ECONOMICS REPORTING REVIEW: The NYT and the
Washington Post Under the Microscope
Week of October 7 - October 13

Dean Baker is co-director of the Center for Economic and Policy Research.


THE STOCK MARKET 

"Stocks Fall as Pessimism Rises," by Steven Pearlstein and Sandra Sugawara in the
Washington Post, October 13, 2000, page A1. 

This article discusses the recent tumble in stock prices. Much of the analysis
presented is quite confused. For example, it presents a comment from an economist
at Wells Fargo Corporation that "the economic fundamentals are not looking as good
as they did even a month ago." The term "economic fundamentals" usually refers to
the basic features of the economy. These cannot change in a significant way in a
month. 

The article then asserts that "corporate capital spending has been the single most
important driver in the current economic expansion." This is not true. The surge in
consumption has generated almost six times as much demand as the increase in
capital spending over the last decade. 

The article emphasizes that profit growth has not been matching expectations on
Wall Street. This is interesting, since the Congressional Budget Office (CBO) has
projected that profits would actually shrink by 10 percent in real terms over the next
decade. While CBO budget projections have been at the center of recent political
debates, apparently the profit projections (which provide the economic context for
the budget projections) are completely ignored on Wall Street. 

LOS ANGELES BUS STRIKE 

"For Poor of Los Angeles, an Added Burden: The Transit Strike," by Don Terry in the
New York Times, October 15, 2000, page A11. 

This article examines how the strike by transit workers in Los Angeles has been
making life extremely difficult for poor people in the area, who are the main users of
the system. The article significantly exaggerates the wages currently received by
the bus drivers. It also misrepresents the budget and economic context in which the
contract is being negotiated. 

The article asserts that average wage of a typical driver is $50,000. According to an
earlier article in the New York Times ("Day 3 of Los Angeles Transit Strike Is a
Work-Day Headache for Poorest Angelenos," September 19, 2000), the average wage
of a Los Angeles bus driver is $43,000. If the information in the first article is correct,
then this article has overstated the average wage by more than 17 percent. The
article also comments that overtimes pay "can add as much as $20,000" to this
wage. If the overtime is paid at 1.5 times the hourly rate implied by the $43,000
figure, it would take more than 600 overtime hours in a year to reach this $20,000
figure. It is worth noting that, while $43,000 is above the average pay for a full time
worker, it is well below the average income received by economists and many other
less demanding occupations. 

The article notes that the Metropolitan Transportation Authority has offered a pay
increase of 9.3 percent over the next three years and that it is facing budget
deficits of $438 million over the next decade. This pay increase would leave these
workers only slightly ahead of the inflation rate projected for the next three years,
which means that they would not be sharing in the nation's current prosperity. The
projected deficit assumes that no taxes are raised over the decade. If the L.A.
region accounts for 1.0 percent of the national economy, then a tax increase equal
to 0.03 percent of the income earned in the region would be sufficient to close the
projected shortfall and end the inconvenience being imposed on the poor. 

TAXES ON STOCK OPTIONS 

"Tax Relief Sought on Stock Options," by Carrie Johnson in the Washington Post,
October 13, 2000, page E5. 

This article discusses proposals to change the tax treatment of employee stock
options. It comments that employees often sell some stock at the time they exercise
options "to cover the steep taxes they must pay." Stock options are taxed at the
same rate as other labor income. The article does not indicate how it has determined
that this rate is "steep." 

SEPTEMBER EMPLOYMENT DATA 

"Jobless Rate Dips To 3.9%," by Steven Pearlstein in the Washington Post, October 7,
2000, page E1. 

This article reports on the Labor Department's release of employment data for the
month of September. At one point, it notes that hourly wages have risen by 3.6
percent then comments: "though for companies, most of that has been offset by
higher productivity, so the increase shouldn't eat into corporate profits." 

While this is characterized as "good news" in the next paragraph, most workers
probably would not view it that way. Over the last year inflation has been almost the
same as wage growth, meaning that real wages have been virtually unchanged. It is
remarkable that workers would experience almost no gains while the productivity is
growing very rapidly. The vast majority of the population derive most of their income
from wages, presumably they would not view this redistribution from wages to profits
as good news. 

OIL PRICES AND EAST ASIAN ECONOMIES 

"A Resurgent Asia Craves Oil," by Clay Chandler in the Washington Post, October 11,
2000, page E1. 

This article examines the extent to which the resurgence of growth in East Asia has
affected its demand for oil. It also considers the impact that higher oil prices are
having on the economies of the region. At one point it asserts, "Japan, the region's
largest economy, won't be affected much by higher oil prices. Its economy remains
weak, and in any event, the government's strategic petroleum reserve is the
equivalent of 150 days of the nation's oil requirements." 

