Economic Reporting Review
March 5, 2002

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

OUTSTANDING STORIES OF THE WEEK

Bush Proposing Policy Changes On Toxic Sites
Katharine Q. Seelye
New York Times, February 24, 2002, Page A1

This article reports on a proposal by the Bush administration to
reduce the payments that firms must make to clean-up their toxic
wastes. Under the proposal, most of the cost would be shifted to the
government.

Deconstructing Housing
Daniela Dean
Washington Post, February 28, 2002, Page E1

This article examines the importance of recent data on housing sales.
It examines the ways in which the data is compiled and points out
that the implications have often been misinterpreted.

Technology's Toxic Trash Is Sent to Poor Nations
John Markoff
New York Times, February 25, 2002, Page C1

This article reports on a new study that documents the disposal of
toxic waste from computer equipment in developing countries. It
points out that this disposal process is almost completely
unregulated and poses serious health problems.

I.R.S. Audits of Working Poor Increase
David Cay Johnston
New York Times, March 1, 2002, Page C2

This article reports on the increase in the audit rate among the
working poor, at the same time that the I.R.S. is decreasing its
audit rate of high-income taxpayers.


Welfare Reform

Governors Want Congress to Ease Welfare Work Rules
Robert Pear
New York Times, February 24, 2002, Page A18

This article reports on the discussion of welfare proposals at the
National Governors Association. At one point the article comments
that "governors take credit in making the 1996 welfare reform a
success." It goes on to note both the decline in the size of welfare
rolls and the reduction in the poverty rate among children between
1996 and 2000.

This data does not establish that welfare reform was a success. The
unemployment rate fell to 4.0 percent in 2000, a level that the vast
majority of economists claimed was unobtainable four years earlier.
This low level of unemployment explains many of the economic gains by
those at the bottom end of the income distribution. The real test of
welfare reform will be how those at the bottom fare during a
recession, after many of the welfare time limits have taken effect.
There is not yet enough data available to assess this situation.


Social Security

Bush Plays Defense on Social Security
Dana Milbank
Washington Post, March 1, 2002, Page A4

This article reports on a speech by President Bush in which he
defended his position on privatizing Social Security. At one point it
presents the view of Federal Reserve Board Chairman Alan Greenspan,
that the law requires reduced Social Security benefits, if the Social
Security trust fund is empty. The article then asserts that "the
federal budget is tapping into the trust fund."

This statement is wrong and is a serious misrepresentation of the
finances of Social Security. The trust fund is currently running a
surplus of close to $200 billion a year, all of which is invested in
government bonds. The trust fund holds the exact same amount of
government bonds regardless of whether the money it lends to the
government is saved or spent. Therefore, under the law, the fact that
the government is currently spending the Social Security surplus has
no effect on the program whatsoever. Thus the government is
not "tapping into the trust fund." The most recent projections by the
Social Security trustees show that the program can pay all promised
benefits through the year 2038, and will always be able to pay a
higher real (inflation adjusted benefit) than what current retirees
receive.

The error in this article is especially serious because many
politicians have sought to misrepresent the nature of the trust fund
to public, by implying that spending the Social Security surplus will
affect the program. As a result, much of the public is unaware of the
law that governs the program.


Steel

Bush Faces Tough Choices on Steel Imports
Steven Pearlstein and Mike Allen
Washington Post, February 26, 2002, Page A4

This article gives an assessment of the issues facing the Bush
Administration in its decision on imposing restrictions on steel
imports. The article never mentions the over-valuation of the dollar.
The fact that the dollar is 20-30 percent above its sustainable level
effectively subsidizes foreign imports by 20-30 percent relative to
domestically produced steel.


Copyrights

Napster Wins One Round In Music Case
Matt Richtel
New York Times, February 23, 2002, Page B1

This article reports on the latest developments in the suit that the
recording industry has filed against Napster over copyright
infringement. At one point it presents the argument of the industry
that it will not be able to survive if people are able to freely
transfer music over the Internet. It is worth noting that there is no
public interest in having the recording industry survive -- just as
there is no public interest in the survival of telegraph industry
after the invention of the telephone and the Internet.

