Economic Reporting Review
By Dean Baker
March 31, 2003

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OUTSTANDING STORIES OF THE WEEK

War Rally Loses Sight of Deeper Risks
Gretchen Morgenson
New York Times, March 23, 2003, Section 3 Page 1
http://www.nytimes.com/2003/03/23/business/yourmoney/23WATC.html?ex=1049000400&e\n=6610f0de05af3766&ei=5007&partner=USERLAND

This article points out many of the negative factors facing the U.S. economy, which make a strong recovery unlikely regardless of the outcome of the war.

Who Will Put Iraq Back Together?
Reported by Richard A. Oppel Jr., Diana B. Henriques and Elizabeth
Becker, and written by Ms. Henriques
New York Times, March 23, 2003, Section 3 Page 1
http://www.nytimes.com/2003/03/23/business/23REBU.html?ex=1049000400&en=fdb44169\aa212270&ei=5007&partner=USERLAND

This article examines U.S. plans for the post-war reconstruction of Iraq based on examination of confidential documents outlining bidding procedures in which only U.S. firms had been invited to participate.

Social Security

Daniel Patrick Moynihan, Former Senator From New York, Dies at 76
Adam Clymer
New York Times, March 27, 2003, Page A1
http://www.nytimes.com/2003/03/27/obituaries/27MOYN.html?ex=1049432400&en=7d8aee\908c717d75&ei=5007&partner=USERLAND

This article recounts highlights from the life of former Senator Daniel Patrick Moynihan. At one point it asserts that, "Among his last great causes were strengthening Social Security and attacking government secrecy."

Actually, Senator Moynihan was one of the most prominent proponents of cutting Social Security. In his last years in the Senate he advocated reducing the annual cost of living adjustment by an amount approximately 1.0 percentage point less than what is provided under current law. After ten years, Senator Moyihan's proposal would have reduced benefits by approximately 10 percent for people who had been getting Social Security for that long. After twenty years, the reduction in benefits would have been approximately 20 percent. Few other politicians have openly advocated such sweeping cuts in Social Security, which is projected to be fully solvent for the next 39 years with no changes whatsoever.

Senate Votes to Slash Bush's Tax Cut to $350 Billion
Helen Dewar
Washington Post, March 26, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A28860-2003Mar25.html

Senate Votes to Reduce Bush's Tax Cut Plan
David E. Rosenbaum
New York Times, March 26, 2003, Page A1
http://www.nytimes.com/2003/03/26/politics/26BUDG.html

These articles report on a vote by the Senate to limit the size of President Bush's tax cut proposal to $350 billion over the next ten years. Both articles mention in passing a proposal that would set aside the money saved for Social Security. Neither article describes the details of this proposal, but the discussion implies that the proposal would use general revenue to support Social Security. If this is in fact the case, then this would be a drastic change in the way in which Social Security is funded, since it currently relies almost exclusively on the designated payroll tax. If the Senate actually approved such a radical change in the funding of Social Security, it deserved much more attention than the passing mention it received in these articles.

Mexico

Trade Brings Riches, but Not to Mexico's Poor
Mary Jordon and Kevin Sullivan
Washington Post, March 22, 2003, Page A10
http://www.washingtonpost.com/wp-dyn/articles/A7669-2003Mar21.html

This article reports on the fact that the percentage of Mexicans who live below the poverty line has not changed in the last twenty years. The article characterizes this fact as a "paradox," noting the large expansion of trade during this period.

There is nothing paradoxical about this situation. Data from the World Bank show that Mexico's economy has stagnated since 1980, with per capita GDP growth averaging less than 0.5 percent annually. By comparison, per capita GDP growth averaged 3.9 percent annually in the two decades from 1960 to 1980. Given the sharp slowing of growth associated with Mexico' policies of the last two decades, it should not be a surprise that there has been no reduction in the poverty rate.

