ECONOMICS REPORTING REVIEW: The NYT and the
Washington Post Under the Microscope
Week of November 11 - November 17
Dean Baker is co-director of the Center for Economic and Policy Research.
THE GREENSPAN RECORD AT THE FED
"Behind the Boom," by Bob Woodward in the Washington Post, November 12, 2000,
magazine section, page 8.
"In '87 Crash, All Eyes on Greenspan," by Bob Woodward in the Washington Post,
November 13, 2000, page A1.
These articles present excerpts from Bob Woodward's new book, Maestro:
Greenspan's Fed and the American Boom. Much of the discussion in these pieces
misrepresents basic economic relationships, as well as recent economic history.
For example, the first excerpt includes an explanation for high interest rates that
Greenspan supposedly gave to Clinton at their first meeting after Clinton's election.
According to the excerpt, Greenspan explained that interest rates were high because
of high inflationary expectations. If investors no longer expected inflation to rise,
then interest rates would fall.
The problem with this argument is that in virtually every economic model, it is the
real interest rate -- the nominal interest rate minus the expected rate of inflation --
which is relevant to the economy. This means, for example, if inflation is expected to
be 10 percent annually, and mortgage rates are 10 percent, then the real interest
rate is effectively zero, and people should be happy to borrow money to buy homes
at this rate. They would expect their wages and the price of their home to rise by 10
percent each year, making the burden of paying back the loan very small. By
contrast, the burden would be much greater if the nominal interest rate were 7
percent and the expected inflation rate were just 2 percent. It seems unlikely that
Alan Greenspan was unaware of the distinction between real and nominal interest
rates, or that he tried to mislead President Clinton on this issue, as the excerpt
implies.
The article also implies that the subsequent history supported Alan Greenspan's
decision to raise interest rates in 1994 and slow the economy. As indicated in
Greenspan's congressional testimony at the time, Greenspan began raising interest
rates in 1994 because the unemployment rate was falling towards 6.0 percent, which
most economists viewed as the non-accelerating inflation rate of unemployment
(NAIRU). According to the NAIRU theory, if the unemployment rate fell below 6.0
percent, then inflation would begin to accelerate.
Subsequent events have shown that the NAIRU theory is not true. The
unemployment rate has been below 6.0 percent for over six years. It has been below
5.0 percent for more than three years. During this period, the inflation rate has
actually declined slightly. This history suggests that Greenspan unnecessarily slowed
the economy in 1994, preventing the unemployment rate from declining more quickly,
and denying millions of people jobs.
The second article examines Alan Greenspan's efforts to prevent the stock market
crash in 1987. It never once mentions the question of whether this sort of
government intervention into the market was desirable. Presumably Greenspan
considered this issue and discussed it with other economists at the Fed. Arguably,
his bailout of the market in 1987 gave investors the confidence that led them to bid
up stock prices to the record levels of the last year. In this sense, this intervention
had exactly the negative effect that many economists would have anticipated. It led
to an even larger bubble than existed in 1987, which could set the stage for an even
larger collapse in the future. While Greenspan must have given thought to this
possibility, the excerpt does not even raise it as an issue.
"Suspicious Numbers Added Up to a Boom," by Bob Woodward in the Washington
Post, November 15, 2000, page A1.
This last excerpt from Bob Woodward's book is centered on a logical error in basic
economic accounting. It argues that Greenspan recognized that the standard
productivity numbers generated by the government's statistical agencies were
wrong, and that this meant the economy could actually grow faster than was
generally recognized. This view makes no sense. If there is an error in measuring
productivity growth, then there is also an error in measuring GDP growth of
approximately the same magnitude. It is not clear whether the article is
misrepresenting Greenspan's position, or whether Greenspan has made this error
himself.
Productivity measures the amount of output per hour of work. According to the
article, Greenspan believed that productivity growth was actually more rapid than
official data showed because of the huge investments that firms made in computers
and other high tech equipment. If productivity growth was more rapid than the
official data showed, according to the article, the economy could grow faster than
2.5-3.0 percent rate that most economists felt to be its maximum potential rate of
growth.
