Economics Reporting Review
A DUBIOUS ASSESSMENT OF CONSUMER SPENDING
Week of May 12 - May 18
Dean Baker is co-director of the Center for Economic and Policy Research.
OUTSTANDING STORIES OF THE WEEK
"Energy Industry Raises Production at a Record Pace," by Joseph Kahn and Jeff Gerth
in the New York Times, May 13, 2001, Section 1, page 1.
This article examines the near term prospects for the nation's energy supply. Based
on government and industry statistics, and the assessment of industry experts, the
article concludes that energy supplies are increasing at an extremely rapid pace. The
article indicates that there is little evidence to support the Bush administration's
contention that environmental regulations are hampering the ability of energy
companies to meet demand.
"The Wealthy and the Wealth Effect," by John M. Berry in the Washington Post, May
13, 2001, page H1.
This article reports on the findings of a new Federal Reserve Board study of savings
behavior. The study found that the sharp decline in household savings over the last
decade is entirely attributable to a drop in savings among the richest 20 percent of
households. In turn, the study attributes the drop in savings among this group --
which owns 96 percent of individually held shares -- to the wealth effect created by
the soaring stock market. In effect, the study shows that the rising stock market
has reduced national savings in much the same way as a large federal budget deficit
would.
"For the Wealthy, Tax Plan's Benefits Could Vary Widely," by David Cay Johnston in
the New York Times, May 15, 2001, page C1.
This article examines some of the main features of the tax cut proposals approved by
the House and Senate. It points out that there are major differences between the
plans, with the largest being the lower top marginal tax rate in the House plan, which
disproportionately benefits a very small number of extremely wealthy taxpayers, and
the change in alternative minimum tax in the Senate plan, which will benefit many
slightly less affluent families.
"The Green Revolution Yields to the Bottom Line," by Andrew Pollack in the New York
Times, May 15, 2001, page D1.
This article examines the impact of the growing role of private industry in funding
agricultural research, as government and university sources of funding have been
scaled back. The article reports complaints from scientists and farmers about access
to research findings, technology and seeds as more firms try to profit from research.
"Brown Lungs, Lost Fingers; Now, a Lost Mill," by Rick Bragg in the New York Times,
May 16, 2001, page A1.
This article reports on the closing of a cotton mill in a small town in Alabama. The
article reports how the availability of low cost labor in Mexico, as a result of NAFTA,
made the plant unable to compete. The plant had been the major employer in
Jacksonville, Alabama, for more than a century. As the article explains, its history is
similar to that of many other textile factories across the south.
SOCIAL SECURITY
"For the First Time, Nuclear Families Drop Below 25% of Households," by Eric Schmitt
in the New York Times, May 15, 2001, page A1.
This article discusses some of the data from the 2000 census. It notes the impact of
the aging of the baby boom generation, and then quotes a demographer at the Urban
Institute commenting that "20 years from now they [baby boomers] will cause the
Social Security crisis." It is not clear what crisis this quote could refer to. The
Greenspan Commission was well aware of the demographics of the baby boom when
it restructured the program in 1983. As a result, the program is now projected to be
fully solvent until 2038, with no changes whatsoever. At that point, all the baby
boomers will be long past normal retirement age, and most will probably be dead.
CONSUMER SPENDING
"U.S. Consumers Still Spending," by Caroline E. Mayer and Sabrina Jones in the
Washington Post, May 12, 2001, page E1.
"Consumers Still Spending with Gusto," by Michael Brick in the New York Times, May
12, 2001, page B1.
These articles report on the release of data by the Commerce Department on April
retail sales. Both articles imply, particularly in their headlines, that the data showed a
robust rate of spending growth. This is a dubious assessment. The previously
reported figures for February and March were both revised downward, so that the
both months now show significant declines. Therefore, the sales data reported for
April were just 0.2 percent higher in nominal dollars than the sales reported for
January. After adjusting for the impact of inflation, April's numbers imply that retail
sales have actually been falling in real terms over the period from January to April.
ENERGY AND THE ENVIRONMENT
"Energy Policy's Ground Zero," by William Booth in the Washington Post, May 15,
2001, page A1.
