Economic Reporting Review
By Dean Baker
March 10, 2003
Economic Reporting Review
By Dean Baker
March 10, 2003
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OUTSTANDING STORIES OF THE WEEK
Once Secure, Argentines Now Lack Food and Hope
Larry Rohter
New York Times, March 2, 2003, page A6
http://www.nytimes.com/2003/03/02/international/americas/02ARGE.html
This article reports on the enormous increase in poverty in Argentina over the
last two years. Argentina had been the richest nation in Latin America, and
during the nineties it was widely touted as a success story of neo-liberalism.
According to the article, nearly 60 percent of the population is now living
below Argentina's poverty line, and malnutrition has become widespread.
Bush Plan a Boon to Drug Companies
Mike Allen
Washington Post, March 5, 2003, Page A6
http://www.washingtonpost.com/wp-dyn/articles/A42445-2003Mar4.html
This article reports on the potential profits that the drug industry could earn
if President Bush's plan for a Medicare prescription drug benefit is approved.
It notes that the drug industry has been a major contributor to the Republican
party.
A Prescription Plan Hailed as a Model Is a Budget Casualty
Timothy Egan
New York Times, March 5, 2003, page A1
http://www.nytimes.com/2003/03/05/national/05OREG.html
This article reports on Oregon's plans to eliminate funding, due to a severe
budget crisis, for a program that provided prescription drugs to many poor
people with chronic illnesses. This program had been widely viewed as a model,
since it enabled many lower income people to obtain medicines that allowed them
to work and live near-normal lives.
China
China: Partner, Rival or Both?
Daniel Altman
New York Times, March 2, 2003, Section 3 page1
http://taiwansecurity.org/NYT/2003/NYT-030203.htm
This article examines the impact of China's growing economic ties to the
United States. It includes a set of charts that show China's annual GDP growth
since 1990 as well as annual flows of foreign direct investment. The heading
states that "[China's] economy expanded faster in years when inflows of
foreign capital jumped by the biggest proportions."
The charts do not show this. For example, the charts show 1995 to rank fourth in
GDP growth, even though there was only a small increase in foreign investment
from the prior year. On the other hand, the chart shows a substantial increase
of foreign investment in 2001, even though China had slower growth in 2001 than
in any year since 1990.
This article does not discuss at all the impact of imports from China on wages
in the United States. Virtually all economists recognize that the availability
of low cost manufactured goods from developing nations has been one of the
factors contributing to the growth in wage inequality between college and
non-college educated workers. As China is by far the largest source of such
imports, it would have been appropriate to include some discussion of this issue
in a lengthy article assessing the importance of U.S. economic ties with China.
The Economic Outlook
Jump in Price of Oil Puts New Strains On Economy
David Leonhardt
New York Times, March 2, 2003, page A23
http://www.therochesterdemocrat.com/comments.php?id=P1023_0_1_0_C
Economic Growth Rate Upgraded
John M. Berry
Washington Post, March 1, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A18618-2003Feb28.html
These articles examine the economy's near-term prospects. The Times article
assesses the impact of the recent surge in oil prices on the U.S. economy. At
one point it asserts that rising energy prices will have an even larger effect
on the economies of Europe and Japan than the U.S. economy, because they are
more dependent on foreign sources of energy.
While Europe and Japan do get a far larger share of their energy from foreign
sources, their economies use only about half as much energy per dollar of
output. For this reason they are likely to be somewhat less affected by rising
energy costs than the United States.
Both articles refer to forecasters' expectations that the United States economy
will continue to grow at a modest pace this year and will not fall into another
recession. It is worth noting that most economic forecasters failed to predict
the 2001 recession. It would be appropriate to include the views of economic
analysts who had correctly anticipated the last recession.
Also, neither of these articles mentions the housing bubble which has helped to
sustain the economy through the last two years. If this bubble collapses, a
second recession is extremely likely.
The Bush Tax Cuts
GOP Aides Revise Bill To Help Big Firms
Jonathan Weisman
Washington Post, March 1, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A18439-2003Feb28.html
This article reports on the changes in the Bush Administration's proposed tax
bill, which will give more tax breaks to some corporations. At one point the
article refers to the proposal to eliminate the taxation of dividends and
comments that, "the Bush administration has argued that corporate income
should be taxed only once."