There is a need for a mechanism to support recording artists (most
currently receive very little support through copyright based
income). But if their work can be distributed effectively without the
recording industry's involvement, this is not a basis for public
concern. The only loss would be to the shareholders and higher paid
employees in the recording industry.


The Recession and the Economy

Hiring to Improve Slightly in 2nd Quarter, Survey Shows
Associated Press
Washington Post, February 25, 2002, Page A8

This article reports on a survey of corporate hiring plans by
Manpower Inc. According to the article, the report suggests a slight
improvement in the labor market, showing that 21 percent of firms
intend to add workers in the second quarter, while only 10 percent
plan to reduce their work force. The article notes that this is a
somewhat weaker reading than in the second quarter of last year, when
28 percent of firms said they intended to add workers and only 8
percent intended to cut their workforce.

It would have been helpful to point out the labor market's actual
performance in the second quarter of 2001. According to the Bureau of
Labor Statistics, employers reduced their payrolls by 223,000 jobs
from March to June.

Home Resales Set Record in January
Jeanine Aversa
Washington Post, February 26, 2002, Page E3

Homes Resales Increased by 16% in January
Bloomberg News
New York Times, February 26, 2002, Page C10

These articles report on Commerce Department data showing a large
jump in home sales in January. These articles present this as
evidence of the current strength of the economy. Home sales are
reported when the transaction is completed, not when the contract is
signed. Since there is typically a 6-8 week period between the
signing of a home sales agreement and the closing of the contract,
the sales data reveals more about the state of the housing market in
November than in January.

Economy Shows Added Strength
John M. Berry
Washington Post, March 1, 2002, Page A1

This article reports on new data on 4th quarter GDP. At one point it
notes that inventory depletions have subtracted from GDP growth, as
firms have sold items from their shelves, rather than current
production. It then argues that restoring these inventories will be a
large boost to GDP in future quarters. It is important to recognize
that approximately half of the goods in inventories are imported. As
a result, restocking will lead to a large boost in imports --
increasing demand abroad -- but its effect on the U.S. economy will
be only half as large as the change in inventory accumulations.


Germany

With Germany In Recession Many Ask Why
Edmund L. Andrews
New York Times, February 28, 2002, Page C1

This article reports on the current economic situation in Germany. It
includes many assertions about structural flaws in Germany's economy
that are either not supported by evidence, or inconsistent with
standard economic theory. An example of the former is the claim that
the root cause of Germany's unemployment is its high tax rate,
generous welfare state and extensive employment protection
regulations. This is an area that has been extensively researched by
economists, with ambiguous findings. Many studies have found little
or no relationship between these policies and the level of
unemployment. It is worth noting that countries with even more
generous welfare states, such as Sweden and Denmark, currently enjoy
lower unemployment rates than the United States.

The unemployment rate that the article uses is also misleading to
readers. The official German measure of the unemployment rate is
based on a different methodology than that of the United States,
which leads to a somewhat higher unemployment rate. According to the
article, the unemployment rate by this measure is 8 percent for
former West Germany and 9.6 percent for the country as a whole. The
OECD standardized rate, which uses a methodology comparable to the
one used in the United States, shows the overall unemployment rate at
just over 8.0 percent, which implies an unemployment rate in former
West Germany of about 6.5 percent, only slightly higher than the U.S.
rate.

The article also asserts that Germany's slow growth, like Japan's, is
creating problems for other nations, by reducing demand for their
products. While this can be true in a world where output is
constrained by a lack of demand -- the view expressed in this, and
most other economic reporting, is that the economies are constrained
by lack of supply. If the standard assumptions are true, the weakness
of the German (and Japanese) economy should make little difference.
In fact, less demand for goods by Germany and Japan should lower
interest rates and free up resources for investment in the same way
that cutting a government budget deficit would. In this sense, if
deficit reduction leads to more investment in the United States, then
we should also believe that a reduction in US exports to Germany and
Japan will lead to more domestic investment here.


Drilling in the Arctic Refuge

Rival Energy Plans Face Senate Debate
Helen Dewar
Washington Post, February 24, 2002, Page A4

This article reports on the Congressional debate over a new energy
bill. At one point it discusses Republican proposals to authorize oil
drilling in the Arctic National Wildlife Refuge. It refers to the
argument of drilling supporters that this drilling will "loosen the
grip of foreign producers on U.S. markets."

