Economics Reporting Review
STOCK MARKET UNDER REVIEW
Week of May 26 - June 1
Dean Baker is co-director of the Center for Economic and Policy Research.
OUTSTANDING STORIES OF THE WEEK
"Buy, They Say. But What Do They Do?" by Gretchen Morgenson in the New York Times, May 27, 2001, Section 3, page 1.
This article examines the personal investment patterns of several stock analysts who had been major promoters of IPOs. It notes several examples of analysts who were selling shares of stocks that they were enthusiastically promoting in their analyses.
"Why the Happy Talk From Chief Executive Cheerleaders?" by Gretchen Morgenson in the New York Times, May 27, 2001, Section 3, page 1.
This article notes the tendency of corporate executives to try to talk up their stock's price even when there is no real basis for the optimism they express. It points out that a recent change in the law governing disclosure of corporate information makes it almost impossible for investors to sue for damages that they could incur as a result of trading on such unwarranted statements of optimism.
"Inept Physicians Are Rarely Listed As Law Requires," by Robert Pear in the New York Times, May 29, 2001, page A1.
This article reports on the failure of HMOs and hospitals to report disciplinary actions have been taken against doctors for incompetence or misconduct. Apparently because they are afraid of being sued, HMOs and hospitals rarely report such instances, even though they are required by law to do so.
"An Internet Tracking System Questions the Value of Advice Offered by Many Brokerage Firms," by Market Place in the New York Times, May 29, 2001, page C5.
This column reports the findings of a study by Investars.com, which analyzed the performance of the stocks recommended by several leading brokerage houses. It found that the recommended stock picks vastly trailed the overall market, and in most cases would have actually led investors to lose money over the last four years, even though the market as a whole has risen by more than 75 percent over this period.
INCOME GROWTH
"Study Details Income Gap Between Rich and the Poor," by Richard W. Stevenson in the New York Times, May 31, 2001, page C4.
This article reports on a new study by the Congressional Budget Office which shows that the wealthy have received most of the benefits of the nation's economic growth over the last two decades. At one point the article comments: "confirming with statistics what common sense suggests, the study found that most people benefited from the generally strong economy of the last 20 years, with 80 percent of the nation's 103 million households enjoying income gains."
Growth over the last twenty years has actually not been particularly strong. The growth rate averaged 3.3 percent annually from 1980 to 2000. By comparison, it averaged over 3.8 percent in the prior twenty years. Since the benefits were far more evenly distributed in the earlier period, most families had much more rapid increases in living standards from 1960 to 1980. Median family income grew at the rate of 2.1 percent annually from 1960 to 1980, while it grew at just a 0.8 percent annual rate in the last twenty years.
THE EURO
"Europe Central Bank Declines to Support the Falling Euro," by Bloomberg News in the New York Times, June 1, 2001, page C8.
This article discusses the decision of the European Central Bank not to support the euro following a recent decline. At the end, the article warns, "A falling currency can start a sell-off of bonds and stocks by foreign investors out of concern the investments will generate losses." While this can be the result of a fall in a currency, this sort of flight generally only happens when the fall is expected to persist. Given that the euro zone nations have a current account surplus (and the fall in the euro should increase the surplus), and the United States already has an unsustainable current account deficit, there would be little reason for investors to expect any decline in the euro to be long lasting.
TRADE POLICY
"Bush Foreign Policy Plans Through Democrats' Prism," by Jane Perlez in the New York Times, May 28, 2001, page A5.
This article examines how the Bush administration's foreign policy is likely to be affected by the Democrats' takeover of the Senate. At one point it discusses the fact that South Carolina Senator Ernest F. Hollings will head the Commerce Committee. It notes that Senator Hollings has been a critic of recent trade pacts, adding that "many in his state, where textile mills have been closing for decades because of overseas competition, are suspicious of free trade."
