Economic Reporting Review
By Dean Baker
September 23, 2002

OUTSTANDING STORIES OF THE WEEK

CSFB Analyst Suggested Dodging New Industry Regulations
Ben White
Washington Post, September 14, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A15073-2002Sep13.html

This article reports on evidence that Credit Suisse First Boston deliberately violated new rules by the Securities Industries Association that prohibited stock analysts from making reports directly to investment bankers.

Analyze This: What Those Analysts Said in Private
Gretchen Morgenson
New York Times, September 15, 2002, Section 3 page 1
http://query.nytimes.com/search/abstract?res=FB0E12FE35550C768DDDA00894DA404482

This article reports on internal e-mails at Credit Suisse First Boston, which indicate that its analysts had serious questions about the prospects for AOL-Time Warner. In spite of these concerns, Credit Suisse continued to issue very positive reports on AOL, presumably to maintain good relations with the company.


The Budget

For Bush, the Stump Goes On
Mike Allen
Washington Post, September 17, 2002, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A26553-2002Sep16.html

This article reports on President Bush's trip to Iowa, during which he campaigned on behalf of Representative Jim Nussle who is running for re-election. While the article reports that Bush referred to Rep. Nussle as "the budget man in the House of Representatives," and that the topic of the event was "Remarks on the Budget," it presents none of the substance of the president's speech. The article provides no information whatsoever about what Bush actually said about the budget.

Group May Estimate Effects of Tax Cuts
Richard W. Stevenson
New York Times, September 18, 2002, page A19
http://www.nytimes.com/2002/09/18/politics/18TAX.html

This article discusses the possibility that the Congressional Joint Committee on Taxation will start using "dynamic scoring" to estimate the impact of tax cuts on the budget. The article describes this methodology as an assessment "of whether proposed tax cuts will help the economy and ultimately pay for themselves by generating more revenue for the government."

While it is plausible that tax cuts could increase economic growth, which would lead to additional tax revenue, it is almost inconceivable that they would stimulate enough growth to pay for themselves. For example, conventional estimates put the elasticity of the supply of labor at between 0.1 and 0.2 percent. This means that a 10 percent increase in the after-tax wage would lead to an increase in labor supply of between 1-2 percent. The tax cut approved last year by Congress would have the effect of raising the after-tax wage by an average of approximately 3 percent. This implies that labor supply would increase by between 0.3 and 0.6 percent, which would lead to a roughly equivalent increase in output. The government collects approximately 20 percent of GDP in tax revenue, which means that this additional output could be expected to generate an amount of additional tax revenue equal to approximately 0.15 to 0.3 percent of GDP. By comparison, the tax cut will cost the government an amount equal to approximately 1.0 percent of projected GDP. It would be necessary to use completely unrealistic assumptions about the responsiveness of the economy to tax cuts in order to construct a scenario in which there was sufficient growth for the economy to pay for itself.

It is also important to note that budget forecasters do not use "dynamic scoring" for any other budget proposal. For example, it would be reasonable to argue that government expenditures on research will lead to new inventions and thereby increase economic growth, which would also generate more tax revenue. However, budget forecasters do not assume that research expenditures will lead to additional growth, because of the difficulty in constructing accurate estimates of the impact of research spending on growth. This is the same reason why the Joint Committee, like all other official budget forecasters, has not used dynamic scoring for taxes. The amount of error in any projection based on dynamic scoring would be very large because the impacts are extremely hard to predict. While the article does note this criticism of the dynamic scoring of tax cuts, the point could have been made more clearly.

Amid Talk of War Spending, Bush Urges Fiscal Restraint
Elisabeth Bumiller
New York Times, September 17, 2002, page A20
http://www.nytimes.com/2002/09/17/politics/17BUSH.html

This article reports on President Bush's insistence that Congress restrain spending, even as he is proposing a war that his aides estimate could cost between $100-$200 billion. The article notes that the immediate focus of Mr. Bush's concern was a $5.1 billion emergency spending appropriation.

The article reports that Lawrence Lindsey, the President's chief economic advisor, downplayed the importance of a one-time expenditure on a war. It is worth noting that the real (inflation-adjusted) interest burden caused by the additional debt that would result from the war would be $3-$6 billion annually, assuming a 3 percent real interest on government borrowing.


