Economic Reporting Review
November 19, 2001

By Dean Baker, co-Director of the Center for Economic and Policy Research

OUTSTANDING STORIES OF THE WEEK

In the 'Idea Wars,' a Fight to Control a New World Currency
Amy Harmon
New York Times, November 11, 2001, Section 3 page 1

This article examines some of the ways in which patents and
copyrights are creating legal obstacles to innovation and economic
growth.


The Rust Belt With a Drawl
David Leonhardt
New York Times, November 13, 2001, page C1

This article examines the impact of the economic downturn on
the states of the interior South. It notes that that many
manufacturing jobs have been shifted into this region in the last two
decades. As a result, this area has been feeling the brunt of the
layoffs in the manufacturing sector.


Hotel Workers' Last Resort
Dana Hedgpeth
Washington Post, November 13, 2001, page E1

This article reports on how the Hotel and Restaurant Employees
International Union has come to take on a social welfare role
-- providing food and shelter to laid off workers -- as many of its
members now find themselves unemployed due to the downturn in the
tourism industry.


The W.T.O.

No Deal Yet for Global Trade Talks
Paul Blustein
Washington Post, November 14, 2001, page A29

This article provides an update on the status of the W.T.O.
negotiation in Qatar. At one point it comments that the possibility
of a failure of the talks "has weighed heavily on the meeting because
of the implications for both the global trading system and the war
against terrorism."

Since the September 11th attacks, the Bush Administration has
sought to portray virtually every item on its political agenda as
necessary for the war against terrorism. This has included its
proposals for large corporate tax breaks, oil drilling in the Arctic
National Wildlife Refuge, and its trade agenda. This article does not
indicate how it has determined that a W.T.O. agreement is actually
important for the war against terrorism.

Trade Talks Hinge on Finesse of U.S.
Joseph Kahn
New York Times, November 10, 2001, page A6

World Trade Organization Admits China, Amid Doubts
Joseph Kahn
New York Times, November 11, 2001, page A12

Trade Deal Near for Broad Access to Cut-Rate Drugs
Joseph Kahn
New York Times, November 13, 2001, page A3

These articles discuss the dispute over the treatment of drug
patents. All three refer to efforts by developing nations to weaken
or violate drug patents in order to provide for the health of their
populations. At this point, the extent of international drug patents
is not well-defined. Many experts, for example Adrian Otten, the
W.T.O.'s Director for Intellectual Property, believe that the
existing wording of the W.T.O. agreement already allows developing
nations to engage in widespread compulsory licensing of drugs. If Mr.
Otten's interpretation is correct, then it is the United States and
other industrialized nations that are seeking to strengthen drug
patents, not the developing nations who are seeking to weaken them.

It is also inappropriate to refer to the efforts of developing
nations as attempts to "break" or "violate" patents. The length and
scope of a patent are set by governments. If patents don't apply in a
specific circumstance, according to the law, then they cannot be
broken or violated. For example, the standard patent length for drugs
is now 20 years. Selling a drug in the 21st year, without the consent
of the patent holder, does not violate the patent.


Trade Officials, Feeling Pressure to Avert a Damaging Setback in
Qatar, Extend Talks
Joseph Kahn
New York Times, November 14, 2001, page A11

Nations Back Freer Trade, Hoping to Aid Global Growth
Joseph Kahn
New York Times, November 15, 2001, page A12

These articles discuss the progress of the W.T.O. talks inn
Qatar. Both articles assert that an agreement in Qatar can provide an
immediate stimulus to the world economy, which can help to boost it
out of recession. For example, at one point the first article asserts
that the negotiations are "widely seen as crucial to stimulating the
global economy." The second article includes comparable assertions.

Neither article cites anyone who holds this view of the W.T.O.
talks. It seems implausible that this belief would be widely held.
The talks will just establish a negotiating framework for a final
deal, which may take years to complete. Even when the deal is
completed, it will likely be phased in slowly over a period of 5 to
10 years. It is also not clear how much, if any, growth will be
accelerated by a trade deal. It does not seem likely that any
economist would view the prospect of an eventual trade agreement as
being important to boosting the economy out of its current slump, as
these articles claim.


