Economic Reporting Review
May 17, 1999
By Dean Baker
"Rubin Resigns Treasury Post"
Paul Blustein
Washington Post, May 13, 1999, page A1
"An Unlikely Policy Partnership Forged in Mutual Respect"
Charles Barington
Washington Post, May 13, 1999, page A18
"Rubin Resigning as Treasury Secretary"
John M. Broder and David E. Sanger
New York Times, May 13, 1999, page A1
"A Key Architect of Prosperity"
Richard W. Stevenson
New York Times, May 13, 1999, page C1
These articles discuss Treasury Secretary Robert Rubin's decision to resign his position and
analyze his record. All four articles present his record in almost exclusively positive terms,
although the Broder and Sanger article does note that many economists have criticized Rubin's
handling of the East Asian financial crisis.
In presenting this positive assessment, these articles misrepresent many statistics and ignore
much recent history. For example, the Blustein article includes a front-page chart that
compares the economy at the time of Rubin's arrival and departure by five measures: the
budget deficit, the Dow Jones average, the unemployment rate, the interest rate on government
bonds and the interest rate on 30-year mortgages. The chart implies that the economy has
done quite well on all these measures.
On closer examination, the numbers tell a different story. If the stock market is significantly
over-valued, as many economists believe, its high current level should be seen as bad sign,
since the economy has a large negative shock waiting for it when the market corrects itself.
The interest rate numbers are also misleading since, according to economic theory, the interest
rate that matters is the real interest rate, the difference between the nominal interest rate and the
inflation rate. The inflation rate has declined by slightly over a percentage point since Rubin
became Treasury Secretary, which means that real interest rates have essentially remained
unchanged through his tenure.
Two important measures that were excluded would have presented a very different picture.
The median real hourly wage has risen by a total of just 1.6 percent since 1992. This means
that the typical worker has seen extraordinarily slow wage growth through this recovery. In the
'60s, real hourly wages generally grew by more than that in a single year. For example, from
1964 to 1965, real hourly wages grew by 2.6 percent.
The other important measure is the trade deficit. This rose from $29.5 billion in 1992 to
$198.6 billion in the first quarter of 1999. According to the Stevenson article, this was the
result of Rubin's deliberate decision to push up the value of the dollar.
A trade deficit of this magnitude will not be sustainable indefinitely. Eventually, the dollar will
have to fall enough to bring trade more into balance. When it does, it will have an inflationary
impact on the U.S. economy and may lead the Federal Reserve Board to raise interest rates,
possibly throwing the economy into a recession. In this sense, Rubin's policy can be seen as a
way to purchase short-term prosperity that will leave large problems for others to address.
It is also worth noting that Rubin's management of the international economy has not been very
successful from the standpoint of the populations of the nations whose economies he attempted
to direct. While the financial markets in nations such as Mexico, Korea and Thailand have
largely recovered from the impact of their financial crises, the populations of these nations have
not.
In Korea, for example, the unemployment rate is nearly four times its pre-crisis level. Real
wages remain far below their pre-crisis level in Mexico. The Russian economy contracted by
nearly 50 percent under the direction of the team of "reformers" backed by Rubin. Rubin also
failed to foresee any of the world's major financial crises during his tenure, as he encouraged a
process of liberalized capital flows that created the preconditions for these crises. The latter
point is noted briefly in the Broder and Sanger article.
It is also worth noting that Rubin worked aggressively to head off a Japanese effort to establish
an East Asian bailout fund. (See "East Asian Fund Summit Stresses Trade, Leaving Bailouts to
IMF," by Paul Bluestein, Washington Post, 11/27/97, page B11.) Many economists now
believe that the countries of the region and Japan would have fared much better if Japan had
been allowed to go ahead with its plans.
"Summers a Key Player In Global Rescue Effort"
George Hager
Washington Post, May 13, 1999, page A18
"The Administration's Fiscal Closer"
David E. Sanger
New York Times, May 13, 1999, page C1
These articles discuss the career of Larry Summers, the person nominated to succeed Robert
Rubin as Treasury Secretary. Both pieces are largely laudatory in giving Summers part of the
credit for the policies pursued by Rubin (see above discussion). The uncritical praise is perhaps
best exemplified by a quote from Senator Daniel Patrick Moynihan that appears in the Post
article. Senator Moynihan commented that with Summers as Secretary of the Treasury, "the
Dow Jones might hit 22,000."
Moynihan clearly intended this comment as praise, but there is no economic theory, given
current profit forecasts by the Congressional Budget Office and others, that would justify the
market at even one-third this level. If the Dow hit such heights, the eventual correction would
imply the loss of more than $20 trillion in wealth. Even at current price- to-earnings ratios, a
reversion to a more normal relationship between stock prices and corporate earnings would
already mean a loss of wealth of more than $7 trillion.
