Economic Reporting Review
July 23, 2001

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

OUTSTANDING STORIES OF THE WEEK

"U.S. Opposes Plan for Financing of Clean Energy over Fossil Fuel,"
by Joseph Kahn in the New York Times, July 14, 2001, page A1.

This article reports on the Bush administration's efforts to obstruct
proposals by the G-8 to support the development of clean energy, and
to phase out subsidies for fossil fuels.

"Hispanic Workers Die at Higher Rate," by Steven Greenhouse in the
New York Times, July 16, 2001, page A11.

This reports on data from the Bureau of Labor Statistics, which shows
that Hispanic workers are far more likely to die on the job than
other workers. It includes assessments from a number of experts on
workplace safety who offered possible explanations for this
discrepancy.

"Drug Ads Hyping Anxiety Make Some Uneasy," by Shankar Vedantam in
the Washington Post, July 16, 2001, page A1.

This article reports on the efforts of GlaxoSmithKline, one of the
world's largest pharmaceutical manufacturers, to convince the public
that millions of people suffered from a particular mental disorder.
The company undertook a major advertising campaign to convince people
that they or their children suffered from this new psychological
disorder. This is exactly the sort of abuse that economists predict
would result from monopoly profits generated through drug patents.

"An Executive's Missing Years: Papering over the Past," by Floyd
Norris in the New York Times, July 16, 2001, page A1.

This article reports on the past history of Arthur J. Dunlap, the
former chief executive officer at Sunbeam. Mr. Dunlap, who had the
nickname "chainsaw" because of his willingness to lay off workers,
was fired from Sunbeam in 1998 over accounting irregularities.
According to the article, Mr. Dunlap had engaged in similar behavior
two decades earlier at another company, but had apparently managed to
keep his past secret as he became a top executive in several major
corporations.

"Belt Tightening Is Called Threat to the Economy," by David Leonhardt
in the New York Times, July 15, 2001, Section 1, page 1.

This article examines the potential impact of consumers' decision to
cut back on consumption, as a result of a weakening job market and
flat stock market. It notes that consumption growth has been the only
factor keeping the economy out of a recession in the last nine
months.


GLOBALIZATION

"Bush Urges Shift to Direct Grants for Poor Nations," by David E.
Sanger in the New York Times, July 18, 2001, page A1.

"Protestors at Bay, Rich Nations' Chiefs to Meet in Genoa," by
Alessandra Stanley and Warren Hoge in the New York Times, July 18,
2001, page A10.

"Fortress Genoa Awaits G-8 Leaders and Foes," by Alessandra Stanley
in the New York Times, July 19, 2001, page A12.

"Bush Scolds Protesters at Genoa Talks," no byline, New York Times,
July 19, 2001, page A12.

The Times article by Sanger discusses a speech in which President
Bush advocated that the World Bank convert many of its loans to
grants. The other Times articles report on preparations for the G-8
summit in Genoa, Italy. All of these articles include criticisms
directed against those who have protested the recent course of
globalization, including comments from President Bush and British
Prime Minister Tony Blair. For example, the Stanley and Hoge article
quotes Blair saying, "If the public knew [the protesters'] views,
they'd disagree with them," but neither this article nor any of the
others cited above present the protesters' views.

The theme repeated by the protesters' critics is that developing
nations must export to the industrialized nations in order to escape
poverty. It is worth noting that a large share of export earnings,
especially for the poorest nations, are used to service past debt. If
this debt were cancelled, poor nations would have to divert far fewer
resources to producing goods for export and would be better able to
develop their domestic economies. The TRIPS agreement, which extends
U.S.-type patent and copyright protection to developing nations, will
increase the flow of royalty payments and licensing fees from
developing nations, further increasing the need for developing
nations to export. In short, the industrialized nations are seeking
to impose a situation in which developing nations must increase their
exports. This need is not a natural development, as implied by the
protesters' critics.

The article by Sanger notes that the World Bank's programs "often go
awry," but attributes this fact to "local corruption or the conflict
between the bank's plans and
those of local and national leaders." It is also possible that the
World Bank's programs go awry because they are poorly designed or
driven by ideological motives -- such as the promotion of
privatization -- rather than a serious examination of conditions.
This was an argument made by Joseph Stiglitz, the former chief
economist at the World Bank.


THE ECONOMIC SLOWDOWN

"U.S. Slowdown Going Global," by Steven Pearlstein in the Washington
Post, July 18, 2001, page A1.

This article examines the extent to which economies are slowing
around the world. At one point, it presents a scenario -- attributed
to G-8 finance ministers and C. Fred Bergsten of the Institute for
International Economics -- that the U.S. economy will lift the world
economy out of its slump, as it did in 1998. This view seems
implausible on its face. The United States is currently running a
trade deficit equal to 4 percent of its GDP, which is leading the
country to borrow more approximately $450 billion a year from abroad.
In order to provide the same sort of stimulus as it did in 1998, the
trade deficit would have to rise to close to 6 percent of GDP, with
foreign borrowing approaching $700 billion a year. No industrialized
nation in the world has ever accumulated debt at this rapid a rate
for any significant period of time. If the 3.0 percent growth figures
projected by the Federal Reserve Board and others prove correct, this
level of borrowing would quickly lead to ratios of foreign debt to
GDP that could not possibly be sustained.

