Economic Reporting Review
September 27, 1999
By Dean Baker
Trade Deficit | Federal Budget | Child Care | Labor | IMF
Japan | Asia | South Africa | Germany | Russia | Outstanding Stories
TRADE DEFICIT
"Japan Keeps Hands Off as Yen Keeps Rising"
John Burgess and Kathryn Tolbert
Washington Post, September 22, 1999, page E1
"Trade Deficit Rise Provokes Concern of Risk to Dollar"
David E. Sanger
New York Times, September 22, 1999, page A1
"Record July Trade Deficit Slams Stocks"
Tim Smart
Washington Post, September 22, 1999, page E1
"Dollar's Slide Spurs Doubts On U.S. Move"
George Hager
Washington Post, September 23, 1999, page E1
These articles discuss aspects of the United States trade and international financial situation. All
of the articles note that the dollar appears to be under pressure in international currency
markets, and that in particular it has fallen a large amount against the yen. The articles also note
that it had been the Clinton administration's policy to maintain a highly valued dollar and that a
declining dollar may lead to higher inflation, since it will raise the price of imports.
None of these articles even discusses the question of whether the high dollar policy was
sustainable. The predictable result of the high dollar policy was an increase in the trade deficit,
which the United States has experienced. The trade deficit has now reached nearly $300 billion
on an annual basis, or close to 3.0 percent of GDP. The country can run a deficit of this
magnitude for a year or two, but it clearly is not sustainable over a long period. For example, if
the trade deficit remained at 3.0 percent of GDP through 2009, the foreign debt of the United
States will have increased to more than $8 trillion, or more 60 percent of GDP.
It is worth noting that the trade deficits currently being run by the United States are far less
sustainable than the federal budget deficits of the last two decades. Yet, while there has been
an enormous amount of media attention focused on the budget deficit, and more recently the
outstanding debt, there has been virtually no discussion whatsoever of the implications of the
trade deficit. In fact, the Post article by George Hager does not even mention the trade deficit,
even though its topic, the value of the dollar, is the deficit's primary cause.
The Times article comments that the rise in imports associated with the rise in the dollar "were
generally regarded as relatively good news in the financial markets." The article never mentions
the obvious point, that the resulting trade deficit could not be sustained indefinitely. Nor does it
note the implication that the dollar will have to fall at some point in the future in order to reduce
the trade deficit, commenting instead that President Clinton "did not discuss" how to reverse
the run-up in the U.S. trade deficit. The last time trade deficits reached these levels in the
mid-eighties, the dollar subsequently had to fall by close to 40 percent against other major
currencies in order to bring the deficit down to more manageable levels.
In discussing the magnitude of the trade deficit, two of these articles express its size as a share
of GDP, apparently following the suggestion of Commerce Secretary William Daley. While this
is the appropriate unit of measurement, it is worth noting that this metric is almost never applied
in discussions of the budget deficit, debt, or government spending. As a result, readers have
very little ability to assess the significance of the quantities being discussed.
FEDERAL BUDGET
"President Vetoes GOP Tax Cut Bill"
Eric Pianin and Charles Babington
Washington Post, September 24, 1999, page A1
This article reports on President Clinton's veto of the Republican tax cut bill. At one point, the
article comments: "a sharp decline in the national debt could have substantial benefits, many
economists assert, by holding down interest rates, freeing up capital for private investment, and
leaving the government in a stronger position to shore up the Social Security system early in the
next century, when baby boomers begin to retire."
This statement is virtually identical to an assertion that appeared in a New York Times article
last week: "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" ("As G.O.P. Hopes for Tax Cut Dim, Debt Reduction Gain in
Appeal," by Richard W. Stevenson, New York Times, 9/11/99, page A1).
While the statement is an accurate description of what economists would view as the benefits
of debt reduction, it is questionable whether adjectives such as "great" or "substantial" are
appropriate 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; this is approximately equal to the amount the
economy grew in the first two months of 1999. (See ERR, 9/20/99).
"Hill GOP Leaders Agree to Bust '97 Budget Spending Limits"
Eric Pianin and Juliet Eilperin
Washington Post, September 18, 1999, page A13
"Hill GOP Seeks Way to Avoid Shutdown"
Eric Pianin and Juliet Eilperin
Washington Post, September 23, 1999, page A1
Both of these articles report on Republican efforts to pass spending bills that will keep the
government running after the end of the month. Both articles imply that money will be taken
from the Social Security program if the government does not use the full Social Security surplus
to pay down the debt. For example, the first article presents a Republican description of their
latest plan as "a workable compromise that would not involve raiding the Social Security
program for more money." The second article describes efforts to "leave Social Security
unscathed."
In reality, the finances of the Social Security program are in no way affected by the what the
government chooses to do with the program's surplus. The program will be sold exactly the
same amount of government bonds regardless of how, or whether, the money is spent. This
fact was correctly pointed out in a Washington Post editorial ("False Debate," 9/23/99;
A28).
