ECONOMICS REPORTING REVIEW: The NYT and the
Washington Post Under the Microscope
Week of September 23 - September 29

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


THE EURO 

"U.S., Japan and Europe Join to Prop Up Euro," by William Drozdiak in the Washington
Post, September 23, 2000, page A1. 

"Central Banks Move to Rescue An Ailing Euro," by Edmund L. Andrews and Joseph
Kahn in the New York Times, September 23, 2000, page A1. 

"If Euro Declines Again, G-7 May Prop It Back Up," by Steven Pearlstein in the
Washington Post, September 24, 2000, page A34. 

"U.S. and Others Press for Cuts In Price of Oil," by Joseph Kahn in the New York
Times, September 24, 2000, Section 1, page 1. 

"Rescue Attempt for the Euro Falls Short of Bankers' Hopes," by Edmund L. Andrews
in the New York Times, September 24 2000, Section 1, page 6. 

These articles report on the decision of the major industrial nations to intervene in
currency markets to raise the value of the euro. Much of the discussion in these
articles is misleading or wrong. 

First, all the articles explicitly state or imply that it is the euro nations that face a
serious problem if the euro continues to decline. For example, the article by Drozdiak
asserts that the intervention is intended to "bolster the economies of the 11
European nations that use the euro, which are suffering from the currency's slump."
Actually, the euro nations are growing at relatively healthy clip of more than 3.0
percent annually. The euro's slump is acting as a stimulus to further growth, since it
is increasing the region's exports. 

Logic suggests that it is the United States that will face a serious problem if the euro
continues to fall. The United States is currently borrowing approximately $450 billion
a year from abroad, an amount equal to approximately 4.5 percent of its GDP. The
euro nations, by contrast, have a current account surplus of approximately $50
billion a year, or 0.8 percent of their GDP. If the euro were to fall further against the
dollar, the current account deficit of the United States and the current account
surplus of the euro nations would both grow. Virtually all economists recognize that
the current level of borrowing by the United States is already unsustainable. If a
falling euro pushed the current account deficit even higher, then the U.S. will start
to reach the limits of its borrowing capacity even sooner. This potential expansion of
its current account deficit means that United States has more to fear from a falling
euro than do the euro zone nations. 

The decline in the euro also creates a more immediate problem for the United States,
since it reduces the profits of U.S. corporations that either sell in the European
market or compete with European imports. Many large firms are reporting lower
profits because of the fall in the euro. A drop in profits can have a large impact on a
stock market that seriously over-valued. For example, when Intel reported that the
fall in the euro would cause it to miss its profit projections, its stock fell by more
than 20 percent, eliminating more than $80 billion in market value in a few hours. 

Several of the articles imply that European nations have been particularly hard hit by
the rise in oil prices because prices are posted in dollars, and the euro has fallen
against the dollar. This argument would only be valid if nations had a target price in
dollars. For example, if OPEC set a price of $34 for a barrel of oil, then the decline in
the value of the euro would raise the price for the euro zone nations. However, there
is not a fixed price for oil, the OPEC nations have set targets for quantities. Under
these circumstances, it would make no difference whatsoever to the euro zone
nations if oil was typically priced in euros rather than dollars. They would see the
exact same price increase in their own currency units. 

It is also worth noting that the euro zone nations are actually less affected by the oil
price rises than the United States. This is both because they use less oil per unit of
output and because these nations impose much higher energy taxes. The euro zone
nations use approximately 60 percent as much energy per dollar of GDP, which means
that the impact of an oil price increase is only about 60 percent as large as in the
United States. Also, since a much larger share of the price of energy in Europe is
attributable to taxes, the proportionate increase in the price of oil is less. (For
example, if the cost of the oil needed to produce a gallon of gas goes up by 50
cents, this could mean a fifty percent increase in the price of gas in the United
States from $1.00 to $1.50 gallon. By contrast, if taxes had already pushed the price
to 3.00 dollars a gallon, then a 50 cent price increase would raise the cost of a
gallon of gas by less than 20 percent to $3.50.) 

The Drozdiak and Pearlstein articles both express the view that the European
countries must undergo significant restructuring. The restructuring envisioned would
involve less job security for workers and reduced pension and health care benefits
from the government. The strong productivity growth exhibited by these economies,
both in the last year and over the last two decades, indicates that these economies
do not need this sort of restructuring. 

