Economic Reporting Review
June 18, 2001

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

OUTSTANDING STORIES OF THE WEEK

"As Biotech Crops Multiply, Consumers Get Little Choice,"
by David Barboza in the New York Times, June 10, 2001,
Section 1, page 1.

This article reports on the spread of genetically modified crops
throughout the world. It points out that the crops have spread not
just through deliberate sales of genetically modified crops, but
alsothrough mislabeling of seed and through wind-blown pollen. As a
result, in spite of the industry's promises, it may now be impossible
for consumers to avoid food from genetically modified plants.

"Lawyers and Accountants Expect Windfall From Estate Tax Repeal," by
David Cay Johnston in the New York Times, June 14, 2001, page C1.

This article examines some of the legal and accounting complications
stemming from the gradual repeal of the estate tax. The article
points out that the changes, which are not entirely predictable at
this point, will force the families affected by the tax to rewrite
wills and make other adjustments to their assets. This will create a
large amount of work for lawyers and accountants. This is ironic,
because one of the arguments for eliminating the tax was precisely
to reduce the amount of paperwork associated with inheritances.



SOCIAL SECURITY AND MEDICARE

"Government by Wish List," by Richard W. Stevenson in the New York
Times, June 10, 2001, Section 4, page 3.

This article assesses the prospects for future budgets now that
President Bush's tax cut has been signed into law. At one point the
article asserts, "Looking ahead two decades, the nation faces paying
Social Security and Medicare benefits to a rapidly aging population,
a challenge that would be difficult even if the current surplus
projections prove to be correct, and perhaps overwhelming if the
surplus evaporates."

Current projections from the Social Security and Medicare trustees
show that the costs of these programs will rise by an amount equal to
approximately 1.9 percent of GDP over the period from 2000 to 2020.
While this is considerably more rapid than the increase of 0.7
percentage percent of GDP from 1980 to 2000, it is slower than the
increase in spending on these programs of 2.5 percentage points of
GDP from 1970 to 1990.

The article gives no reason why it expects the projected increases
in the cost of these programs to be more unmanageable than the
larger ones experienced in previous decades.

"Bush Commission on Social Security May Propose Caps," by Richard
W. Stevenson in the New York Times, June 12, 2001, page A1.

"Social Security Panel Meets, Urges Options for Investing," by Amy
Goldstein in the Washington Post, June 12, 2001, page A23.

These articles discuss the first meeting of President Bush's Social
Security Commission. Both articles include comments that may mislead
readers about the financial health of the program. For example, at
one point the Times article comments that the system "will begin to
running short of money" in the next few decades. This refers to the
fact that system will begin to draw upon the surplus that is
currently being built up to help defray the cost of paying for the
retirement of the baby boomers. This can hardly be viewed as a crisis
since this is exactly the situation that was anticipated by the
Greenspan Commission, when it instituted the last major reform of
Social Security in 1983. (Senator Daniel Patrick Moynihan, the co-
chair of the Bush Commission, was the ranking Democrat on the
Greenspan Commission.)

One of the sub-heads of the Times article is "Restoring Fiscal
Health." It is worth noting that Social Security is in better
fiscal health at present than at any point in the 1940s, 1950s,
1960s, or 1970s.

The Post article asserts that the Commission began preparing to
"demonstrate the frailties of the current Social Security system."
It would have been more accurate to say that the Commission
will try to convince the public that the system is frail.

This article also includes an assertion that Social Security "is
predicted to start becoming financially unstable in the middle
of the next decade." As noted above, this is exactly the situation
envisioned by the Greenspan Commission in 1983. Its proposal won
near unanimous approval from Congress, so it wasn't seen as a
problem at the time; the article presents no reason why Greenspan
and his colleagues should be seen as exercising bad judgment for
setting the system on this path.

EUROPE

"Optimism Recedes as Europe Faces Long-Term Issues," by Edmund L.
Andrews in the New York Times, June 14, 2001, page W1.

This article reports on an alleged bout of pessimism among
European leaders over the continent's economic prospects. Most of
the article's central points are based on mistakes or fundamental
misunderstandings.

For example, the article asserts that "the Center for European
Policy Studies in Brussels published a report on Monday concluding
that European productivity had declined in the last six years."
This is wrong. The report found that the rate of productivity growth
in Europe had slowed; it did not find that productivity had fallen.
Until the mid-1990s, Europe enjoyed considerably faster productivity
growth than the United States. It appears that productivity growth
in Europe fell to the 1973-1995 U.S. rate, just as the U.S. rate
accelerated in the late 1990s.

