Economic Reporting Review
July 2, 2001

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

OUTSTANDING STORIES OF THE WEEK

"As Welfare Deadline Looms, Answers Don't Seem So Easy," by
Nina Bernstein in the New York Times, June 25, 2001, page
A1.

This article discusses the plight of families receiving
welfare as they approach the five-year benefit limit set in
the 1996 law. Many of the women receiving welfare have been
unable to hold a full-time job in the paid labor market,
because of health conditions and inadequate child care. It
is not clear what will happen to these families when they
reach their benefit limits.

"Lacking Pensions, Older Divorced Women Remain at Work," by
Louis Uchitelle in the New York Times, June 26, 2001, page A1.

This article examines the plight of older divorced women.
In many cases, these women have no access to pensions
earned by their husbands, and have few resources of their
own, other than Social Security. As a result, many work
into their late sixties or beyond.

"Unions Say Labor Department Is Ignoring Wage Requirements,"
by Steven Greenhouse in the New York Times, June 27, 2001,
page A15.

This article reports on a suit against the Labor Department
brought by two farm worker unions over its administration
of a foreign guest worker program. Under current law, the
Labor Department is required to adjust wages every year for
the workers brought in under the program, in accordance
with inflation and prevailing wages in the industry. The
Labor Department is interpreting this to mean that it can
make the adjustment at any point prior to December 31, even
if the adjustment occurs after the work has already been
completed.


SOCIAL SECURITY AND MEDICARE

"Bush Seeking Defense Increase," by Thomas E. Rick in the
Washington Post, June 23, 2001, page A1.

"$33 Billion Rise to Be Sought for Military," by Thom
Shanker and James Dao in the New York Times, June 23, 2001,
page A9.

Both of these articles discuss President Bush's budget
proposals for the military. Both make references to the
possibility that increased military spending may cause the
government to "dip" into the Medicare or Social Security
surplus. It is worth noting that, under current law,
dipping into these trust funds has no effect whatsoever on
either program. Medicare and Social Security will have the
exact same amount of resources available to them regardless
of whether Congress spends the surplus these programs are
currently accumulating.

At one point the Post article refers to President Bush's
plan to increase military spending as "reforms." This term
carries a positive connotation which is inappropriate for a
news article. It would be more neutral to refer to the
higher spending as a military "build-up."

"Paving the Way for Privatizing Social Security," by Glenn
Kessler in the Washington Post, June 26, 2001, page A1.

This informative article reports on the concerted effort
that conservatives have made over the last two decades to
move the privatization of Social Security from a fringe
cause to the center of a major national debate. At one
point it refers to research by Harvard Professor Martin
Feldstein, which purported to show that Social Security
reduced private savings. Subsequent research showed that
Professor Feldstein's results had been generated by a
programming error (see "Social Security and Private Saving:
New Time Series Evidence," by Dean Leimer and Selig Lesnoy,
Journal of Political Economy, June 1982, pp 606-29). This
research showed that when the data was entered correctly,
there was no statistically significant relationship between
Social Security and private savings in Feldstein's model.

The article also refers to claims by proponents of
privatization that the United States is lagging behind
other nations in not following the route of privatization.
Sweden is included on the list of countries cited by the
privatizers. While Sweden's system does include an
individual account component, its core system is
approximately one third larger than the U.S. system. In
other words, if the U.S. were to follow the Swedish model,
it would have to significantly expand its Social Security
system, and then add on an individual account component, as
President Clinton had proposed with his Universal Savings
Account system. This would take the system in the opposite
direction from what the privatizers are advocating.


FARM POLICY

"House Backs $5.5 Billion in New Aid for Farmers," by
Elizabeth Becker in the New York Times, June 27, 2001,
page A12.

This article reports on a vote in the House of
Representatives to appropriate $5.5 billion for emergency
farm aid. The article notes concerns expressed by many
representatives that the global market was responsible for
farmers' problems. It then asserts that "overproduction is
as much to blame for the flat prices of commodities as the
global marketplace."

While overproduction by U.S. farmers is clearly a part of
the problem facing farmers, it is unlikely that it is more
important than the impact of the global economy. There is a
single world price for most agricultural products set by
worldwide conditions. As a result of the dollar being over-
valued by 20-30 percent, U.S. farmers are being forced to
accept prices that are 20-30 percent lower in dollars
terms, than if the dollar were valued at a more sustainable
level. For example, suppose farmers in Brazil, Canada,
Russia and other countries are able to profitably sell
their wheat at $2.00 a bushel, when the dollar is at its
normal level. When the dollar rises by 20-30 percent
against the Brazilian, Canadian, and Russian currencies,
the price of wheat will stay nearly constant, when measured
in these currencies, but will fall by between 20-30 percent
measured in dollars. While farmers in these other countries
will still be able to sell their wheat profitably, farmers
in the U.S. will have to be able to get by selling wheat at
prices between $1.40-$1.60 per bushel, 20-30 percent less
than what they received before the dollar became over-
valued.

It is worth noting that the current over-production was a
predictable outcome of the elimination of the system of
price supports that had been in place prior to 1996. This
system had restricted the supply of most farm commodities.
The 1996 "Freedom to Farm" Act eliminated most of the
supply restrictions. The reporting on this Act at the time
was overwhelmingly positive. It rather mentioned the
potential problems of overproduction, which the supply
restrictions were designed to prevent.


CONSUMER CONFIDENCE

"Economic Reports Show Gains," by John M. Berry in the
Washington Post, June 27, 2001, page E1.

