Economic Reporting Review
October 11, 1999
By Dean Baker
Stock Market | Labor & the Election | Health Care | Social Security | Europe | Outstanding Stories
STOCK MARKET
"Fading Dividends Don't Always Mean the Dawn of a Recession"
Floyd Norris
New York Times, October 7, 1999, page C11
This article discusses the drop in the number of firms that are increasing dividend payouts.
While it discusses a variety of explanations, it ignores the most obvious one, that earnings
growth has slowed. The Commerce Department's broadest measure of after-tax earnings
(corporate profits with inventory and capital consumption adjustment) has increased by just 5.0
percent between the second quarter of 1997 and the second quarter of 1999, a 2.5 percent
annual rate of growth. By comparison, this measure of corporate profits rose at a 14.9 percent
annual rate between 1992 and 1997.
Now that corporate profits, measured as a share of GDP, have hit post-war highs, they are
unlikely to grow rapidly in the future. Since stock prices cannot continually rise relative to
corporate profits, it is unlikely that share prices will increase any more rapidly. This implies that
total stock returns (dividend payouts plus capital gains) will be extremely low. The current
dividend payout rate of approximately 1.5 percent, coupled with real growth in the share price
of 1-2 percent, would provide a 2.5-3.5 percent real return, somewhat below the 4.0 percent
real return currently available on government bonds.
Alternatively, the dividend yield can increase if stock prices first take a large plunge (e.g., 50
percent), a scenario viewed as likely in a recent paper by M.I.T. economist Peter Diamond.
(See "What Stock Market Returns to Expect for the Future?,"
www.bc.edu/bc_org/avp/csom/executive/crr.)
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LABOR & THE ELECTION
"Gore Campaign Is Buoyed by Support of a Health Care Union"
Katherine Q. Seelye
New York Times, October 3, 1999, Section 1 page 31
This article reports on the decision by a large union of health care workers in Northern
California to endorse Vice President Al Gore for the Democratic Party nomination over former
Senator Bill Bradley. At one point the article states that "the two agreed on most basic union
issues." Actually, on one fundamental union issue there is a major disagreement between the
candidates. Bradley has indicated that he would support "card check recognition." Under this
system, a union is legally recognized as representing a group of workers as soon as a majority
of the workers have signed cards indicating their support for it.
Currently, the union can only force an election by getting workers to sign cards. Employers
routinely engage in delaying and intimidation tactics, such as firing workers who support a
union, between the time when an election is requested and when it is actually held. While these
tactics are often illegal, the penalties are so minor that they don't have much impact on
management's behavior. As a result, it is very difficult for unions to win recognition through
elections. This is why card check recognition has been an extremely important issue to
organized labor for the last two decades.
"Labor May Hold Off on Gore"
Thomas B. Edsall
Washington Post, October 5, 1999, page A6
This article discusses the debate within the AFL-CIO over endorsing Vice President Al Gore
for president. At one point the article notes that some unions object to the Clinton-Gore
Administration's trade policy, pointing out that "the UAW has been deeply angered over the
administration's free trade policies."
It is inaccurate to characterize the administration's policies as "free trade." While it has
promoted trade agreements that would remove barriers to importing goods like automobiles
into the United States, it has done little or nothing to promote trade in professional services like
those provided by doctors, lawyers or accountants. This trade policy has the effect of putting
workers in manufacturing industries in competition with low-wage labor throughout the world,
while protecting highly educated professionals from the same sort of competition.
In addition, the administration has tried to increase protectionism with respect to intellectual
property claims, attempting to spread U.S.-style patent and copyright laws to developing
nations. It is inaccurate to describe such policies as "free trade."
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HEALTH CARE
"Health Care Bill Passed by House Intensifies Furor"
Robert Pear
New York Times, October 7, 1999, page A1
This article reports on the battle in Congress over alternative health care bills. At one point, the
article discusses a Republican proposal which would increase the portion of the health
insurance premium that is tax deductible for people that buy their own health insurance. The
article notes the competing claims of the Republican proponents of the bill--that it will "help
millions of people without insurance"--and the White House--that it will "help fewer than 1
percent of the people who lack coverage."
