Economics Reporting Review
PEANUTS FOR HYBRID CARS
Week of May 19 to May 25
Dean Baker is co-director of the Center for Economic and Policy Research.
OUTSTANDING STORIES OF THE WEEK
"Some Hybrid Vehicles Are Here; Their Tax Status Remains Vague," by Matthew L. Wald in the New York Times, May 24, 2001, page C1.
This article examines the current tax treatment of hybrid vehicles, which run partially on gas and partially on electricity. Vice President Cheney has proposed a $2,000 vehicle tax rebate for purchases of hybrids; however, under some interpretations of the current law on tax rebates for clean cars, Mr. Cheney's proposal may actually reduce the size of the rebates that apply to hybrids.
"Bleak Statistics Tarnish Nevada's Glitter," by Todd S. Purdum in the New York Times, May 19, 2001, page A1.
This article examines Nevada's performance in recent years as measured by a variety of social indicators such as suicide rates, teenage pregnancy rates, and high-school dropout rates. These measures place Nevada near the bottom of the 50 states, even though the economy has experienced very rapid growth over the last decade.
"Temporary Jobs Have Become the Victims of a Slow Market," by David Leonhardt in the New York Times, May 19, 2001, page C1.
This article reports on the sharp decline in the temporary employment sector in the last nine months. The workers in this sector have felt the effects of the economic downturn most severely.
"Tax Analysts See Big Gains For Top 1% Of Taxpayers," by David Cay Johnston in the New York Times, May 19, 2001, page C1.
This article examines the timing of various provisions of the tax cuts approved by the House and Senate. It notes that many of the provisions that favor low or middle income families will lose value through time, largely as a result of inflation. In contrast, the provisions that primarily benefit upper income taxpayers tend to increase in value through time.
TAX CUTS
"In Different Eras, Two Big Tax Plans," by John Lancaster in the Washington Post, May 20, 2001, page A5.
This article compares the Reagan tax cuts passed in 1981 with the tax cuts likely to pass Congress this month. At one point the article asserts that the Reagan tax cuts were about the same size measured in relation to economy, placing both at approximately 2.1 percent of GDP. Actually, the $1.35 billion tax cut that is projected to pass Congress is less than 1.0 percent of the projected GDP for the 11 years included in this revenue loss estimate. This makes the Bush tax cut less than half as large as the Reagan tax cut.
The article also poses the question, "Why is Congress on the verge of cutting taxes by $1.35 trillion over 11 years, especially given the uncertainties about long-range budget surplus projections on which the cuts are based?" This is a peculiar question, since there has never been a time in the post-war era when a ten year projection would have shown a better fiscal picture than it does at present. There are many reasons for questioning the merits of this tax cut, but the nation has never been more able to afford a tax cut of this magnitude than now.
"Bush Tax Cut Pares Government's Role," by Glenn Kessler in the Washington Post, May 21, 2001, page A1.
This article examines the long-run impact of President Bush's tax cut. At one point it refers to arguments from some Democrats and experts on national finances that the tax cut "set the nation on an increasingly tight fiscal path that potentially leaves little maneuvering room for future presidents and Congresses when the baby boom generation begins to retire."
It is worth noting that this view assumes that future Congresses will behave in a qualitatively different manner than past Congresses, for reasons that are never explained. In the past, Congresses have repeatedly voted to raise taxes to meet important public needs. In the last two decades Congress voted for four major tax increases. In 1982, 1990, and 1993 it approved significant tax increases aimed at reducing budget deficits. In 1983, it approved a large increase in the payroll tax to keep the Social Security fund solvent. While none of these tax increases were very popular, relatively few members lost seats as a result of supporting these measures.
The basis for concern about long-term budget shortfalls stems from a view that for some reason Congress will never again approve a tax increase, even if it is needed to meet pressing social needs. There is no apparent reason for thinking that this would be the case.
"Team Bush: Partisan but Nimble," by Richard W. Stevenson in the New York Times, May 20, 2001, Section 3, page 1.
This article examines the economic views and practices of President Bush's top economic advisors. At one point the article discusses the strategy of Bob Zoellick, the trade representative, to sell future trade agreements as having the same stimulative effect as tax cuts, since reducing tariffs are a form of tax reduction.
It would have been worth noting that any stimulative effect from the tariff reductions in future trade agreements would almost certainly be too small to measure. The Congressional Budget Office's baseline projections show that tariff revenue will remain at approximately 0.2 percent of GDP over the next decade, approximately $20 billion annually at present. Even if this were reduced to zero in a single year, the impact on the economy would be minimal. If a tariff reduction were phased in over a period of five years, as is more typical, then the impact would be far too small to be measured.
If President Bush's trade representative believes that he must make this sort of
argument to promote his trade agreements, then it implies that he does not feel the
public would support the agreements if he spoke of them honestly. It would have been appropriate to point out this fact out to readers.
TRADE DEFICIT
"Big Jump in Trade Gap in March May Be Sign of Slower Economy," by Michael Brick in the New York Times, May 19, 2001, page C3.
This article reports on Commerce Department data showing a large jump in the U.S. trade deficit in March following a large drop in February. While the article seeks to explain the change by trends in the economy, it is more likely a statistical aberration. The trade deficit probably did not actually fall as much in February as had been originally reported, so the rise in March was considerably less than the data implies. This pattern can appear in the data if goods that were brought into U.S. docks at the end of February were for some reason not recorded until the beginning of March. Such errors are common.