This is an unusual way to characterize the views of the people in South Carolina. They oppose trade pacts which put them in competition with much lower paid workers in developing nations, in the same way that doctors oppose arrangements that allow foreign doctors into the United States to compete with them, and drive down their salaries (e.g. see "Caught in the Middle," Lena H. Sun, Washington Post, March 19, 1996, Health Section, page 10, or "A.M.A. and Colleges Assert There is a Surfeit of Doctors," by Robert Pear, New York Times, March 1, 1997, page A7).
TRADE AND THE DOLLAR
"Steel Firms Said to Sway White House," by Paul Blustein in the Washington Post, May 26, 2001, page E1.
This article reports on the efforts of steel producers to get the Bush administration to take measures to reduce steel imports. At one point the article notes the effort to gain protection began in 1998 "when a torrent of foreign steel drove a number of firms into bankruptcy and contributed to the layoffs of thousands of steel workers." It would have been appropriate to note that the tide of imports was associated with the plunge in the value of foreign currencies (i.e. a rise in the value of the dollar) that followed in the wake of the East Asian financial crisis. To a large extent the problems facing the steel industry are the result of the high dollar policy that was pursued by the Clinton administration and is now being followed by the Bush administration. This policy effectively provides a subsidy of 20 to 30 percent to steel imports, making it almost impossible for domestic producers to compete.
STOCK MARKET PROSPECTS
"Is the Bubble Back?" by Steven Pearlstein in the Washington Post, May 27, 2001, page H1.
This informative article presents the arguments of stock market optimists and pessimists. The article does not attempt to determine which view is more coherent. It would have been appropriate to note that most of the arguments of optimists which are cited in the article involve crude induction, inferring that the stock market will perform the same way in the future as it has in the past in response to specific events, such as Federal Reserve Board interest rate cuts. This reasoning is comparable to inferring that a coin will land on heads, because on five previous coin flips it has also landed on heads.
The stock market pessimists refer to the basic relationship between stock prices and expected future profits. If corporate profits do not ultimately determine stock prices, then it is equally possible that Uganda or Panama will have a stock market valued at $15 trillion as the United States, since stocks would have no grounding in the real economy. No serious economist would make such a claim. The only plausible argument presented in the article is that of the pessimists. This should have been noted, instead of leaving the question unanswered.
MEXICO
"Giving Mexico Its Tax Medicine," by Graham Gori in the New York Times, May 27, 2001, Section 3, page 2.
This article profiles Mexico's finance minister, Francisco Gil Diaz. At one point the article comments that "thanks in part to Mr. Gil, Mexico is weathering the United States economic downturn well." Its evidence for this assertion is that Mexico's currency is relatively strong and Citigroup has just decided to make a large investment of Mexico.
Neither of these items reflect the extent to which Mexico's economy is currently faring. A nation can have a very strong currency and a deeply troubled economy. For example, Argentina's currency is tied to the dollar, and therefore has risen significantly against most other currencies. However, its economy is currently mired in a severe recession with a high and rising unemployment rate.
Similarly, Citigroup's investment is presumably based on a long-term perspective. The prospects for Mexico's economy for the next year or two would make little difference in the profit that this investment is expected to yield. (Of course, the investment may prove quite profitable even if Mexico's economy slumps indefinitely.)
The government of Mexico has repeatedly revised downward its projections of economic growth for the year. Economic growth and trends in unemployment are the more standard methods of determining how well an economy is performing.
The article also asserts that Mr. Gil may have lost the opportunity to become governor of Mexico's central bank in 1997 because of his "firmness of conviction." At the time he was promoting a plan to tie Mexico's currency to the dollar, as Argentina has done. This policy has proved disastrous for Argentina, as its currency has risen along with the dollar, making its goods uncompetitive in international markets. It also was forced to match the Federal Reserve Board's interest rate hikes of the 1999 and 2000 in order to keep the link to the dollar. As a result, Alan Greenspan's effort to slow the U.S. economy also slowed Argentina's economy. It might have been more appropriate to attribute Mr. Gil's failure to be appointed central bank president to his support of a bad policy, rather than his "firmness of conviction."