It is worth noting that Bergsten has often been seriously wrong on
major issues in the past. He was one of the major proponents of the
twin deficit theory in the eighties -- that the large U.S. budget
deficit was the cause of the trade deficit. While the budget deficit
has been turned into a large budget surplus, the trade deficit
(measured as a share of GDP) is larger than ever.

At one point the article refers to the Nasdaq stock market boom as
though this was the only cause of the over-valuation in stocks. In
fact, even ignoring the Nasdaq, the price-to-earnings ratios of
stocks continue to be close to 50 percent above historic levels. This
is in spite of the fact that the Congressional Budget Office projects
real profit growth over the next decade that will be less than half
its historic average.


DRUG PATENTS

"Europe Moves to Speed Up Approval of New Drugs," by Alan Cowell in
the New York Times, July 19, 2001, page W1.

This article discusses proposals by the European Commission to speed
up the approval process for new drugs and to extend the period during
which patent holders have exclusive market rights. While the article
notes that the beneficial effect that these proposals appear to have
had the stock prices of European pharmaceutical manufacturers, it
does not even mention the extent to which the extension of patent
exclusivity may increase the cost of drugs to European consumers.


WTO TALKS

"U.S., E.U. Near Accord on Trade Talks," by Paul Blustein in the
Washington Post, July 18, 2001, page E1.

This article reports on negotiations between the European Union and
the United States over the agenda for the WTO summit in November.
Much of the article is ostensibly devoted to the concerns of
developing nations, discussing efforts to increase their access to
markets in the industrialized nations.

In spite of this focus, the article never mentions the
reconsideration of the TRIPS agreement, the one item that developing
nations insisted be on the agenda at the WTO talks. By imposing U.S.-
type copyright and patent protection on developing nations, TRIPS
could drain hundreds of billions of dollars in royalty payments and
licensing fees from developing nations over the coming decades.

It is also worth noting that at one point the article refers to the
views of "free-trade advocates," without identifying any groups or
individuals. Most people who claim to support "free trade" also
support protectionist measures like copyrights and patents, and do
not object to professional restrictions that maintain high salaries
for doctors, lawyers and other professionals. It is unlikely that the
people referred to in this quote can accurately be described as "free
trade advocates."


CONSUMER SPENDING

"Economy Gains as Consumers Keep Spending," by John M. Berry in the
Washington Post, July 14, 2001, page E1.

This article reports on the Commerce Department's release on data for
retail sales for June. The headline and the article present the 0.2
percent increase in spending in a very positive light, implying that
consumer spending is continuing to propel the economy forward. The
reported increase in spending is approximately equal to the monthly
rate of inflation in the goods covered, which means that the Commerce
Department's data indicates that real spending was essentially
unchanged between May and June. This is the way in which the release
was reported in the New York Times (see "U.S. Reports Weak Retail
Sales, Casting Doubt on Early Recovery," by Louis Uchitelle, July 14,
2001, page B1).

There have been several previous articles in the Post, with this
reporter's byline, which have presented a much more positive view of
the economy than was warranted by the data. For examples,
see "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 5-4-01; and "Reports Offer
Positive Economic News," Washington Post, April 3, 2001, page E1, and
ERR 4-6-01.


STEEL

"Ex-Alcoa Boss May Become a Man of Steel," by Leslie Wayne in the New
York Times, July 17, 2001, page C1.

This article discusses the current situation of the steel industry in
the wake of the Bush administration's decision to act on industry
complaints of unfair foreign competition. The article neglects to
mention the impact of the high dollar on the competitiveness of the
steel industry. The dollar is currently between 20-30 percent higher
than a level that would be sustainable in the long run. This has the
same effect on domestic steel as if the U.S. paid a subsidy of
between 20-30 percent on every ton of steel imported from abroad. The
over-valuation of the dollar has far more to do with the industry's
current problems than with the structural problems cited in the
article.

At one point the article minimizes the importance of the steel
industry to the economy by pointing out that the combined stock
market capitalization of all domestic steel manufacturers is $10
billion, while Microsoft has a capitalization of $369 billion and
General Electric has a capitalization of $483 billion. Market
capitalization does not always provide a valid measure of a firm's
importance to the economy. For example Yahoo, which may never make a
real profit, had a market capitalization of more than $200 billion at
its peak last year. (Its current market capitalization is
approximately $10 billion.) A more standard measure of the industry's
importance would be value added, the sum of the wages and profits
generated by the industry. By this measure, the steel industry would
rank far above Microsoft, and close to General Electric in
importance.


GLOBAL WARMING

"U.S., Japan Are Pressed on Kyoto," by William Drozdiak in the
Washington Post, July 17, 2001, page A11.