It would have been informative to readers if the article had pointed out that the White House
claim was based on a congressional analysis of the bill. This fact was noted in the Post article
the same day ("House Approves GOP's Health Insurance Tax Breaks," by Amy Goldstein and
Juliet Eilperin, 10/7/99; A12).
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SOCIAL SECURITY
"DeLay Whips Up a Fiscal Showdown With Clinton"
Juliet Eilperin and Eric Pianin
Washington Post, October 6, 1999, page A3
"As Options Fade, GOP Is Considering Broad Cuts"
Tim Weiner
New York Times, October 6, 1999, page A16
"House Republicans Battling Budget, Democrats and Bush"
Alison Mitchell
New York Times, October 7, 1999, page A1
These articles report on Republican efforts to pass a budget for the next fiscal year which does
not require spending a portion of the surplus generated by the Social Security program. The
Times articles imply that the Social Security trust fund will lose revenue if the government
spends a portion of the surplus, characterizing such spending as "draining Social Security funds"
or "eating into the surplus." The Post article notes the Republican accusations that such
spending is a "raid" on Social Security, but does not itself characterize it in this manner.
As has been noted in previous press accounts, Social Security's finances are in no way affected
by the decision of the government to spend a portion of its current surplus. (See, e.g., "Noble
Talk of Saving Social Security Is Muted by Political Gamesmanship," by Richard W.
Stevenson, New York Times, 9/29/99, A20; and "False Debate," Washington Post,
9/23/99; A28; see also ERR, 9/27/99 and 10/4/99.) The Social Security program will be
issued exactly the same quantity of government bonds regardless of how, or whether, the
federal government spends its surplus.
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EUROPE
"As Business Confidence Grows, Euro Stages a Comeback"
Edmund L. Andrews
New York Times, October 2, 1999, page B2
"Heavy Debt Erodes United Germany's Prosperity, Power"
William Drozdiak
Washington Post, October 3, 1999, page A1
"Under Attack, Premier Offers France's Left an Embrace"
Suzanne Daley
New York Times, October 3, 1999, Section 1 page 7
All three of these articles discuss issues related to the high current level of European
unemployment. None of these articles discuss the contractionary monetary policy currently
being pursued by the European central bank, and previously pursued by national central banks
of the 11 nations that comprise the euro zone, as a possible cause of high unemployment. This
monetary policy, which is far more restrictive than the monetary policy pursued by the Federal
Reserve Board in the United States, has frequently been cited by prominent economists as one
of the main causes of high European unemployment. (See "An Economists' Manifesto on
Unemployment in the European Union," BNL Quarterly Review, # 206, 9/98, pp 327-361.)
The Post article argues at considerable length that Germany faces an economic crisis. Its
strong assertions to this effect are not supported by the evidence presented in the article. For
example, the second paragraph of the article asserts that "the foundations of the nation's
prosperity are rapidly eroding." To support this assertion, the article presents a quote from
Chancellor Gerhard Schroder that Germany has "built up a mountain of debt that is placing an
intolerable burden on the backs of our children." The article goes on to assert that Schroder
"acknowledges a crisis" and that he is proposing to cutback the welfare state in order to "stop
the hemorrhaging debt caused by Germany's runaway entitlements."
Contrary to the assertions in the article, there is no evidence that Germany faces a debt crisis.
At present, its national debt has nearly stabilized at just over 60 percent of GDP. The ratio of
debt to GDP in the United States exceeded this level from the early years of World War II
until near the end of the '50s. This debt placed no apparent hardship on the workers of that
era. In other words, the levels of debt and the current deficits in Germany do not pose any
immediate crisis by standard measures.
It should not be surprising that a politician who is trying to promote a program that requires
significant sacrifices from the population would "acknowledge a crisis." It is somewhat more
surprising that this claim would be taken at face value in a news article. Later, the article states
that "close associates say Schroder was stunned by the ruinous state of the nation's finances"
when he took office. Since Germany's budget data are completely public, it would be
astounding if the incoming chancellor had actually been unfamiliar with the nation's finances.
This implausible claim by his "close associates" would support the view that the chancellor's
statements are being made for political effect, and may not reflect his real views.
