Economic Reporting Review
May 1, 2000:
Myths About Trade, Europe and Canada
By Dean Baker
Trade | Europe | Europe | Inflation | Outstanding Stories
TRADE
"Unions Deny Stand Over Trade Policy Is Protectionist"
Steven Greenhouse
New York Times, April 24, 2000, page A1
This article examines whether the position adopted by organized labor on trade is protectionist.
It would be extraordinary if one of the main motivations of unions is not to protect the jobs of
their workers. In this sense, it is reasonable to assume that the AFL-CIO is trying to obstruct
patterns of trade that will cost its members their jobs.
At the same time, this article is written as though organized labor is the only group that would
use "protectionism" to advance its interests. In fact, many aspects of trade policy are explicitly
protectionist. For example, the United States has been working hard to extend patent and
copyright protection throughout the developing world. This form of protectionism will produce
tens of billions of profits for the movie, recording and pharmaceutical industries, which will
come at the expense of consumers in developing nations.
Most highly educated professionals, such as doctors, lawyers and accountants, benefit from
licensing requirements and other protectionist barriers that limit competition from foreigners.
(See, e.g., "AMA and Colleges Assert There is a Surfeit of Doctors," by Robert Pear, New
York Times, 3/1/97, page A7; "U.S. to Pay Hospitals Not to Train Doctors, Easing Glut," by
Elisabeth Rosenthal, New York Times, 2/15/97, page A1.) This has allowed wages for these
workers in the United States to vastly exceed those elsewhere in the world. For example,
according to data from the OECD, the average wage of a doctor in the United States is more
than twice as high as the average in the other industrialized nations.
Given the widespread use of protectionist measures in the economy, it should not be surprising
that the AFL-CIO would attempt to use its power to promote forms of protectionism that
benefit its members.
"On China Bill, a Different Sort of Trade Gap"
Matthew Vita
Washington Post, April 23, 2000, page A1
This article discusses the Colorado congressional delegations views towards establishing
permanent normal trading relations with China. The article repeatedly refers to the benefits that
the agreement would offer to Colorado by increasing export opportunities to China. It also
includes several comments from business people and politicians making this point.
At no point does the article mention that the United States, and presumably Colorado as well,
imports more than three times as much as it exports to China. While this agreement may hold
the potential to create new jobs in Colorado through increased exports, it also has the potential
to eliminate other jobs by facilitating an increase in imports from China. This half of the story is
completely missing from the article.
More about trade.
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EUROPE
"Pensions Threaten European Economies"
Anne Swardson
Washington Post, April 26, 2000, page A1
This article reports on an alleged "crisis" facing European nations as a result of the aging of their
populations. (The sub-head of the article is "Governments Ill-Prepared for Crisis of Retiring
Baby Boomers.") Most of the argument presented in this article is misleading or blatantly
wrong. The article relies on two experts who hold an extreme position on this issue, while
ignoring more centrist or liberal economists who would present a different perspective.
The basic point is that Europe will be seeing a large increase in the ratio of retirees to workers
over the next three decades. The article points out that the increase in this ratio in Europe is
projected to be larger than in the United States because European nations have lower
birthrates and less immigration. Based on this set of facts, it warns of "unprecedented drains"
on European governments, and huge future financial burdens facing European children.
Actually, in most cases the projected increase in the share of GDP devoted to cover retirement
benefits over the next 30 years is comparable to the increase that these nations have
experienced in the last 30 years. The dearth of children will make this burden easier for
governments to afford, since a large portion of the cost of raising children is born by the public
sector through expenditures on education, childcare and healthcare.
The article is also wrong in implying that Europe is less prepared to deal with the cost of an
aging population than the United States. In its recent study of the effects of an aging population,
Averting the Old Age Crisis (pp. 159-160), the World Bank assumed that the European
countries would maintain an average rate of real wage growth of 2.0 percent annually. By
contrast, like the Social Security trustees, it assumed that real wage growth in the United States
would average just 1.0 percent annually.
This means that before tax real wage will have increased on average more than 81 percent by
2030 in the European countries, while they will have increased by less than 35 percent in the
United States. If tax increases took away an additional 25 percent of the wages of European
workers, they still would experience a greater increase in living standards over this 30-year
period, even if U.S. workers saw no increase in taxes. The fact that European workers are
expected to experience improvements in living standards undercuts the article's contention that
Europe's young are facing an extraordinary burden.
