Economic Reporting Review
By Dean Baker
September 3, 2002

OUTSTANDING STORIES OF THE WEEK

Deals Within Telecom Deals
Gretchen Morgenson
New York Times, August 25, 2002, Section 3 page 1
http://query.nytimes.com/search/abstract?res=F10915FF39580C768EDDA10894DA404482

This article reports on a practice in which telecom companies would give contracts to small suppliers in exchange for the suppliers granting shares of an Initial Public Offering to executives at the telecom companies. Since these shares almost always rose rapidly in the first days after an offering, this essentially amounted to a kickback to the executives at the telecom companies.

As Multinationals Run the Taps, Anger Rises Over Water for Profit
John Tagliabue
New York Times, August 26, 2002, page A1
http://www.nytimes.com/2002/08/26/international/americas/26WATE.html

Chinese Will Move Waters to Quench Thirst of Cities
Erik Eckholm
New York Times, August 27, 2002, page A1
http://www.nytimes.com/2002/08/27/international/asia/27WATE.html

These articles are segments of a four point series that examine current and future problems associated with water shortages.

AIDS Scourge in Rural China Leaves Villages of Orphans
Elisabeth Rosenthal
New York Times, August 25, 2002, Page A1
http://query.nytimes.com/search/abstract?res=F10E1FF838580C768EDDA10894DA404482

This article reports on the situation in several poor villages in central China, where most of the adult population has become infected with AIDS. The disease has spread widely, because villagers often sold blood plasma as a way to get extra money. Because facilities lacked adequate screening devices, people with AIDS were often among the plasma donors. This allowed AIDS to spread quickly to other donors, because after plasma was removed from their blood, infected blood was injected back into their bodies.


The Budget

U.S. Deficit Ballooning, but Not as a Hot Issue
Jonathan Weisman
Washington Post, August 25, 2002, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A58060-2002Aug24.html

This article discusses the fact that the federal budget has shifted from large surpluses in 2000 to large deficits in the current fiscal year, noting that this does not appear to be a major political issue at present.

The article reports that the most recent CBO budget projections show that the 2002 deficit will be $157 billion, which it describes as "the largest since 1995." The 2002 deficit is equal to approximately 1.5 percent of GDP, only slightly higher than the deficit of 1.4 percent of GDP in 1996. The deficit in 1995 was equal to 2.2 percent of GDP. It is only meaningful to compare deficits measured relative to the GDP. (Somewhat later, the article does express the deficit as a share of GDP, noting that it is relatively small.)

At one point the article reports that President Bush rejected $5.1 billion in emergency spending appropriated by Congress, ostensibly because it would raise the deficit. It then reports a counter-argument by Leon Panetta, a top Clinton administration official, that this amount is very small compared to "the $73.5 billion farm bill Bush signed or the $49 billion in added defense spending he is seeking for 2003." The farm bill that President Bush signed is a five-year appropriation that averages approximately $14.7 billion per year. The spending level is actually somewhat of a reduction from current levels of farm subsidies.

The article also refers to efforts by Democrats to claim that the return of deficits will imperil Social Security. Since Social Security is financed by a separate tax, the deficits cannot affect the health of the program unless the government defaulted on the bonds held by Social Security, an option that no politician has publicly advocated.

A major theme of this article is that the budget has not become a major political issue because it is very complicated. In reality, the basic facts concerning the budget are not terribly complicated, but most Americans will not have the time to do their own budget analysis. They will have to rely on the accounts presented in the media. If the media reports without correction any statement made by a politician about the budget, no matter how blatantly false it might be, then the public will inevitably be confused. Also, if false statements about the budget are treated with the same respect as true ones, then politicians have an incentive to make politically convenient claims, even if they know that they are not true.

Forecast: Deficits To Last Into `05
Jonathan Weisman
Washington Post, August 28, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A4318-2002Aug27.html

Budget Office Forecasts Shift From Surplus To Big Deficits
Edmunds L. Andrews
New York Times, August 28, 2002, page A11
http://www.nytimes.com/2002/08/28/politics/28BUDG.html

Both of these articles report on new budget projections from the Congressional Budget Office (CBO), which show considerably larger deficits than prior projections. Both articles include assertions from CBO director Dan Crippen -- that no one knows why revenue has fallen so sharply, leading to higher deficits.

These assertions are not accurate. The main reason for the fall in revenue was the collapse of the stock market bubble. This has led to a sharp fall in capital gains tax collections as well as lower tax revenue on income from exercising stock options and some forms of bonuses, which are generally taxed as normal income. Some economists did warn of such a revenue shortfall when the stock bubble collapsed (e.g. see "Double Bubble: The Over-valuation of the Stock Market and the Dollar [http://www.cepr.net/columns/baker/double_bubble.htm] and "Letter to Dan Crippen, February 26, 2002," [http://www.cepr.net/Dean%20CBO%20letter.htm].