The fact that Japan's economy is still weak does not mean that the oil price hikes will
not affect it. Since oil has a single world price, Japan must pay the same high price
as everyone else. The current weakness of the Japanese economy makes it more
vulnerable to the impact of the price rise, not less. As far as the strategic reserves,
this will only matter if the government chooses to release some of this oil. If the
Japanese government views it to be important to retain reserves of this magnitude,
then it will not be able to use them to temporarily lower the price. 

At one point the article comments on the reluctance of the governments of the
region to "dismantle the clubby business practices that many say provoked the crisis
[the 1997 financial crisis] in the first place." These clubby practices were associated
with the most rapid and sustained period of economic growth that the world has ever
seen. It is understandable that governments would be reluctant to replace them with
the sort of institutional structures favored by the IMF and U.S. Treasury Department,
which have a far worse performance record. 

PRESCRIPTION DRUGS 

"The Drug Store Right Next Door," by DeNeen L. Brown in the Washington Post,
October 8, 2000, page A24. 

This article examines the differences in prescription drug prices in Canada and the
United States. The article repeatedly refers to U.S. drug prices as being "market
based," which it contrasts with Canada's system in which the government restricts
prices. In fact, the U.S. system is hardly market based, since it depends on a
government enforced monopoly. If the government allowed free competition in drugs
that currently enjoy a patent monopoly, prices would fall well below Canadian levels. 

THE BUDGET AND THE CAMPAIGN 

"Clinton Caveat On Surplus May Cut Both Ways," by Glenn Kessler and Ellen
Nakashima in the Washington Post, October 10, 2000, page A7. 

This article reports on a statement by President Clinton that current projections for
budget surpluses may prove overly optimistic. It then discusses the potential
implications for Bush and Gore's tax and spending proposals. The main issue
presented is whether the candidates' plans could push the budget back into a deficit,
if the President Clinton's assessment proves correct. It is difficult to see why any
voter would care about this possibility. 

Deficits due to excessive optimism of the size postulated by President Clinton ($300
to 500 billion over a ten year period) are less than 0.5 percent of the GDP projected
for this period. The economic impact of deficits of this magnitude are too small to
even be measured. Furthermore, if anyone really cared about keeping the budget
balanced, there will be plenty of opportunities to cut some areas of spending or raise
taxes to keep a balance. Since the nation has elections for Congress every two
years, and president every four, there seems little reason for concern that this
election will lead to a budget in 2009 that voters will not like. They will have many
opportunities before then to change the pattern of taxation and spending, if they
find it is leading to undesirable outcomes. 

"Gore Revives 'Trickle-Down' Charge," by Howard Kurtz in the Washington Post,
October 10, 2000, page A7. 

This article analyzes a Gore campaign commercial. It questions the accuracy of one
of the claims in the ad, that nearly half of Bush's proposed tax cut will go to the
richest 1 percent of the population. It points to a congressional study that finds that
only 21 percent of the tax cut will go to the richest 1 percent, although it notes that
this figure excludes the impact of eliminating the inheritance tax. The elimination of
the inheritance tax will almost exclusively benefit the richest 1 percent. This cut
accounts for nearly one quarter of the proposed tax cut, bringing the gains to the
richest 1 percent to above 40 percent of the total. 

"Gore Campaign Sees Florida as Ripe for the Picking," by Katharine Q. Seelye in the
New York Times, October 7, 2000, page A11. 

This article reports on Gore's prospects for winning Florida in the election. At one
point it quotes an attack by Gore on Bush's Social Security program in which Gore
claimed that the plan "would cause the bankruptcy of Social Security in a single
generation." 

If this is an accurate quote, then the statement is clearly untrue. Governor Bush has
not laid out a specific plan at this point. If he is elected, he proposes to establish a
commission which will design the actual proposal. He has indicated that he intends to
cut the guaranteed benefit, which will be at least partly replaced with individual
accounts. Unless the arithmetic used in designing this proposal is extraordinarily poor,
and no changes are ever made even as the program sinks into a deficit, there is no
reason to believe that it will bankrupt Social Security, although it may mean that
retirees will receive much lower benefits. 

BUDGET DEFICITS AND THE ECONOMY 

"Beyond Surpluses, CBO Finds Grim Budget Picture," by Glenn Kessler in the
Washington Post, October 7, 2000, page A2. 

"Tax Cuts and Spending Plans Aside, Is There Money?" by Richard W. Stevenson in
the New York Times, October 7, 2000, page A11. 