At several points the article refers to trade as though it were a measure of prosperity. There is no direct link between trade and prosperity, just as there is no direct link between a firm's sales and its profits. While rising sales usually are associated with rising profits, a firm may increase sales by selling its products at below cost. In this case, rising sales would be associated with losses. Similarly, Mexico's growing trade in the last two decades has been associated with stagnation, not healthy growth.

At one point the article asserts that the economic policies implemented over the last two decades were "intended to create prosperity for all." It is not clear that this was the intention. Many of the people who designed and implemented these policies managed to get very rich as a result, while the country as a whole suffered. It is possible that the outcome is exactly what was intended, with those in power implementing policies that were designed for their own benefit. The article presents no evidence that this was not the case.

Latin America

Native Latins are Astir and Thirsty for Power
Juan Forero with Larry Rohter
New York Times, March 22, 2003, Page A3
http://www.nytimes.com/2003/03/22/international/americas/22LATI.html?ex=10489140\00&en=b399e3d393f0487b&ei=5007&partner=USERLAND

This informative article discusses aspects of the current political situation in Latin America. The first article makes two references to "free-trade" agreements involving Latin American countries and the United States. This is inaccurate since these agreements actually increase certain forms of protectionism, such as copyright and patent protection. It would be more accurate to simply refer to them as "trade" agreements.

Both articles refer to the policies currently being followed by Brazil's new President, Luiz Inacio Lula la Silva, as being fiscally prudent. It is not clear that Brazil will be able to maintain payments on its debt in any plausible scenario (see "Paying the Bills in Brazil: Does the IMF's Math Add Up?" [http://www.cepr.net/paying_the_bills_in_brazil.htm ). If a default or restructuring of the debt is inevitable, then it is not clear that it is accurate to describe budget cuts and tax increases, necessitated by efforts to temporarily meet interest payments, as fiscally prudent.

The Budget

Delaying Talk About the Cost of the War
Richard W. Stevenson
New York Times, March 23, 2003, Page A19
http://www.nytimes.com/2003/03/23/politics/23MEMO.html?ex=1049000400&en=91b75037\1e10bd85&ei=5007&partner=USERLAND

This article discusses the Bush Administration's tactic of refusing to release any estimates of the cost of the Iraq war until after a budget resolution had been approved. At one point it presents the views of a representative of the Concord Coalition. It identifies the Concord Coalition as "a bipartisan group that advocates fiscal responsibility."

The Concord Coalition has advocated large budget surpluses and paying off the national debt. This can be accurately characterized as "fiscal conservatism." Given the social and economic implications of such policies, it is questionable whether they are responsible.

On the Hill, Business as Usual
Carl Hulse and David Firestone
New York Times, March 23, 2003, Page A19
http://www.nytimes.com/2003/03/23/politics/23CONG.html?ex=1049000400&en=a4adf783\ebe4bc8d&ei=5007&partner=USERLAND

This article reports on the Congressional debate over the budget. At one point it refers to the deficits for 2003 and 2004 as "record deficits." These deficits are currently projected to be in the range of $300 to $400 billion. While this is larger in nominal terms than prior deficits, these deficits (at 3.0 to 4.0 percent of GDP) are much smaller than the 6.0 percent reached in 1983, when measured as a share of GDP. The fact that the deficit is a record measured in dollars is meaningless-only the measure as percentage of GDP is meaningful.

It would also be appropriate to add the Social Security surplus of approximately $180 billion (approximately 1.7 percent of GDP) to the deficit, since this is money which will have to be repaid. It is often alleged that politicians use the Social Security surplus to "hide" the true size of the deficit. The media has the ability to report whatever measure of the deficit it chooses, regardless of which measure is favored by politicians.