TAX CUTS AND BUDGET
"Still Uncertain, Budget Surplus Is Gobbled Up," by Richard W. Stevenson in the New York Times, May 27, 2001, Section 1, page 27.
This article examines long-term budget prospects after the passage of President Bush's tax cut. At one point it presents a list of national priorities that include "preparing Social Security and Medicare for the aging of the population." This comment is somewhat peculiar for two reasons. First, the population has always been aging. As a result of increasing affluence and improving medical technology, the population has been getting older on average for hundreds of years. The aging projected for the future is not qualitatively different than what the nation has experienced in the past.
The second reason that it stands out is that both programs are currently far better prepared to deal with the projected increases in spending than they have been through most of their history. Under current projections, the Social Security program will be able to pay all scheduled benefits for the next 37 years with no changes whatsoever. At no point in the decades of the 1940s, 1950s, 1960s, or 1970s would this have been true. The Medicare program is projected to be able to pay all scheduled benefits for the next 24 years. At no point in the program's prior history has it ever been this financially solid.
"New Spending, Tax Cut May Bust Budget," by Eric Pianin in the Washington Post, May 28, 2001, page A1.
This article examines the prospects for the budget over the next decade in the wake of the passage of President Bush's tax cut. The headline is an example of inappropriate editorializing. The phrase "may bust budget" is clearly intended to describe the possibility of a negative outcome, but the article does not describe any outcome that can be characterized as especially negative.
The budget projections indicate that the government will continue to run significant surpluses for the next decade, even after the tax cut. According to the article, the surpluses may not be equal to the full size of the Social Security and Medicare surpluses during this period, but that would only mean that the government had to on net increase its borrowing to some extent (i.e. it would be borrowing more from the Social Security and Medicare trust funds than the amount of publicly held debt that it was paying down). The economic consequences of modest borrowing (e.g. 2 percent of GDP -- $200 billion a year, at present) are virtually invisible. Therefore, the article can only be expressing a distaste for a policy of deficit spending, not warning of actual negative consequences from a budget that is in deficit.
At one point, the article includes a comment from Robert Bixby of the Concord Coalition, that Congress may not be able to meet its spending targets "without dipping into the Medicare surplus." This comment misrepresents the outcome of a budget shortfall. Under current law, the Medicare program is not affected at all by whether the government balances the budget without using funds from Medicare. The finances of the Medicare program will be exactly the same regardless of whether or not Congress spends a portion of the Medicare surplus.
It is worth noting that Mr. Bixby is cited twice in this article. He is the only non-governmental source for this article. The Concord Coalition is an organization that has repeatedly argued for cutting Social Security and Medicare, placing it at odds with the majority opinion within the country on these and other budget issues. It would have been appropriate to balance Mr. Bixby's views with those of analysts more in the mainstream of public opinion.
ECONOMIC GROWTH
"U.S. Lowers Estimate of Growth in 1st Quarter," by John M. Berry in the Washington Post, May 26, 2001, page E1.
"Economy Grew Less Than 2% for 2 Quarters," by Michael Brick in the New York Times, May 26, 2001, page B3.
These articles report on the release of revised data from Commerce Department on the economy's growth in the first quarter of 2001. While both articles note the slow growth in gross domestic product (GDP) over the last two quarters, it is worth noting that net domestic product has grown even more slowly. The Commerce Department's data shows that net domestic product (NDP) has grown at just a 0.1 percent annual rate over the last two quarters and a 0.5 percent annual rate over the last three quarters.
The difference between GDP and NDP is the amount of capital that is used up, or depreciated, in the quarter. Insofar as GDP grows simply because more capital is being used up each quarter, it provides no benefit to the economy, since this output can be used neither for wages nor profits. Usually GDP and NDP grow at almost the same rate, but in recent years there has been a large divergence between the two, primarily because a large share of GDP is now being used to replace computers and software that quickly becomes obsolete.