There are few economists who would argue that it is desirable to have a market become so
over-valued, since the inevitably correction is likely to be quite painful. Japan is still suffering
the fallout from the collapse of a similar bubble in stock prices in 1990.
During his academic career Larry Summers actually did path-breaking work on the tendency
for financial markets to deviate from prices that reflect underlying values. Along with several
colleagues he developed the theory of "noise trading," in which market actors trade on gossip
or sentiments rather than any appreciation of the underlying fundamentals of the market. (See,
e.g., Summers' "Does the Stock Market Rationally Reflect Fundamental Values?", Journal of
Finance, 1986.)
The concern over the inefficiency of unfettered financial markets led Summers to co-author an
academic piece with his wife, Victoria Summers, which presented the case for a small
securities transactions tax, a tax on the buying and selling of shares of stock ("When Financial
Markets Work Too Well: A Cautious Case For a Securities Transactions Tax," Journal of
Financial Services Research, 1989). Summers advanced the same argument for a general
audience when he included a securities transactions tax in his list of "a few good taxes" in a
New Republic article (11/30/87).
"Jobless Rate Rose Slightly to 4.3% in April"
John M. Berry
Washington Post, May 8, 1999, page A1
This article reports on the April Employment Report released by the Labor Department. The
article notes that the employment report showed that the average hourly wage was 3.2 percent
above its year ago level. It then adds: "That hourly figure does not include either bonuses or
non-cash compensation such as employer-paid health insurance premiums. Nevertheless,
workers' pay was rising faster than consumer prices…."
This comment implies that the growth rate would be more rapid if these non-wage benefits
were included. The Bureau of Labor Statistics Employment Cost Index (ECI) suggests the
opposite is the case. This measure showed wage costs increasing by 3.3 percent in the year
from March 1998 to March 1999, while benefit costs increased by just 2.3 percent. Taken
together, the increase in labor compensation as a whole was 3.0 percent.
It is also worth noting that both the wage data in the April Employment Report and the most
recent ECI indicate a substantial slowing in the pace of wage growth. The annual rate of wage
growth recorded over the last quarter in the Employment Report data was 2.5 percent, while
the rate shown by the ECI over the first quarter of 1999 was just 2.0 percent, only slightly
above the 1.5 percent inflation rate for this period.
This article also repeats warnings from Alan Greenspan that if the unemployment rate gets any
lower it may lead to inflationary wage increases, which will cause the Federal Reserve Board
to raise interest rates to slow the economy.
Alan Greenspan has been issuing these warning since early 1994 when the unemployment rate
was still above 6.0 percent. The unemployment rate has repeatedly fallen below the levels that
he suggested would lead to accelerating inflation. Meanwhile, the rate of inflation has actually
decelerated. There is no reason to believe that his judgment on this issue is better now that it
has been in the past.
"Jobless Rate In Germany Unexpectedly Turns Higher"
Edmund L. Andrews
New York Times, May 8, 1999, page B2
This article reports on new data from Germany's central bank, which shows the unemployment
rate rising in April by 0.1 percentage points from its March level. While this increase is the
central point in the article, it is not large enough to even be statistically significant.
The article also reports on criticism of the Social Democratic government's economic policies
from industrialists. It later comments that "some experts worry that joblessness will remain high
because Mr. Schroder's center-left Government has stiffened Germany's already rigid work
rules and pushed through tax increases on business."
While some conservative experts may hold this view, many prominent economists believe that
the major factor keeping unemployment high in Germany is the contractionary monetary policy
being pursued by the European Central Bank. (See "An Economists' Manifesto on
Unemployment in the European Union," BNL Quarterly Review, # 206, 9/98.) The real
(inflation-adjusted) short-term interest rate set by European Central Bank is currently just
under 2.0 percent. By contrast, the Federal Reserve Board, under Alan Greenspan, allowed
the real short-term interest in the United States to fall to zero when the U.S. was recovering
from its last recession in 1992.
"Where Joblessness Is a Way of Making a Living"
Sylvia Nasar
New York Times, May 9, 1999, Section 4, page 5
This article examines the difference between the rate of job creation in the U.S. and Europe.
While it notes the view of M.I.T. economist Paul Krugman, that the main obstacle to European
job growth is the contractionary monetary policy being pursued by the European Central Bank,
it then asserts that "tight monetary policy isn't the main culprit in Europe. Rather, it's that various
safety-net programs over the years have made not working a viable way of life."