The Times article includes an assertion that the Social Security and Medicare trust fund surpluses "are supposed to be reserved for the baby-boom generation's retirement." It is important to note that these surpluses are kept in the form of Treasury obligations to the Social Security and Medicare Trust Funds, and therefore will be available to pay for the baby-boom generation's retirement. The above assertion, therefore, is really saying that the surpluses -- borrowed by the Treasury -- should be used to pay off existing government debt, thereby reducing the national debt. There is no legal requirement for this, nor does the article present an economic argument that this would be the best public policy.


The Economics of An Aging Society

Blunt Portrait Drawn of the U.S. Work Force in 2020
Daniel Altman
New York Times, August 30, 2002, page C4
http://www.nytimes.com/2002/08/30/business/30WORK.html

This article reports on the findings of a new study examining some of the economic implications of the aging of the U.S. population. According to the article, the study reports that economic growth will slow in the next few decades due to both slower growth in the size of the labor force and a shortage of highly educated workers.

If the economy experiences slower growth due to slower labor force growth, there is no reason that this would be viewed as a problem. Economic well-being depends on productivity -- output per hour of work -- not total output. Slower labor force growth is actually likely to be associated with faster growth in productivity, since it should increase the capital to labor ratio and reduce the constraints imposed by limited natural resources.

There is no obvious reason that the United States should suffer from a shortage of highly educated workers, since there is an enormous potential supply of highly educated workers in developing nations. Currently, protectionist barriers, in the forms of licensing requirements, make it difficult for professionals from developing nations to work in the United States. If trade policy focused on eliminating these barriers, then there is no reason that the nation need experience any shortage of highly educated workers in coming decades. Since it is so much cheaper to educate professionals in developing nations than in the United States, it would be easy to design policies that ensure that developing nations also benefit from the elimination of protectionist barriers in the United States against educated workers (e.g. lengthy home country work requirements as repayment for student loans).

The article includes a quote from David T. Ellwood, the director of the group that produced the study claiming "no one's thought through what it [aging] means for the larger economy." This is not true. Economists have been writing on this topic for more than a decade (e.g. see The Future of U.S. Capitalism, by Frederick Pryor, Cambridge University Press, 2001 or Aging Societies: The Global Dimension, by Barry Bosworth and Gary Burtless, Brookings Institution, 1998).


The Stock Market

Too Much Supply, Too Little Demand
Steven Pearlstein
Washington Post, August 25, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A58181-2002Aug24.html

This informative article examines the obstacles to a quick recovery. At one point it refers to "lackluster stock prices." Actually stock prices are still relatively high, with shares prices trading at close to 20 times their pre-recession earnings. By comparison, the price to earnings ratio has historically averaged less than 15 to 1.

At another point, it cites low stock prices as a reason that firms are reluctant to undertake investment. Actually, stock prices have very little to do with investment. (The investment share of GDP was highest in the seventies, when stock prices were quite depressed.) Firms rarely finance much investment by issuing stock (the late nineties were exceptional in this respect), so there is no obvious reason that a low stock price would discourage a firm from investing.


Housing Prices

Housing Sales Up Strongly In July
Daniela Deane
Washington Post, August 27, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A64899-2002Aug26.html

This article reports on the release of new data showing that housing sales remained strong in July. At one point it discusses the debt situation of homebuyers commenting, "the average equity an American holds in his home has remained stable at 55 percent of the value of the real estate." It is worth noting that this is the lowest level of the post-war period. The equity to value ratio stood near 67 percent for most of the sixties, seventies, and eighties (it was over 70 percent in the fifties). The equity ratio would have fallen further in the last five years, except for a sharp run-up in housing prices (30 percentage points above the overall rate of inflation).


Development and the Environment

At Development Talks, U.S. and Its Allies Clash Over Issues of Energy
and Pollution
Rachel L. Swarns
New York Times, August 29, 2002, page A13
http://www.nytimes.com/2002/08/29/international/29SUMM.html

This article reports on the United Nations conference in Johannesburg on development and the environment. At one point it discusses the conflict between the European governments, who have placed a priority on slowing global warming, and the U.S. government, which is refusing to take part in discussions aimed at restricting greenhouse gas emissions.