This article discusses the benefits and risks associated with drilling for the oil in the
Arctic National Wildlife Refuge (ANWR) in Alaska. At several points the article frames
the question as matter of balancing concerns over the environment with the desire
to get cheap energy.
Actually, there is very little evidence to support the claim that the oil produced from
the refuge would even have a noticeable effect on energy prices in the United
States. According to the optimistic estimates from people in the oil industry, the
region may be able to produce approximately 1 million barrels a day for approximately
20 years (some environmentalists have lower estimates of the amount of oil in the
refuge). If there were no offsetting reduction in supply elsewhere, this would
increase the world supply by approximately 1.5 percent. Assuming that demand for oil
is extremely unresponsive to changes in price (an elasticity of 0.25), this would lead
to a 6.0 percent reduction in the price of oil.
However, there is certain to be some reduction in supply elsewhere. A very
conservative assumption would be that oil production elsewhere would decline by an
amount equal to 50 percent of the production of ANWR, reducing the price effect to
3 percent, and it is entirely possible that the OPEC nations would fully offset any
increased production from ANWR, leaving the price of oil unchanged. In this event,
the United States would drain the oil fields in ANWR, causing environmental damage
to the region, for no savings in energy costs whatsoever.
"White House Outlines New Energy Policy," by Dana Milbank and Eric Pianin in the
Washington Post, May 15, 2001, page A1.
"In Energy Plan, Bush Urges New Drilling, Conservation and Nuclear Power Review," by
David E. Sanger in the New York Times, May 17, 2001, page A1.
These articles report on President Bush's new energy policy. It would have been
appropriate to point out that under reasonable assumptions about the amount of oil
brought to the world market through increased domestic production, and the supply
response elsewhere, it is unlikely that consumers would see any noticeable reduction
in the price of oil and gasoline.
TRADE
"Poor Nations May Not Buy Trade Talks," by William Drozdiak in the Washington Post,
May 15, 2001, page E1.
This article reports on reasons that many poor nations may be reluctant to support
another round of trade negotiations. It focuses on the industrialized nations' barriers
to exports of manufactured and agricultural goods from the developing nations. Some
of this discussion directly contradicts standard economic theory. The article also
neglects other important barriers to free trade imposed by the industrialized nations,
which could have far greater costs to developing nations.
When presenting evidence of barriers to exports from developing nations, the article
first gives several examples of tariffs imposed by the industrialized nations. It then
asserts that the industrialized nations spend enormous sums on export subsidies for
agricultural products: "the EU alone spent close to $300 billion last year on export
subsidies that reward its farmers for creating surpluses which are then dumped in
many Third World markets -- at prices below production costs." According to
standard trade theory, the sort of export subsidies to agricultural products described
in the article would be an enormous gift to consumers in developing nations. In effect
European taxpayers are subsidizing food consumption in the developing world. While
this may be a bad use of European tax money, the effect of having low cost food
available is exactly the same to the developing nations regardless of whether it is the
result of efficient production, low cost labor, or huge government subsidies. (It is
worth noting that the $300 billion figure reported in the article is approximately six
times what the European Union reports spending on all agricultural supports, not just
export subsidies.)
There are reasons for questioning whether access to low cost food exports is
necessarily beneficial to developing nations, but this would require going beyond the
standard trade theory -- which clearly provides the basis for the discussion in the
article. There is a school of thought in development economics, which argues that it
is often important for developing nations to have substantial barriers to trade, and
other forms of government intervention in the market, in order to allow industries a
chance to grow and become competitive with the ones that already exist in the
industrialized nations. This view has been almost completely dismissed by the
economists at the WTO, the World Bank, the IMF, and the other major institutions
guiding current international trade and monetary rules. Since this article clearly
starts from the same premises of these institutions in other areas, to be consistent it
should accept the implication that subsidized agricultural exports to developing
nations are effectively gifts from Europe's taxpayers.
Among the forms of protectionism ignored in this article are obstructions to the
supply of professional services in the industrialized nations and the imposition of
patent and copyright protection in the developing nations. As an example of the
former, three years ago the United States reduced the number of foreign doctors
that could practice medicine in the United States in order to protect doctors salaries
(see "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).
