Economics Reporting Review by Dean Baker, 8/20/01

["Robert Naiman" <naiman@xxxxxxxx>]

Economics Reporting Review, August 20, 2001

By Dean Baker

Dean Baker is co-director of the Center for
Economic and Policy Research. (www.cepr.net)

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OUTSTANDING STORIES OF THE WEEK

"Wall Street Still Sees No Wolves in Its Midst,"
by David Leonhardt in the New York Times, August
12, 2001, Section 3, page 4.

This article reports on the tendency of Wall
Street analysts to predict that an economic
recovery is just around the corner. It points out
that these analysts have placed the date of a
recovery at approximately six months in the
future, since the economy first began slowing last
fall.

"Maker Chose Not to Use a Drug Abuse Safeguard,"
by Barry Meier in the New York Times, August 13,
2001, page A11.

This article reports on the failure of Purdue
Pharma to attempt to use a safeguard to prevent a
narcotic painkiller it produces from being abused.
According to the article, the company was aware
that people were abusing the drug, and should have
been able to alter its composition to make this
more difficult. The monopoly profits allowed by
patent protection provide firms with a strong
incentive to promote sales, even when the product
is being sold to drug abusers.

"Patent on Human Stem Cell Puts U.S. Officials in
Bind," by Sheryl Gay Stolberg in the New York
Times, August 17, 2001, page A1.

This article examines the potential problems for
the conduct of stem cell research that may result
from the fact the University of Wisconsin holds a
patent on the cells that have been made available
for research. This is only a problem for
researchers in the United States, since no other
country currently recognizes this patent. The
article provides an interesting example of how
patents may obstruct scientific progress.


ARGENTINA

"Weary Argentine Chief Sees Break in the Clouds,"
by Clifford Krauss in the New York Times, August
12, 2001, Section 1, page 6.

This article examines the situation of Argentina's
president, Fernando de le Rua, as he attempts to
resolve Argentina's current financial crisis. The
article begins by asserting that Argentina is at
the "brink of a ruinous default." It is not
obvious that default would be ruinous to Argentina
at this point in time.

According to data from the World Bank, Argentina's
debt service payments are almost equal to its
exports (in 1999 Argentina's debt service payments
were $25.7 billion, while its exports were
approximately $27 billion), which means that
almost all its imports must be paid with new
borrowing. If Argentina were to temporarily halt
payment on its debt, it would probably be able to
earn enough from exports to pay its import bill.
It would also be helped if it stopped supporting
an over-valued currency. Russia followed this
route in 1998, in the face of strong protests from
the IMF, and subsequently experienced its most
rapid growth in two decades.

"Argentina and the Aid Next-Door," by Larry Rohter
in the New York Times, August 12, 2001, Section 4,
page 3.

This article discusses the current financial
crisis in Argentina and the debate over providing
additional financial assistance. At one point the
article notes questions over the significance of
Argentina and comments: "that isn't new: Henry A.
Kissinger is said to have once dismissed Argentina
as 'a dagger pointed at the heart of Antarctica.'"

Actually, Mr. Kissinger made this comment in
reference to neighboring Chile. The context was a
press conference held just after the military coup
in Chile, led by general Augusto Pinochet. A
reporter asked Kissinger whether the United States
had any involvement in the coup. Subsequently
released documents, including transcripts of White
House meetings, showed that Mr. Kissinger and the
Nixon administration were very much involved with
this coup. The coup overthrew a democratically
elected government. General Pinochet's government
subsequently killed tens of thousands of
opponents.

After Kissinger responded with his joke about
Chile's importance, no reporters followed up with
further questions. It was only years later that
the public was made aware of the Nixon
administration's role in the coup.


BRAZIL

"Growth in Brazil's Economy Is Slower Than
Expected," by Jennifer L. Rich in the New York
Times, August 16, 2001, page W1.

This article discusses the most recent data and
projections on economic growth in Brazil. At one
point it presents reasons why growth in Brazil's
economy is slowing. An important factor that is
not included in the list are the cuts in Brazil's
budget, which the government recently promised as
a way to earn the confidence of foreign investors
and the IMF (see "Brazil Inoculating Its Economy
With Injection of Austerity, by Larry Rohter, New
York Times, August 8, 2001).


FARM POLICY

"Harkin and Lugar Join Forces to Take on Farm
Subsidies," by Elizabeth Becker in the New York
Times, August 12, 2001, Section 1, page 25.