This article reports on the release of several new economic
reports. The article notes that one of the reports, the
U.S. Conference Board's consumer confidence index showed a
higher reading in June than May. It is worth noting that
the increase in this measure was entirely attributable to
an improvement in the measure of expectations about the
future. Consumers' assessments of current conditions
actually worsened in the month. Consumption patterns are
far more closely tied to current sentiments than
expectations about the future. Expectations about the
future change frequently and are very weakly associated
with consumption.

This article also referred to the reports showing a rise in
the sales of new and existing homes in May. It is important
to recognize that sales are recorded at the point where the
transaction is completed. Typically, there is a 6-8 week
gap between when a contract is signed for a home sale, and
when the sale actually takes place. This means that the
figure for May home sales is revealing more about the
housing market in March and April, rather than May. The
Mortgage Banking Association's survey for new mortgage
applications is a better indicator of the current strength
of the housing market. This index has shown some decline in
recent weeks.


THE ECONOMY AND THE BUDGET SURPLUS

"Slowdown May Threaten U.S. Surplus," by Richard W.
Stevenson in the New York Times, June 28, 2001, page C1.

This article discusses the possibility that the government
may end up spending a portion of the Medicare and Social
Security surpluses as result of the tax cut and slower
economic growth. It is worth noting that, under current
law, spending the surpluses from these programs has no
effect on their financial condition. Both programs will own
the exact same amount in government bonds regardless of
whether or not the government spends the money it is
borrowing from them.

In citing the reasons that the revenue may fall short of
projections the article does not mention the projections
for capital gains tax revenue. The Congressional Budget
Office has projected that the government will collect more
than $100 billion annually in capital gains tax revenue
over the next decade. Since it has projected that profits
will grow at a real rate of less than 1 percent annually,
this would imply that stock prices will continually to rise
from their current near record-high price to earnings
ratio. Few economists consider this likely.

The headline for the jump of the article asserts that
"Economists Fear Shrinkage in Projected Budget Surplus."
None of the economists mentioned in the article indicated
any "fear" about the prospect of a shrinking surplus. It is
unlikely that any economists would express such fear, since
the economic consequences of a smaller surplus or modest
deficit are trivial.


THE FEDERAL RESERVE BOARD AND THE ECONOMY

"Fed Trims Interest Rates Again," by John M. Berry in the
Washington Post, June 28, 2001, page A1.

"Fed Lowers Rates by Quarter-Point in 6th Cut of Year," by
Richard W. Stevenson in the New York Times, June 28, 2001,
page A1.

These articles discuss the Federal Reserve Board's decision
to lower short-term interest rates by one quarter of a
percentage point. The Post article relies on four sources
to provide analysis, economists at three financial firms
(Merrill Lynch & Co., Bank of America, and Duetshce Bank)
and an economist at a consulting firm (High Frequency
Economics). The Federal Reserve Board's decisions on
interest rates affects the whole population through their
impact on the number of jobs in the economy and the
interest rates that people pay on credit cards, car loans,
and home mortgages. It would have been appropriate in
interview economists in academia, labor unions, or even
non-financial firms, in order to present a broader
perspective on this issue.

The Times article attempts to access the factors that are
likely to affect economic growth and inflation in the rest
of this year and beginning of next. It does not mention the
impact of the stock market, which is still at a level that
is close to twice its historic price-to-earnings ratio.


JAPAN

"Japan Is Resisting Following the Fed on Rates," by
Stephanie Strom in the New York Times, June 28, 2001,
page W1.

This article discusses the refusal of the Bank of Japan to
have any further easing of monetary policy until the
government implements the economic program it advocates. At
one point the article justifies the bank's behavior, "the
bank is loath to loosen too much, lest it relieve the
pressure on other policy makers to take the painful steps
needed to revive the sagging economy."

It is not clear that painful steps are needed to revive
Japan's economy. Two of the world's most prominent
economists, Princeton Professor Paul Krugman and Harvard
Professor Jeffrey Sachs, have argued that the main obstacle
to Japan's economic recovery has been the behavior of the
bank itself. They argue that the best policy Japan could
pursue presently would be to have a bout of modest
inflation, which could be brought on by the bank's decision
to print more money. This would reduce real interest rates
(the real interest rate is equal to the nominal interest
minus the inflation rate), and thereby stimulate
consumption and investment. It would also reduce the debt
burden of corporations, banks, and the government.

The article should have presented this alternative
perspective, instead of implying that the economic views of
the Japanese Central bank are necessarily correct.


TRADE NEGOTIATIONS

"Seattle Failure Weighs on Future of New Trade Talks,"
by Elizabeth Olson in the New York Times, June 26, 2001,
page W1.

This article discusses the prospects for a new round of
multi-lateral trade talks beginning after the WTO meeting
in Qatar in November. While the article discusses many of
the conflicts between the developing and industrialized
nations, it neglects to mention the TRIPS agreement. This
agreement requires developing nations to adopt U.S.-type
patent and copyright laws. It will lead to an outflow of
billions of dollars in royalties and licensing agreements
from developing nations to the rich nations, and could
block access to essential drugs for people in developing
nations. The impact of the TRIPS agreement has been put on
the agenda for the November meeting at the request of
developing nations.

At one point the article refers to a statement by President
Bush, in which he referred to free trade as a "moral
imperative." It is worth noting that this statement
contradicts the efforts of his administration to increase
copyright and patent protection through TRIPS and other
appendages to trade pacts, which will restrict commerce in
a wide range of products.