Germany

German Rival, In Hard Race, Raises Specter of Immigrants
Steven Erlanger
New York Times, September 17, 2002, page A10
http://www.nytimes.com/2002/09/17/international/europe/17GERM.html

This article reports on the elections that are scheduled in Germany on September 22nd . It reports that the conservative party's candidate, Edmund Stoiber, is now trying to make immigration an issue. At the end of the article it notes that Germany's population is projected to decline by more than 20 percent over the next fifty years, and that this decline will make immigration an important political topic.

There is no obvious problem created by a slowly declining population. In a relatively densely populated country like Germany, a declining population can actually be seen as a positive development, since it will reduce crowding and pollution. According to the numbers presented in the article, the projected decline in the ratio of workers to population (due to aging) is just 4 percentage points over the next fifty years. If productivity grows 2.0 percent annually (roughly the average of the last twenty years), the impact on workers' living standards of this reduction in the ratio of workers to retirees, can be offset with just 5 percent of the country's normal productivity growth.


Rewards and Innovations

Rebel Wants Japan's Inventors To Get Some U.S.-Style Rewards
John Markoff
New York Times, September 18, 2002, page C1
http://www.nytimes.com/2002/09/18/technology/18INVE.html

Japan Court Says Company, Not Inventor, Controls Patent
Ken Belson
New York Times, September 20, 2002, page W1
http://www.nytimes.com/2002/09/20/technology/20INVE.html

These articles report on the lawsuit brought by an engineer against a Japanese chemical company. According to the articles, he has sued the company because it is marketing inventions that he developed while he was employed there, without paying him royalties. 

The articles imply that the engineer has been treated unfairly by the company. For example, the second article describes Japanese companies as "notoriously stingy when it comes to paying employees for a share of their inventions." It is worth noting that Japan has one of the highest rates of patents per capita in the world. This suggests that the Japanese system is very effective in developing new technologies as it is currently structured. While society has a major interest in promoting innovation, it has no obvious interest in ensuring that innovators become rich. These articles seem to imply that it should.


The Economy

Industrial Production Falls For First Time in Eight Months
Associated Press
New York Times, September 18, 2002, page C7
http://www.nytimes.com/2002/09/18/business/18ECON.html

This article reports on new data from the Federal Reserve Board showing that industrial production fell in August. At one point it reports that "economists remain optimistic" that the economy will not fall back into a recession, in large part because consumer spending continues to remain strong. It is worth noting that the vast majority of economists never expected the economy to sink into a recession in the first place; their ability to predict recessions is very poor.

It is also worth noting that consumer spending is remaining strong because consumers are borrowing at record rates. The current pace of borrowing cannot be sustained indefinitely. In particular, borrowing against home equity, which grew at an annual rate of $650 billion in the second quarter, is likely to slow soon as more and more families reach the limit of their borrowing capacity.


Fed Signals Point to No Rate Shift
John M. Berry
Washington Post, September 20, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A41743-2002Sep19.html

This article evaluates the likelihood that the Federal Reserve Board will lower interest rates at its meeting next week. At one point, the article reports the views of "many forecasters" that the recovery is continuing, albeit in an uneven pace. The vast majority of forecasters did not anticipate last year's recession, so their views must be treated with caution.

The article also notes that unemployment claims have jumped above 400,000 in the last two weeks. Prior articles reported that Federal Reserve Board Chairman Alan Greenspan considers unemployment claims an important leading indicator of an economic downturn (e.g. "Fed Shows No Sign of Another Rate Cut," by John M. Berry, Washington Post, July 25, 2002, Page E1).

The article also reports that the trade deficit was recorded as declining in July from the levels reported in June. It quotes an economist who described this decline as "startling." Prior articles had reported that the June trade deficit was likely inflated by the fact that importers were rushing to bring in goods ahead of a possible strike by longshoremen on the west coast (e.g. "U.S. Growth Sluggish in 2nd Quarter," by John M. Berry, Washington Post, August 1, 2002, Page E1; and "New Report Shows U.S. Economy Slowed Significantly for Quarter," David Leonhardt, New York Times, August 1, 2002, Page C1). If this explanation of the June rise in the trade deficit was accurate, then the July decline should have been expected.


Campaign Ads

Hearing 'Foul,' Stations Pull Political Ads
Howard Kurtz
Washington Post, September 20, 2002, Page A14
http://www.washingtonpost.com/wp-dyn/articles/A41262-2002Sep19.html

This article discusses efforts by candidates to prevent the airing of ads by opponents, which they claim are untrue. The article presents several examples of ads that stations have stopped running because of such objections. It does not make any effort to assess whether the claims are in fact true.