The standard measure that economists use to assess an economy's vitality is the rate at which
productivity, output per worker hour, increases. The article implies that German productivity
growth has been very poor, quoting an economics professor's assertion that Germany is in the
process of becoming "an industrial museum." No contrary views are presented in this article.
According to data from the Bureau of Labor Statistics, Germany had the highest productivity
growth in manufacturing of any nation in the OECD in 1998. Over the last ten years,
manufacturing productivity has increased 7.2 percentage points more in Germany than in the
United States.
Data from other sources, such as the OECD and the Conference Board, similarly imply that
Germany enjoys a considerably more rapid overall rate of productivity growth than the United
States. Economy-wide productivity growth has generally averaged close to 2.0 percent
annually in Germany, compared to just over 1.1 percent annually in the United States. In short,
on this fundamental measure of economic vitality, Germany appears to be doing far better than
the United States.
The article also asserts that Germany's "hefty taxes" have encouraged an enormous
underground economy, which it estimates is one-sixth the size of the official economy. If this
claim is accurate, then Germany is far wealthier than is generally recognized, since its economy
is one-sixth larger than is indicated by its official GDP measures. This would place Germany
near the very top in international GDP comparisons and mean that its actual economic growth
has been extremely rapid over the period in which this enormous underground economy was
developing.
At one point the article makes a basic error when it asserts that having a low birth rate
"threatens Germany's future." Holding other things equal, a lower birth rate will mean a higher
capital to labor ratio, which means that each worker will be more productive. For example,
according to a standard economic model (the Cobb-Douglas production function) a 10
percent decline in the labor force will raise the real wage for each worker by more than 3.0
percent. While a smaller workforce may be associated with a higher tax rate, since each
worker may have to support more retirees, under almost any plausible scenario it will still lead
to a higher after-tax real wage. It is the after-tax real wage that determines living standards, not
the tax rate. In addition, a smaller population will also have environmental benefits for future
generations, particularly in a relatively densely populated country such as Germany.
This article claims that the view of Germany in crisis was a point of agreement among the
"politicians, economists, labor leaders and businessmen interviewed." The article does not
present the views of any labor leaders.
The first Times article includes a comment that the European central bank may "have to react
to the inflation risk" by raising interest rates. When a central bank raises interest rates, it is a
policy decision. It never is forced to raise interest rates as is implied by this statement. It has
become common in reporting on central bank policy to use language that implies that central
banks do not have a choice when they opt to raise rates.
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OUTSTANDING STORIES OF THE WEEK
"Business Thrives on Unproven Care, Leaving Science Behind"
Gina Kolata and Kurt Eichenwald
New York Times, October 3, 1999, Section 1 page 1
This article investigates the extent to which untested medical procedures are being promoted
by doctors and hospitals. It focuses on the practice of using bone marrow transplants as a
treatment for some types of cancer, noting that this procedure came to be widely used without
any medical evidence to suggest that it was effective. The article points out that doctors and
hospitals could earn high fees by giving patients this expensive treatment.
"Recording Industry Escalates Crackdown on Digital Piracy"
Sara Robinson
New York Times, October 4, 1999, page C5
This article reports on the difficulties that the recording industry is encountering in trying to
develop devices that will obstruct the reproduction of recorded music. The industry's latest
invention has the problem that if a person decides to get a new disc player, then their entire
music collection would be worthless. This is exactly the sort of inefficiency that economic
theory predicts will result with a government-regulated monopoly, such as copyrights.
"Support Grows in Congress for a Pension Overhaul Plan That Would Aid High
Earners"
David Cay Johnston
New York Times, October 7, 1999, page C7
This article discusses various proposals being considered in Congress that would remove
restrictions on the amount of pension savings that workers could shield from taxes. The article
points out that the changes being considered will almost exclusively benefit high-end wage
earners.
[Top]
Dean Baker is a senior research fellow at the Preamble Center and at the Century Foundation.
Recent articles can be found on the websites of the New York Times and Washington Post.
You can sign up to receive ERR via email every week at
www.preamble.org/columns/subbaker.htm. ERR is archived at www.fair.org/err/.
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