Economics Reporting Review
REPERCUSSIONS OF A STRONG DOLLAR
Week of May 5 - May 11
Dean Baker is co-director of the Center for Economic and Policy Research.
OUTSTANDING STORIES OF THE WEEK
"U.S. Scientists See Big Power Savings from Conservation," by Joseph Kahn in the
New York Times, May 6, 2001, Section 1, page 1.
This article reports on the findings of two new studies that examined the potential
energy savings from low-cost conservation measures. Both studies found that these
measures could have a very large impact on energy demand, with one study finding
that conservation measures could reduce the growth in energy demand by between
20 percent and 47 percent.
"Bush Touts Proposal to Reduce Top Tax Rate," by Glenn Kessler in the Washington
Post, May 9, 2001, page A4.
This article examines the arguments surrounding the Bush administration's proposal to
reduce the top marginal tax rate to 33 percent. It presents a brief, but informative,
summary of the evidence on the economic impact of such a reduction.
"Many Utilities Call Conserving Good Business," by Timothy Egan in the New York
Times, May 11, 2001, page A1.
This article reports on how many utilities have managed to avoid the expense of
building new power plants over the last two decades by taking measures to promote
energy conservation. It notes that in the case of the city-run utility in Los Angeles,
the emphasis on conservation has insulated the city from the power shortages
afflicting the rest of the state.
"Labor Abuses in El Salvador Are Detailed in Document," by Steven Greenhouse in the
New York Times, May 10, 2001, page A8.
This article discusses the contents of a report by the Salvadoran government, which
examined labor conditions in the nation's apparel factories. The report had been
suppressed by the Salvadoran government, but it was made available to the Times
by the National Labor Committee, a labor rights group based in the United States.
THE EURO
"Euro Inspires Little Confidence," by William Drozdiak in the Washington Post, May 7,
2001, page A1.
This article discusses the reluctance of many people, most notably those engaged in
black market activity, to hold the currencies of nations switching to the euro. The
headline misrepresents the content of the article. The main point of the article is
that people engaged in black market activity do not want to be in a situation of
being forced to explain why they have large amounts of German marks, French
francs, or Italian lira, which they suddenly need to change into euros. (There will be
a two month period after the euro is introduced as a physical currency on January 1,
2002, in which people will have to change their currencies.) Therefore, these people
are changing their cash holdings of the various currencies of the euro zone nations,
into dollars, so that they can then change them back into euros at a convenient
pace. This process has nothing to do with a lack of confidence in the euro. Rather, it
is a strategy designed to avoid detection that would occur regardless of how much
confidence these people had in the euro.
"European Central Bank Cuts Rates," by William Drozdiak in the Washington Post, May
11, 2001, page E1.
"To the Thinnest of Applause, Europeans Cut Interest Rates," by Edmund L. Andrews
in the New York Times, May 11, 2001, page C1.
These articles report on the decision of the European Central Bank (ECB) to cut
interest rates by one-quarter of a percentage point. It is worth noting that this
decision seems to reflect an abandonment by the ECB of its policy of inflation
targeting. The ECB had set an inflation target of 2.0 percent. Primarily because of
the recent jump in world oil prices, the inflation rate in the Euro zone is now just over
2.5 percent. Nonetheless, the ECB is lowering rates in order to combat slowing
growth.
This abandonment is worth noting, because inflation targeting had become a very
popular policy among the world's leading monetary economists in recent years. The
inability of the ECB to adhere to its inflation target demonstrates the flaws of this
approach.
PRODUCTIVITY
"Productivity: An Exaggerated Boom May Soon Be a Bust," by Floyd Norris in the New
York Times, May 11, 2001, page C1.
This article examines the possibility that the strong productivity growth of recent
years may be coming to an end. At one point it makes a comparison between
productivity growth in the last five years and productivity growth in the five years
ending in 1972. It notes that in both periods productivity growth averaged close to
2.9 percent annually (actually it has averaged less than 2.6 percent in the last five
years), but in the period after 1972 productivity growth fell to just over 1.0 percent
annually as soaring energy prices derailed the economy. It suggests that the
experience going forward could prove to be similar.
While this point is well-taken, it is worth noting that the strong productivity growth
of the 1967 to 1972 was not an unusual spurt, rather it was only slightly higher than
the 2.7 percent average from 1947 to 1967. It is also worth noting that the recent
upturn in productivity growth has been accompanied by a large increase in the share
of output going to depreciation of plant and equipment. The gap between net
domestic product and gross domestic product has been rising at the rate of 0.4
percentage points annually over the last five years. Insofar as higher productivity
growth is associated with a larger share of depreciation in final output, it is of no real
value, since it will not provide for more rapid growth of wages or profits.
CALIFORNIA BUDGET
"California Struggling over Budget Amid Crisis," by James Sterngold in the New York
Times, May 6, 2001, Section 1, page 20.
This article discusses California's current budget problems, which stem from both a
slowing economy and also large state expenditures to bail out two major electric
utilities. The article twice makes comments implying that recent budgets have
allowed for lavish spending, at one point comparing them to "Christmas morning." This
assessment is questionable. California spends considerably less per pupil on education
than the national average. (According to the National Center for Education
Statistics, California spent approximately 9 percent less than the average for 1998,
the last year for which data is available.) Since the cost of living is far higher in
California than the national average, it is questionable whether this level of education
spending should be viewed as generous. This point is especially important, since the
article indicated that education spending is one of the areas where the Republicans
in the state legislature would like to see cuts.
SOCIAL SECURITY
"Image and Reality on Social Security," by Richard W. Stevenson in the New York
Times, May 6, 2001, Section 3, page 6.
