Economic Reporting Review
June 28, 1999
By Dean Baker
Gambling | Inflation | Trade | Russia | Developing Nations | Outstanding Stories
Gambling
"Panel Urges Pause in Spread of Legalized Gambling"
Edward Walsh
Washington Post, June 19, 1999, page A2
"Commission on Gambling Prescribes Broad Changes"
Brett Pulley
New York Times, June 19, 1999, page A9
These article discuss the release of a study, sponsored by the National Gambling Impact Study
Commission, that looked into the social and economic impact of the spread of legalized
gambling. Both articles note the study's claim that gambling has been an important source of
economic growth.
According to standard economic theory, the impact of gambling on growth would almost
certainly have been minimal. While money spent on gambling does lead to growth and jobs in
the gambling industry, if this money had not been spent on gambling, then by definition it would
either have been spent elsewhere or saved. If it had been spent elsewhere, then the jobs
created in the gambling industry are simply coming at the expense of other jobs in the
economy. If it would have been saved, then this money would have led to more investment and
economic growth in exactly the same way that saving the government surplus can lead to more
investment and growth.
The only way in which gambling may have actually led to increased economic growth is if the
opportunity to gamble with one's wages has encouraged people to work more than they would
have otherwise. While this may have been the case with some people, many of those who fall
into this group are compulsive gamblers. Taking advantage of these people's addictions may
not be the best way to promote economic growth.
Inflation
"Rolling, Rolling, Rolling"
Tim Smart
Washington Post, June 22, 1999, page E1
This article reports on a set of earnings forecasts that project corporate profits rising by 15
percent from their year ago levels in the second quarter of 1999, and 20 percent in the third
quarter. If these projections are even close to being accurate, it implies that corporations are
successfully increasing their profit margins, even though the unemployment rate is hovering near
4.3 percent.
This means that any concern that wage pressures are going to lead to accelerating inflation are
completely misplaced. Real wage growth is not exceeding productivity growth; in fact, these
numbers imply that it is not even keeping pace with productivity growth. Under such
circumstances, there is no reason that inflation should accelerate.
"Will a One-Step Rate Increase Satisfy Fed? "
John M. Berry
Washington Post, June 24, 1999, page E1
"Help Wanted on Inflation Front"
John M. Berry
Washington Post, June 25, 1999, page E1
These articles discuss the factors that the Federal Reserve Board will be considering when it
decides whether to raise interest rates next week. Both articles write as though any
acceleration in wage growth will necessarily be translated in higher inflation.
There has been a large shift in shares of national income, from labor to capital, over the course
of the this business cycle. The share of income going to profits has risen by more than 3.0
percentage points compared with the profit peak of the last business cycle in 1988. It doesn't
seem unreasonable to believe that workers might be able to get some portion of this back, now
that the unemployment rate is at a 30-year low.
The second article is written as though firms will not be able to get workers if there is not a
pool of the unemployed from which to draw. In fact, the most common way that firms generally
get workers is by luring them from other firms with offers of better pay and benefits. This may
mean that the least productive firms, who cannot afford to pay high wages, will not be able to
find workers. But this is the way a capitalist economy advances. Firms that don't keep pace
with the economy's overall rate of productivity growth go out of business.
This is precisely the reason that only 2 percent of the U.S. workforce works in agriculture
today, compared to more than 15 percent 50 years ago. These workers could be more
productively employed outside of agriculture. If the Federal Reserve Board had attempted to
slow the economy whenever inefficient farms could not get enough workers, it would have
seriously impeded the nation's economic growth.
Trade
"White House Tries to Fend Off Push for Steel Quotas"
David E. Sanger
New York Times, June 22, 1999, A1
"Bill to Restrict Steel Imports Fails to Clear Hurdle in Senate"
Paul Blustein
Washington Post, June 23, 1999, page A6
"Senate Kills Efforts to Impose Tight Limits on Steel Imports"
David E. Sanger
New York Times, June 23, 1999, A1
These article report on the Clinton administration's successful effort to stop a bill that would
place a quota on imported steel. The articles contrast this "protectionist" measure with the
administration's support for free trade.
Actually, the Clinton administration has not had objections to other protectionist measures.
Most recently it has been pursuing protectionist efforts to have U.S.-style patent law apply to
South Africa. The administration does not want South African drug manufacturers to be able to
produce AIDS drugs that would compete in their market with the drugs that are patented in the
United States. If it succeeds, the price of AIDS drugs in South Africa may rise by a factor of
20, making them unaffordable to the bulk of the population. By contrast, it is estimated that this
bill would raise the cost of steel in the United States less than 4.0 percent.