Bush Tax Cuts

GOP Liberals Are Key to Tax Cut
Jim VandeHei
Washington Post, March 27, 2003, Page A3
http://www.washingtonpost.com/wp-dyn/articles/A33877-2003Mar26.html

Companies Mobilize To Save Bush Plan to Scrap Dividend Tax
Ariana Eunjung Cha
Washington Post, March 27, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A34123-2003Mar26.html

These articles discuss the prospects of President Bush's tax cut proposals. Both articles assert that he has proposed ending the taxation of stock dividends. Actually, President Bush's proposal would only end the taxation of dividends in stock held outside of retirement accounts. The majority of stockholders, who hold stock in traditional IRAs or 401(k) retirement accounts would still be taxed on their dividend income when they withdraw their money after retirement. They would receive no tax benefits from this proposal.

The Economy

War in Iraq Could Bring U.S. Recession, or Economic Growth
Daniel Altman
New York Times, March 25, 2003, Page C4
http://www.nytimes.com/2003/03/25/business/businessspecial/25COST.html?ex=104917\3200&en=bf254131113ea0af&ei=5007&partner=USERLAND

War Spurs Fears of Another Recession
Paul Blustein
Washington Post, March 28, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A39638-2003Mar27.html

These articles discuss the economy's prospects now that the war in Iraq has begun. Neither article mentions the bubble in the housing market. In the last seven years, home prices have risen by more than 30 percentage points in excess of the overall rate of inflation. There is no precedent for this sort of run-up in housing prices, which generally rise at approximately the same rate as the overall rate of inflation.

This run-up in housing prices has created approximately $3 trillion in additional housing wealth, as compared to a situation in which housing prices had just kept pace with inflation. The bubble wealth has helped to support consumption over the last two years, as homeowners have borrowed against the increased equity in their homes at a record pace. In addition, housing construction has been the strongest sector in the economy over this period. However, this bubble is not likely to last much longer. A surge in interest rates would likely bring it to a quick end. Otherwise, overbuilding, which has already led to record rental vacancy rates, will eventually lead to the bubble's deflation. An article seeking to assess the economy's near-term prospects should have included some discussion of the housing bubble.

These articles relied on a limited range of experts, none of whom had foreseen the collapse of the stock market bubble and the onset of the last recession. These articles should have also included the views of at least one expert who has had a better recent track record on predicting the economy's course.

The Stock Market

Consumer Confidence Falls to Lowest Level Since 1993
Floyd Norris
New York Times, March 26, 2003, Page C7
http://www.nytimes.com/2003/03/26/business/26PLAC.html

This article examines the possibility that a low consumer confidence level may be an indicator of a coming bull stock market, based on the market's past behavior. The article never mentions the price-to-earnings ratio in this assessment. This is comparable to evaluating a piece of commercial real estate without ever considering the rent that the property commands.

The price to-earnings-ratio for the market as a whole is currently close to 18 to 1, somewhat higher than its historic average of 14.5 to 1. In the prior periods of low consumer confidence readings noted in the article, the price-to-earnings was always far below its historic average.

It is also worth noting that the factors that spurred the recovery from previous recessions are not likely to be positive forces in the economy in the new future. Coming out of the recessions in 1975, 1982, and 1991 there was a big spurt of car buying and homebuilding. Since both cars and housing have remained strong through the recession, it is unlikely that there will be any significant growth in these sectors in the near future. In fact, with housing prices having soared far beyond the overall rate of inflation, it is more likely that we will see a collapse of the housing market rather than a new growth spurt. With these factors weighing down the economy, it is difficult to find any real basis for a bull market in the economy at present.

Trade

Farm Exports Boom in Argentina
Tony Smith
New York Times, March 26, 2003, Page W1
http://www.nytimes.com/2003/03/26/business/worldbusiness/26ARGE.html

This informative article reports on the boom in Argentina's exports, which has followed the devaluation of its currency. At one point it describes the country's trade negotiations as "free trade talks." This is inaccurate, since the talks in part focus on increasing some protectionist barriers, such as strengthening patent and copyright protections. They should be referred to simply as "trade talks."