Measuring Success: At Least the Talks Didn't Collapse
Richard W. Stevenson
New York Times, November 15, 2001, page A12

This article examines the importance of the W.T.O. agreement
reached in Qatar. The article characterizes the opponents of the
W.T.O. as "protectionist" and opposed to "the concept of
globalization." Actually, many opponents of the W.T.O. are less
protectionist and more supportive of globalization than is the Bush
administration. For example, many opponents of the W.T.O. would like
to see drugs sold in competitive markets, without the government
monopoly provided by patent protection. They would also like to see
the technological capabilities of the Internet fully exploited, with
music, software, and videos transmitted freely, without
government-imposed copyrights.

It is inaccurate to describe the difference between supporters
and opponents of the W.T.O., as one between proponents and opponents
of globalization or free markets. Rather, there are simply
differences on the course each group believes that globalization
should take and what items it would like to see protected.


Social Security

Social Security Panel Unable to Agree
Amy Goldstein
Washington Post, November 10, 2001, page A5

Benefits Panel Plans Array of Choices For Solvency
Richard W. Stevenson
New York Times, November 10, 2001, Page A8

These articles discuss the apparent failure of President
Bush's Social Security Commission to reach agreement on a plan to
privatize the program. Both articles imply that Social Security's
financial situation is far more dire than is indicated by the Social
Security trustees' report. For example, the Post article reports the
commission's goal is "helping the Social Security system withstand
enormous financial strains in coming decades as the baby boomers
reach old age."

According to the Social Security trustees, the system is
already prepared to pay full benefits well into the retirement of the
baby boom generation. It is not projected to experience a shortfall
until 2038, at which point the youngest baby boomers will be age 74
and the oldest will 92. There was never a period prior to the 1983
reforms when the Social Security system was as strong as it is at
present.

Both articles refer to the commission's plans to privatize the
system as a way to fix the program's problems. No economist has yet
shown how privatizing the system can increase the money available to
retirees. The only projections for stock returns that have been
derived from the Social Security trustees' projections for profit
growth, show that the difference between the returns from stocks and
the government bonds now held by the trust fund, are not likely to be
large enough to even cover the administrative cost of individual
accounts
(http://www.cepr.net/Social_Security/letter_to_feldstein2.htm).

Both articles also refer to the views of several members of
the commission that people should be able to do whatever they want
with their individual accounts when they retiree, without the
government's interference. It is worth pointing out, that if people
can just spend their money at age 65 on some form of luxury
consumption (e.g. a trip around the world), there is no obvious
reason why the government should have forced them to save for their
whole working life. While the forced saving may ensure substantial
commissions for the financial industry, it serves no apparent social
purpose.

Russia

Russia Seeks Belated Peace Dividend
Sabrina Tavernise
New York Times, November 14, 2001, Page W1

This article discusses efforts by Russia's government to
increase its economic integration with the United States and west
Europe. At one point the article asserts that "in the tumult of the
first decade after Communism, Russian economic relations with the
West mainly took the form of emergency loans from the International
Monetary Fund."

Actually, Russia's economic relations with the West were far
closer than this comment suggests. Under Boris Yeltsin, Russia
followed a program of "shock therapy" which was designed by Jeffrey
Sachs and other prominent Harvard economists. This program, which had
the support of the Bush Administration, the I.M.F., and World Bank,
called for the rapid privatization of state-owned enterprises in
Russia. It led to an economic collapse, with Russia's output falling
by approximately 50 percent in the first half of the nineties. In
just five years, this economic plan managed to turn Russia into a
developing nation with a per capita GDP that is less than Mexico's.
It was the failure of shock therapy that led Russia to request
emergency loans from the I.M.F.