The article's contention that Europe's slow population growth (or in some cases decline) will
make its situation worse, also defies economic logic. Other things equal, a declining population
and labor force will increase the capital to labor ratio. This will make each worker more
productive, and presumably better paid. Also, countries with a relatively small number of
children will find it less costly to provide them all with a good education. In addition, a lower
population will reduce demand for scarce resources, such as land, and limit the impact on the
environment. This could lead to large economic benefits in coming years. For example, the
European nations and the United States have signed the Kyoto agreement on climate change,
which commits nations to getting back to their 1990 levels of carbon emissions by 2010. A
country with a stagnant population will be able to reach this target at a much lower cost than a
country with a rapidly growing population.
The two economic experts cited in this article are Laurence J. Kotlikoff and Paul Hewitt. It
would be difficult to find an economist who holds a more extreme view on this the aging issue
than these two. The article chose not to cite any of the dozens of experts working on this topic
who hold more moderate views
The article also makes some claims that are completely wrong. It asserts that because they
have a common currency, the 11 countries in the euro block are "effectively one economy."
Panama uses the dollar as its currency and Ecuador is switching over to the dollar. It is unlikely
that anyone would claim that Panama, Ecuador and the United States are therefore a single
economy.
It also warns that, as a result of the single currency, if Italy runs large deficits to support its
pension system, it will be able to cause inflation in Ireland. This claim also is wrong. Italy's
government cannot print money. It can borrow, just like a state government in the United
States. Italy would no more be able to cause inflation in Ireland with its borrowing than
California could cause inflation in Massachusetts with its borrowing.
"Euro Falls to New Low Despite Bank's Action"
Anne Swardson
Washington Post, April 28, 2000, page E3
"Rate Increase Fails to Halt Euro's Slide Against Dollar"
Edmund L. Andrews
New York Times, April 28, 2000, page C1
These articles discuss the continued decline of the euro against the dollar. Both articles imply or
assert that the decline is due to some fundamental problem with European economies. For
example, the Post article states that "experts" attribute the decline in part to "the failure of
European leaders to make their economic systems as competitive as that of the United States."
There is little relationship between currency prices and the health of an economy. The United
States dollar rose by more than 30 percent against other major currencies between 1980 and
1986. At this time the U.S. was experiencing record budget deficits and very weak
productivity growth. The dollar then plummeted by close to 30 percent over the next three
years, a period in which budget deficits came down and growth continued on the same path.
The first quarter GDP data suggests that the United States is not doing very well by market
measures of competitiveness. The trade deficit soared to a record 3.5 percent of GDP. U.S.
exports actually fell in the quarter, even though most U.S. trading partners are currently
experiencing healthy growth.
The Times article includes quotes or comments from four experts. The experts are employed
by Bank Julius Baer, Deutsche Bank, ABN Amro (a Dutch bank), and Dresdner Bank. There
is no indication that anyone who does not work for a bank was consulted for this article.
"Retired, Rehired: Dutch Fill Crucial Work Force Gap"
Marlise Simons
New York Times, April 23, 2000, Section 1 page 6
This article reports on efforts in the Netherlands to encourage retired workers to return to the
labor force on a part-time basis. At one point the article notes a downside for retirees
re-entering the work force: "Additional earnings can push the pensioner into a higher tax
bracket."
It is not clear why anyone would be concerned about being pushed into a higher tax bracket.
The Netherlands, like other nations, applies a marginal tax rate. This means that if a worker's
wages pushes them into a higher tax bracket, it is only the income above the bracket cutoff
point which is taxed at a higher rate. For example, in the United States income above (roughly)
$30,000 is taxed at a 28 percent rate, while income below $30,000 is taxed at a 15 percent
rate. If a worker just crosses the cutoff between brackets, say by $100, then it is only the $100
over the threshold that would be taxed at a 28 percent rate. The rest of the worker's income
would still be taxed at a 15 percent rate. The fact that additional wage income happened to
make a portion of the worker's income taxable at a higher rate would be of relatively little
concern.
At one point the article refers to a study which it claims concludes that it will be necessary for
the Netherlands to double the percentage of older people who work in order to meet the
expenses for its social welfare programs in 30 years. This is not true. The government could
always raise taxes for this purpose. Since productivity and wages are rising at a rate of close to
2.0 percent annually in the Netherlands, real hourly wages will be more than 80 percent higher
in 2030 than at present. This means that the after-tax wage would still be considerably higher
than it is at present, even if there were substantial increases in the tax rate.
More about Europe.
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CANADA
"Rightist in Canada's West Has Eyes Set on Ottawa"
James Brooke
New York Times, April 26, 2000, page A3
This article reports on the electoral ambitions of Stockwell Day, who is currently the treasurer
of the province of Alberta. The article includes several incorrect claims painting a dire picture of
Canada's economy.