CHILD CARE
"For Many Children, Nowhere to Go"
Jacqueline L. Salmon
Washington Post, September 19, 1999, page A1
This article investigates the growing problem of working parents being unable to make child
care arrangements for their children. The article notes that in many places the number of
available child care slots is actually declining because workers are switching to higher-paying
jobs. While the article presents a good description of a major national problem, it does not
attempt to analyze why the wages of child care workers do not rise in the face of growing
demand.
Ordinarily, it would be expected that the wages of workers in high demand would rise. If child
care workers received more competitive wages, however, many parents would probably be
unable to afford child care. Therefore the affordability of child care is really the core
question--and the possible need for additional government subsidies--not a shortage of child
care workers, as this article implies.
LABOR
"US Airways, Machinists Union Reach Tentative Agreement"
Frank Swoboda
Washington Post, September 22, 1999, page A7
This article reports on a contract settlement between US Airways and the Machinists union.
The article concludes by reporting the top-scale hourly pay for mechanics and cleaners, the
major occupations covered under this contract. A relatively small portion of the workforce will
be earning top-scale pay. It would have been more informative to present the average or
median wage rate for these workers.
IMF
"Debt Relief Promised, But Who Pays the Bill?"
Richard W. Stevenson
New York Times, September 19, 1999, Section 3, page 4
This article discusses the problem of paying for the International Monetary Fund's proposal to
provide debt relief for some of the world's poorest nations. At one point the article comments
that seven countries have qualified for debt relief by "showing a willingness to pursue prudent
economic policies."
These nations have qualified by agreeing to follow the conditions set out in the structural
adjustment programs that IMF designed for them. Whether these conditions coincide with
"prudent economic policies" is an open question. Russia was held to be in compliance with the
IMF's conditions during a seven-year period in which its economy shrank by nearly fifty
percent. More recently, at the IMF's insistence, Brazil wasted billions of dollars in foreign
exchange trying to support an over-valued currency. Given the IMF's record in these and other
cases, there is no reason to assume that policies that meet its conditions are necessarily
prudent.
It is also worth noting that it is not clear that the IMF's proposal will provide much of a
reduction in the debt service being paid by the nations that qualify for debt relief. These nations
have debt levels that far exceed their ability to pay them. Even if a substantial portion of the
debt is written off, the payments required to meet the service on the remainder of the debt may
still be close to the current debt service payments.
JAPAN
"Japan Bank Clings to Monetary Policy"
Stephanie Strom
New York Times, September 22, 1999, page C3
This article discusses the recent rise of the yen against the dollar and the reaction of the
Japanese central bank. The article reports criticisms that the bank's policies are too
contractionary. It is worth noting that in the recent past both the Times and Post ran articles
issuing dire warnings that the expansionary policies being pursued by Japan's central bank
would cause the yen to plummet against the dollar and other major currencies (see "Japan Cuts
Key Interest Rate; Economists Are Skeptical," by Sandra Sugawara, Washington Post,
2/13/99, page E3; "Japan Lowers Key Rate, but (Surprise) Bond Yields Go Higher," by
Sheryl WuDunn, New York Times, 2/13/99, page B1. See also ERR, 2/22/99)
ASIA
"Trying to Keep Recovery Going"
John Burgess
Washington Post, September 23, 1999, page E14
This article discusses the current international economic climate as a backdrop to the annual
meetings this weekend sponsored by the World Bank and International Monetary Fund. The
article includes a complaint by Greg Mastel, director of the global economic policy project of
the New America Foundation, that "the Asian crisis was solved too quickly." He goes on to
assert that "you're rebuilding the old system."
The fact that several East Asian economies have recovered quickly, without undergoing
extensive reform, has been a frequent complaint in the media (e.g. see "Asian Rebound Derails
Reform as Many Suffer," by David E. Sanger and Mark Landler and New York Times,
7/12/99, page A1 and "Skepticism Over Korean Reform," by Stephanie Strom, New York
Times, 7/30/99, page C1; see also ERR, 7/19/99, 8/2/99.) According to data from United
Nations, in the three decades prior to the financial crisis, Malaysia had annual per capita GDP
growth of more than 4 percent, Thailand had growth of more than 5 percent, and South Korea
had growth that was close to 7 percent. Developing nations that have followed the model
promoted by the U.S. and the I.M.F. have rarely been able to sustain per capita GDP growth
rates of even 2 percent. Given the relative track records of the different models, it is
understandable that the East Asian nations would be reluctant to "reform."
SOUTH AFRICA
"Deal Made on AIDS Drug Sales"
Ceci Connolly
Washington Post, September 18, 1999, page A11
This article reports on an agreement between the United States and South Africa over South
Africa's plans to manufacture low-cost AIDS drugs for its population. The Clinton
administration had objected to these plans because it claimed that South Africa would not be
respecting the patent rights of U.S. corporations. The article notes that the United States has
agreed to drop the threat of trade sanctions.
