Economic Reporting Review By Dean Baker October 28

Economic Reporting Review
By Dean Baker
October 28, 2002

OUTSTANDING STORIES OF THE WEEK

For Richer: How the Permissive Capitalism of the Boom Destroyed
American Equality
Paul Krugman
New York Times, October 20, 2002, Magazine page 62
http://query.nytimes.com/search/abstract?res=FA0F1EF83A5E0C738EDDA90994DA404482

This article examines how the gap between the rich and everyone else has expanded in the lasttwo decades. It attributes this primarily to the erosion of norms that limited the ability of top executives to extract wealth from the companies they managed.

For Bush, Facts Are Malleable
Dana Milbank
Washington Post, October 22, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A61903-2002Oct21.html

This article describes several instances in which President Bush has made claims that were not true in order to advance his political agenda. For example, he has described the fact that his tax cut expires in 2010 as a quirk in the law put in by the Senate. In fact, it was a change put in place by his congressional allies, so that its cost would appear to be lower over the ten-year budget forecasting period.

Brazil

Ex-Leftist In the Center as Brazil Votes Again
Tony Smith
New York Times, October 25, 2002, Page W1
http://www.nytimes.com/2002/10/25/business/worldbusiness/25LULA.html

This article reports on the attitude of the Brazilian business community to Luiz Inacio Lula da Silva, just prior to his election as president. At one point it refers to a speech to a business group in which he said he would continue to follow the economic policies of the current government. The article describes these policies as: "a floating exchange rate, low inflation, and a budget surplus high enough to make the public debt repayable, while still keeping the economy growing."

Under the current government, the debt has exploded from less than 29 percent of GDP in 1994 to more than 61 percent of GDP at present. Due to the high interest rates faced by Brazil, it is continuing to rise at a rapid pace. If this current path is continued the debt is not payable (see "Paying the Bills in Brazil: Does the IMF's Math Add Up?" [http://www.cepr.net/paying_the_bills_in_brazil.htm] ). Brazil will only be able to meet its obligations if there is a sharp break from current policies.

Argentina

Peso's Devaluation Gives Argentina Cost Advantages
Tony Smith
New York Times, October 24, 2002, Page W1
http://www.nytimes.com/2002/10/24/business/worldbusiness/24ARGE.html

This article examines the current economic situation in Argentina. The article reports that Argentina's economy appears to be growing once again, after a sharp contraction following its default on its debt last December. The article notes that the plunge in Argentina's currency has made Argentinean goods very competitive internationally. After presenting evidence that Argentina's economy may be poised to rebound, the article then cites an analyst's assessment that "Argentina's fate depends on being able to successfully conclude drawn-out negotiations with the International Monetary Fund for a rescue package."

The evidence in this article seems to contradict this assertion. It appears that Argentina's economy is again growing in spite of the fact that it has not come to an agreement with the IMF. Also, the IMF has already explicitly stated that it will not provide new money to Argentina; it will only loan it enough money to repay prior loans. Given these facts, it is quite plausible that the damage caused by conditions attached to new IMF loans will more than offset any benefits from coming to an agreement with the IMF.

The Budget

Bid to Hold Line on Spending Puts Bush Priorities in Limbo
Jonathan Weisman
Washington Post, October 19, 2002, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A49248-2002Oct18.html

This article reports on the fact that Congress appears likely to leave existing spending priorities largely unchanged, rather than support requests from President Bush for substantial increases in some areas, which will be paid for with cuts in other areas. At one point it notes that the amount of spending currently in dispute is $13.5 billion, which it observes is little more than 1.5 percent of total discretionary spending.

The article then quotes a White House spokesperson as saying: "over one year, it sounds small by Washington standards, but over ten years it's $180 billion," after taking into account growth and inflation. It is worth noting, that even over ten years, this is still only about 1.5 percent of discretionary spending.

