Economic Reporting Review
September 20, 1999
By Dean Baker
Federal Debt | China | Asia | Germany | Russia | Outstanding Stories
FEDERAL DEBT
"As G.O.P. Hopes for Tax Cut Dim, Debt Reduction Gain in Appeal"
Richard W. Stevenson
New York Times, September 11, 1999, page A1
This article examines the likely outcome of the current deadlock over Republican proposals for
a tax cut. The article asserts that "centrist economic thought holds that debt reduction brings
great benefits by holding down interest rates, freeing capital for investment in new technologies
and factories, and giving the government greater borrowing power in the future if needed to
deal with a problem like a shortfall in Social Security."
While this is an accurate description of what economists would view as the benefits of deficit
reduction, it is questionable whether they would use the adjective "great" to describe the
magnitude. According to standard economic models, the impact of the debt reduction
envisioned in the Clinton budgets would be to add a cumulative total of approximately 0.7
percent to GDP by 2010. (For a discussion of the impact of deficit reduction on economic
growth see The Economic and Budget Outlook: Fiscal Years 1998-2007, Congressional
Budget Office, 1997, page 90.) This is roughly equal to the amount that the economy grew in
the first two months of this year. Such an addition to economic growth is clearly beneficial, but
it is of questionable importance.
It is also questionable whether paying the debt will significantly enhance the government's ability
to borrow under any foreseeable set of circumstances. The ratio of debt to GDP is currently
just under 42 percent. In previous years it has exceeded 100 percent, and even at that point
the government was having no difficulty selling its bonds. The government can clearly borrow
several trillion more dollars without any threat to its credit rating, even if it does not pay down
the debt over the next 15 years.
"Tax Cut Goes to Clinton; G.O.P. Moves On"
Richard W. Stevenson
New York Times, September 16, 1999, page A18
This article discusses the budget situation as the Republicans send their tax cut bill to the
President. At one point the article describes the budget situation in recent decades, where the
government has run an on-budget deficit: "Both parties for decades have routinely spent payroll
tax revenues earmarked to pay Social Security benefits, simply issuing government I.O.U.s to
Social Security in return."
While this past is contrasted with the present situation, where large surpluses will allow the
government to use Social Security funds to pay down the debt, the reality for the Social
Security program is exactly the same. The Social Security fund will be issued I.O.U.s for the
amount of the annual surplus in the program, just as it had been prior years. The finances of the
Social Security program are not affected at all by how, or whether, the government spends its
surplus.
It is also worth noting the use of the term "I.O.U." here. The Social Security program is actually
issued government bonds by the U.S. Treasury. All bonds are by definition I.O.U.s; however,
journalists generally use this term only to refer to the bonds held by the Social Security Fund,
not to private bonds or other types of government debt.
CHINA
"China Braces for Open Trade Bid"
Clay Chandler
Washington Post, September 11, 1999, page E1
"Why China Smiles"
Erik Eckholm
New York Times, September 13, 1999, page A7
These articles report on China's efforts to gain admission into the World Trade Organization
(WTO). Both articles either imply or directly assert that the factions of the Chinese government
that support China's entry in the WTO have the nation's long-term economic interest at heart,
while those who are opposed to entry are either protecting special interests or Communist
ideologues.
For example, the Post article refers to one group of officials opposed to the WTO as
"Communist stalwarts," while later informing readers that supporters of the treaty are "betting
that however painful the short-term adjustments, they will be outweighed by the potentially
huge long-term benefits of opening the nation's troubled $1 trillion economy to foreign
competition."
While it is possible that the Chinese leaders supporting the nation's entry into the WTO really
are acting in what they perceive to be the national interest, it is also possible that they are acting
to further special interests that will benefit from an agreement. In other developing countries
that have "opened" their economies, such as Mexico, Argentina and Russia, the sale of
government-owned assets has provided enormous opportunities for personal gain to
well-placed government officials. It is at least plausible that similar corruption would
characterize the sale of government assets in China.
The Post article also appears somewhat confused about the current state of China's economy.
The article characterizes China's economy as "wobbly," adding that "unlike many of its
neighbors, China has yet to bounce back from the Asian financial crisis." Actually, China was
virtually the only nation in the region to continue to maintain strong growth right through the
crisis. According to data from the I.M.F., China's economy grew at a 5.5 percent annual rate
in 1998. By comparison, the economies of Malaysia, Thailand, and Indonesia, shrunk by 6.4,
8.0 and 15.0 percent, respectively. While these economies again appear to be growing,
China's economy is also continuing to grow at close to a 5.0 percent annual rate.
While China's growth rate slowed somewhat as a result of the crisis (it had been close to 10
percent), it has managed to get through this period with remarkably little damage. Most
economists attribute its success to the fact that it has more state control over its economy and
was not so completely subject to the whims of world capital markets. This would be less true if
China agrees to the conditions being set out for its admission to the WTO.
