Economic Reporting Review
November 29, 1999:
Workers' "grim" prosperity; causes of inflation; Clinton's "simple"
economics
By Dean Baker
LABOR
"The Missing Ingredient; Food Services Suffer Labor Shortage"
Carole Sugarman
Washington Post, November 20, 1999, page A1
This article reports on the increasing difficulties that restaurants are encountering in hiring and
retaining workers. The article describes the situation entirely from the standpoint of employers,
at one point commenting on the problem of finding restaurant workers in the Washington area:
"locally, the situation is particularly grim."
Of course, from the standpoint of workers, this situation is far from grim since they are in a
situation where they can expect rising real wages and improved working conditions. Such gains
are usually viewed as the goal of economic growth.
The article also mischaracterizes the nature of the long-term problem, stating that "as more of
the food dollar is projected to be spent outside the home, the problem will worsen." The only
reason there is a shortage of restaurant workers is that employers are apparently unwilling to
pay the market wage for these workers. An employer that isn't willing to pay the going wage
will be unable to find workers, in exactly the same way that a consumer unwilling to pay the
going price will not be able to buy a new car.
In the long term, if people are willing to spend more money to eat out, then they may have to
pay higher restaurant prices to meet the rising cost of labor through time. In this case, there will
be no shortage of restaurant workers. Alternatively, if they are unwilling to pay higher prices for
their restaurant meals, then the demand for restaurant workers will not grow as the projections
suggest. In this case, there also will not be a shortage of restaurant workers. Since there is no
apparent constraint on the ability of workers to enter or leave the restaurant industry, there will
be no shortages of restaurant workers, just business owners who would like pay less for their
labor.
More about labor.
[Top]
SOCIAL SECURITY
"Underlying Tensions Kept Congress Divided to the End"
Alison Mitchell
New York Times, November 21, 1999, Section 1 page 1
This informative article assesses the performance of Congress as it ends its session for the year.
At one point the refers to the possibility that Congress would "restructure the Medicare and
Social Security programs to prepare for the retirement of the baby boom generation."
While Medicare's finances are uncertain, due to projections of rapidly rising health care costs in
both the private and public sector, Social Security's finances are projected to be sound until
2034, with no changes whatsoever. By that date, the whole baby boom generation will have
already reached normal retirement age, and most of the generation will probably have passed
into history. The real problem facing Social Security is simply the projection of longer life
expectancies, which will be a bigger problem as life expectancies continue to increase
throughout the century.
More about Social Security.
[Top]
GROWTH & INFLATION
"Economy Proving It's More Robust Than Anticipated"
Robert D. Hershey
New York Times, November 25, 1999, page A1
"U.S. Economy Roars Ahead; Inflation Low"
John M. Berry
Washington Post, November 25, 1999, page A1
Both of these articles discuss the release of revised data on GDP growth in the third quarter. At
one point the Times article notes the Federal Reserve Board's fear that the economy is
growing too rapidly and comments: "One source of anxiety is the fact that inflation is creeping
up in the early stages of production."
While this is true, the acceleration of inflation that has been experienced to date has almost
nothing to do with the strength of the U.S. economy. The recovery of much of the world from
the Asian financial crisis has raised world oil prices from unusually low levels. Also, a modest
decline in the value of the dollar from a level that was clearly unsustainable has led to some
increase in import prices. While these factors may eventually led to somewhat higher inflation at
the consumer level, slowing the U.S. economy will have little effect on these sources of
inflation.
The Post article notes the upward revision to the growth estimate in this release and comments:
"Since the beginning of 1997, the booming economy has enabled American households,
businesses and governments to increase the purchases of the goods and services they want at
more than a 5 percent annual rate, a level of prosperity virtually unparalleled in the nation's
history."
While growth clearly has been very strong in this period, it does not stand out as being
exceptional. From 1949 to 1953, the annual growth rate averaged 6.1 percent, the growth rate
from 1961 to 1966 averaged 5.6 percent, and the growth rate from 1975 to 1978 averaged
5.1 percent.
It is also worth noting that one of the factors that has propelled the growth in domestic
consumption over this period has been a huge increase in the size of the nation's trade deficit,
so that it now exceeds 3 percent of GDP. The deficit cannot continue to increase, and in fact
must shrink in future years, which will be a significant constraint on the future growth of
consumption.
[Top]
GERMANY
"Electoral Setbacks Force German Chancellor to Retreat From the Lure of the Free
Market"
Roger Cohen
New York Times, November 21, 1999, Section 1 page 8
"Triumphant, the Left Asks What Else It Is"
Roger Cohen
New York Times, November 21, 1999, Section 4 page 5
"Clinton a Renaissance Guy, Paints the Globe Bright"
Roger Cohen
New York Times, November 22, 1999, page A4
These articles all discuss the future prospects of the welfare state, primarily in the context of
Germany. All three articles include unsupported assertions that the welfare state cannot adapt
to the "new economy" being created by computer technology. For example, the first article
asserts that welfare state "has proved generally ill-adapted to the speed and competitive
demands of a global economy driven by information technology."
According to data from the Bureau of Labor Statistics and the Conference Board, the welfare
state economies of Europe have generally experienced more rapid productivity growth than the
United States over the last decade. Economists view productivity growth as the most basic
measure of an economy's dynamism and the main determinant of living standards in the long
run.