This view is not well-supported by the evidence. Most European nations actually had more
extensive welfare protections in the '60s than at present, yet their unemployment rates were far
lower then. The article attempts to explain the change by the impact of oil shocks in 1973,
1979 and 1990. The 1990 shock lasted for just six months and was completely reversed. The
other two shocks were more than 20 years ago. There are few economists who would argue
that an economy takes more than 20 years to recover from a shock.
The distribution of unemployment across countries also does not fit well with the view that the
major problem is a too-generous welfare state. Norway and Denmark, nations with some of
the most generous unemployment benefits in Europe, have unemployment rates of 2.9 percent
and 4.9 percent, respectively. By contrast, the unemployment rates in Italy and Spain, two
countries with considerably less generous benefits, are 12.0 and 17.6 percent, respectively.
"Tough Steps Credited for Welfare Dip"
Judith Havemann
Washington Post, May 10, 1999, page A2
This article reports on a new study by the Heritage Foundation, a conservative think tank. This
study finds that punitive policies designed to remove people from welfare were the main factor
driving down welfare case loads in recent years. It is not apparent why this finding would be
newsworthy, a point made by Rebecca Blank, a member of the President's Council of
Economic Advisors, who is quoted in the article.
While the Post chose to devote a large article on its second page to this study, it completely
ignored a study issued later in the week, which concluded that 675,000 eligible beneficiaries
had been dropped from the Medicaid rolls due to the changes in welfare system (see "Study
Links Medicaid Drop to Welfare Changes," by Robert Pear, New York Times, 5/14/99,
page A18). This study, which was issued by Families USA, found that more than 1 in 5 of the
people who have been dropped from the welfare rolls are now uninsured. The vast majority of
these people are children.
The study apparently does not examine the extent to which people have been forced into
homelessness or gone hungry as a result of being forced off welfare rolls, which would have
been a more newsworthy issue. The article also quotes Representative Nancy L. Johnson, who
asserts that "there is more social service money available than at any time in history." In fact, by
most measures there is far less social service money available at present than at any time since
the early '60s.
"Productivity Up for 2nd Quarter in Row"
John M. Berry
Washington Post, May 12, 1999, page E1
This article discusses the Bureau of Labor Statistics (BLS) release of productivity data for the
first quarter of 1999. The article points out that the data show productivity in the non-farm
business sector increasing at a very impressive 4.0 percent annual rate.
While productivity growth has almost certainly been quite good in recent quarters, the data
continued in the preliminary report is notoriously unreliable. For example, in the third quarter of
1997, the BLS originally reported productivity growth of 4.1 percent. This has since been
revised down to 1.5 percent. For the fourth quarter of 1995, BLS originally reported
productivity declining at an annual rate of 1.2 percent. This number has since been revised
upward to show a healthy 2.6 percent rate of increase.
Since the revisions to quarterly productivity are so large, it implies that the preliminary data
actually contain very little information about the economy. Therefore, it seems rather to dubious
to have a lengthy article on the front of the business section based on a reported surge in
productivity growth that may disappear when better data becomes available.
Outstanding Stories of the Week
"More Groups Are Sharing In Job Growth"
Sylvia Nasar
New York Times, May 8, 1999, page B1
This article reports on the release of the Labor Department's Employment Report for April.
The article gives an extensive analysis of the impact of continued low unemployment on the
living standards of minorities and less educated workers. It includes comments from many of
the nation's leading experts in this area.
"Many States Slow to Use Children's Insurance Fund"
Robert Pear
New York Times, May 9, 1999, Section 1, page 1
This article examines the extent to which states are extending health care insurance to children
in low-income families under a program approved by Congress in 1997. The article points out
that most states have been slow to design programs which would use the money appropriated
by Congress for the program. As a result, the number of children insured under the program
may not even offset the decline in the number insured through Medicaid over the last two
years.
"The Gurus of Gilt"
Michael Powell
Washington Post, May 13, 1999, page C1
This article comments on how Treasury Secretary Robert Rubin has gained celebrity status,
along with Federal Reserve Board Chairman Alan Greenspan. The article points out, that while
a small number of people have become incredibly rich because of the run-up in the stock
market, the vast majority of Americans, who own little or no stock, have not done particularly
well in this recovery. Unfortunately, this analysis appeared in the "Style" section, rather than the
news or business section.
"Minimum Wage Bandwagon Needs Some Skillful Reining"
Michael M. Weinstein
New York Times, May 13, 1999, page C2
This article gives a thoughtful analysis of the likely impact of proposals to raise the minimum
wage. It notes the finding of recent research that a rise in the minimum wage is likely to have a
minimal impact on the employment of teenagers, and almost no impact on the employment of
adults.
Dean Baker is a senior research fellow at the Preamble Center and at the Century Foundation.
Recent articles can be found on the websites of the New York Times and Washington Post.
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