These articles report the findings of a new report by the Congressional Budget Office
(CBO) which makes long-term projections for the budget deficit. The study uses a
baseline that assumes that Medicare, Medicaid, and Social Security costs continue
to grow as life expectancies increase and birthrates decline, but the nation never
raises taxes to pay these expenses. It also assumes that the relatively slow
productivity growth of the last quarter century continues into the indefinite future.
Under these circumstances, the surplus would turn into a deficit after 2020. If there
were still no changes to tax and spending policy, then the deficits will grow ever
larger, since life expectancies continue to increase and the annual interest on the
debt will be larger as the deficit gets larger. 

The discussion of the report in these articles is extremely misleading. First, the
baseline is never clearly described. If CBO had done the same sort of projections at
any point in the fifties, the sixties, or the seventies, the picture would have been far
more grim, since immediate tax increases were necessary in each of those decades in
order to keep Social Security and/or Medicare solvent and to keep the deficit from
soaring. Since the prospective tax increases that would be needed in the future to
keep the national debt from exploding, in these projections, are smaller than the ones
that took place in previous decades, and people will be much wealthier than at
present when these increases might prove necessary, it is difficult to see why
anyone should be terribly concerned about the deficit scenario presented in this
report. If this sort of accounting had been taken seriously in prior decades it is
unlikely that the Medicare program ever would have been created, since the
long-term projections in the sixties would have looked far worse than they do today. 

Furthermore, there is absolutely no precedent in the United States for a Congress
that just let deficits continue to grow larger year by year and never took any
corrective measures. It is not clear that a projection that assumes this behavior
persisting for decades has any meaning. 

It is also worth noting that if the economic assumptions in these projections prove
correct, then it virtually guarantees that the stock market will undergo a substantial
correction. The profit growth projections used in the CBO projections imply that the
stock market is currently over-valued by close to 100 percent using standard
valuation measures. This means that a stock market correction that restored the
normal relationship between stock prices and corporate earnings would eliminate
close to $10 trillion of wealth. This prospect would have far more impact on people's
lives than the possibility of tax increases twenty to thirty years in the future. 

Both articles include assertions that are somewhat misleading. The Post article
asserts that "the report underscores how campaign rhetoric has become increasingly
separated from the budget reality that will face the next president." Actually, this
report provides very little new information about the budget reality that will face the
next president. Even if he is re-elected, the next president will leave office in 2009,
more than a full decade before the report projects that any deficit will exist. 

The Times article includes a box that labels the surpluses as "short-lived." Since the
report projects that the United States would maintain surpluses for a period of more
than twenty years, the characterization as "short-lived" is rather dubious. It also
claims that in the report's baseline, by 2040 the debt to GDP ratio will have reached
its highest level since the early post-war years. If the gross debt measure is used
(the one that counts the debt held by the Social Security and Medicare trust funds),
even in 2040 the debt to GDP ratio will still be lower than it was in the mid nineties. 

"Roots of Prosperity Reach Past Clinton Years," by Richard W. Stevenson in the New
York Times, October 7, 2000, page A16. 

This useful article examines the relationship between the Clinton-Gore economic
program and the economy's recent strength. In a couple of places, it includes
comments that are somewhat misleading. 

For example, in a chart it asserts that strong productivity gains "have given the
Federal Reserve Board leeway to hold down interest rates." This statement implies
that the Federal Reserve Board would have been forced to raise interest rates
without the recent surge in productivity growth. While it is very possible that the
Fed would raised rates if productivity growth had been slower, this is a policy choice.
It always has the leeway to raise or not raise rates. 

At one point, the article also notes that reduced government borrowing, as a result
of deficit reduction, frees up capital for the private sector. It is worth noting that
the stock market driven consumption boom has more than offset the impact of the
switch from large government deficits to large surpluses. On net, there is actually
less domestic savings available for investment in 2000 than at the peak of the last
business cycle in 1989. 

OUTSTANDING STORIES OF THE WEEK 

"Options Seem to Be Coming Home to Roost," by Gretchen Morgenson in the New
York Times, October 5, 2000, Section 3, page 1. 

This article points out that the use of stock options as a major part of employee
compensation can raise serious problems in a bear market. 

"For Both Debaters, Missteps," by Glenn Kessler and Steven Mufson in the
Washington Post, October 12, 2000, page A6. 

This article provides an assessment of the accuracy of several of the claims made by
the presidential candidates in their debate. 

"Washington Bets That a Bear Market Will Never Come," by Floyd Norris in the New
York Times, October 13, 2000, page C1. 

This article notes that Congressional Budget Office's ten year projections implicitly
assume that the stock market continues to rise in a manner comparable to its pace
over the last decade.

Back to CEPR's Economics Reporting Review website.