THE FEDERAL RESERVE BOARD
"Greenspan Hints at Further Rate Cuts," by John M. Berry in the Washington Post, May 25, 2001, page E1.
This article reports on a speech discussing the current state of the economy by Federal Reserve Board Chairman Alan Greenspan. The article presents the views of critics who either contend that Greenspan was too slow to raise interest rates to correct "speculative excesses" or that he raised interest rates too much.
The article ignores the view of many economists that Greenspan erred in trying to slow growth with higher interest rates, when the more real problems were the unsustainable bubbles in the stock market and the dollar. Greenspan could have attempted to attack the stock market bubble directly by raising the margin requirement for investors who buy stock on credit. This would have slowed stock purchases and presumably would have prevented the market from becoming quite so over-valued.
More importantly, Greenspan could have used his position as chairman of the Federal Reserve Board to explain to investors how out of line stock prices had become with standard projections of profit growth. For example, the Congressional Budget Office is currently projecting that real (inflation-adjusted) profits will grow at an average rate of just 1.0 percent annually from 2001 to 2011. If stock prices keep pace with corporate profits, and with the dividend yield (including share buybacks) is less than 2.0 percent, stocks would be expected to yield a real return of under 3.0 percent annually.
It is very unlikely that many investors would choose to hold stock for returns that
are lower than what they could receive on an inflation-indexed government bond.
Therefore, had Mr. Greenspan chosen to use his position to make the arithmetic clear
to investors, it is unlikely that the stock market, and the dollar, would ever have
become so over-valued. This article should have noted the views of this group of
critics of Federal Reserve Board policy.
"Setting Rates by the Numbers," by Alex Berenson in the New York Times, May 20,
2001, Section 3, page 1.
This article examines Federal Reserve Board Chairman Alan Greenspan's efforts to stimulate the economy with interest rate cuts. At one point it refers to critics who blame Alan Greenspan for not raising interest rates sooner, to attack the bubble in the stock market.
This comment implies that the only way that Mr. Greenspan could have attacked the stock market bubble was through higher interest rates. As noted above, Greenspan could have raised the margin requirement for investors that bought stock on credit or attempted to lower stock prices by explaining the extent to which they had become out of line with plausible projections for future profits.
GERMAN UNEMPLOYMENT
"German Surprise! Who Are the Guest Workers?" by Edmund L. Andrews in the New York Times, May 21, 2001, page A4.
This article reports on efforts to recruit workers from the regions of former East Germany for jobs in the Netherlands and Ireland. The article asserts that Germany has an 8 percent unemployment rate in the area that was formerly West Germany (18 percent in the former East Germany), and attributes this "in part to high taxes, rigid regulations, and huge costs associated with rebuilding the former Communist east."
According to the Bureau of Labor Statistics, the unemployment rate for the whole of Germany was 8.1 percent in the first quarter of 2001, calculated with the same methodology for measuring unemployment in the United States. If the unemployment rate in the east is 16 percent, this would imply that the unemployment rate in the area that was formerly West Germany is less than 6.0 percent (the east has more than 20 percent of the total German labor force). It is not clear that high taxes and regulations are responsible for the difference between the unemployment rates in Germany and the Netherlands and Ireland. According to the OECD, the income tax paid by a typical German worker is -1.1 percent of their wages (i.e. they get a tax credit). By contrast, it is 4.9 percent in the Netherlands and 5.0 percent in Ireland.
THE EURO
"Euro Drops on Release of New Data on Economy," by Edmund L. Andrews in the New York Times, May 24, 2001, page W1.
This article reports on a drop in the euro against the dollar after the release of data showing a somewhat slower pace of growth in France and Germany than had been expected, and somewhat more rapid inflation in parts of Germany. In the lead paragraph, the article characterizes the evidence of slower growth and inflation as "a toxic mix that helped drive down the value of the euro to its lowest level this year against the dollar."
It is worth noting that most projections place European economic growth in the range of 2.0-2.5 percent for the year. This is approximately one percentage point higher than the growth rate that the United States has been experiencing for the last half year. The inflation rate in Europe has been 2.6 percent over the last year, roughly one percentage point lower than the inflation rate in the United States over the same period. Therefore, current trends in European growth and inflation would not seem to explain the decline in the euro against the dollar.
FARM FINANCES
"Rising Fuel Costs Join Growing List of Troubles for Struggling Farmers," by John W. Fountain in the New York Times, May 19, 2001, page A10.
This article examines the impact of rising fuel prices on farmers, many of whom are already heavily indebted. In noting the factors contributing to the farmers' problems, it would have been appropriate to mention the over-valuation of the dollar. There is a world market for most agricultural goods and a single world price. This means that when the dollar rises relative to other currencies, the prices that farmers receive for their crops fall, when measured in dollars. Therefore, the 20 to 30 percent over-valuation in the dollar is currently depressing agricultural prices by approximately the same amount.
ENERGY CONSERVATION
"Bush Shows His Green Side to Sell Agenda," by David E. Sanger in the New York Times, May 19, 2001, page A10.
This article discusses the portions of President Bush's energy plans that focus on conservation. At one point it refers to his proposal for a $4 billion tax credit for consumers who purchase hybrid cars, which will run on both gas and electricity. It would have been worth noting that the proposed spending would take place over a ten-year period. It amounts to approximately 0.015 percent of projected federal spending over this period.