Economic Reporting Review
March 27, 2000:
Social Security Vote; Record Trade Deficit;
Oil Prices
By Dean Baker
SOCIAL SECURITY
"A Senior Statesman Is Facing the Threat of Youth"
Eric Schmitt
New York Times, March 20, page A17
This article discusses the re-election battle facing U.S. Sen. William Roth (R.-Del.). At one
point it discusses Senator Roth's support of a bill which would remove the Social Security
earnings penalty for beneficiaries between ages 65 and 69. The article asserts that the bill
would "allow most Social Security recipients, for the first time, to earn as much money as they
wanted without sacrificing any retirement benefits."
Actually, the vast majority of Social Security beneficiaries can already earn as much money as
they are able without sacrificing benefits. Under current law, less than 6 percent of beneficiaries
earn above the earnings threshold where a portion of benefits are withheld.
The article discusses the situation of a 64-year-old technician who would supposedly lose
$8000 in benefits under current law. If this is in fact the case, then this technician would be
among the top 2-3 percent of wage earners in her age group. The coverage of this issue has
given an extraordinary amount of attention to the relatively small group of workers who are
affected.
"Senate Joins House on Repealing Social Security Earnings Cap"
Amy Goldstein
Washington Post, March 23, 2000, page A6
"Senate Backs End to Penalty on Earnings in Retirement"
Richard W. Stevenson
New York Times, March 23, 2000, page A20
These articles report on the Senate's passage of a bill repealing the earnings penalty for
workers age 65 to 69. The Post article, unlike the Times piece, does not point out the limited
number of workers affected. Nor does the Post article point out that the ceiling on earnings not
subject to the cap was scheduled to rise from $17,000 a year to $30,000 even prior to
passage of this law. At that point, less than 6.0 percent of the beneficiaries in this age group
would be affected by the earnings penalty.
Both articles repeat, without comment, an assertion by Nebraska Senator Bob Kerrey that
"people under the age of 40 are going to pay a terrible price" because Congress has not
changed the Social Security system. According to the projections of the Social Security
trustees, which assume that the economy grows at an average rate of less than 1.5 percent a
year, the payroll tax would have to rise by 2.07 percentage points to balance the program over
75 years.
In the last four years, wages as measured by the Social Security Administration have risen by
more than twice as much as had been projected. The difference in wage growth in the last four
years, between what workers actually experienced and what the Social Security Administration
projected, is larger than the size of the tax increase that would be needed to balance the
program for 75 years. In other words, the extraordinary wage growth from 1995 to 1999 has
raised living standards in four years by more than any plausible tax increase associated with
Social Security will lower living standards over 75 years.
More about Social Security.
[Top]
TRADE DEFICIT
"U.S. Trade Deficit Rises to Record $28 Billion"
John Burgess
Washington Post, March 22, 2000, page E1
"Trade Deficit Rises to Record $28 Billion"
Robert D. Hershey Jr.
New York Times, March 22, 2000, page C2
These articles report on the Commerce Department's release of trade data for the month of
February, which showed the deficit rising to yet another record. Both articles include assertions
that the primary cause of the large U.S. trade deficit is the rapid economic growth in the United
States, and that the deficit will start to come down once other nations begin to grow more
rapidly. The Times article even adds, in reference to the January trade numbers, "economists
expressed no alarm about the results."
Only a portion of the trade deficit can be attributed to differences in growth between the United
States and its trading partners. If the trade deficit remains at its January level, it will end up
being $336 billion for the year 2000. Exports would have to increase by approximately 40
percent for trade to balance. If a 1.0 percent increase in foreign GDP leads to a 2.0 percent
increase in U.S. exports (a high ratio), foreign growth would have to exceed U.S. growth by
20 percentage points in order to bring trade into balance. Even if this were done over ten
years, it would imply an extraordinary difference of 2.0 percentage points in annual growth (i.e.
if the U.S. economy grows 2.5 percent annually, the average growth rate across Europe,
Japan, East Asia and elsewhere would be 4.5 percent). It is highly unlikely that this sort of
growth differential could be sustained.
It is worth noting that some economists have, in fact, expressed alarm about the size of the
trade deficit. For example, Robert Blecker of American University and the Economic Policy
Institute has repeatedly warned that the large trade deficit is increasing the U.S. foreign debt,
which could put substantial downward pressure on the dollar in future years.