Corporate income is already taxed only once. The courts have repeatedly ruled
that corporations are legal individuals and altogether distinct from their
shareholders. Current law taxes the income that corporations receive. It also
taxes the income that shareholders receive as individuals, just as it taxes the
income that workers receive from corporations. While the Bush administration has
referred to the taxation of dividends as "double taxation" in the same
way that it has dubbed the estate tax the "death tax," it is not an
accurate description of current tax law.
Japan
Behind the Paper Doors, a Japan in Turmoil
Howard W. French
New York Times, March 1, 2003, page B1
http://www.nytimes.com/2003/03/01/business/worldbusiness/01JAPA.html
This article assesses Japan's current economic situation. At one point it
asserts that, "Japan's situation defies facile solutions." Many
prominent economists, such as Princeton University Professor Paul Krugman, have
argued that many of Japan's immediate problems could be solved simply by
printing more money and bringing about some modest degree of inflation. The
article presents no evidence to suggest that this strategy would not be
successful if adopted.
Some of the problems cited in the article, such as wage cuts received by
teachers and corporations with unpayable debt burdens, are aggravated by the
deflation that Japan has experienced over the last several years. (The burden of
debt increases when prices and revenue are falling.) Printing money would end
deflation and help to alleviate these problems.
At one point the article asserts that keeping failing companies alive is
draining away capital that could otherwise have been invested productively. In
fact, Japan has plenty of capital for productive investment, as demonstrated by
its extraordinarily low interest rates. Therefore there is little basis for
believing that there would be more productive investment if bankrupt firms were
allowed to go out of business.
The article also notes Japan's falling birth rate and sees this as contributing
to the country's economic problems. There is no obvious reason that a falling
birth rate should lead to economic problems. In a crowded nation such as Japan,
a declining population is likely to be associated with rising living standards
due to less congestion and pollution.
The Housing Bubble
Fed Official Says Rate Cuts Have Not Created Bubbles
Edmund L. Andrews
New York Times, March 2, 2003, page B2
http://query.nytimes.com/gst/abstract.html?res=F60B14FB3B580C728CDDAA0894DB404482
This article discusses Federal Reserve Board Governor Donald Kohn's claim
that the recent run-up in housing prices is not a bubble. According to the
article, the rise in housing prices (30 percentage points more than the overall
rate of inflation since 1995) can be explained by the extraordinarily low
interest rates of the last year and a half. While the run-up in housing prices
long preceded the decline in interest rates, if the fall in interest rates
explains the rise in housing prices, then it implies that if interest rates
return to more normal levels, housing prices will collapse.
It is worth noting that Lawrence Meyers, a former Federal Reserve Board
Governor, argued that it was politically untenable for the Federal Reserve Board
to deliberately take steps to deflate the stock market bubble of the late
nineties (see "Policy Makers Hone Debate: When to Hold, When to Fold,"
New York Times, September 3, 2002, page C1). If Mr. Kohn views the Fed's
political constraints in the same way as Mr. Meyers, then he would probably not
acknowledge a housing bubble even if he believed that one existed.
The Dollar
New Treasury Chief Learns a Lesson
Paul Blustein
Washington Post, March 6, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A48288-2003Mar5.html
This article reports on the reaction of currency markets to a statement by
Treasury Secretary John W. Snow that he is, "not particularly
concerned" about the recent decline in the dollar. The dollar fell sharply
against the euro after the comment.
The article characterizes the statement as a gaffe by the new Treasury
secretary, who subsequently indicated his support for the strong dollar. Most of
the article is devoted to retracing the U.S. government's support for a strong
dollar from the time that Robert Rubin and Larry Summers were Treasury
secretaries under Clinton. The article notes that they didn't want the dollar to
rise forever, because "an excessively high greenback can severely erode the
ability of U.S. manufacturers to compete in a global market."
The trade deficit was running at a record annual rate of nearly $480 billion, or
4.6 percent of GDP, in the fourth quarter of 2002. A deficit of this magnitude
is less sustainable than the budget deficit, which is currently projected to be
approximately $300 billion for fiscal 2003 (without a war with Iraq). The only
effective way to reduce the trade deficit is to lower the value of the dollar.
