stagnant in the last year, while imports have
soared.
This trade deficit is clearly unsustainable for any significant period of time. If the trade deficit in
the United States stays at its current level (measured as a share of GDP), by the end of 2010
the net foreign debt will be close to $8 trillion, or more than 55 percent of the GDP projected
for that year. There is no other major industrialized nation that is accumulating debt at such an
unsustainable rate.
The article also states that Europeans are "struggling with 12 percent unemployment." Actually,
the average is approximately 10 percent, and several countries, such as Sweden, Denmark, the
Netherlands and Norway, have unemployment rates that are approximately the same as in the
United States.
The article also claims that Russia's objections to the austerity measures demanded by the
International Monetary Fund are rooted in its envy of the United States. A more plausible
explanation for Russia's objections is that the IMF's economic program has virtually destroyed
Russia's economy. (See "Wither Reform: Ten Years of the Transition," by Joseph E. Stiglitz,
www.worldbank.org/research/abcde/stiglitz.html.) According to World Bank data, Russia's
economy has contracted by approximately 50 percent while it followed the IMF's program for
transition to a market economy. This has led to a collapse of its education and health care
system and rapidly falling life expectancies. As a result of the IMF's program, Russia now
ranks near the middle of developing nations in per capita GDP, behind such countries as Peru,
Panama and Iran.
"Trade Deficit Set a Record During May"
David E. Sanger
New York Times, July 21, 1999, page C1
This article discusses the record U.S. trade deficit reported for the month of May. It asserts
that this record deficit is "a byproduct of American economic health." While the healthy
economy explains part of the growth in the trade deficit, imports have been growing more than
50 percent faster than GDP. At the same time, in the first five months of 1999, exports have
actually fallen slightly from their year ago levels, even though U.S. trading partners have
experienced modest economic growth. Neither of these trends can be explained by the healthy
U.S. economy.
The article also characterizes China's economy as "lagging." China's economy is growing at a
rate of close to 7.0 percent, according its official statistics. While there is reason to believe that
this number may be somewhat overstated, it almost certainly is growing at least at a 5.0
percent rate. This is considerably faster than the annual growth rate of the U.S. economy,
about 4.0 percent.
[Top]
International Monetary Fund
"Overhaul of Relief Plan to Sell IMF Gold Likely"
Paul Blustein
Washington Post, July 23, 1999, page E1
This article reports on the opposition to IMF plans to sell some of its gold reserves in order to
raise money to finance debt relief for poor nations. The article characterizes the debt relief plan
as aid "given to poor countries that agreed to put their economies on a sound footing…so they
could direct less of their government revenue to debt and more to education, health and other
social needs."
The condition of the IMF debt relief plan is that nations agree to accept an IMF structural
adjustment program. Such programs do not necessarily put economies on a sound economic
footing. For example, in Russia it led to a disastrous economic collapse. See above.
It also is not clear that the IMF plans will reduce the debt service burdens for the countries that
qualify. Since most of the debt for these nations is unpayable in any case, eliminating a certain
portion will not necessarily mean an actual reduction in debt payments. The poor nations that
qualified for the last IMF debt relief plan have yet to see any reduction in the burden imposed
by debt service.
[Top]
Asia
"The Casino Effect in Asian Stock Markets"
Wayne Arnold
New York Times, July 22, 1999, page C3
This article reports on the recent upturn in stock markets across East Asia. It asserts that
"Asian markets are soaring despite a widely held view among financial experts that the
collusion, corruption and financial bungling that contributed to Asia's troubles have merely been
diluted, not eradicated."
It is worth noting that this "collusion, corruption and financial bungling" produced far more rapid
growth and improvements in living standards than any of the policies promoted by institutions
such as the IMF or World Bank. In the period from 1960 to 1994, according to data from the
United Nations, per capita GDP growth averaged 7.0 percent annually in South Korea, 5.2
percent in Thailand, and 4.2 percent in Malaysia. No country following the recommendations
of the IMF has ever been able to sustain growth rates of even half this size.
The article also claims that "the big gains in Asian stock indexes are helping to obscure just
how much value corporate Asia has lost," because the indexes don't take account of the large
depreciation of these currencies against the dollar. It is extremely unlikely that investors in these
markets would be confused about the value of their assets because they are unable to calculate
the dollar value of their assets. This calculation can be done in a fraction of a second with an
inexpensive calculator.