This article reports on an international conference designed to reach
an agreement to curb global warming, which is taking place in
Germany. At one point the article reports that the previous
conference in the fall of last year broke down over a dispute over
trading pollution credits between countries. The article also reports
that the delegates will attempt to determine the extent to which
forests and farmlands -- which pull greenhouse gases out of the
atmosphere -- "should be factored into the equation."

According to reporting at the time, the last conference in the Hague
broke down primarily over a demand by the United States that it be
allowed to emit at levels above those agreed to in the Kyoto
conference in 1997, based on the fact that it has large amounts of
forests and farmlands (see "Global Warming Talks Collapse," by
William Drozdiak, Washington Post, November 26, 2000, page
A1; "Treaty Talks Fail to Find Consensus In Global Warming," by
Andrew C. Revkin, New York Times, November 26, 2000, Section 1, page
1; "Envoys Could Not Agree on Value of Forests to World Environment,"
by Andrew C. Revkin, New York Times, November 26, 2000, Section 1,
page 16; and ERR 12-1-00). The Clinton administration took the
position at the Hague conference that it should be able to count the
carbon dioxide pulled out of the atmosphere by its forests and
farmland against the ceiling it had agreed to three years earlier.
Since everyone at the Kyoto conference knew that the United States,
like other nations, has forests and farmlands, and set the ceilings
with this in mind, the U.S. was effectively demanding that it be
granted a higher ceiling than the one that it had originally
accepted.

There would be little dispute among the nations that increasing their
forests, farmlands, or other sinks for carbon dioxide, should be
counted against the limits. The issue that created controversy was
the U.S. effect to raise the limits based on existing carbon sinks.
This would seriously reduce the effectiveness of the treaty in
curbing global warming.


ARGENTINA

"Argentine with a Headache: The Economy," by Clifford Krauss in the
New York Times, July 18, 2001, page A12.

This article examines the situation of Domingo Cavallo, Argentina's
economy minister, as he tries to get Argentina out of its current
economic crisis. The article begins by asserting that Mr. Cavallo was
viewed as "the knight in shining armor who would lift Argentina out
of its three-year long recession," when he took over the position
four months ago. It is worth noting that many of Argentina's current
problems actually are the result of Mr. Cavallo's policies in a
previous government.

Mr. Cavallo made the decision in the early 1990s to tie Argentina's
currency to the dollar as a way to curb hyper-inflation. While the
policy was successful in taming inflation, it had predictable
consequences, which Argentina is now experiencing. When the U.S.
dollar rose against other major currencies, the Argentine currency
rose with it, making its goods uncompetitive in world markets. The
problem was exacerbated in 1999, when Brazil, Argentina's major
trading partner, devalued its currency.

Argentina's situation became even worse when Alan Greenspan began
raising interest rates in 1999 in order to slow the U.S. economy. In
order to maintain the link to the dollar, Argentina had to raise its
interest rates, even though it was already in a recession. Current
efforts to maintain the peg with the peso significantly overvalued
have led to even higher interest rates, enormous foreign borrowing,
and other measures that are hurting the economy.

At one point the article quotes Mr. Cavallo as saying that when he
became economics minister four months ago, he "didn't realize our
credit had totally evaporated." Argentina's financial difficulties
had been widely reported in the international business press at the
time (see "Speedy Start on Emergency Economic Plan in Argentina," by
Clifford Krauss, New York Times, March 24, 2001, page B1;
and "Argentina Presses for Ways to Jolt Its Economy Out of
Recession," by Clifford Kraus, New York Times, March 25, 2001,
section 1, page 11). If Mr. Cavallo was unaware of the extent of the
nation's credit problems it would suggest that he was an
extraordinarily ill-informed person to become the government's top
economic official.


GREENSPAN AND THE STOCK MARKET

"Slump Persists, Greenspan Says," by John M. Berry in the Washington
Post, July 19, 2001, page E1.

"Greenspan Warns of Serious Risk But Says Rebound May Be in Sight,"
by Richard W. Stevenson in the New York Times, July 19, 2001, page
A1.

These articles report on Alan Greenpan's testimony before House
Financial Services Committee. Both articles refer to the stock market
as being weak. The stock market is actually very strong compared to
its historic levels, with the price-to-earnings ratio above 25 to 1,
compared to an historic average of approximately 14.5 to 1. The
current valuation is especially high, given that projections for real
profit growth for the next decade are far below the historic
average.

At one point the Post article refers to the expectations of "Fed
officials" and "many private economists" that growth will pick up
before the end of the year. These people's record in forecasting
economic conditions has been unusually bad recently. They did not see
the slowdown prior to its beginning, and once it began they projected
that it would be over by the second quarter of this year. For
example, in September of 2000, the average forecast among the "Blue
Chip" economic forecasters for fourth quarter GDP growth was 3.6
percent. The actual rate was 1.0 percent. Their average forecast for
2001 was 3.5 percent. It would have been appropriate to note the poor
track record of this group when presenting their assessment of the
economy.