At one point the article comments "the agreement leaves unresolved the precise details of how
South Africa will both abide by international patent laws and make less-expensive AIDS drugs
available to patients there." Actually, South Africa should have little difficulty complying with
international patent law, since there is a provision which explicitly allows for the sort of low
cost manufacturing it is proposing, in the event of a health emergency. Since the rate of HIV
infection among young adults exceeds 30 percent in some areas, the AIDS crisis would seem
to qualify as a health emergency. This fact was noted in other reporting on the agreement. (See
"South Africa and U.S. End Dispute Over Drugs," by Steven Lee Myers, New York Times,
9/18/99, page A6.)
GERMANY
"Another Crushing Defeat For Schroder in a State Vote"
Roger Cohen
New York Times, September 20, 1999, page A8
This article reports on a large decline in support for the German Social Democratic Party in
elections held in the former East German state of Saxony. The article attributes the party's
declining support to an austerity program recently put forward by Chancellor Gerhard
Schroder. At one point the article asserts that the measures are not popular "but are widely
regarded as necessary to reshape and invigorate a lackluster German economy." The article
does not identify which group(s) recognize these measures as necessary. There are significant
differences among economists on this point. Many of the world's most prominent economists
have argued that the high interest rate policy pursued by the European Central Bank is a major
factor slowing growth and raising unemployment. (See "An Economists' Manifesto on
Unemployment in the European Union," BNL Quarterly Review, 9/98, pp. 327-361.)
It is also not clear that Germany's economy is "lackluster." According to data from the Bureau
of Labor Statistics, Germany's rate of productivity growth averaged 1.9 percent annually from
1990 to 1996 (the most recent year available), while productivity growth in the United States
averaged just 1.0 percent in these years. For the whole '90s business cycle, productivity
growth has averaged less than 1.4 percent annually in the United States.
RUSSIA
"U.S. Policy On Russia Defended"
Kathleen Day
Washington Post, September 22, 1999, page A14
"Treasury Chief Defends U.S. Aid to Russia, but Calls for Safeguards"
Eric Schmitt
New York Times, September 22, 1999, page A5
Both of these articles report on Treasury Secretary Lawrence Summers' testimony before the
House Banking Committee about U.S. policy towards Russia. In the testimony, Summers
implied that the U.S. has played a limited role in directing Russia's economic policy. According
to article, Summers also asserted that pessimistic predictions about the prospects for Russia's
transition have been proven wrong. Neither article presents the views of anyone challenging
these claims.
The United States, through the IMF, actually played a very large in directing Russia's economy
in the nineties. A group of U.S. economists, working in cooperation with the IMF and U.S.
Treasury Department, designed a program of "shock therapy" whereby Russia would move
quickly from a centrally planned economy to a market economy. There were many economists
around the world, and many political figures within Russia, who felt that such a strategy was
ill-advised and that a more gradual transition, similar to that pursued by the Chinese
government, would be desirable. The flaws in transition policy promoted by the United States
are discussed in a recent paper by Joseph Stiglitz, the chief economist at the World Bank (see
"Wither Reform: Ten Years of the Transition," by Joseph E. Stiglitz,
www.worldbank.org/research/abcde/stiglitz.html).
Concerning Secretary Summers second claim, that the pessimistic predictions have been
proven wrong: Russia's GDP has fallen by approximately 50 percent in the last eight years, its
health care system has collapsed, and life expectancies have fallen by seven years. (See A
Letter From Russia. by Francis C. Norzon et al., Journal of the American Medical
Association, 3/11/98, pp 793-800). The country is also fighting civil wars in at least two
provinces. It is not clear that many predictions were more pessimistic than the current reality.
Outstanding Stories of the Week
"Teamsters' Leader Faces New Challenge in Organizing Drive"
Steven Greenhouse
New York Times, September 20, 1999, page A10
"Possible Rift for Detroit in Labor Pact"
Keith Bradsher
New York Times, September 21, 1999, page C1
These articles present a serious analysis of issues facing two major unions, the Teamsters and
the Autoworkers.
"Automotive Alternative"
William Drozdiak
Washington Post, September 20, 1999, page A9
This article reports on a system of car sharing that has been implemented in Bremen, Germany.
This system, which allows people to rent cars for short periods of time, has apparently had a
significant effect on reducing the number of cars in use.
"Fraud in Medicare Increasingly Tied to Claims Payers"
Robert Pear
New York Times, September 20, 1999, page A1
This article reports on an increasingly common pattern where the insurance companies
contracted to administer aspects of the Medicare program assist doctors and hospitals in
processing improper claims. In many cases these insurance companies also have business
relationships with the health care providers submitting the claims. According to evidence
presented in the article, this has become a major source of Medicare fraud.
[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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www.preamble.org/columns/subbaker.htm. ERR is archived at www.fair.org/err/.
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