This article discusses efforts by the two senior
senators on the Senate Agriculture Committee to
devise a new approach to farm policy. At one point
the article implies that both senators do not view
current levels of farm income as a problem since
it "will reach a record high of $61 billion in
2001." This level of farm income is only a record
in nominal terms. Adjusting for inflation, farm
income is far below its previous levels. Its peak
was 1973 when it reached $122.2 billion in today's
dollars.


SOCIAL SECURITY AND THE BUDGET

"Administration Reconfigures the Budget Pie," by
the Associated Press in the New York Times, August
16, 2001, page A13.

"Bush Says He Won't Tap Social Security," by Glenn
Kessler in the Washington Post, August 17, 2001,
page A1.

"White House Sees Economic Growth Doubling in
2002," by Frank Bruni in the New York Times,
August 17, 2001, page A1.

These articles report on a change in accounting
procedures that was implemented by the Bush
administration and updated budget projections,
which are expected to show a much smaller surplus
in the unified budget. The accounting change will
temporarily make the Social Security surplus
appear approximately $4 billion smaller, while
making the rest of the government surplus appear
approximately $4 billion larger. This change will
make it easier for the government to avoid
spending a portion of the Social Security surplus.

All three of these articles note that there is
likely to be a serious debate over whether the
government is spending the Social Security
surplus. It is worth noting that Social Security's
finances will be unaffected either by this change
in accounting or by whether the government
actually spends a portion of the program's
surplus. (This point appears in the Post article,
however the headline to the jump of the article is
"Budget Raises Pressure on Social Security.") The
dispute over saving the surplus is only a
political battle; it has no meaning whatsoever for
the financial health of the program.

The Times article by Bruni notes that the
administration's projection of 3.2 percent GDP
growth for 2002 is somewhat higher than the 2.8
percent consensus among the "Blue Chip"
forecasters. While the 3.2 percent projection may
be high given current economic conditions, the
Blue Chip forecast is not necessarily a reliable
measure. In September of 2000 the Blue Chip
consensus estimate of growth for 2001 was 3.5
percent, with even the lowest 10 forecasters
producing an average estimate of 2.6 percent. The
current projection from the Office of Management
and Budget of growth in 2001 is 1.7 percent.


SOCIAL SECURITY AND SAVINGS

"Decisions on Social Security Loom," by John M.
Berry in the Washington Post, August 17, 2001,
page E1.

This article presents Federal Reserve Board
Chairman Alan Greenspan's views on restructuring
Social Security. The article claims that Mr.
Greenspan's main concern in evaluating proposals
to restructure Social Security is the extent to
which it will increase national saving.

According to recent research from the Federal
Reserve Board, the massive run-up in the stock
market has led to a large increase in consumption,
and therefore a decline in saving, as a result of
the wealth effect (see "The Wealthy and the Wealth
Effect," by John M. Berry, Washington Post, May
13, 2001, page H1). This research shows that
annual saving fell by approximately 4 cents for
each additional dollar of stock market wealth.

At its peak in March of 2000, the average
price-to-earnings ratio for all stock of U.S.
corporations was over 30 to 1, more than twice the
historic average of 14.5 to 1. This over-valuation
led to more than $10 trillion in excess wealth.
The Federal Reserve Board's research implies that
this excess wealth lowered annual saving by $400
billion. This reduction in saving is several times
larger than the increases in saving that could
plausibly result from restructuring Social
Security.

The fact that Mr. Greenspan chose to do nothing to
prevent this run-up in the stock market -- which
led to large declines in national saving -- raises
questions about whether he can be accurately
described as an economist with serious concerns
about national saving.


TAXING INTERNET SALES

"Governors Urge End to E-Tax Ban," by Jonathan Kim
in the Washington Post, August 15, 2001, page E1.

This article reports on a letter signed by more
than 40 governors, urging Congress to end its ban
on taxation of goods sold over the Internet. At
one point the article includes the assertion that
the 7500 distinct state and local taxing
jurisdictions makes it "onerous, if not
impossible, for e-tailers to collect proper taxes
based on where the purchaser resides."

It is not clear that this would be an onerous
burden for e-tailers. The number of distinct
taxing jurisdictions is trivial compared to the
millions of items that major Internet retailers
like Amazon keep in stock. The software needed to
affix a sales tax based on a zip code should be
relatively simple compared to the software the
these companies already use to manage their
inventories.


RETAIL SALES

"Sales Up 0.2% as Shoppers Get Cautious," by
Martha McNeil Hamilton and Nicole C. Wong in the
Washington Post, August 15, 2001, page E1.

This article reports on the Commerce Department's
release of data for retail sales in July. The
headline and lead paragraphs of the article refer
to retail sales excluding sales of automobiles. It
is standard practice to use retail sales,
including automobiles, as the main measure for
this category. This broader category was unchanged
in July.