Both Times articles refer to a study by the Institute for International Economics, which found
that the proposed steel quota would cost consumers $800,000 for each job it saves. This
figure assumes that any savings on steel costs by firms, such as automobile or aircraft
manufacturers, are passed on to consumers in the form of lower prices. This may be a
reasonable assumption, if the savings were long-lasting. However, if the savings are the result
of a temporary drop in steel prices due to currency fluctuations or economic downturns
elsewhere, as seems plausible in this case, then any savings on steel prices will likely fatten the
profit margins of other corporations instead of being passed on to consumers.
The study cited in this article shows that quotas can be an expensive form of protectionism,
since it allows foreign corporations to charge more for their product. With tariffs, by contrast,
the government pockets the revenue and less money flows abroad, improving the trade
balance. However, precisely because quotas are expensive to consumers, they are very
unlikely to lead to the trade retaliation by other nations. In many cases, a foreign manufacturer
subject to a quota on its exports to the United States may actually see an increase in its profits,
even if its sales fall. For this reason, foreign manufacturers would be unlikely to press their
governments for retaliatory measures against the U.S. These articles include numerous
references to the probability that other nations would retaliate if the U.S. implemented the
proposed steel quotas.
"Lawsuits Are Prompting Calls for Changes to Clause in Nafta"
Timothy Pritchard
New York Times, June 19, 1999, page B2
This article reports on a lawsuit by a Canadian firm against the United States government over
a decision by the state of California to ban an environmentally harmful gasoline additive. The
article notes that this is one of a growing number of suits being filed under a provision of
NAFTA that allows corporations to sue foreign governments over the loss of a potential export
market.
It is worth noting, although it is not mentioned in the article, that this issue was a main argument
against NAFTA by its opponents, and more recently against the proposed Multilateral
Agreement on Investment. This argument was generally treated dismissively by supporters of
both treaties. According to the article, "trade experts" say that this part of NAFTA may have
to be rewritten.
"Durable-Goods Orders in May Rebounded With a 1.4% Rise"
Bloomberg News
New York Times, June 25, 1999, page C3
This article reports on a Commerce Department release showing a 1.4 percent jump in durable
goods orders in May. The article presents the data as evidence that manufacturing is
rebounding in the United States. This may not be accurate, since the report is giving data on
orders placed with U.S. manufacturers, not orders that will necessarily be filled with production
in the United States. Insofar as U.S. manufacturers either outsource to foreign suppliers, or
have items produced by foreign subsidiaries, an increase in orders will not be translated into an
increase in domestic production.
Russia
"Financially Strapped Russia May Press Summit for Payback"
David Hoffman
Washington Post, June 19, 1999, page A20
"Western Powers to Help Russia Cut Debts"
William Drozdiak and Charles Babington
Washington Post, June 20, 1999, page A24
Both of these articles discuss Russia's efforts to get additional economic assistance at the G-8
summit meeting in Cologne, Germany. Both articles portray Russia as being in a desperate
situation, where addition Western assistance in repaying its debts is essential to its economic
survival.
The first article asserts that Russia "desperately needs to defer some of the debts or it will face
distressing alternatives: a sovereign default, which could further hurts its already rock-bottom
credit worthiness; pay the debt at the expense of miners, teachers, and nurses; or eat into the
remaining hard currency reserves and watch the ruble tumble and hyperinflation take off." It
comments further on negotiations for assistance, "Now, Russia is racing the clock."
It is not clear that Russia stands very much to lose by not reaching agreement on repaying its
debt, nor that it has more at stake than do western financial interests. In recent months,
Russia's economy has actually been growing at a decent pace. It has now largely regained the
ground it lost in the wake of its financial crisis last August (see "Signs That Russia's Economy
May Be Gradually Reviving," by Neela Banerjee, New York Times, 5/15/99, page B2).
Russia has also been quite successful in getting its creditors to accept substantial write-downs
of its debt. It recently persuaded its largest private creditor to accept a repayment package
under which Russia would pay less than 5 cents on a dollar (see "Bankers Split Over Russian
Debt Payment," by Alan Cowell, New York Times, 3/2/99, page C4).