It would have been useful to point out that, according to the Energy
Information Agency, the peak production of the Refuge will be equal
to 5 percent of national oil consumption and 8 percent of U.S.
imports. This level of output is only expected to be maintained for
10 years, with output falling rapidly over the following ten years.
After that point, the United States would be more dependent than ever
on foreign oil, since it would no longer have the Arctic reserves to
rely on in a national emergency.


Energy Conservation

California Tries to Have Energy Renegotiated
James Sterngold
New York Times, February 25, 2002, Page A17

This article reports on California's efforts to void long-term energy
contracts it signed last year, when energy prices were peaking. At
one point it lists the factors that have led to a sharp decline in
energy prices in the last year. One item on the list is "surprisingly
effective conservation measures." The effectiveness of these measures
was not a surprise to many advocates of conservation. If these views
had been given more prominence last year, public policy may have been
less misguided.


Fuel Efficient Cars

Bush Touts Hybrid-Fuel Cars for His Energy Plan
Dana Milbank
Washington Post, February 26, 2002, Page A4

This article discusses President Bush's proposal to support the
production of more fuel-efficient cars. The article reports that the
Bush administration is proposing $3 billion in subsidies for fuel-
efficient cars over the next 11 years. It would have been helpful to
readers to express the size of the proposed subsidies on a per car
basis.

In an average year, there would be approximately 16 million cars sold
in the United States. This comes to 176 million cars over the next 11
years. In this case, the proposed subsidy would average $17 a car. If
5 percent of cars qualified for the subsidy, it would average $340 on
a qualifying car, or just over 1 percent of the purchase price if an
average qualifying car cost $30,000.


Japan

Critics Say Koizumi's Economic Medicine Is a Weak Tea
James Brooke
New York Times, February 27, 2002, Page A3

This article reports on Japanese Prime Minister Junichiro Koizumi's
new economic plan. At one point it notes the argument that the
central bank must print more money to stop deflation. In response it
presents the view of the a Bank of Japan official, that "deflation is
not a monetary phenomenon." It follows this with the view of an
analyst at a securities firms: "Japan's overcapacity -- or 'too many
goods chasing too many consumers' is the cause of deflation."

This quote is incoherent (the analyst may have meant too "few"
consumers). The argument that deflation is attributable to a lack of
demand is completely consistent with inflation being a monetary
phenomenon. If enough money is shoved into the hands of consumers,
eventually they run out of room under their mattresses, and start to
spend some of it. This creates more consumers.

This article concludes with a dire warning that Moody's
is "threatening to downgrade Japan's government bonds to the level of
Botswana's." It is worth noting that financial markets do not seem to
share Moody's concern about the creditworthiness of Japan's
government. The real interest rate in Japanese government debt is
lower than that of the United States. This means that if that Moody's
does downgrade Japan's debt, then U.S. government bonds will carry a
higher risk premium than a country with the same credit rating as
Botswana.


Argentina

In Argentina, I.M.F. Impasse Heightens Fear On Economy
Larry Rohter
New York Times, February 23, 2002, Page B1

This article reports on the state of negotiations between the I.M.F.
and Argentina's government over the granting of new loans. At one
point, it presents the views of an analyst at a financial firm, that
the I.M.F. will take a very hard line because it "has been so
seriously burned by Argentina."

This is a peculiar characterization of the situation. Argentina is
now in the fourth year of a recession, with an unemployment rate of
22 percent. Its economy is expected to shrink by an additional 5-10
percent in the current year. It experienced this collapse after
adopting a liberalization program that was widely praised by the
I.M.F. and other international financial institutions. This program
included pegging its currency to the dollar. This peg made
Argentina's goods uncompetitive in international markets and forced
the nation to pay exorbitant interest rates, which led to a large run-
up of the nation's debt. (It was high interest payments, due to
higher interest rates, that led to government deficits -- not
additional spending.) Since the I.M.F. promoted the policies that
have proven so disastrous for Argentina, and supported these policies
with tens of billions of dollar of loans from both the Fund and other
creditors who made their loans on the basis of IMF approval, it is
not clear how the IMF has been "burned by Argentina."