Economic Reporting Review
March 11, 2002

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

A Rebound, Yes, but the Price May Be High
Gretchen Morgenson
New York Times, March 3, 2002, Section 3 Page 1

This article examines the turnaround of the Eckerd chain of
drugstores. The article reports that some questionable billing
practices may be responsible for its newfound profitability.


Questions Raised of Conflicts At 2 Hospital Buying Groups
Reported by Walt Bogdanich, Barry Meier and Mary Williams Walsh,
written by Mr. Bogdanich
New York Times, March 4, 2002, page A1

This article reports the findings of an investigation into
the hospital equipment market. It presents information indicating
that the two large buying groups, which decide on major equipment
purchases for hospitals, are taking kickbacks from equipment makers
to promote their products.


For Executives, Nest Egg Is Wrapped in a Security Blanket
David Leonhardt
New York Times, March 5, 2002, page C1

This article reports on the fact that many top executives at
major corporations have large defined benefit pensions. These plans
protect them from any risk associated with a bear market, or a bad
performance by their own company. While top executives feel the need
to provide themselves with this security, they are quickly
eliminating defined benefit plans for their workers.



Social Security

Bush Uses Own Brand of Math on Social Security
Edward Wyatt
New York Times, March 3, 2002, page A11

This article assesses the accuracy of President Bush's claim
as to how much retirement income a middle income worker would have,
if they had placed their money in the stock market rather than Social
Security. The article adjusts some of the President's assumptions in
accordance with standard investment practices, and shows that the
amount would be just over half as much as the President asserted, but
still considerably higher than the benefit provided by Social
Security.

However, this calculation does not use assumptions of stock
returns that are consistent with the market's current valuation and
the Social Security trustees projections of profit growth. The only
projections of stock returns that have been derived from the trustees
profit growth projections show that stocks will provide only slightly
higher returns than the government bonds currently held by the trust
fund (see "Letter to Martin Feldstein, May 15, 1999," by Dean Baker,
[http://www.cepr.net/Social_Security/letter_to_feldstein2.htm]). A
calculation made from this set of consistent stock returns would show
that most workers would not even be able to cover the administrative
costs of individual accounts, leaving them on average worse off, even
before taking account of the risks associated with the stock market.


Argentina

Argentina's Senate Approves Budget Plan
Anthony Faiola
Washington Post, March 6, 2002, Page A12

This article reports on the passage of a new budget by
Argentina's senate. At one point it describes the budget as an effort
to "rein in runaway spending blamed for the failure of previous loan
deals." Actually Argentina's non-interest spending has remained
virtually constant as a share of GDP since 1994, when its budget was
almost balanced. The reason that its deficits and debt increased was
almost entirely due to higher interest rates resulting from
instability in international financial markets and investor
uncertainty about Argentina's ability to maintain its currency peg
(see "What Happened To Argentina"
[http://www.cepr.net/IMF/what_happened_to_argentina.htm]). It is
therefore incorrect to assert that Argentina has "runaway spending."


Policy Inconsistencies

They Give, but They Also Take: Voters Muddle States' Finances
Timothy Egan
New York Times, March 2, 2002, page A1

This article reports on a pattern in several states, where
voters seem to act inconsistently in referendums. They support
measures requiring higher expenditures, especially for education, but
also support measures limiting taxes, which make it difficult to
afford such spending. The article includes comments from several
political analysts, including one who suggests that voters might
be "stupid."

Although the seeming inconsistency in voters' behavior is
interesting, it is perhaps not surprising, since most voters have
little opportunity to learn about issues apart from the highly biased
accounts in political advertising. While the apparent inconsistent
behavior of voters was given a front page article -- inconsistent
statements from political figures are often ignored. For example, the
most recent Economic Report of the President includes a discussion of
the new economy, which claims that the economy's long-run growth rate
has been increased by a full percentage point as a result of the
development of information technologies. On the other hand, the
Social Security trustees have actually lowered their growth
projections (adjusted for measurement changes) over the last five
years. This inconsistency has received virtually no attention from
the media.

The fact that policy professionals, many of whom have
advanced degrees in their areas of expertise, make inconsistent
statements or policies, should be far more newsworthy than the fact
that poorly informed voters may act inconsistently. However, the
professionals' inconsistencies have rarely been given much
attention.