The Times article also seeks to dismiss the January trade data by claiming that trade numbers
"have repeatedly been weak for January in recent years, suggesting more than the usual
imprecision in the way the Commerce Department adjusts the data for recurring seasonal
swings."
While seasonal adjustments can be difficult, particularly for winter months, there is no evidence
that the adjustments have been overstating January's trade deficit in recent years. The trade
deficit reported in January of 1999 was $2.4 billion lower than the deficit reported for
February, and $3.2 billion lower than the deficit reported for March of that year. The trade
deficit reported for January of 1998 was $0.9 billion lower than the deficit reported for
February, $2.9 billion lower than the deficit reported for March, and $0.4 billion lower than the
deficit reported for December of 1997.
More about trade.
[Top]
FEDERAL BUDGET
"Senate Committee Delays Budget Vote (Washington in Brief)"
Compiled from reports by staff writer Eric Pianin, the Associated Press and Reuters
Washington Post, March 22, 2000, page A8
This short piece states that the budget supported by House Republican leaders includes $597
billion of non-military discretionary spending. This is actually the amount for all discretionary
spending; the non-military portion is $289 billion.
[Top]
INTEREST RATES
"Fed Raises Rates as Inflation Hedge"
John M. Berry
Washington Post, March 22, 2000, page E1
This article reports on the Federal Reserve Board's decision to raise the short-term interest rate
to 6.0 percent. At one point, the article asserts that the spread between the interest rate and the
core inflation rate (which measures the rate of inflation excluding energy and food prices) is
"known as the real interest rate."
Economists do a considerable amount of research that makes use of a measure of the real
interest rate. The vast majority of this research uses the overall measure of inflation in
constructing the real interest rate, not the core inflation rate.
[Top]
US AIRWAYS
"Down to the Wire, US Airways and Union Try to Resolve Contract"
Steven Greenhouse
New York Times, March 24, 2000, page C1
This article reports on the prospects of a strike/lockout as a result of contract dispute between
the flight attendants union and U.S. Airways. At one point the article cites estimates from
Merrill Lynch that U.S. Airways has higher costs per mile than its competitors.
In presenting this comparison, the article fails to note, as it does later, that U.S. Airways on
average flies considerably shorter flights than other airlines. There are many fixed costs
associated with putting a plane in the sky, so the cost per mile generally falls on longer flights.
On shorter flights, the cost per mile is higher, and the price of a ticket per mile flown is also
higher. Simply comparing costs per mile, without making any adjustments for average flight
distance, misinforms the reader.
More about labor.
[Top]
POPULATION
"Population-Loss Trends Cited"
Colum Lynch
Washington Post, March 22, 2000, page A28
This article reports on a United Nations study that purportedly claims that falling populations in
Europe and Japan will lead to labor shortages and "threaten economic growth."
Economists usually assess economic performance by per capita GDP, not total economic
growth. For example, a nation that had 2 percent annual GDP growth but no population
growth (giving 2 percent per capita GDP growth) would usually be thought to be doing better
economically than a nation with 3 percent GDP growth and 2 percent population growth
(resulting in 1 percent per capita growth). If Europe and Japan's populations are declining, they
could still enjoy considerable prosperity even with slow GDP growth.
The assertion that these nations will experience a labor shortage has little meaning in the context
of market economies. In the event that there is excess demand for labor, then wages will be bid
up, and the least productive jobs will go unfilled and eventually disappear. For example, it may
be impossible to find workers to fill the midnight shift at convenience stores, so these stores will
not be open all night. It may turn out to be difficult to get enough housekeepers to clean the
rooms of hotel guests on a daily basis, and these rooms may only be cleaned every second day
for guests that stay over. It might not be possible to get valets to park cars in front of
restaurants, requiring people to park their own cars. This is the future scenario being described
in this report.
It is also worth noting that a smaller population may provide substantial environment benefits,
especially for densely populated regions such as Europe and Japan.