[Top]
Argentina
"Soon to Bow Out, Argentine Brushes Off the Boos"
Clifford Krauss
New York Times, July 20, 1999, page A3
This article reflects on the record of Argentina's president, Carlos Saul Menem, as he enters
the last months of his second term. The article praises his economic accomplishments, although
in doing so it seriously misrepresents them.
For example, the article asserts that per capita income in Argentina has risen under Menem
from $2,100 in 1989 to $8,100 at present. This implies a growth in per capita GDP of 285.7
percent, an incredible 16.2 percent annual rate. According to data from the IMF, per capita
GDP grew by just 28.3 percent over this period, a 2.8 percent annual rate.
At one point, without commenting, the article quotes Menem as saying "the world economic
crisis was not in our calculations." This is truly a remarkable statement. While the exact
magnitude and dimensions of the recent financial crisis were not predictable, the fact that
disruptions of this sort would take place was a virtual certainty. Menem deliberately integrated
Argentina much more closely with the world economy. His claim that he never planned for the
possibility of an international economic downturn is comparable to an architect designing a
house in Maine without including insulation for the winter months.
[Top]
Outstanding Stories of the Week
"Most in H.M.O.'s Wouldn't Benefit From Senate Bill"
Robert Pear
New York Times, July 17, 1999, page A1
This article points out that the "Patients Bill of Rights" passed by the Republican controlled
effectively denies any protection to the vast majority of people enrolled in managed care
programs, the group generally thought to be in greatest need of such assistance. The article also
notes that Senate Republican aides "said they did not know whether the bill would pre-empt
state laws" on patients rights. The impact of this bill will differ enormously depending on
whether or not it supercedes existing state laws.
"What Price the Most Expensive Diamond of All?"
Timothy Egan
New York Times, July 17, 1999, page A7
This article reports on the growing subsidies that state and local governments are giving to
professional sports teams. It notes examples of subsidies to build stadiums being approved by
legislatures even in cases where voters had explicitly opposed public subsidies in ballot
initiatives or referendums. The newly finished baseball stadium in Seattle, which is the primary
focus of the story, is the first such stadium to be completed.
"So Many Analysts, So Little Analysis"
Gretchen Morgenson
New York Times, July 18, 1999, Section 3 page 1
This article discusses the changing responsibilities of stock market analysts. Increasingly,
analysts are spending their time promoting stock to clients. As a result, they spend far less time
actually researching the companies they are supposed to be following. This often leads to
reports that provide little substantive information.
"Picking and Packing Portobellos, Now With a Union Contract"
Steven Greenhouse
New York Times, July 21, 1999, page A12
This article discusses the successful organizing effort of a group of mushroom pickers in
Florida. These workers are the first farm workers in the state to be covered by a union
contract.
[Top]
"Tracking Just What the Doctor Ordered"
Robert Pear
New York Times, July 13, 1999, page C1
This article gives a careful explanation of the services provided by pharmacy benefit managers.
These firms purchase drugs at wholesale prices from the pharmaceutical industry and pass on
savings to HMO's or the government. They also act to steer patients to lower cost drugs.
"Freeways, Their Costs and 2 Cities' Destinies"
Timothy Egan
New York Times, July 14, 1999, page A1
This article discusses the ways in highway construction has promoted suburban sprawl and led
to the deterioration of inner cities. Its focus is on Milwaukee and Salt Lake City, but the
discussion examines the issue of government-subsidized sprawl more generally.
"Food Aid: Too Much, Too Late?"
Sharon LaFraniere
Washington Post, July 12, 1999, page A1
This article reports on the food aid program that the Clinton administration established for
Russia in the wake of the collapse of the ruble last summer. The article points out that the grain
is just now beginning to arrive in Russia. Any grain shortages that may have existed in the past
appear to have been eliminated, so that the main impact of the aid is to lower the price of
wheat in Russia, thereby hurting their domestic agriculture. The main beneficiaries appear to
have been the U.S. farmers who sold the grain to the government.
"In Japan, Mired in Recession, Suicides Soar"
Stephanie Strom
New York Times, July 15, 1999, page A1
This article examines how Japan's recession and the resulting rise in layoffs and unemployment
has led to a sharp upturn in suicides.
"Cutting the Tax on Capital Gains: The Theory and the Evidence"
Michael M. Weinstein
New York Times, July 15, 1999, page C2
This article gives a careful presentation of the economic theory behind a capital gains tax cut. It
then notes the existing evidence, which suggests that the size of the economic impact would be
negligible.
[Top]
Dean Baker is a senior research fellow at the Preamble Center and at the Century Foundation.
Recent articles can be found on the websites of the New York Times and Washington Post.
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