It is possible that Mr. Snow has done the simple arithmetic, which shows that
the massive trade deficits resulting from the strong dollar are unsustainable.
Recognizing this fact, he realizes that it is necessary for the dollar to
depreciate in order to allow U.S. manufacturers to compete. In this case, Mr.
Snow's comments may not have been a gaffe, but rather part of a deliberate
effort to bring the U.S. trade deficit down to a sustainable level.
Financial Derivatives
Divided on Derivatives
John M. Berry
Washington Post, March 6, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A48287-2003Mar5.html
This article assesses the benefits and dangers of financial derivatives, noting
that Federal Reserve Board Chairman Alan Greenspan and investor Warren Buffet
seem to have directly opposing views of their merits. A serious examination of
the benefits and costs of financial derivatives would try to assess their effect
on the stability of financial markets as well as the resources used in running
the derivative markets. This article includes neither.
It does present a comment from an expert who notes that the markets have been
especially volatile in recent years, and that derivative instruments have
allowed investors to protect themselves against this volatility. However, there
is no obvious reason that markets should be more volatile today than in prior
years. The growth of derivative instruments, which have been tied to such
catastrophic events as the collapse of the Long-Term Capital hedge fund, may be
one of the factors contributing to market volatility. If the purchase of
derivative instruments allows individual investors to protect themselves from
volatility, while the spread of derivatives increases overall volatility, then
the net effect of derivatives would clearly be negative. This is the question
that this article should have addressed.
Medicare
Bush to Seek New Medicare Drug Plan
Mike Allen
Washington Post, March 4, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A37249-2003Mar3.html
This article discusses President Bush's plans for a prescription drug benefit
for senior citizens. At one point the article reports that the plan does not
make "fundamental changes to [Medicare] to prevent bankruptcy with the
retirement of the baby boomers." The most recent projections from the
Medicare trustees show that Medicare can pay all benefits through the year 2030,
with no changes whatsoever. This date is 19 years after the first baby boomers
will have become eligible for Medicare. The twenty seven years between now and
the projected date at which the Medicare trust fund will be depleted is a longer
period than Medicare has ever gone without a tax increase The article does not
indicate the source for its assertion that Medicare will go bankrupt with the
retirement of the baby boom generation.
Copyrights
Pondering Value of Copyright vs. Innovation
Amy Harmon
New York Times, March 3, 2003, page C2
http://www.nytimes.com/2003/03/03/technology/03COPY.html
This article reports on a conference that assessed the extent to which
copyrights are inhibiting innovation. At one point the article refers to the
Digital Millennium Copyright Act as "restraining Internet piracy."
This is not accurate. Since the law defined certain types of copying as illegal
in cases where the status of this copying had previously been ambiguous, it also
created the possibility of "piracy." Piracy refers to the violation of
copyright laws. If the government did not extend copyright monopolies to the
Internet, then piracy would not be possible.
Housing Prices
Price Pace on Homes Slows
Daniela Deane
Washington Post, March 4, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A36962-2003Mar3.html
This article reports on the release of new data showing a sharp slowing in the
rate of appreciation of home prices. The article presents the views of
economists who expect slower growth in housing prices, but does not present the
view of any economists who anticipate a sharp fall in housing prices.
Since 1995, home prices have risen 32 percentage points more than the overall
rate of inflation. This run-up in housing prices, which coincided with the stock
bubble, has no precedent in the post-war period. Unless people suddenly came to
value housing much more in the late nineties than they had previously (at the
expense of other goods), the run-up reflects a bubble that will be largely
reversed in coming years. This view should have been presented -- just as the
view that the stock market was experiencing a bubble should have been presented
in the late nineties.
Malpractice Insurance
Malpractice Insurance: No Clear or Easy Answers
Joseph P. Treaster
New York Times, March 5, 2003, page C1
http://www.nytimes.com/2003/03/05/business/05MAL.html
This informative article examines the factors that have led to spiraling rates for malpractice insurance in many states. It does not consider the factors that actually lead to malpractice. Specifically, it does not discuss the methods of sanctioning doctors who are repeatedly found to be negligent in their practice of medicine. The top priority of any policy on malpractice insurance should be to limit the incidents of actual malpractice. The proposal being put forward by President Bush, which limits damages, would have the opposite effect.