[Top]
INTERNATIONAL MONETARY FUND
"Outlining Goals, IMF Heir Apparent Cites Dialogue and Stability"
David Stout
New York Times, March 18, 2000, page A3
This article reports on the agenda that Horst Kohler, the presumptive new director of the IMF,
described in a press conference. The article noted Kohler's discussion of the IMF's deputy
director and current acting director, Stanley Fischer, in which he commented on Fischer's
"intellectual brilliance and experience."
It is worth noting that the IMF has committed numerous acts of economic mismanagement
during Fischer's term as deputy managing director. Its policies have lead to major economic
and social disruptions in Russia, Brazil, East Asia and elsewhere. (See ERR, 3/6/00.)
[Top]
OIL PRICES
"At $4 a Gallon, Finding Joy on the Road Not Taken"
Edmund L. Andrews
New York Times, March 24, 2000, page A4
This article discusses the high gasoline prices in Europe, which average over $4 a gallon. The
article points out that the main cause of these high prices are high taxes on gas in Europe. It
presents several examples of people being angry over the size of these taxes; it cites a political
party, the Free Democrats in Germany, that has made lowering gas taxes part of its political
platform.
The article does not point out that, to a large extent, gasoline taxes in Europe were deliberately
raised to promote conservation. This has had a positive environmental effect and has made
Europe less dependent on oil.
The article does not present the views of anyone who supports high gasoline taxes, and fails to
note that there is considerable support across Europe for further increases in the gasoline tax.
For example, the German Green Party platform calls for large increases in the national gasoline
tax. The Green party was voted into the government in the German elections in the fall of 1998.
In these elections, the Free Democrats were voted out of power.
[Top]
CHINA AND THE WTO
"Electronics Lobby Focusing on China Trade"
Juliet Eilperin
Washington Post, March 21, 2000, page A4
This article discusses the lobbying by the electronics industry to persuade Congress to approve
permanent normal trade relations with China. At one point the article notes the large increase in
U.S. exports of electronic goods to China, pointing out that they have grown at a 17 percent
annual rate since from 1994 to 1999. This is approximately the same as the growth rate of all
U.S. imports from China over the same period.
The article then notes that "the Chinese personal computer market is expected to double in the
next five years." This fact is likely to have very little bearing on U.S. exports of electronics to
China. The vast majority of these computers will almost certainly be produced in China, or by
other countries in East Asia. Computer makers that attempted to produce their products in the
United States and ship them to China would be at a serious competitive disadvantage.
The article also includes comments from Rep. Dave Weldon (R-Fla.), who said that those
promoting the change in trade status are "trying to create jobs in my district." The U.S. trade
deficit with China is approaching $60 billion a year. There is no obvious reason why this trade
agreement would do anything to reduce this deficit or create jobs in this representative's
district.
"A Senior Statesman Is Facing the Threat of Youth"
Eric Schmitt
New York Times, March 20, page A17
The article, on the re-election campaign of Sen. William Roth (R.-Del.), claims that the decision
by the United States to grant China permanent normal trading relations is "a vital step for
Beijing's entry into the World Trade Organization." This is untrue. As has been frequently noted
by President Clinton, China will be able to enter the World Trade Organization regardless of
whether or not the United States grants it permanent normal trading relations.
The article also asserts that Delaware's farmers would gain if China were granted this trade
status. If this is true, it implies that the price of food will go up, which means that Delaware's
consumers will be hurt by the measure.
More about China.
[Top]
OUTSTANDING STORIES OF THE WEEK
"If You Think Last Week Was Wild..."
Gretchen Morgenson
New York Times, March 19, 2000, Section 3 page 1
This article reports on the future prospects for the stock prices of recent IPOs. It notes that for
many IPOs, the period in which sales by insiders is restricted is about to end. This could lead
to a large fall in the price of many of these stocks. The article notes the findings of a study that
institutional investors are the predominate shareholders of IPOs when they first appear on the
market and generally offer large gains. But after several months, the vast majority of shares are
held by individual investors.
"Buying on Margin Becomes a Habit"
Gretchen Morgenson
New York Times, March 24, 2000, page C1
This article reports on the surge in margin borrowing, as investors increasingly turn to debt to
finance purchases of stock.
[Top]
Dean Baker is an economist and the co-director of the Center for Economics and Policy
Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The
Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.
ERR is edited by Jim Naureckas.
Back to CEPR's Economics Reporting Review website.