The imposition of patent and copyright protection in developing nations represents
an enormous cost, since it can raise the price of drugs, recorded music and movies,
and other items by several hundred or thousand percent. It is especially surprising
that this article does not mention this issue, since the developing nations have
insisted that the rules on patents and copyrights, laid out in the last WTO round, be
a topic of discussion at the WTO meeting scheduled to be held in Qatar in the fall.
THE HIGH DOLLAR
"Far From Dead, Subsidies Fuel Big Farms," by Elizabeth Becker in the New York
Times, May 14, 2001, page A1.
"The Paper Chase: Why Newspapers and Newsprint Makers Are at War," by Felicity
Barringer in the New York Times, May 14, 2001, page C1.
These articles present informative accounts of the problems facing two industries:
agriculture and newsprint. It would have been helpful if the articles had mentioned
the impact of the strong dollar on both industries. In the case of agriculture, the high
dollar of recent years has severely depressed agricultural prices. (There is a world
market for most agricultural goods. If the price of wheat is held fixed in euros, yen,
or other currencies, it falls in dollars, if the dollar rises.)
Similarly, the high dollar has put domestic newsprint manufacturers at a competitive
disadvantage. The article briefly alludes to this point, when it notes that newspapers
are considering switching to lower cost Russian and South Korean manufacturers. In
both cases, the rise in the dollar -- approximately 25 percent in the last four years
-- has significantly reduced the prices received by domestic producers.
SOCIAL SECURITY IN GERMANY
"German Parliament Votes to Revamp Pension System," by Edmund L. Andrews in the
New York Times, May 12, 2001, page A4.
This article reports on the German Parliament's approval of a bill that would reduce
benefits provided to retirees by Germany's Social Security system. At one point the
article notes that the German system, like most other European systems, is relatively
generous compared to the Social Security system in the United States. It then adds
"but all of these systems have been headed toward collapse, because the pool of
younger workers paying in [to the system] is being swamped by the retirees
collecting from it."
Actually, there is no real basis for asserting that these systems are heading for
collapse. As a result of improving medical technology and greater prosperity, the
people in Europe are projected to live longer in the future than they did in the past.
This will increase the ratio of retirees to active workers. If taxes are not increased at
some point (or benefits cut), then these systems will eventually lack sufficient
money to pay scheduled benefits.
However, lifespans have been increasing throughout the century, thereby continually
raising the costs of European Social Security systems. If tax revenues had been
frozen at any point since these Social Security systems were established, then the
system would have eventually run short of money as the share of retirees in the
population increased. In the past, the populations of these nations have always
supported tax increases to maintain their retirement system. In short, if the Social
Security systems of European nations are heading toward collapse now, they have
always been heading for collapse in exactly the same way.
It is perfectly reasonable to expect that nations would choose to use a portion of
their increasing affluence to support a longer retirement, through higher Social
Security taxes, as they have in the past. In other words, increasing productivity will
allow workers to enjoy higher after-tax wages, even if they pay out more in Social
Security taxes to support longer retirements. The article presents no evidence to
support its implicit assertion, that countries with much higher shares of retirees
among the voting population, will not support the same sort of tax increases as they
did in the past, when their Social Security systems ran short of revenue.
TURKEY
"Turkish Bailout Is Joined to a Political Overhaul," by Douglas Frantz in the New York
Times, May 18, 2001, page A8.
This article examines the prospects for Turkey's economy after receiving new loans
from the IMF. It reports that the IMF is demanding that the country dismantle the
close ties between government and various businesses, which it identifies as "crony
capitalism." While these sorts of ties often lead to wasteful corruption, it is worth
noting that the countries that are most often characterized as suffering from crony
capitalism are also the ones that have achieved the highest sustained growth rates
in the world. For example, from 1960 to 1995 per capita GDP growth in South Korea,
Thailand, and Malaysia averaged 7.0, 5.2, and 4.2 percent, respectively. The IMF
can point to few, if any, countries that have followed its advice and managed to
sustain growth rates that were even half as fast.
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