Economics Reporting Review
Week of March 24 - March 30
Dean Baker is co-director of the Center for Economic and Policy Research.
OUTSTANDING STORIES OF THE WEEK
"Abbott to Sell Low-Cost AIDS Drugs in Africa," by Melody Petersen in the New York
Times, March 28, 2001, page C9.
This article reports on an announcement by Abbott Laboratories that it would sell
two AIDS drugs at "no profit" to nations in sub-Saharan Africa. The article also
reports on plans by the Consumer Project on Technology, a patient advocacy group
in Washington, to establish a new non-profit corporation. This new corporation would
apply for licenses to produce drugs that were largely developed with government
funding, but are currently being sold at high prices by the pharmaceutical industry.
The federal law on government-supported research has a clause indicating that it
should be possible for the new corporation to obtain licenses.
"Uranium Miners Wait As U.S. Payments Lapse," by Michael Janofsky in the New York
Times, March 27, 2001, page A1.
This article reports on the status of a fund that was established to compensate
uranium miners and other people exposed to radiation as a result of nuclear weapon
production or testing. The fund is currently out of money because Congress
increased the basic payment to victims last year without increasing the
appropriation.
"Economic Slowdown Could Put Welfare Reform to Test," by Charles Babington in the
Washington Post, March 29, 2001, page A2.
This article examines the situation of former welfare recipients as the economy slows
down and possibly sinks into a recession. The article presents the assessment of
several experts, that the unusually strong labor market of the last few years has
protected many low-income families from the worst effects of welfare reform. These
experts warned that the weakening labor market could lead to serious hardships.
TELECOMMUNICATIONS POLICY
"Huge Debts Hobble Europe's Telecoms," by William Drozdiak in the Washington Post,
March 29, 2001, page E1.
This article discusses the financial situation of several major European telephone
companies after they paid very high prices to purchase wireless frequencies in public
auctions held last summer. The article points out that the stocks of these companies
have since plummeted, as most observers have come to the view that the firms
vastly overpaid for these frequencies. It reports that the resulting debt burden on
these companies will impede their ability to invest in new technology and has even
jeopardized the creditworthiness of the banks that lent them money.
On its face, the fact that some of the world's largest corporations -- backed by
some of the world's largest banks -- managed to blunder in their assessment of the
value of these frequencies, would appear to be a major failure of the private market.
However, this article implies that it was a failure of government policy: "What once
seemed to be a government coup now looks like a policy disaster that imposed
[emphasis added] an intolerable burden on some of Europe's most prominent
enterprises, triggered a wave of bankruptcies and threatened the banks behind the
spending."
No one forced any of these firms to overbid on these frequencies, or even to bid at
all. Nor were the banks forced to provide credit to support the bids. The implication
of the problem highlighted in this article is that the highly paid executives who run
these corporations and banks can't be trusted to handle their own businesses.
Instead, they need the state to intervene to keep them from making big mistakes
that will jeopardize their companies, and possible even the national economy. The
facts in the article imply a massive failure of the market, not a failure of government
policy.
CONSUMER CONFIDENCE
"Consumer Confidence Up Sharply," by John M. Berry and Caroline Mayer in the
Washington Post, March 28, 2001, page A1.
"March Survey of Consumers Is Brighter," by Kenneth N. Gilpin in the New York
Times, March 28, 2001, page C1.
These articles report on the rise in the Conference Board's measure of consumer
confidence for the month of March. The Post article, in particular, presents this
measure as a good omen for the economy. It is worth noting that the consumer
confidence measure has historically not been a very good predictor of consumption
patterns. It often has large changes that are not reflected in consumption
expenditures and conversely can miss big turning points in consumption.
For example, the index fell for four consecutive months from July through October of
1998. The October decline alone was 9 percentage points, somewhat larger than the
7.8 percentage increase reported for March. But according to the Commerce
Department's data, consumption spending grew at a 4.3 percent real annual rate in
the third quarter of 1998 and a 4.9 percent rate in the fourth quarter. Similarly, the
index showed almost no decline until the economy had actually entered the recession
in June of 1990. In short, the index has not been a reliable indicator of consumption
patterns.
It is also worth noting that the rise in the index in March was completely due to the
component that measures future expectations, not to the measure of current
conditions. The expectations component is an even worse predictor of current or
future consumption expenditures than the index as a whole.