If Russia can continue to negotiate significant debt write-downs with its creditors and maintain
a respectable rate of growth without coming to terms with the IMF, it will be very damaging to
the prestige and credibility of the IMF. In seven years of running its economy under IMF
tutelage, Russia economy's shrank by approximately 50 percent, a collapse without precedent
for a nation at peace. Emerging from this catastrophe without reaching terms with the IMF
would provide an example for other developing nations, suggesting that they could ignore the
IMF as well. To date, the only nations that have been declared in default by the IMF are rogue
states like Libya or Iraq. If there is no agreement on rescheduling debt payments, Russia would
be the first nation with a democratically elected government to be declared in default by the
IMF.
Developing Nations
"Taming Currency Crises"
Paul Blustein
Washington Post, June 20, 1999, page H1
This article discusses various proposals that have been put forward to limit volatility in currency
markets. At one point, the article, quoting Israeli Central Bank governor Jacob Frenkel,
presented the choices as having stable currency markets and poor economic growth, or having
the "rapid growth in living standards that many developing countries can enjoy by remaining
open to international lenders and investors." This is an unusual way to characterize the issue,
since virtually no one in the debate has advocated closing developing nations off to foreign
investment. The only issue is the degree of control over this investment.
The notion that many developing nations stand to experience rapid growth by having
uncontrolled flows of capital is contradicted by recent experience. Nations such as Brazil and
Mexico, which have freed up capital flows, have experienced per capita GDP growth of less
than 1 percent annually since they took this route. By contrast, in the two decades prior to
1980, when significant controls on capital were in place, per capita GDP grew at annuals rate
of 4.7 percent and 3.7 percent in Brazil and Mexico, respectively. This experience was typical
for developing nations in this period in which capital controls were almost universal.
Later the article comments on the new wisdom among IMF officials, that developing nations
should not fix the value of their currency against the dollar. It then cites Russia and Brazil as
examples of nations that made this mistake and thereby wasted billions of dollars in reserves
trying to support their currency. Actually, both nations attempted to support their currency at
the insistence of the IMF, which argued at the time that devaluation would have a devastating
impact on these nation's economies. (E.g., see "Tense Times on Front Line of Brazil's Battle on
Hyperinflation: Empty Shops," by Diana Jean Schemo, New York Times, 1/20/99, page A8;
"Hopes for Russian Economy Fade," by Clay Chandler, Washington Post, 8/28/98, page
A16.)
The article also discusses various plans for establishing ranges that limit the extent of currency
fluctuations, and includes the assertion that former Treasury Secretary Rubin and his Treasury
team "consider them impractical and likely to create more problems than they solved." It is
possible that this actually is the view of these officials, but it also possible that they see such
proposals as inimical to the interests of the United States financial industry. A previous Times
article reported on how Rubin had pushed through policies that were perceived as being in the
interests of Wall Street over the objections of senior Clinton administration economists such as
Laura Tyson and Joe Stiglitz. (See "How U.S. Wooed Asia To Let Cash Flow In," by
Nicholas D. Kristof and David E. Sanger, New York Times, 2/16/99, page A1.)
[Top]
Outstanding Stories of the Week
"Despite the Fears, Inflation Still Refuses to Materialize"
Louis Uchitelle
New York Times, June 20, 1999, Section 3 page 4
"Greenspan on Inflation: Wait, Don't Wait. Go Figure"
Michael M. Weinstein
New York Times, June 20, 1999, Section 4 page 3
These articles note the persistent lack of inflationary pressures in the economy in spite of the
relatively low rate of unemployment over the last several years. Both articles point out that this
development has forced economists to rethink their views on inflation.
"Medicare Overpays HMOs, Report Says"
Amy Goldstein
Washington Post, June 23, 1999, page A3
This article reports on the findings of a study from the General Accounting Office, which has
not yet been released, that HMOs are being overpaid for their Medicare patients. The HMO
industry has been engaged in a major lobbying campaign to have their payments increased.
"Russian Financial Eclipse Is an Opportunity for Ford"
Neela Banerjee
New York Times, June 23, 1999, page C11
This article reports on plans by Ford to build a new automobile factory in Russia. The article
notes that the collapse of Russia's currency last summer has increased its potential as a base for
manufacturers.
"Victory for Union at Plant in South Is Labor Milestone"
David Firestone
New York Times, June 25, 1999, page A1
This article reports on the vote by the workers at a major Southern textile manufacturer to join
the Union of Needletrades, Industrial and Textile Employees. According to the article, more
than 5,200 workers would be represented by the union, making this one of the largest
organizing victories for unions in the South in a considerable period of time. This election was
not mentioned in the Washington Post.
[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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