In some cases, this could have been quite easily done. For example, one ad accused Jill Long, a Democratic running to regain a House seat, of having "voted seven times to raid the Social Security trust fund." There has never been a congressional vote on raiding the Social Security trust fund. This would mean a vote on defaulting on the government bonds held by the trust fund. Many politicians have used the words "raiding the Social Security Trust Fund" to refer to spending the money which is borrowed from the trust fund, but under current law this has no effect whatsoever on the Social Security program or its financing. It would have been helpful to make such information available to readers.


The Housing Market

Housing 'Bubble' May Not Exist, but the Market Could Still Teeter
Daniela Deane and Neil Irwin
Washington Post, September 20, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A41625-2002Sep19.html

This article assesses whether the nation and the Washington metropolitan area are experiencing a housing bubble. At several points it refers to facts that there does not appear to be an excess supply of houses for sale on the market as evidence that there is no housing bubble.

It is important to note that this can change very quickly, depending on the psychology of current and prospective homeowners. While there was no excess supply of Internet stocks as long as investors expected them to rise in value, there quickly became a huge excess supply when investors became concerned about profits. In the case of the housing market, the supply could surge quickly if people who are currently considering a move in the next few years rush to sell now because they are worried that home prices will fall.

It is also worth noting that the vacancy rate for rental housing is at near record levels. This is likely to put downward pressure on home sale prices, both because renting can offer a lower- cost option, and because rental housing can be converted into owner- occupied housing.

The article fails to note that the rise in home prices, (30 percentage points above the rate of inflation over the last seven years), is without any precedent in the post-war period. Without this basis of comparison it is impossible to determine whether such a run- up is normal or extraordinary. It also neglects to mention the national demographics which point to reduced demand for housing - the children of most baby boomers have moved out recently or will in the near future, which will lead to lower demand for housing from the baby boomers. (This neglect is striking since the projected budgetary costs of the baby boomers' retirement have been discussed at enormous length.)

The article also seriously misrepresents a key statistic. It reports that the Bureau of Labor Statistics "annual survey of consumer spending" (presumably the consumer expenditure survey), showed that the share of after-tax income spent on housing fell from 30.9 percent in 1995 to 29.6 percent in 2000. This expenditure refers to spending on rent or rental equivalence in the case of owner- occupied housing. If the sale price of homes (and mortgage payments) outstrips the increase in rental prices, as it has over the last seven years, then it will not be reflected in this measure.

Finally, the article lists a number of conditions, including low interest rates, which it says must be maintained to keep home prices high. It asserts these conditions are likely to be met "in the view of most who study such issues." The current interest rate on ten- year government bonds is 3.78 percent. Last month the Congressional Budget Office projected that the interest rate on ten-year bonds would average 5.4 percent in 2003 and 5.8 percent for the rest of the decade.


Africa

In Quietly Courting Africa, White House Likes Dowry: Oil
James Dao
New York Times, September 19, 2002, page A1
http://www.nytimes.com/2002/09/19/international/africa/19AFRI.html

This article reports on efforts by the Bush administration to strengthen ties with African nations, which it hopes will result in increased oil imports from the region. At one point it comments that, "during the 1990's, the Clinton administration tried to increase trade and investment in Africa, while promoting efforts to fight AIDS." The latter assertion is questionable. The Clinton administration pushed through the TRIPS provisions of the WTO, which makes it more difficult for African nations to get access to AIDS medicines. It also threatened South Africa with trade sanctions when it planned to provide generic drugs to AIDS victims. (It backed away from this position after AIDS activists protested at several Gore campaign appearances.)


Trade

Consumer Prices Post 0.3% Rise, But U.S. Trade Deficit Narrows
Associated Press
New York Times, September 19, 2002, page C8
http://www.nytimes.com/2002/09/19/business/19ECON.html

This article reports on the decline in the trade deficit reported for July. This news takes up seven paragraphs of a wire service story in the middle of the business section. The news on the trade deficit was covered in one sentence in the "Business in Brief" section in the Washington Post.

At present, the trade deficit is leading the United States to borrow nearly $500 billion annually from abroad. The economic consequences of this borrowing are approximately equivalent to a budget deficit of the same magnitude. The (much smaller) budget deficit has been frequently discussed in great detail in major front- page stories. The difference in the attention given to these two issues cannot be justified on the basis of their significance for the economy or people's lives.