While the articles all point to Europe's high unemployment rate, none of them mention the most
obvious cause, the contractionary monetary policies being pursued by the European Central
Bank. The European Central Bank recently raised the short-term real interest rate in Europe to
2.0 percent; by contrast, the Federal Reserve Board left the short-term real interest rate at
essentially zero for two years when the United States was recovering from a far more mild
slump in 1992.
The only comment on monetary policy is a quote from Sidney Blumenthal, a Clinton advisor
who is not an economist, which appears in the second article: "Reflate? Nobody among these
center-left leaders is doing that because everybody knows it leads straight to disaster." To
which the article adds "true." Many of the world's most prominent economists differ with the
view offered by Blumenthal and the article. They identified the tight monetary policy of
European central banks as one of the main causes of Europe's slow growth and high
unemployment. (see "An Economists' Manifesto on Unemployment in the European Union,"
BNL Quarterly Review, # 206, 9/98.)
Much of the discussion of the U.S. economic record is misleading. For example, the creation of
19 million jobs in the Clinton years is presented as incontrovertible evidence of the success of
the U.S. model. Actually, job creation was considerably more rapid in the 1970s (2.8 percent
annual rate in the '70s, compared to a 1.7 percent rate in the '90s), a decade which is generally
viewed as a period of stagnation.
The last article includes a quote from President Clinton in which he supposedly explains to
President Henrique Cardosa of Brazil: "We are now the parties of fiscal discipline, because that
brings interest rates down, creates jobs, lowers interest rates on car loans, and so helps
ordinary people.... If we all run a surplus, that makes it that much easier for Enrique to get
money in Brazil." To which the article adds: "Simple really. If only everyone on the center-left
understood."
Actually, it's a bit more complicated. The only factor that could conceivably affect the ability of
Brazilian's to get money is total national savings in the United States. While government savings
in the United States has risen dramatically, as the nation has gone from running large budget
deficits to large surpluses, there has been a more than offsetting decline in private savings.
Therefore over the last decade, national savings has actually fallen when measured as a share of
GDP. This is why the United States is now running a trade deficit that exceeds 3 percent of
GDP.
It is only the net lending position of the United States that could conceivably affect a borrower's
ability to get money in Brazil. Since the United States is at present the world's biggest net
borrower, according to standard economic theory, it is making it much more difficult for
Brazilians to borrow money.
"Creditors Approve Plan to Rescue German Firm"
Associated Press
Washington Post, November 25, 1999, page A35
This articles discusses the German government's plans to bail out a large construction firm. At
one point the article asserts that the German economy "suffers from huge debt and high wage
costs that are hobbling its ability to cope with global competition."
It is worth noting that in spite of its debt and high wages, Germany continues to run a modest
trade surplus, in contrast to the United States, which has a trade deficit of more than 3 percent
of GDP. This evidence suggests that Germany is doing relatively well in coping with global
competition.
More about Europe.
[Top]
CHINA
"China Deal Adds a Sour Note to Gore's Sweet Labor Tune"
Katherine Q. Seelye with Steven Greenhouse
New York Times, November 25, 1999, page A1
This article discusses how the Clinton administration's agreement with China on entering the
WTO has affected labor's support for Al Gore. At one point the article notes that, while labor
has strongly opposed this agreement, other constituencies like business and farmers stand to
gain from it.
The only way that farmers stand to gain from this agreement is if it leads to an increase in the
world price of various farm products. Insofar as such a price increase takes place, U.S.
consumers will be losers. While on net, the nation may still gain from additional sales of
agricultural products to China, according to standard trade theory, most of the farmer's gains
will be losses to consumers.
More about Asia.
[Top]
OUTSTANDING STORIES OF THE WEEK
"At Amazon.com, Service Workers Without a Smile"
Mark Leibovich
Washington Post, November 22, 1999, page A1
This article examines the quality of "new economy" jobs from the perspective of the employees
of Amazon.com. It points out that many workers feel constant pressure to meet narrowly
defined service targets.
"When Shelters Aren't Aboveboard"
Albert B. Crenshaw
Washington Post, November 23, 1999, page B1
This article examines how the effective corporate tax rate has declined over the last five years,
as industry lobbyists have managed to persuade Congress to create dozens of new tax shelters.
"The Mania of Momentum and the Cost of Trading"
Gretchen Morgenson
New York Times, November 21, 1999, Section 3 page 1
This analysis discusses the findings of recent research in financial markets, which shows that the
growing volume of trading is leading to increasing volatility in stock prices. The article notes the
finding of other research which shows that frequent traders typically lose money as a result of
their transactions, compared with an alternative of just holding a major market index.
"Stock Option Bonanzas Vs. Stagnant Paychecks"
Louis Uchitelle
New York Times, November 21, 1999, Section 3 page 4
This article discusses new research from the Federal Reserve Board on how much money
workers have received in recent years from stock options. The article notes that while the
amount of money received in options has been significant, most of this has gone to high-end
workers. The article also notes that options are not counted as an expense on corporate
balance sheets, and therefore lead to an overstatement of corporate profits.
[Top]
Dean Baker is an economist and the co-director of the Center for Economics and Policy
Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The
Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.
ERR is edited by Jim Naureckas.
Back to CEPR's Economics Reporting Review website.