JAPAN

"Bank of Japan Pledges to Boost Credit Markets,"
by Clay Chandler and Akiko Kashiwagi in the
Washington Post, August 15, 2001, page E1.

"Japanese Leader Proposes Big Budget Cuts," by
Clay Chandler and Akiko Kashiwagi in the
Washington Post, August 11, 2001, page E1.

The August 15th article reports on the decision by
Japan's central bank to increase the banking
system's reserves in the wake of continuing
economic weakness. The only people cited in this
article, other than the Central Bank's president,
are two economists who work for financial firms.
Both were critical of the Bank's actions, since
they felt it was a concession to the opponents of
the government's program of structural reforms. It
would have been appropriate to find a broader
range of sources.

At one point, this article notes that additional
reserves from the Central Bank may not have much
impact at a time when banks already have plenty of
money, but "see few promising lending
opportunities." While this point is well taken, it
applies at least as strongly to the strategy being
pursued by proponents of structural reform. As the
August 11th article explained, proponents of
structural reform hope that their effort "prods
banks to purge weak borrowers so truly competitive
firms can flourish." If banks already have more
money than they can lend, as implied by the August
15th article, then cutting off weak borrowers will
not help competitive firms.

Arguably, structural reform would be an
advantageous policy when the capital and labor
used on wasteful government projects or by
inefficient firms could instead be employed more
productively elsewhere. However, it is worth
noting that Japan's system of "crony capitalism"
consistently generated far higher rates of
economic growth than any nation following a U.S.
model has ever been able to achieve. In any case,
at a time when Japan already has plenty of excess
capital and idle labor, eliminating government
waste or inefficient firms is not likely to help
more efficient ones to grow. Given the depth of
the current recession, reductions in government
waste and bankruptcies of inefficient firms will
most likely cause further increases in the rate of
unemployment.


TAX CUTS

"Remembering a Tax Cut, and Revisiting a Debate,"
by Todd S. Purdum in the New York Times, August
14, 2001, page A10.

This article reports on a reunion of a number of
former Reagan administration officials and
admirers, who were celebrating the twentieth
anniversary of the day he signed his major tax cut
bill. At one point the article notes that they
credit the tax cut with "prompting the economic
boom of the past 20 years."

The nation has not had an economic boom over the
last 20 years, according to standard measurements.
GDP growth has averaged 3.2 percent annually in
the twenty years since 1981. By contrast, the
growth rate averaged 3.7 percent (3.9 percent
after correcting for measurement changes) during
the previous 20 years from 1961-1981.


PRESCRIPTION DRUGS

"In Tijuana, a New Kind of Drug Peril," by Tim
Weiner in the New York Times, August 14, 2001,
page A9.

This informative article discusses the cross
border trade where U.S. residents go to Tijuana,
Mexico, to buy low cost drugs. The article
includes several comments from doctors, government
officials, and employees of the pharmaceutical
industry, asserting that many of the drugs being
sold in Tijuana are counterfeits of questionable
quality or adulterated versions of U.S. drugs.

It would have been appropriate to interview an
economist for this article. These are exactly the
problems that economic theory predicts will result
when the government attempts to maintain an
artificially high price in a market, as it does
when it attempts to enforce a patent monopoly. The
problems resulting from a black or gray market in
drugs of questionable quality is one more of the
costs of this form of protectionism.


TRADE DEFICIT

"U.S. Trade Deficit Worries IMF," by Reuters in
the New York Times, August 15, 2001, page C7.

This article reports on concerns raised by the IMF
over the sustainability of the current U.S. trade
deficit. At one point, the article comments,
"productivity rebounded in the second quarter, up
2.5 percent." While this is accurate, it is worth
noting that quarterly productivity numbers are
extremely erratic, especially around turning
points in business cycles. For example,
productivity was reported as rising at a 4.2
percent annual rate in the third quarter of 1981,
just as the economy was entering a recession.
Productivity growth fell at an annual rate of 4.8
percent in the next quarter.

It is also subject to very large revisions.
Current data show that productivity grew at an
annual rate of 3.8 percent in the second quarter
of 1982. Previous data showed productivity falling
at a 1.6 percent rate in that quarter.

It is more reliable to examine productivity
movements over a longer period of time. Over the
last year productivity grew at a 1.6 percent
annual rate. Much of the growth in output was
attributable to a rising share of depreciation. A
net productivity measure, which measures the
growth of net output, would show an increase of
just 0.8 percent over the last year.