A slower rate of productivity growth implies that living standards
are improving at a slower rate, other things being equal. Falling
productivity, on the other hand, implies declining living standards.
Instances of falling productivity are extremely rare, except in a
cyclical downturn or in the presence of war or natural disaster.

The article also makes repeated references to the notion that
nations have a "speed limit" to their growth rate. This is a
misrepresentation of the "non-accelerating inflation rate of
unemployment" (NAIRU) theory, which holds that nations cannot get
below a fixed rate of unemployment without triggering ever-
accelerating inflation.

This theory has been largely disproved by the events of the last
seven years. Nearly every nation in the OECD has seen its
unemployment
rate fall far below the level that the OECD and other authoritative
sources had identified as their NAIRUs without experiencing any
significant upturns in inflation. For example, just four years ago,
the OECD estimated the NAIRUs for Germany, Belgium, and Sweden at
9.6 percent, 11.6 percent, and 6.7 percent, respectively. According
to the OECD, their current unemployment rates are 7.7 percent, 6.8
percent, and 4.9 percent, respectively. If monetary policy had
adhered strictly to the OECD's guidance, and acted to prevent
unemployment rates from falling below the estimated NAIRUs, millions
of European workers who currently have jobs would be unemployed.

The article also repeatedly comments on Europe's problems with
inflation. The inflation rate in Europe over the last twelve months
has been slightly lower than the inflation rate in the United States
over the same period, with the European rate averaging approximately
3.0 percent, while the U.S. rate has been 3.4 percent.

The article's main sources appear to be proponents of the NAIRU
view who would like to dismantle European welfare states. There is
no attempt to include an opposing view, although there are many
prominent economists and elected officials, as well as millions of
European citizens, who do not share this view. An alternative
explanation of relatively high unemployment is the contractionary
monetary policy pursued by the European Central Bank. The head of
the Central Bank was one of the main sources for the article.

TRADE IN NURSING SERVICES

"Hospitals Go Abroad to Fill Slots for Nurses," by Bill Brubaker in
the Washington Post, June 11, 2001, page A1.

This very informative article examines how hospitals in the
Washington metropolitan area have been recruiting nurses from all
over the world in order to avoid paying higher wages. The article
notes that the large pay differentials between the D.C. area and
nations in the developing world (and even with some developed
nations) make it profitable for hospitals to pay to bring foreign
nurses into the country, and even to subsidize their education in
instances where it is necessary for them to get additional training.

It is worth contrasting this situation with the labor market for
doctors. In that case, the government restricted entry of foreign
doctors precisely because it was believed that they would lower the
wages of doctors in the United States ("Caught in the Middle," by
Lena H. Sun, Washington Post, March 19, 1996, Health Section, page
10; "A.M.A. and Colleges Assert There is a Surfeit of Doctors," by
Robert Pear, New York Times, March 1, 1997, page A7, and "U.S. to Pay
Hospitals Not to Train Doctors, Easing Glut," by Elisabeth Rosenthal,
New York Times, February 15, 1997, page A1). Apparently, doctors
have been more effective than nurses in controlling competition in
their labor market.

THE IMF

"Global Realities Redefine Bush's Agenda," by David E. Sanger in the
New York Times, June 11, 2001, page A6.

This article discusses some of the global issues facing President
Bush as he makes his first trip to Europe as president. At one point
the article discusses IMF loan programs to countries facing financial
crises and refers to these loans as a "bail out" for countries that
have "dug themselves into an economic hole."

This characterization of IMF loan programs is questionable. In some
cases, such as Brazil and Russia, the IMF programs clearly made
matters worse for the countries. In both cases the IMF insisted that
the countries waste billions of dollars of foreign exchange in an
effort to prop up an over-valued currency. Both of these efforts
failed, as they were eventually forced to devalue their currencies.
In both cases, the devaluation helped to spur economic growth, as
domestically produced goods were suddenly far more competitive on
world markets.

THE DOLLAR

"The Buck That Didn't Stop," by John M. Berry in the Washington Post,
June 10, 2001, page H1.

This article discusses the continued strength of the dollar in the
face of several factors, such as declining interest rates and large
current account deficits, which should be expected to depress its
value. Several aspects of the analysis in the article are of dubious
accuracy.