For example, it notes that Canadians' per person disposable income averages approximately
two-thirds that of people in the United States. It then adds "some economists think they
(income levels) will drop to half American levels by the end of the decade."
This prospect seems highly implausible. The growth projections from the Congressional Budget
Office combined with the population projections from the Social Security trustees imply that
real per capita income in the United States should increase by approximately 16 percent over
the next decade. Income in Canada would actually have to decline over the next decade in
order for it to fall to half the U.S. level by 2010. At present, it's growing at close to a 3.0
percent annual rate, so an absolute decline for the decade, doesn't seem likely. It is worth
noting that the article does not identify any of the economists who it claims hold this pessimistic
view about Canadian income levels.
The article also asserts that "Canada's maximum capital gains tax, 38 percent, is almost double
the American rate, discouraging investment." According to data from Statistics Canada, 17.3
percent of GDP was attributable to investment in the fourth quarter of 1999. By comparison, in
the United States investment accounted for just 12.6 percent of GDP. At the 1979 business
cycle peak, when the maximum capital gains tax in the United States was still 40 percent,
investment accounted for 12.9 percent of GDP. The negative relationship between capital gains
taxes and investment asserted in this article is not supported by this evidence, or by most recent
economic research.
At another point, this article lists Canada's economic troubles over the last decade and includes
"a brain drain to the United States." The article does not indicate the basis for this statement.
A recent paper by John F. Helliwell, a Canadian economist, examined the evidence on a brain
drain from Canada to the United States ("Checking the Brain Drain: Evidence and
Implications," http://www.arts.ubc.ca/econ/helliwell/pages/Papers.htm). The paper found that
the rate of emigration of Canadians to the United States has fallen sharply over the last four
decades. This decline in emigration is particularly dramatic for scientists and engineers. In the
early sixties more than 30 percent of Canadian scientists and engineers moved to the United
States. By the mid nineties, this number had dropped to 8 percent.
In short, insofar as a drain of highly skilled workers leaving the country has been a problem for
Canada, it is much less the case now than it had been in previous years. This finding directly
contradicts the article's unsupported assertion.
It is worth noting that the Times has run several recent articles with this reporter's byline which
disparage Canada's welfare state based on wrong or misleading information (see ERR,
1/24/00 and 3/6/00).
More about Canada.
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JAPAN
"In Japan, Start-Up and Risk Are New Business Watchwords"
Stephanie Strom
New York Times, April 23, 2000, Section 1 page1
This article reports on the growing number of new companies in Japan, particularly in the high
tech sector. At one point it notes obstacles to start-ups in Japan and lists the lack of portable
pensions. Actually, pensions in the United States also are generally not portable. Many
workers lose much of their pension earnings if they switch jobs too frequently.
More about the IMF and World Bank.
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OUTSTANDING STORIES OF THE WEEK
"Drug Firms Reap Profits on Tax-Backed Research"
Jeff Garth and Sheryl Gay Stolberg
New York Times, April 23, 2000, Section 1 page1
This article investigates the process through which Xalatan, a drug used to treat glaucoma, was
developed, and how it has subsequently been marketed. The article points out that the original
discovery was made a researcher at Columbia University whose work was being supported by
a grant from the National Institutes of Health. This researcher, along with Columbia University,
was allowed to obtain the patent on the drug, which has made him quite wealthy.
The article goes on to point out that Pharmacia Corporation, the company that now produces
Xalatan, receives more than $500 million a year in revenue from its sales of the drug. As a
result of the monopoly provided by patent protection, it is able to sell the Xatalan for $45-$50
a bottle, close to 100 times the cost of producing the drug. The government has received no
payback for its support of the research that led to the discovery of Xatalan.
"Nike's Chief Cancels a Gift Over Monitor of Sweatshops"
Steven Greenhouse
New York Times, April 25, 2000, page A12
This article reports on the decision by Phil Knight, the chairman of Nike, to cancel a planned
contribution of $30 million to Oregon University. According to the article, he made the decision
to cancel the contribution because the University had agreed to work with the Workers Rights
Consortium, an organization that monitors working conditions in factories in the developing
world. The university has agreed not to sell clothing in its campus stores produced in factories
that do not meet minimal labor standards. Nike has refused to allow the Workers Rights
Consortium to monitor its factories in developing nations.
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Dean Baker is an economist and the co-director of the Center for Economics and Policy
Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The
Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.
ERR is edited by Jim Naureckas.