The article asserts that "the debate, however, is more nuanced than some critics suggest." The essential facts in this debate seem rather straightforward. The European nations already emit only about half as much greenhouse gases per person as the United States. They have signed the Kyoto agreement, which obligates them to reduce their emissions levels further by the period 2008-2012. The United States refuses to commit itself to any binding limits. There are additional nuances that can be noted on any topic, but the characterization of the European nations as being willing to take steps to limit global warming, while the U.S. government is not, is accurate.

The article includes a picture of solar cooking devices, with a caption that reads "solar power for devices like this parabolic cooking unit in Sandtoon, South Africa, pollutes less than traditional fuels but is expensive. While using solar power to produce electricity is relatively expensive, it is actually possible to make a simple solar cooking unit at very low cost, requiring little more than a cardboard box and aluminum foil (see http://solarcooking.org).


Steel Tariffs

Steel Tariffs Put G.O.P. On the Spot In Campaigns
Edmund L. Andrews
New York Times, August 24, 2002, page B1
http://query.nytimes.com/search/abstract?res=F20712FB39580C778EDDA10894DA404482

U.S. Steel Firms Lose Another Import Battle
Paul Blustein
Washington Post, August 28, 2002, Page A6
http://www.washingtonpost.com/wp-dyn/articles/A4139-2002Aug27.html

Panel Rejects Effort to Add A Steel Tariff
Edmund L. Andrews
New York Times, August 28, 2002, page A1
http://www.nytimes.com/2002/08/28/business/worldbusiness/28STEE.html

These articles report on the continuing debate over tariffs on imported steel. All three articles include assertions that the prices of some types of steel have risen by 60 to 70 percent as a result of the tariffs.

If these claims are true, then it indicates that some foreign suppliers are attempting to manipulate the market. The maximum tariff imposed was 30 percent, with the tariffs on most types of steel being considerably less. This means that if even if a foreign supplier fully passed on the cost of the tariff to its customers (an unlikely scenario in most market conditions), then the prices of some type of steel would have risen by 30 percent. If prices for any types of steel actually rose more than this, then it was for reasons other than the tariffs.

The first article by Andrews reported claims that some types of steel had become unavailable altogether because of the tariffs. If a foreign steel producer is unwilling to make a product available in the United States, even if he can sell it for the same price as before (passing the full cost of the tariff on to his customer), then this is a political decision, not an economic response to the tariff. If foreign steel producers are actually behaving in the manner claimed by steel consumers in the United States, then it would be an important story to investigate.


Free Trade

A New Villain in Free Trade: The Farmer on the Dole
Elizabeth Becker
New York Times, August 25, 2002, Section 4 page 10
http://query.nytimes.com/search/abstract?res=F70911FD39580C768EDDA10894DA404482

This article discusses the farm subsidies in the United States and other industrialized nations as major violations of the principles of "free trade." It is not clear why anyone would believe that the United States or any of the other industrialized nations are motivated by principles in the conduct of their economic affairs, as opposed to advancing the goals of powerful interest groups.

A major topic in recent trade negotiations has been imposing U.S. style patent and copyright protections in developing nations. These forms of protectionism will transfer tens of billions of dollars each year from developing nations to rich nations. The United States has also not sought to remove the barriers to foreigners working in high paid professions in the United States, such as medicine and law. The behavior of the United States in trade negotiations should make it quite clear that it is not motivated by principles of free trade.

While this article implies that developing nations suffer great harm from U.S. agricultural subsidies, most economic models do not support this claim. In fact, a model developed by three prominent trade economist, Drusilla Brown, Alan Deardorf, and Robert Stern, found that most developing nations would be net losers if the United States eliminated its subsidies and trade barriers. The subsidies pose the same amount of harm as an increase in the efficiency of U.S. agriculture, or a fall in the value of the dollar. In other words, if subsidies lower the price of U.S. farm products by 20 percent, on average, this does as much harm (or in some cases, provides as much of a net benefit due to cheaper food) to developing nations as a 20 percent increase in the efficiency in U.S. agriculture, or a fall of 20 percent in the value of the dollar.


Unauthorized Drugs in China

China's Killer Headache: Fake Pharmaceuticals
Peter S. Goodman
Washington Post, August 30, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A13785-2002Aug29.html

This informative article reports on China's growing trade in unauthorized copies of drugs. The article points out the enormous potential profits that can be made by producing home-made versions of various drugs. In some cases, these unauthorized versions actually are chemically equivalent to the real drug, while in other cases, they are may contain no active agent, or even harmful substances.

It would have been helpful to include some economic analysis in this article. The spread of unauthorized drugs is exactly the result that economic theory predicts when the government imposes a barrier to the free market, such as patents. In the absence of patent protection, drug prices would fall closer to their cost of production, and most of the incentive to make unauthorized copies would disappear.