For example, the article characterizes Europe as having "overly
rigid" labor markets. "Rigid" in this context means protections for
workers, such as restrictions on firing, generous unemployment
benefits, and high rates of unionization. There is considerable
dispute among economists as to whether these sorts of protections
slow growth, since the evidence is quite mixed. Some of the
industrialized nations that have enjoyed the most rapid growth in
recent years, and lowest unemployment rates, such as Ireland and the
Netherlands, have very strong labor market protections. On the other
hand, New Zealand is the country that the OECD's economists felt had
gone the farthest in eliminating labor market protections in the last
two decades. Its productivity growth has been the slowest in the OECD
over this period, and its unemployment rate is higher than that of
many European countries, including such bastions of the welfare state
as Sweden and Denmark.

The article also cites possible future tax increases in Europe, to
support under-funded retirement systems, as a disincentive to
investment. In standard economic theory, the payroll taxes that are
the primary source of funding for these systems are seen as coming
out of wages. An increased tax burden on workers would not be an
obvious disincentive to investment. It is also worth noting that the
cost of employer-provided health insurance in the U.S., which can be
seen as similar to a tax in many ways, is rising far more rapidly
than any plausible projections of the cost of European pension
systems.

At one point the article asserts that Europe has not experienced the
same sort of upturn in productivity growth as has the United States.
While the United States has enjoyed somewhat more rapid productivity
growth than Europe for the period from 1996 to 2000 (partially as
result of differences in measurement), it actually had considerably
slower productivity growth than all countries in Europe over the
previous fifteen years. According to the OECD, productivity growth
averaged 1.2 percent annually in the United States from 1980 to 1995,
compared to 1.9 percent in Japan, 2.1 percent in Italy and Germany,
and 2.2 percent in France. Based on the recent history, it is not
clear why anyone would expect the United States to maintain a more
rapid pace of productivity growth in the future.

In assessing the costs and benefits of a high dollar, the article
notes that a high dollar lowers inflation. While this is correct, it
is important to note that this is a short-term benefit. The high
dollar makes imports cheaper and therefore raises the trade deficit.
As a result of the current trade deficit and interest payments on
past borrowing, the United States is currently borrowing
approximately $450 billion a year from abroad. This borrowing is no
more sustainable than a budget deficit of the same size. In the short-
term, foreign borrowing allows the nation as a whole to increase its
living standard, in the same way as accumulating credit card debt
allows a family to do so. In the long-run this borrowing will lower
living standards, since interest and dividend payments to foreigners
will have to be made out of domestic production in the United States.
This will leave fewer resources to be consumed or invested
domestically.

GLOBAL WARMING

"Bush Voices Doubts on Global Warming Causes," by Mike Allen and
Eric Pianin in the Washington Post, June 12, 2001, page A1.

"Bush Will Continue to Oppose Kyoto Pact on Global Warming," by
David E. Sanger in the New York Times, June 12, 2001, page A1.

These articles report on President Bush's continued opposition to
the Kyoto Pact on climate change. Both articles report on the
treaty's requirement that the United States reduce its emissions of
greenhouse gases in the period between 2008-2012 to a level 7 percent
below its 1990 level.

This is not entirely accurate. The treaty would require that groups
of nations attain these levels of reductions with trading allowed
among them. The United States is in a group that includes Russia.
With the collapse of Russia's economy in the wake of the break-up of
the Soviet Union, its emissions levels are now far below its 1990
level. This decline would make it far easier for the group including
the U.S. to reach its target. (The exact terms under which emission
declines in Russia could offset increases in the U.S. had not yet
been established.)

Although it made no mention of the ability of the U.S. to meet its
targets partially as a result of the decline in Russian emissions,
the Times article did briefly refer to a similar situation. It noted
President Bush's comment that the decline in emissions in former East
Germany will make it easier for Germany to reach its targets under
the treaty.

Both articles also made references to President Bush's complaint that
the Kyoto agreement exempts developing nations, such as China and
India (which are identified as "two other large polluters" in the
Post article) from the caps imposed on industrialized nations. It is
worth noting that the ceilings imposed in the Kyoto agreement are
based on countries' historical levels of emissions. There is no
obvious ethical basis for allowing a nation to pollute more in the
future than other nations, simply because it has done so in the past.
If the ceilings were instead related in some way to population (which
may appear more fair), then any cap that was remotely feasible for
the United States would still allow for a huge increase in emissions
by China and India.

At one point, the Times article reports that Bush "remained firm in
rejecting the 1997 Kyoto accord, noting that it set no standards for
major emitters of greenhouse gases, like China and India, while
creating mandates for the United States that could prove economically
crippling." While some studies have shown that the requirements in
the Kyoto agreements could reduce growth in the United States, their
impact would be considerably smaller than previous shocks to the
economy, such as the military build-up in Reagan era. Given the
potential size of the impact of the Kyoto agreement, the use of the
phrase "economically crippling" is questionable.