With an Eye on Taking Back the Senate, Bush Hits the Trail With
Republican Candidates
David E. Sanger
New York Times, October 25, 2002, Page A28
http://www.nytimes.com/2002/10/25/politics/campaigns/25BUSH.html

This article reports on President Bush's campaign appearances on behalf of Republican congressional candidates. At one point it comments that President Bush has responded to criticisms that he has stretched the truth, and has stopped making some inaccurate claims. As an example, the article reports that expiration of the tax cut in 2010 was not just the fault of the Senate, but "it was a decision the administration acceded to as well." Actually, the expiration date was put in by the President's congressional allies to make the cost appear lower over the 10-year budget forecasting period used by CBO. By having the tax cut end in the ninth year, the revenue loss projected by CBO was much lower than if the tax cut had been projected for the full ten-year period.

The Economy

Democrats Court the Elderly
Stephen Labaton
New York Times, October 21, 2002, Page A12
http://query.nytimes.com/search/abstract?res=F40E11FE34590C728EDDA90994DA404482

This article assesses a Democratic campaign ad that attacks the way in which the Republicans have handled the economy by comparing the economy's poor performance in the Bush years with the strong growth at the end of the Clinton administration.

When assessing the accuracy of the ad, the article comments that, "the economy did expand to unparalleled levels in the 1990's." This statement is either trivial or wrong. If it is interpreted literally, then it is trivial because the economy almost always grows. The economy expanded to unprecedented levels in every decade following the depression. If it is interpreted as referring to the rate of growth, the economy grew faster in the fifties and sixties than in the nineties, and at about the same pace in the seventies.

The article also points to the record high stock market in the nineties as evidence of positive economic performance. In fact, this was an unsustainable bubble, the collapse of which is the primary cause of the current downturn. The fact that the Clinton Administration allowed this bubble to grow so large was a major failure of economic policy, not a success story as this article implies.

The Stock Market

A Short Bounce or a New Bull
Jonathan Finer
Washington Post, October 20, 2002, Page A13
http://www.washingtonpost.com/wp-dyn/articles/A53166-2002Oct19.html

This article discusses the stock market's recent run-up and assesses whether it is likely to be the beginning of a new bull market. At one point the article comments that, "when a rebound does come, history suggests that stocks will rise quickly."

History does not suggest this. Stocks have historically traded at a price-to-earnings ratio that is close to 15 to 1, a bit less than their current level. When the price-to-earnings ratio rises substantially above this level, then prices will have to fall back, unless stockholders have decided that they are willing to accept lower returns in the future than in the past. (Stock returns are inversely related to their price to-earnings-ratio because the dividend yield falls when the share price rises. This means that when a stock price is high relative to corporate earnings, its return will be low, and vice versa.)

Drugs and Philosophy

Democrats See a Stealthy Drive by Drug Industry to Help Republicans
Robin Toner
New York Times, October 20, 2002, Page A22

This article reports on an ad campaign, attacking Democrats, that is being financed by the pharmaceutical industry. The article discusses the two parties' alternative approaches to making drugs affordable for senior citizens. The article notes that the Democrats favor extending Medicare while the Republicans prefer a system of subsidies to private insurers.

The article describes this difference as "a deep philosophical issue behind the struggle." While it is possible that many Republicans view this as a philosophical issue, it is also possible that they are simply acting to help powerful political allies in the pharmaceutical industry. The article provides no reason to assume that political rather philosophical motives best explain the attitudes of Republican members of Congress toward providing prescription drug coverage to senior citizens.

The Dollar and the Trade Deficit

Strong Dollar Runs Into Renewed Resistance
Edmund L. Andrews
New York Times, October 19, 2002

This article discusses the continued strength of the U.S. dollar and the impact that it is having on the trade deficit. At one point it presents the comments of an economist suggesting that investors are holding dollars because the U.S. economy is growing more rapidly than the economies of Japan or Europe. Mr. Sheperdson, the economist, is quoted as saying: "if you are looking for returns on assets, the U.S. is the place to be."

There is no direct relationship between economic growth rates and returns on assets. For example, in the case of U.S. stocks, the return has been a large negative in the last two years. An informed foreign investor would have found it far more profitable to have kept Japanese yen in a warehouse than to own shares of U.S. companies. Many foreign investors failed to recognize this fact (e.g. the huge German telephone company Deutsche Telecom bought the U.S. wireless company Voice Stream for $50 billion in 2000, it is currently selling it for approximately $7 billion), but their purchase of dollar assets was due to ignorance, not the fact that higher returns were actually available in the United States.