Several articles allude to the current view of the Clinton Administration, that a strong
dollar is desirable, without fully explaining its consequences. As noted above, a
strong dollar will reduce the price of imports, thereby increasing the purchasing
power of U.S. consumers. However, since it leads to the build-up of foreign debt, it
is an unsustainable policy. In the long-run, the interest flows on this debt will
eventually depress the value of the dollar, making imports more expensive and
reducing the living standards of the U.S. consumers. In this way, the Clinton
Administration has chosen to pursue short-term gains that could have significant
long-term costs. 


THE IMF-WORLD BANK MEETINGS 

"Protestors Assemble, Hoping for Rerun of Seattle's Show," by Joseph Kahn in the
New York Times, September 23, 2000, page A4. 

"Debating How to Repair Global Financial System," by Steven Pearlstein in the
Washington Post, September 24, 2000, page A34. 

"Tough Crowd for IMF, World Bank Leaders in Prague," by Steven Pearlstein in the
Washington Post, September 24, 2000, page A38. 

These articles provide background on the annual meeting of the International
Monetary Fund and World Bank and the protests against these institutions. Each of
them include misleading or gratuitous comments that have the effect of putting
these institutions in a better light, or putting the protestors in worse light. 

For example, the page 38 article by Pearlstein quotes a comment by IMF director
Horst Koehler, and then characterizes it by saying that Mr. Koehler was "making clear
his view that economic policy requires more than just empathy." It is unlikely that
anyone believes that empathy is a sufficient basis for economic policy, although Mr.
Koehler and the article apparently want to tie this view to the IMF's critics. 

The Times article presents, as an example of a person fighting against the perceived
colonial approach of the IMF and World Bank, a Bolivian peasant leader who was
trying to call attention to displacement of indigenous farmers through the forced
eradication of coca plantations. It would have been difficult to find a cause that
would garner less sympathy among newspaper readers in the United States. 

The page 34 article by Pearlstein, which notes the reluctance of the leadership at
the IMF and World Bank to adopt significant reforms suggested by their critics,
comments that "it is they --- and not their academic critics -- who will have to deal
with the unintended consequences of a more sweeping redesign." These leaders have
often been quite willing to engage in major experiments. For example, the IMF
strongly supported the "shock therapy" that shrank Russia's economy by nearly fifty
percent in the last decade. It also has insisted that East Asian countries dismantle
institutional structures that have been associated with unprecedented economic
growth over the last forty years, arguing that theoretical economic models provide a
better basis for growth. In short, the IMF-World Bank leadership has often been
willing to take big risks with other countries' well-being based on speculative
academic theories. 

"Giving the World Bank an Outsider's View," by John Burgess in the Washington Post,
September 27, 2000, page E1. 

This article profiles Mamphela Ramphele, a black South African woman who is one of
the World Bank's five managing directors. The article notes that Dr. Ramphele has
often argued with groups that have questioned the Bank's effectiveness in reducing
poverty, commenting: "She is not afraid to zing critics she feels are unfair. 'I want to
know what practical steps they're taking [to reduce poverty], sitting in Switzerland,
sitting in Oslo.'" 

This does not appear to be a very effective zing. The World Bank has tens of billions
of dollars at its disposal to combat poverty. Most of the organizations that have
criticized its actions operate on budgets that are less than one ten-thousandth this
size. The director's "zing" should be seen as comparable to a surgeon who, after
botching a simple operation, challenges the patient's friends to do a better job. 


THE BUDGET 

"Spending Floodgates Open on Hill," by Eric Pianin and Dan Morgan in the Washington
Post, September 27, 2000, page A1. 

This article reports on the state of negotiations over the 2001 budget. It repeatedly
uses terms implying potential spending increases are very large, such as "floodgates."
The article notes that the current spending target would lead to increase in nominal
spending of 6.1 percent. This is considerably less than the economy's nominal growth
rate over the last year, which has been more than 8.0 percent. It is reasonable to
believe that over any long period, government spending on areas like parks,
education, and research and development will remain roughly constant as a share of
GDP. Therefore, it seems dubious to characterize spending increases that still lead to
a decline in the government share of GDP as excessive. 


SOCIAL SECURITY AND MEDICARE 

"Candidates Claim Key to Prosperity," by Glenn Kessler and Mike Allen in the
Washington Post, September 29, 2000, page A20. 