Economic Stimulus


With Sagging Economy as Ally, Democrats in Congress Go on the Attack
Adam Clymer
New York Times, November 11, 2001, Page A29

Divided Senate Takes Up Stimulus
Richard W. Stevenson
New York Times, November 13, 2001, Page A12

House G.O.P. Rejects Stimulus-Bill Summit
Adam Clymer
New York Times, November 14, 2001, Page B7

These articles contrast Democratic proposals for a stimulus
package that is oriented primarily toward increased spending with
Republican proposals for a package that primarily consists of tax
cuts for corporations and high-income individuals. All three articles
imply that the Republicans actually believe that their proposals are
an effective stimulus for an economy in recession. For example, the
Stevenson article attributes the debate to "deep-rooted policy and
ideological differences."

It is impossible that Republicans actually believe that their
tax package is an effective form of stimulus, unless they were lying
when they were arguing for similar tax cuts in the past. The standard
conservative argument for tax cuts targeted towards high income
individuals is that they will be more likely to save this money than
will low and moderate income individuals. In a standard economic
model, increased saving lowers interest rates, and thereby encourages
investment.

However, in a recession, the problem is that there is too much
saving, not too little. People save any time they choose not spend
(that is the economic definition of "saving"). For example, people
save when they choose to cancel a vacation because they are scared of
flying. In this sense, the Republican package, by providing more
money to high income families -- much of which will be saved -- will
stimulate the economy in the same way that another airplane hijacking
might lead people to save more by discouraging them from flying.
Unless it is appropriate to refer to an airplane hijacking as a form
of economic stimulus, it is inappropriate to refer to a tax cut
oriented towards high-income families as "stimulus."

Characterizing a tax cut for the wealthy as "stimulus", makes
it more politically appealing. It is questionable whether the
Republicans actually think of it as stimulus.

The November 11th article by Clymer also refers to an
assertion by Senator Murkowski that oil drilling in the Arctic
National Wildlife Refuge would create 250,000 jobs. It would have
been appropriate to point out that there is no credible economic study
that supports this claim. (A 1990 study by WEFA, a major economic
consulting firm, did produce such a number. However, a more recent
study challenged the WEFA analysis [see "Hot Air Over the Arctic," by
Dean Baker, http://www.cepr.net/ANWR.htm]. WEFA has told reporters
that it no longer stands behind the findings of the earlier study.)


Lobbyists Shaping Stimulus Bill
Glenn Kessler and John Lancaster
Washington Post, November 11, 2001, page A1

This informative article examines some of the special
interests that are trying to insert narrow provisions into a stimulus
bill. At one point the article reports on the financial industry's
efforts to get favorable tax treatment for its foreign earnings. It
notes their claim that the provision belongs in a stimulus package
"because it will help to protect jobs, especially in the financial
service sector, which accounts for approximately 10 percent of the
economy."

The percentage of jobs that appear in a particular economic
category are irrelevant to the impact of this measure on the economy.
It can also be claimed that these jobs are in the banking sector,
which accounts for less than 2 percent of the economy. The only issue
that is relevant is the actual number of jobs at stake, which is
probably close to zero (at least in the United States).


The Stock Market and the Economy

Washington Doesn't Share Wall Street's Economic Confidence
Jerry Knight
Washington Post, November 12, 2001, page E1

This article discusses the stock market's recent rally in the
wake of considerable economic pessimism in Washington. It attributes
the rally to confidence that "the recession might be over early next
year." It is worth noting that even before the rally, the stock
market was already priced at more than 22 times peak corporate
earnings, approximately 50 percent above its historic price to
earnings ratio. Investors acting rationally could only bid up stock
prices if they believed that corporate profits are about to surge at
rate that is far faster than they have ever done in the past. A more
likely explanation is that this rally represents a partial reflation
of the stock market bubble.

At one point the article berates Washington policy types for
not recognizing that history indicates that stocks rally when
interest rates fall as low as they have, commenting that, "historical
precedents are not recognized as much 'down here' [Washington] as 'up
there' [Wall Street]. There is no historical precedent for a stock
market trading at 22 times peak corporate earnings having a large
rally when interest rates fall.