ASIA
"Some Birthday Cake For a Toothless Wonder"
David E. Sanger
New York Times, September 12, 1999, Section 3, page 4
"APEC Set On Plan for Financial Markets"
Clay Chandler
Washington Post, September 13, 1999, page A16
Both of these articles discuss the agenda facing the Asian Pacific Economic Cooperation
Forum at its annual meeting. Both articles assert that APEC failed to take leadership in dealing
with the East Asian financial crisis. The Times article asserts "when its big chance to ride to the
rescue arrived--in the form of the Asian economic meltdown of 1997--APEC froze in the
headlights. It could not come up with an agenda of economic reforms or even coordinate
emergency financial aid. That work was left to the International Monetary Fund, the World
Bank and the United States Treasury." The Post article comments that "during the Asian
financial crisis, APEC choked, ceding leadership to officials at the International Monetary
Fund."
The situation was actually reported very differently at the time. Japan, with the support of
Taiwan and possibly other East Asian nations, had proposed establishing an East Asian bailout
fund. According to the press accounts at the time, the United States Treasury worked
vigorously to prevent the establishment of such a fund and insisted that the International
Monetary Fund be left in control of any bailout for the region. (See "East Asian Fund Summit
Stresses Trade, Leaving Bailouts to IMF," by Paul Blustein, Washington Post, 11/27/97,
page B11.)
GERMANY
"Elections Put Fresh Bruises on Schroder"
Roger Cohen
New York Times, September 13, 1999, page A3
This article reports on a round of defeats for Germany's Social Democratic Party in several
state elections the previous day. The article notes that the party's electoral troubles stem largely
from the unpopularity of Chancellor Gerhard Schroder's austerity plan. This proposal provides
for large cuts in government benefits, such as Social Security.
At one point, after describing Mr. Schroder's economic agenda, the article asserts that he "is
trying to modernize his party with a Tony-Blair-like message of entrepreneurship and personal
responsibility." The rhetoric of entrepreneurship and personal responsibility actually date from
the 19th Century. There is nothing especially modern about them.
"Schroder's Woes"
Roger Cohen
New York Times, September 16, 1999, page A1
This article discusses the plunge in German Chancellor Gerhard Schroder's popularity as he
has attempted to implement a series of cuts in social benefits. The article makes several strong
assertions which it supports with misleading data.
For example, the article asserts that "the central issue is straightforward enough: The German
state is running out of money…. German debt has ballooned to about $833 billion, 50 percent
more than in 1994." The article goes on to include an assertion, attributed to Finance Minister
Hans Eichel, that "one in every four marks of taxpayers' money now goes simply to pay interest
on the debt."
While Germany's debt has increased in recent years, the growth of its total government debt
has been far less explosive than is suggested here. The increase has been approximately 35
percent since 1994. Since the total government debt is actually considerably higher than the
number presented in the article (approximately $1,400 billion), the article may have referred to
a more narrow category of debt, which could have been subject to a more rapid growth rate.
This may also explain the apparently absurd claim that one in four marks collected in taxes
goes to interest payments. Germany collects approximately $980 billion in taxes annually. Its
total interest payments are approximately $70 billion a year, which means that approximately
one in fourteen tax dollars goes to pay interest.
It may be possible to draw budget categories in a way that makes the claim in the article
accurate, but this would be very misleading. For example, if one examined only the on-budget
receipts and outlays of the U.S. government (which excludes Social Security and several
smaller programs), it would appear that one out of every five dollars collected in taxes by the
United States government is paid out in interest. It had been more than one in four, by this
measure, as recently as 1995.
The article goes on to assert that Germany is at a crossroads, and that "times have changed,"
and therefore the country cannot continue on its current course. Apart from the misleading data
presented above, the article presents no evidence to support these assertions. It is worth noting
that rate of productivity growth in the German economy has consistently outpaced that of the
United States, and that the rate of productivity growth in its manufacturing sector has been near
the top of the OECD in the '90s. These facts do not seem consistent with the claim, repeated in
the article, that the German model is "finished."
RUSSIA
"Albright Warns the Russians to Battle Corruption, or Else"
Steven Lee Myers
New York Times, September 17, 1999, page A8
This article reports on a speech by Secretary of State Madeline K. Albright, in which she
warned Russia's leaders to control government corruption. At one point the article discusses
the International Monetary Fund's support for Russia throughout the decade. This discussion
includes a quote from a "senior fund official" who asserted, "Russia is a program that works."
The article made no effort to assess the validity of the senior official's claim.
Under the IMF's tutelage, Russia's economy has shrunk by almost 50 percent in the last eight
years, an economic collapse that is without precedent for a nation that is not suffering from war
or natural disasters.
[Top]
OUTSTANDING STORIES OF THE WEEK
"Tentative Contract in Yearlong Strike at North Carolina Tire Plant"
Steven Greenhouse
New York Times, September 16, 1999, page A19
This article discusses the tentative acceptance of a contract on behalf of 1,450 striking workers
at a tire factory in North Carolina. It examines the labor dispute which has led to a year-long
strike at the factory.
"Strong Currency, Weak Economy"
Michael M. Weinstein
New York Times, September 16, 1999, page C1
This article discusses the factors behind the recent rise in the yen against the dollar. It notes that
Japan has continued to run a very contractionary monetary policy in spite of its long and severe
economic downturn.
[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.
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