The flaw in this logic is that the data on productivity growth is derived from the data
on economic growth. To calculate productivity growth, the Bureau of Labor Statistics
uses measures of economic growth from the Commerce Department and divides this
figure by its measure of hours growth. Since there are few disputes about hours
growth, if productivity growth is being under-measured, it implies that GDP growth is
being under-measured by approximately the same amount. This means that any
under-counting of productivity growth would not be a basis for allowing more rapid
GDP growth, since GDP is already growing faster than the official numbers indicate.
At one point the article refers to the 5.5 percent unemployment that the economy
had in 1996 and comments "the old economic models virtually dictated that inflation
was around the corner." It would have been appropriate to point out that this issue
was actually hotly debated in the profession at the time. There were prominent
economists, such as Robert Eisner at Northwestern University, Ray Fair at Yale, and
James Galbraith at the University of Texas, who did not accept this view of the
economy. They argued that the unemployment rate could decline further without
leading to accelerating inflation.
THE FED AND INFLATION
"Fed Puts Rates On Hold Again," by John M. Berry in the Washington Post, November
16, 2000, page E1.
"Still Vigilant, Fed Maintains Steady Rates," by Richard W. Stevenson in the New York
Times, November 16, 2000, page C1.
These articles discuss the Federal Reserve Board's decision to leave interest rates
unchanged at a meeting of its open market committee. Both articles include
misleading comments about the economic situation that the Federal Reserve Board
may face in the future.
The Post article raises the possibility that continued low rates of unemployment could
lead to "inflationary wage increases." There is no reason that higher wage increases
would necessarily be inflationary. Wage growth has fallen far behind productivity
growth in the last year, which suggests that income has been shifting from wages to
profits. If productivity growth continues at even a 2.0 percent rate (as opposed to
4.0 percent in the last year), the rate of wage growth would also have to increase
just to increase the wage share constant. Furthermore, since there has already been
a large shift to profits over the last decade, it is reasonable to believe that more
rapid wage growth can be absorbed by shrinking profit margins, instead of being
passed on in higher prices.
The Times article warns that if the economic slowdown also leads to slower
productivity growth, which will create some inflationary pressures, then "the Fed
might be handcuffed, unable to stimulate the economy with lower rates." Under
these circumstances, the Federal Reserve Board will not literally be handcuffed. It
will still have the option to stimulate the economy by lowering rates. It may choose
not to do so, because it is more concerned about inflation than rising unemployment,
but this would be a policy decision.
SOCIAL SECURITY
"A Retirement Plan That Wall Street Likes," by Louis Uchitelle in the New York Times,
November 12, 2000, Section 3, page 6.
This informative article discusses proposals to replace a portion of the defined Social
Security benefit with individual accounts. At one point it notes that the average
annual return for a fund invested in a mix of stock and bonds has been 5.5 percent
to 6.0 percent above the rate of inflation. It is important to note that none of the
proponents of privatizing Social Security has been able to show how such returns will
be possible in the future, given current stock valuations and the profit growth
projections from the Social Security trustees. The only stock return projections that
have been derived from the trustees' profit growth projections show that the returns
on stock will average close to 3.5 percent annually above the rate of inflation.
COPYRIGHT PROTECTION
"Amazon.com Draws Fire on Secondhand Books," by David Streitfeld in the
Washington Post, November 14, 2000, page E1.
This article discusses the anger of some publishers and authors over Amazon.com's
decision to start posting the availability of used books on the same page as new
books are listed. While the article presents the views of several publishers and
authors who are concerned that this will cut into their sales and royalties, it does
not present the views of any economists.
While it is understandable that interest groups would be upset over innovations that
reduce their income, their objections are comparable to the complaints of a clothing
store that its competitors are advertising their low prices. When this sort of
complaint is expressed by other groups -- for example manufacturing workers
unhappy about competing with low wage workers in developing nations -- they are
usually treated with derision. Articles generally include comments from economists
and other policy experts stating that the affected groups will simply have to learn to
adapt to the new economy. It is interesting to note, that in this case, the same sort
of complaints expressed by publishers or writers, a comparatively well-educated
group, were treated with great respect.