This article examines some of the issues concerning President Bush's plan for
privatizing Social Security. At one point it refers to the government bonds held by
the Social Security trust fund as "i.o.u.'s." All bonds are by definition forms of
i.o.u.'s; however, other bonds are never referred to in this way. The newspaper
should apply the same term to the bonds held by the Social Security system as it
does to other bonds.
The article later notes that if the economy performs well, the fund may be able to
pay full benefits long past 2038, the date when the system is now first projected to
face a shortfall. It then comments that "policy should not be made on a bet that
things work out." It is worth noting that past Congresses, in a single session, have
been able to address the sort of shortfall now projected for 37 years in the future.
For example, the Social Security system ran short of money in 1982, and in less than
a year Congress implemented a set of measures that has kept the program solvent.
If it appears in future years that the fund is going to run short of money in 2038,
because the economy does not grow as fast as some expect, there would still be far
more time -- e.g. in 2020, 2025, or even later -- to address the impending shortfalls
than was the case in 1982, or in several previous Social Security crises.
"Congress Adopts Budget Proposal with Big Tax Cut," by David E. Rosenbaum in the
New York Times, May 11, 2001, page A7.
This article reports on the approval of a budget plan, which includes a large tax cut,
by the Senate. At one point the article refers to a senator's complaints that the plan
will "raid" the Social Security and Medicare trust funds. In fact, these funds will hold
the exact same amount of government bonds regardless of whether or how the
government spends the money it borrows from them. Therefore, as a practical
matter, the budget plan cannot lead to a raid on either fund.
ARGENTINA
"In Argentina, More Room to Breathe," by Clifford Krauss in the New York Times, May
5, 2001, page B1.
This article discusses the efforts of Domingo Cavallo, Argentina's economy minister,
to sustain Argentina's position in international credit markets. The article asserts that
Mr. Cavallo has a "stellar reputation" as a result of the fact that he ended
hyperinflation in Argentina by linking its currency to the dollar.
It is worth noting that Argentina's current difficulties are largely attributable to this
linking. The dollar has risen by close to 25 percent against other major currencies
over the last four years. As a result of the link, Argentina's currency has risen by the
same amount. This has made Argentina's goods uncompetitive in international
markets.
In addition, the link has forced Argentina to match the Federal Reserve Board's
interest rate hikes as Alan Greenspan tried to slow the U.S. economy in 1999 and
2000. (In order to maintain the currency link, it is necessary for Argentina to
maintain interest rates that are comparable to those in the U.S., after adjusting for
risk -- otherwise people would sell their Argentinean currency and buy dollars.) These
interest rate hikes occurred at a time when Argentina was already in a slump.
Recently, the government has also borrowed heavily to maintain the peg; and as the
possibility of a devaluation increases, this risk -- plus the risk of default on the
rapidly expanding foreign debt -- results in higher interest rates and tighter foreign
credit.
The problems that have afflicted Argentina's economy as a result of its link to the
dollar were entirely predictable. In order to avoid these problems, most nations do
not choose to link their currency to the dollar.
TRADE
"In Search of Fast-Track Authority," by Paul Blustein in the Washington Post, May 9,
2001, page E3.
"Bush Requests a 'Fast Track' for His Talks on Free Trade," by Alison Mitchell in the
New York Times, May 11, 2001, page A15.
These articles discuss the Bush administration's efforts to win congressional approval
of fast-track trade authority. Both articles refer to the Republicans who support the
president's trade agenda as supporters of "free-trade." The Post article adds that
these Republicans "fear" that labor and environmental standards could be an excuse
for protectionist measures.
The supporters of President Bush's trade agenda are not consistent proponents of
free trade. Most of them have supported plans to enhance copyright and patent
protection in trade agreements, both of which are forms of protectionism. For this
reason, it is also questionable whether they really "fear" other measures that could
be deemed protectionist. As politicians, it is understandable that they would
denounce measures that they oppose as "protectionist," since this has become a
pejorative term in public debate; however there is little basis for assuming that this
reflects their actual view of the world.
"Bush Declares Freer Trade a Moral Issue; Chides Critics," by Marc Lacey in the New
York Times, May 8, 2001, page A7.
"Bush Seeks Broader Trade Pact Powers," by John Lancaster in the Washington Post,
May 11, 2001, page A4.
These articles report on President Bush's efforts to gain support for fast track trade
authority from Congress. Both articles refer to President Bush's claims that there is a
moral need to promote increased trade as a way to lift the poor out of poverty. This
claim is misleading, since there is no evidence that the policies promoted in recent
trade pacts, such as NAFTA, will help alleviate poverty. The last two decades -- the
period in which liberalization policies have been implemented in many developing
nations -- have been a period of weak per capita GDP growth throughout most
developing countries. (See "The Emperor Has No Growth: Declining Growth Rates in
the Period of Globalization," by Mark Weisbrot, Robert Naiman, and Gila Neta.)
"Farm Policy's Blossoming Dilemma," by Dan Morgan in the Washington Post, May 10,
2001, page A1.
This informative article reports on the difficult economic situation facing the apple
industry in upstate New York. It notes that the industry has been hard hit by foreign
competition, which has depressed prices. It is also worth noting that the lower prices
can be traced directly to the recent run-up in the value of the dollar. As the dollar
rises in value relative to other currencies, the world price of apples, measured in
dollars, will fall. The article reports that apples are now selling for an average of less
than $6 dollars a bushel, compared to more than $8 a bushel five years ago. During
this period, the dollar has risen in value by approximately 25 percent against other
currencies, which would almost fully explain this fall in apple prices.
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