The Post article indicated that there is an upcoming revival of production and
employment in the auto industry due to the paring of inventories and "strong sales of
new cars and trucks." This week Delphi, the nation's largest auto parts manufacturer,
announced layoffs of 11,500 workers, or 5 percent of its work force. Federal-Mogul,
another major parts manufacturer, also announced job cuts. In addition, General
Motors announced it was laying off 10,200 workers and Ford announced two new
plant closings for next week.
JAPAN
"Taking a Bubble Economy Bath," by Clay Chandler in the Washington Post, March 27,
2001, page E1.
This article examines the possibility that Japanese banks will start forcing
corporations with large debts into bankruptcy. At one point, the article asserts that
the Japanese economy is "slipping back into recession." It is not generally accepted
that Japan's economy is necessarily entering a recession. It would have been useful
if the article had identified an economist who held this perspective, or presented the
evidence on which this assertion was based.
The article also asserts that "reform advocates promise" that their restructuring
policies would produce "sustained growth at rates more than double the paltry 1.3
percent average annual expansion of the past 10 years." Since Japan is projected to
have virtually no growth in its labor force in coming years, virtually all of its growth
will have to come from productivity growth. The growth rate promised by the
unnamed reform advocates referred to in this article implies a rate of productivity
growth that is far more rapid than what is projected for the United States or most
other industrialized nations. It would have been useful to readers if the article had
indicated why Japan should be able to sustain a significantly more rapid pace of
productivity growth, and also if it identified some of the reform advocates who hold
this view.
TAX CUT PLANS
"Bush Says Rebate Isn't a Substitute For His Tax Cut Plan," by Frank Bruni in the New
York Times, March 28, 2001, page A1.
"Senate Democrats Ask $300 Rebate for Taxpayers, and Further $150 for Most," by
David E. Rosenbaum in the New York Times, March 28, 2001, page A12.
These articles report on the state of the current tax debate between President Bush
and the Democrats in Congress. At one point the Rosenbaum article asserts that the
Republicans are claiming that "the only way to help the economy in the long-run was
to give upper-income taxpayers a large tax cut that they would use to invest and
create jobs." It then quotes Treasury Secretary Paul O'Neill, "If we want to change
consumption patterns, we need to make a permanent change in people's tax
burdens."
These two claims are in direct contradiction to each other. The claim attributed to
Republicans is that the tax cut will lead people to save more, which, it asserts, would
be good for the economy. Saving and investing are interchangeable terms -- when a
person places money in the stock market, this is acutally a form of saving, although
it is often referred to as "investing." In contrast, O'Neill is arguing that it is desirable
to have people spend, rather than save, their tax cuts, and that the only way that
this will happen is if they know the tax cuts will be permanent. There is a major
school of thought in economics arguing that a temporary tax cut will be largely
saved, while a permanent tax cut will lead to an increase in consumption.
It would have been appropriate to explicitly point out that the Treasury Secretary is
directly contradicting the position on the tax cut that is apparently being taken by
congressional Republicans. It is likely that many readers missed this point, in spite of
the two claims being juxtaposed in the article.
The article by Bruni quotes a reference by President Bush to the Reagan tax cuts. It
would have been helpful to point out that people largely spent these tax cuts, as the
personal savings rate fell sharply in the 1980s. This suggests that the tax cuts
proposed by President Bush would probably have relatively little positive effect on
personal savings, and -- since they will reduce the budget surplus -- on net they will
have a negative impact on national savings.
The article by Bruni also refers to President Bush's plans to promote "free trade"
agreements. It would be more appropriate to report that Bush wants to pursue new
"trade" agreements. Some of the measures that will likely be sought in these
agreements will be increased protection for U.S. patents and copyrights. These are
forms of protectionism and cannot properly be viewed as "free trade."
ARGENTINA
"Speedy Start on Emergency Economic Plan in Argentina," by Clifford Krauss in the
New York Times, March 24, 2001, page B1.
"Argentina Presses for Ways to Jolt Its Economy Out of Recession," by Clifford Kraus
in the New York Times, March 25, 2001, Section 1, page 11.
"New Minister for Economy Presses Ahead in Argentina," by Clifford Krauss in the New
York Times, March 28, 2001, page C8.
"Economy Aide to the Rescue, As Argentina Fights Default," by Clifford Krauss in the
New York Times, March 30, 2001, page A5.
These articles report on efforts by the Argentine government to deal with its
economic downturn. The articles are centered on proposals by Domingo Cavallo, the
new economy minister in the government. All four articles refer to Mr. Cavallo's
success in bringing down the inflation rate and stabilizing the economy by tying
Argentina's currency to the dollar in 1991.