This article reports on the campaign speeches by the major party candidates, in
which each claimed the other's policies would jeopardize the nation's prosperity. At
one point the article refers to the Democratic Leadership Council (DLC), a
business-oriented group within the Democratic Party. It states that they want
"modernize" Medicare and Social Security. The DLC has supported proposals to
cutback and privatize these programs. It is not apparent that these changes imply
modernization, any more than plans to cut the military would imply a "modernization"
of the military. 

"Bush Walks a Fine Line on Social Security," by Glenn Kessler in the Washington Post,
September 28, 2000, page E1. 

This article assesses a Social Security privatization proposal put forward by
Representative John Kasich, which appears to be close to the principles described by
Governor Bush for his proposed restructuring of the program. The article presents
projections of benefits which were calculated by the Social Security Administration. 

The article notes that these projections assume that the stock market will yield 7.0
percent real returns in the future. In fact, given current stock prices and the profit
growth projections from the Social Security Administration, it will not be possible for
the stock market to produce 7.0 percent returns in the future. The only stock market
projections that have actually been derived from the Social Security profit figures
show that the returns in the market will average just over 3.5 percent (see May 15,
1999, Letter to Martin Feldstein). 

The Social Security Administration (SSA) has never made a projection for stock
returns since stock returns have never been relevant to the solvency of the
program. When making projections for privatization proposals, SSA uses the stock
returns projections suggested to them by the person requesting the projections. If
the Kasich plan had been evaluated using consistent projections for stock returns,
the projected benefits would have been far lower. 


JAPAN 

"Japan's New Train Runs at 270 M.P.H. Into Hot Water," by Howard W. French in the
New York Times, September 24, 2000, Section 1, page 16. 

This article reports on the costs that the Japanese government has incurred in its
effort to design a super-fast train. At one point, it refers to Japan as "the world's
most indebted country, with public debt recently estimated at 130 percent of GDP."
This comment is misleading since this figure includes the government's debt to its
public pension system. When Japan's debt is measured by the standard OECD
method, which excludes this sort of debt, it is less than 70 percent of GDP, well
below the debt levels of nations such as Italy and Belgium. 


OUTSTANDING STORIES OF THE WEEK 

"China's Poor Fear Cost of Free Trade," by John Pomfret in the Washington Post,
September 24, 2000, page A1. 

This article discusses the problems facing the poor in China as the country reduces
tariff barriers in accordance with its agreement to enter the WTO. The article notes
that the expected drop in grain prices is likely to displace tens of million of farmers
and also cost millions of jobs in less efficient factories. Since there are already tens
of millions of unemployed in China and there is no real government safety net, these
people may face very dire circumstances. 

It is worth noting that this article, like a similar piece in the Times last week ("China's
Farmers Rebel Against Bureaucracy," by Craig S. Smith, New York Times, September
17, 2000, Section 1, page 1), present a very different picture of the impact of
China's entry into the WTO than most stories than ran prior to the pact's approval in
Congress. Most of these articles implied that the pact would unambiguously benefit
the bulk of China's population. 

"40 States Forfeit Health Care Funds For Poor Children," by Robert Pear in the New
York Times, September 24, 2000, Section 1, page 1. 

"States Prove Unpredictable in Aiding Uninsured Children," by Jennifer Steinhauer in
the New York Times, September 24, 2000, Section A, page 16. 

These articles examine the extent to which various states have made use of the
federal funds provided under the Children's Health Insurance Program that was
passed in 1997. The first article points out that many states have not used a
significant percentage of the money that was allocated to them, and therefore will
be losing the unspent money at the end of the month. The second article examines
the factors that have led to different outcomes across states. 

"Energy Jolt: Who Wins, Loses or Shrugs," by Louis Uchitelle in the New York Times,
September 24, 2000, Section 3, page 1. 

This article examines how various sectors of the economy and segments of the
population have dealt with the recent surge in energy prices. 

"M.I.T. Report Says International Accounting Firm Overlooks Factory Abuses," by
Steven Greenhouse in the New York Times, September 28, 2000, page A12. 

This article presents the finding of a report that examines the practices of an
accounting firm, Price-Waterhouse Coopers, which is supposed to be monitoring labor
conditions in factories in developing nations. The report found that the firm was
often ignoring abusive practices. 

"Many Holes Weaken Safety Net For Victims of Failed Brokerages," by Gretchen
Morgenson in the New York Times, September 25, 2000, page A1. 

This article reports the findings of an investigation into the practices of the
Securities Investor Protection Corporation, an insurance company that was
established to protect stockholders from improper practices by brokerage houses. 


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