Steel Tariffs


Bush Weighs Raising Steel Tariffs But Exempting Most Poor Nations
David E. Sanger and Joseph Kahn
New York Times, March 4, 2002, page A1

President Opts For Compromise On Free Trade
Steven Pearlstein
Washington Post, March 6, 2002, Page E1

Politics a Key Force in Forging Policy
Mike Allen
Washington Post, March 6, 2002, Page E1

Bush Puts Tariffs Of As Much As 30% On Steel Imports
David E. Sanger
New York Times, March 6, 2002, page A1

Steel Tariffs Weaken Bush's Global Hand
Richard W. Stevenson
New York Times, March 6, 2002, page C1

Reaction Abroad on Steel Is Harsh
Steven Pearlstein and Clay Chandler
Washington Post, March 7, 2002, Page E1

U.S. Users of Steel Worry That Tariffs Will Be Costly
Claudia H. Deutsch
New York Times, March 7, 2002, page C4

These articles discuss President Bush's decision to impose
tariffs on some imported steel. Much of the reporting in these
articles implies or asserts that President Bush's actions in this
case represent a fundamental departure from past trade policy and his
political philosophy. For example, these articles repeatedly
characterize this action as a departure from "free trade." Several
articles, such as the one by Allen in the Post, also note that
politics played a key role in President Bush's decision, as if this
was a new practice in trade policy. The Stevenson article in the
Times warned that the tariffs may be seen as a departure from
President Bush's "free trade, antitax philosophy."

In fact, there is little basis for asserting that the United
States has had a consistent policy promoting free trade. One of the
main goals in recent trade agreements has been to extend copyright
and patent protection to developing nations. These forms of
protectionism are extremely costly to the economy, since they
typically raise the price of goods by several hundred percent above
their competitive market price. By contrast, none of the tariffs that
were imposed on steel exceed 30 percent, and they are scheduled to be
phased out over a three year period.

The United States has also been quite willing to impose
protection for other politically powerful sectors. For example, when
doctors complained that the entry of foreign doctors was reducing
their income, the government tightened restrictions on the entry of
foreign medical residents and doctors. Unlike the steel case, there
was no discussion of the impact of the restriction on foreign doctors
on U.S. consumers. On the contrary, the fact that foreign doctors may
be lowering physicians wages (and therefore reducing health care
costs), was presented as an argument for restricting the number of
foreign doctors (e.g. see "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).

It has been quite transparent for some time that politics
plays a very large role in trade policy. It is no secret that
corporations and unions spend millions of dollars on lobbyists and
campaign contributions in order to ensure that their specific
concerns are addressed in trade negotiations. For example, when the
United States negotiated the conditions under which it would consent
to China's admission to the W.T.O., it made a set of very specific
demands for entry to industries such as banking, telecommunications,
and on-line services, at the bequest of the firms that expected to
benefit. This was widely reported at the time (e.g. see "U.S.
Business Lobby Poised for China Trade Deal," by Robert G. Kaiser and
Steven Mufson, Washington Post, November 14, 1999, page A1; "White
House and Business Groups To Push Congress on China Pact," by Richard
W. Stevenson, New York Times, November 16, 1999, page A1).
Protections for specific crops, such as sugar and tobacco, is also
quite explicitly influenced by politics. It would be newsworthy if
President Bush had made a decision on trade policy without taking
into account politics.

While President Bush may like to portray himself as having
a "free trade, antitax philosophy," there is little substance to this
image. President Bush has been quite open in supporting a wide range
of protectionist measures, such as patent and copyright protection,
or professional restrictions which obstruct foreigners from high
paying occupations like law, accounting, and medicine. It is
obviously in his political interest to portray himself as possessing
a consistent political philosophy, rather than being a politician who
responds to powerful interests, but there is little basis in reality
for this view.

Several of these articles discuss the costs of the steel
tariffs and imply that they will impose a large burden on the
economy. The size of the tariffs, coupled with the relative
unimportance of steel in the cost of most products, imply that the
effect will be quite limited. For example, a ton of flat rolled steel
costs around $180. If the tariffs raise the average price by 10
percent, then this would be an $18 increase. If a car uses one ton of
flat rolled steel, plus an amount of other steel of equal cost, then
the total impact on car prices would be $36, less than 0.2 percent of
the price of a typical new car. It is unlikely that this price
increase would have too much impact on the car market. By comparison,
if the CEOs and other top executives at Ford or GM earn a total of
$200 million in wages, stock incentives, and bonuses, it would add
approximately $40 to the price of a car.

It is also important to note that the dollar is 20-30 percent
above its sustainable level. As a result, the United States is
borrowing more than $400 billion a year to pay for its imports. If
the dollar fell to a sustainable level, it would have more impact on
imported steel prices than the tariffs imposed by President Bush.
None of these articles even mentioned the over-valuation of the
dollar.