At present, a large share of foreign investment is going into government bonds and short-term deposits in the United States. These investments offer lower returns than comparable investments in Europe. For example, the interest rate on U.S. 10 year treasury bonds has been as low as 3.6 percent in recent weeks. European government bonds of the same duration offer interest rates that are approximately 1.0 percentage point higher. These investors are willing to forego higher returns on assets to hold U.S. bonds.

This article does not discuss the long-term implications of the trade and resulting current account deficits. At present, the United States is borrowing money from abroad at a rate of more than $500 billion a year. This has approximately the same effect of a government deficit of the same magnitude. While the government can run a $500 billion deficit for a few years without serious problems, it would not be able to do so for 15 to 20 years. At some point, the borrowing will have to be significantly reduced, which will present a burden in the future, as the U.S. will be forced to export more of its output, leaving less available for domestic consumption.

It is worth noting that the Washington Post neglected to cover the release of August trade data altogether. This release showed the trade deficit at a new record. As a result, the United States is now borrowing more than $40 billion a month from abroad. While a dispute over $13.5 billion in annual government spending was given significant attention (see "Bid to Hold Line on Spending Puts Bush Priorities in Limbo," Washington Post, October 19, 2002, Page A4, http://www.washingtonpost.com/wp-dyn/articles/A49248-2002Oct18.html), the trade deficit -- which is much larger than the federal budget deficit -- was completely ignored.

Climate Change

Climate Talks Will Shift Focus From Emissions
Andrew C Revkin
New York Times, October 23, 2002, Page A8
http://www.nytimes.com/2002/10/23/science/23CLIM.html

This article reports on a new round of international meetings on climate change. At one point the article notes President Bush's opposition to the Kyoto treaty, which restricted greenhouse gas emissions. It attributes this opposition to "fear it would harm the economy."

This is the reason that President Bush gave publicly for his opposition, but it is not necessarily the real reason. Standard econometric models indicate that the negative impact of the Kyoto agreement would be relatively modest, probably about the same size as the negative impact attributable to the recent military build-up.

While the overall impact may be limited, restricting greenhouse gas emissions will affect sectors of the economy in different ways. Among the sectors that are likely to be hardest hit are the domestic auto industry and the oil industry. Both of these industries enjoy very close ties to the Bush administration. It is possible that President Bush's position on the Kyoto agreement is more attributable to his ties to these industries than any concern about the overall state of the economy.

Health Care in Oregon

Oregon Ponders Universal Care
William Booth
Washington Post, October 21, 2002, Page A6
http://www.washingtonpost.com/wp-dyn/articles/A56967-2002Oct20.html

This article reports on the status of a ballot initiative that would create a statewide system of health insurance in Oregon that would be administered by the state government. At one point the article presents the views of opponents -- that the measure would be too costly. The article reports that they estimate the cost as being as high as $20 billion a year. The article compares this figure to Oregon's current state budget of $12 billion.

The more appropriate comparison for the cost of this measure would be Oregon's current level of health care spending, since the state government would be paying the vast majority of health care spending if the measure is approved. As a first approximation, this cost would be approximately equal to the $20 billion estimated by the measure's opponents (per capita health care expenditures are currently more than $5,600 a year and Oregon has more than 3.5 million people). This means that if the initiative's opponents are correct, then Oregon's residents will be able to provide universal health insurance without paying any more for health care than they do at present.

Telephone Prices

New WorldCom Losses Hint at Disputed Future
Seth Schiesel
New York Times, October 23, 2002, Page C1
http://www.nytimes.com/2002/10/23/technology/23PLAC.html

This article examines WorldCom's prospects of emerging from bankruptcy and the potential problems this could create in the phone industry. The article includes a chart which shows sharply declining prices for long-distance calls, while local calls are shown to be rising at close to the overall rate of inflation.

It is worth noting that one of the reasons that the cost of long-distance service has fallen so sharply is that long-distance carriers are paying much less to local phone companies to carry their calls. The reduced fees charged by local phone companies have allowed the long-distance carriers to pass on savings to consumers. It has also meant that the local phone companies have been forced to increasingly depend on the revenue from local calls to maintain their telephone wires and infrastructure. In many cases, this has forced local providers to raise their rates.