It is worth pointing out that most of Argentina's current difficulties can be directly
traced to this policy. Argentina's currency rose with the dollar in 1998 and 1999,
making its goods less competitive internationally. This situation was exacerbated
when Brazil, Argentina's largest trading partner, devalued its currency at the
beginning of 1999, which also made Argentina's goods far less competitive in the
region. Then, when the Federal Reserve Board began raising interest rates to slow
the U.S. economy, the link to the dollar forced Argentina's central bank to do the
same, even though its economy was already in a slump.
The sorts of problems that Argentina has experienced as a result of its link to the
dollar were entirely predictable. The long recession in which the country is now stuck
results largely from the high interest rates and tight credit necessary to maintain
Argentina's peg of its currency to the dollar in the face of market forces that would
lower its currency, as well as investors' fears and speculation against the currency.
They are the main reasons that most developing nations have chosen not to follow in
Argentina's path on this policy.
TAX CUTS AND RECESSIONS
"Democrats Back Immediate Tax Cut Proposed By G.O.P.," by David E. Rosenbaum in
the New York Times, March 24, 2001, page A1.
This article discusses plans to provide an immediate tax cut as a stimulus to the
economy. At one point it presents the warnings of "Wall Street economists" that if
Congress passes a tax cut, it may only begin to take effect after the economy is
already recovering, and therefore will not be needed. As an example, the article cites
a tax cut passed in March of 1975. This tax cut did not begin to have an impact until
later in the year, at which point the economy was already recovering.
It is worth noting that the economy had already been in a recession for more than a
year by March of 1975. Few economists presently believe that today's economy has
even entered a recession yet. This means that if the business cycle of the 1970s
should be seen as an example, Congress would be taking action far earlier this time
than it did in the 1970s cycle.
THE STOCK MARKET AND THE ECONOMY
"Despite Stock Jump, Economic Future Still Unclear," by John M. Berry in the
Washington Post, March 24, 2001, page E1.
This article discusses the prospects for the economy in the near future. At one point
it comments, "Few experts are forecasting an actual recession in which the economy
begins to contract." It is worth noting that very few experts forecast the current
slowdown. In September of last year, all of the experts who are included in the "Blue
Chip" list of top forecasters expected that the economy would continue to grow at a
healthy pace into this year. There is little reason to assume that these experts'
forecasts for the future are more accurate now than their forecasts were last
September.
The headline for this article is peculiar. There is no relationship whatsoever between
stock movements on a given day and the future prospects of the economy. It would
have been equally sensible for a headline to read, "Despite Maryland Basketball
Victory, Economic Future Still Unclear."
RUSSIA
"A Slump That Won't Stay Home," by David E. Sanger in the New York Times, March
25, 2001, Section 4, page 16.
This article discusses the world economic situation as the U.S. economy slows. At
one point the article discusses the Bush administration's attitude towards intervening
in other nations' economic affairs. The article indicates that the Bush administration
may be more reluctant than the Clinton administration to get heavily involved in
international economic problems. The article then adds parenthetically, "It is Mr.
O'Neill [President Bush's Treasury Secretary] who called aid to Russia 'crazy,' and
said he didn't understand why the United States should step in to prop up a falling
currency."
Since the article chose to present Mr. O'Neill's views on the attempts to prop up the
Russian ruble, it would have been appropriate to note that the money loaned by the
International Monetary Fund (IMF) for this purpose is largely unaccounted for, and
generally presumed to be stolen. It is also worth noting that when Russia's currency
collapsed, as a result of the failure of the IMF effort, it gave a major boost to
Russia's economy. As a result, Russia is now experiencing its first period of sustained
growth since the break-up of the Soviet Union.
PRODUCTIVITY GROWTH
"Waiting for the Other Shoe to Drop on a Sagging Economy," by Jonathan Fuerbringer
in the New York Times, March 25, 2001, Section 3, page 8.
This article examines the near term prospects for the economy and the stock market.
At one point it notes that productivity growth had slowed to 2.2 percent in the
fourth quarter of 2000, which it compares to the 8.0 percent rate in the fourth
quarter of 1999. The rate of productivity growth in the 2nd and 3rd quarter of 1999
was 0.2 and 5.0, respectively. It grew at a 2.1 percent rate in the first quarter of
2000. While productivity growth has clearly slowed from its 1999 rate, the
comparison with the 4th quarter is misleading, since that quarter's figure was clearly
somewhat of anomaly.