The Recovery and Tax Cuts

Fed Chief Sees Decline Over: House Passes Recovery Bill
Richard W. Stevenson
New York Times, March 8, 2002, page A1

This article reports on Alan Greenspan's testimony in which
he said that he thought the recession is over. It's worth noting that
he never saw the recession coming.

The article concludes by noting that, "House Republicans said today
that a brightening economic and fiscal picture could help make the
case for further tax cuts this year." The article should have pointed
out that House Republicans had earlier claimed that tax cuts were
needed this year as stimulus, because the economy was weak.


Japan

Japan Economy Contracts for 3rd Consecutive Quarter
James Brooke
New York Times, March 8, 2002, page C2

This article reports on the release of new data which showed
that the Japanese economy shrank in the 4th quarter of 2001. At one
point, the article notes a recent rally in the Japanese stock market,
and attributes it to "a new exuberance, perhaps irrational." Markets
are often driven by irrational forces, however, reporters rarely
raise the possibility that a particular market movement is
irrational. For example, almost none of the coverage of the U.S.
stock market's run-up to its 2000 peaks mentioned the possibility
that the market was being driven by irrational forces. It is not
clear why this rally in Japan was singled out.



Productivity Growth

U.S. Productivity Growth Rate Revised Upward for 4th Quarter
Associated Press
New York Times, March 8, 2002, page C4

This article reports on an upward revision in the reported
productivity growth rate for the 4th quarter of 2001. It is worth
noting that the relatively strong productivity growth rate of the
last two years has been driven primarily by a sharp decline in the
average number of hours worked per worker.

Usually the rate of growth of hours and jobs are very close,
however they diverged sharply in 2000, when the economy was still
growing strongly, and they continued to diverge in 2001 as hours per
worker were cut in the recession. The reported rate of reduction in
hours per worker seems questionable, especially since much of it is
attributable to sectors in which hours are not well measured. The
hours index for production and non-supervisory workers (approximately
75 percent of the work force), which is relatively well measured, did
not diverge as much from the rate of reported job growth as is shown
in the table.

Growth Rate 95-99 99-00 00-01
(fourth quarter to fourth quarter)
Jobs 2.70% 1.82% -1.07%
Hours 2.40% 0.25% -2.07%
(productivity data)
Hours 2.80% 1.13% -1.85%
(production and non-supervisory)

Hourly Compensation 4.12% 7.82% 3.88%
(productivity data)
Hourly Compensation 3.32% 4.43% 4.11%
(employment cost index)

The sharp decline in hours growth in the productivity data also
implied a very rapid acceleration in the rate of growth of hourly
compensation, from 4.12 percent in the prior four years to 7.82
percent in 2000. (Hourly compensation is calculated by using a
separate measure of compensation, and dividing by reported hours.)
This acceleration in the rate of growth in compensation is way out of
line with other compensation measures, such as the employment cost
index. It seems more likely that hours have been mis-measured, than
the rate of compensation growth took a sudden jump in 2000, which was
not picked up in other wage measures.

If hours per worker did not decline at the rate shown in the
productivity data -- for example if the increase in hourly
compensation in 2000 was just 1.0 percentage point (as indicated by
the employment cost index) -- then productivity growth has been
overstated by approximately 2 percent in total over the last two
years.


Energy Policy

A Fight on How to Wean The Nation Off Foreign Oil
David E. Rosenbaum
New York Times, March 6, 2002, page A16

This article contrasts Republican proposals to reduce
dependence on foreign oil through increased domestic production, with
Democratic proposals to reduce oil consumption. At one point the
article notes the White House's claim that drilling in the Arctic
Wildlife Refuge would create hundreds of thousands of jobs. This
claim rests on a 1990 study by WEFA (and funded by the oil industry),
which it no longer stands behind. More realistic analysis shows that
the impact on jobs will be minimal (see "Hot Air Over the Arctic: An
Assessment of the WEFA Study of the Economic Impact of Oil Drilling
In the Arctic National Wildlife Refuge"
[http://www.cepr.net/ANWR.htm]).

This article also presents the White House's argument that
higher mileage standards will lead to lighter and less safe cars and
therefore "thousands of additional passenger fatalities and
injuries." If domestic oil production lowered gas prices, it would
encourage more driving, and therefore also lead to
therefore "thousands of additional passenger fatalities and injuries.