TURKEY
"Tackling Entrenched Corruption in the Turkish Economy," by Douglas Frantz in the
New York Times, November 12, 2000, Section 1 page 12.
This article discusses corruption in the Turkish economy. At one point it notes that
two conglomerates dominate the media. It then indicates that these corporations
cannot be relied upon to report on government corruption because, "unlike most
American media businesses, the companies also have interests in sectors regulated
by the government."
This is not true. Most major U.S. media corporations have extensive interests in
sectors that are heavily regulated by the government. For example, the government
regulates all broadcast mediums. Television and radio stations profit enormously from
the fact that the government gives them exclusive rights to a broadcast frequency,
instead of auctioning off these frequencies. Most magazines and newspapers are
owned by conglomerates that also own television and radio stations. There are also
links between many media conglomerates and cable television operators, which is
another heavily regulated industry. In addition, media conglomerates are heavily
dependent on government enforcement and extension of copyright privileges. In
recent years, these have been extended both in duration, and in geography, as U.S.
trade negotiators have made protecting U.S. copyrights a top priority in recent trade
agreements. If fears over the government's treatment of regulated businesses affect
reporting, then people in the United States have serious grounds for questioning the
independence of the media.
"IMF Ready To Help Argentina Avert Crisis," by Steven Pearlstein and Anthony Faiola
in the Washington Post, November 11, 2000, page A21.
This article reports on the current economic situation in Argentina. The nation is
suffering from a recession that is in large part attributable to its decision to link its
currency to the dollar. The recent rise in the dollar has badly hurt Argentina's
exports. Also, the decision of the Federal Reserve Board to raise interest rates has
forced Argentina's central bank to do the same. The problems due to the currency
link are never mentioned in this article. In previous articles, (e.g. see "Argentine
Economy Reborn but Still Ailing," by Roger Cohen, New York Times, February 6, 1998,
page A1) the linking of the currency to the dollar was widely praised due to its
effectiveness in reducing inflation.
At one point the article notes that the IMF's aid will be conditional on a program that
includes the privatization of Argentina's Social Security system. It is worth noting
that in other countries that have adopted privatized systems, the financial industry
has taken close to 15 percent of annual deposits to cover administrative fees. This
ratio in the United States would imply fees of more than $60 billion annually. By
contrast, the government system only costs about $3 billion a year to administer.
ASIAN PACIFIC ECONOMIC COOPERATION GROUP
"Clinton Says Backtracking Could Lead to a New Slump," by David E. Sanger in the
New York Times, November 15, page A12.
This article discusses President Clinton's appearance a summit meeting of the Asian
Pacific Economic Cooperation Group. At one point it recounts the main points of a
speech in which President Clinton apparently commented on the economic and social
progress that the nations have achieved since the group's first summit meeting in
1993. Actually, the last seven years have been relatively bad ones for most of the
nations in the organization. The 1997 financial crisis took a major toll on many
nations, which most have not yet completely recovered from. Indonesia, in
particular, has experienced a prolonged economic slump. Russia, which is also a
member of the group, has experienced virtually no growth over this seven year
period. By many measures, its economy has actually contracted during this time.
OUTSTANDING STORIES OF THE WEEK
"Rise in Health Care Costs Rests Largely on Drug Prices," by Robert Pear in the New
York Times, November 14, page A12.
This article reports on a new study in the journal Health Affairs, which shows that
main reason for the continued rapid rise in health care costs is increased spending on
prescription drugs.
"Growing Opposition To Free Drug Samples," by Melody Petersen in the New York
Times, November 15, page C1.
This article discusses the sales practices of the pharmaceutical industry, specifically
its distribution of free samples of prescription drugs. As the article points out, this
practice has often helped to persuade doctors to prescribe new drugs that are more
expensive, but often not more effective, than existing drugs.
"High-Tech Stealth Being Used To Sway Doctor Prescriptions," by Sheryl Gay
Stolberg and Jeff Gerth in the New York Times, November 16, page A1.
This article examines the methods that drug companies use to promote their new
drugs. This includes keeping computer files on the prescribing patterns of physicians,
so they know which ones will be most amenable to their marketing pitches.