Economics Reporting Review by Dean Baker, 8/28/01

["Robert Naiman" <naiman@xxxxxxxx>]

Economics Reporting Review
August 28, 2001
By Dean Baker

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These Days, Layoffs Compete With Loyalty
Louis Uchitelle
New York Times, August 19, 2001, Section 3 page 4

This column examines how firms may attempt to
alternatively
motivate workers through the fear of layoffs or
the promise
of rewards for loyalty to the company. It notes
that these
paths imply very different relationships between
workers
and their employers.

Workers' Rights Suffering as China Goes Capitalist
Erik
Eckholm New York Times, August 22, 2001, page A1

This article reports on the sorts of abuses at the
work
place, such as extraordinarily long hours, low
pay, and
physical punishment, which are becoming common as
the
private sector expands in China. Enforcement of
labor laws
is minimal, and few workers outside of the state
sector are
unionized.


The Stock Market

Federal Reserve Cuts Its Key Rate By Quarter-Point
Richard
W. Stevenson New York Times, August 22, 2001, page
A1

Distracted Wall St. Ignores Signs of an Economic
Bottom
Alex Berenson New York Times, August 22, 2001,
page C1

These articles both discuss the fact that the
stock market
plunged in response to the Federal Reserve Board's
decision
to cut interest rates by 0.25 percentage points.
Both
present their analysis of the market's behavior
without
ever considering its current level in relation to
corporate
profits.

For example, the article by Stevenson presents a
comment
from an economist at Merrill Lynch, who noted that
each
time the Federal Reserve Board had cut interests
by this
much in the last half century, the stock market
was "up a
year later, by an average of 28 percent."

The notion that the market can always rise in
response to
interest rate cuts, regardless of how high it
already is,
is absurd on its face. The same logic would have
implied
that the stock index in Japan could have risen
from its
1989 peak of 40,000, in response to interest rate
cuts by
the Japan's central bank. (It's currently near
13,000.)
Trying to determine the direction the market will
move,
without examining its current level, would be the
same as
trying to determine whether the price of a parcel
of land
will rise, without ever finding out its current
price.

While the average price to earnings ratio in the
market is
down from the peak it reached in 2000, it is still
over 25
to 1, more than 70 percent above its historical
average of
14.5 to 1. Since the Congressional Budget Office
projects
that profits will barely grow in real terms over
the next
decade, it is difficult to imagine stock prices
rebounding
substantially, regardless of how low the Federal
Reserve
Board pushes interest rates.


Argentina

Argentina Gets $8 Billion Aid From the I.M.F.
Joseph Kahn
New York Times, August 22, 2001, page A1

This article reports on a new I.M.F. aid package
for
Argentina. At the end, the article points out that
the
I.M.F. is insisting that Argentina eliminate its
budget
deficit, a condition that the article describes as
"traditional." Actually this insistence is at odds
with
traditional economic theory.

Argentina is currently suffering from a recession.
During a
recession budgets move towards deficit as tax
collections
fall and transfer payments, such as unemployment
insurance,
increase. Economists usually consider a modest
deficit,
like the one Argentina is currently running, a
good thing
when the economy is in a recession, since it helps
sustain
demand and employment. The predictable effects of
the
I.M.F.'s demand that Argentina balance its budget
is a
further rise in unemployment and a deepening of
its
recession.


The Euro

An Anxious Countdown To New Cash
William Drozdiak
Washington Post, August 20, 2001, Page A1

This article describes the preparations being
carried
through in the nations that use the euro for the
introduction of the physical currency at the
beginning of
next year. The article implies that this change of
currency
is an extraordinarily complex task. Actually it is
a fairly
common event for nations to change their
currencies,
although it is most often done in developing
nations after
a bout of inflation. For example, both Argentina
and Brazil
adopted new currencies in the nineties.

The fact that developing nations have been able to
successfully carry through currency transitions,
without
massive economic disruptions, suggests that the
euro
nations, with their modern transportation,
communication,
and financial systems, should also be able to
carry through
such a transition.


Currency Values

Dollar's Slow Slide Indicates Foreign Investors
May Be Wary
of U.S.
Jonathan Fuerbringer
New York Times, August 18, 2001, page B1

This article discusses the prospects for the
dollar against
other major currencies. At one point, it mentions
the
Federal Reserve Board's interest rate cuts as a
factor that
led investors to buy dollars. It is not clear why
lower
interest rates would make investors more willing
to hold
dollar-denominated assets. As interest rates fall
in the
United States relative to other nations, the
return on
bonds and interest bearing accounts in the United
States
falls compared to what is available in other
nations.

Lower interest rates do improve growth prospects
for the
economy, but this doesn't help holders of bonds
and
interest bearing accounts. Better growth could
improve the
outlook for stocks, except stocks in the U.S.
remain
enormously over-valued when measured against
widely
accepted profit projections, such as those from
the
Congressional Budget Office. Stocks in the U.S.
would only
appear attractive to investors who held an
assessment of
future profit growth potential that was wildly at
odds with
the one produced by the Congressional Budget
Office.


Productivity Growth

Easing Up on Overtime
Sarah Schafer
Washington Post, August 19, 2001, Page H1

This interesting article presents a series of
anecdotal
accounts which suggest that employers are less
frequently
requiring that employees work overtime as a result
of the
economic slowdown. At one point, the article
refers to the
productivity data reported for the second quarter,
noting
that productivity "grew at an unexpectedly strong
2.5
percent rate," and later adding, "such numbers
bode well
for previously overtaxed workers."

It is worth noting that quarterly productivity
numbers are
extremely erratic, especially around turning
points in
business cycles. They are also subject to
extremely large
revisions (see ERR 8-20-01). It is more likely
that the
strong productivity growth reported for the second
quarter
was the result of quirks in the data than an
actual uptick
in productivity growth.


The Budget

Shrinking Surplus Is Budget Battle Cry
Glenn Kessler
Washington Post, August 19, 2001, Page A1

This article discusses the political battles that
are
shaping up around the lower projected budget
surplus. This
article includes a graph showing budget annual
deficits
over the last two decades. The deficits are
measured in
nominal dollars. This gives a misleading
impression, since
the economy has more than tripled in size over
this period
as a result of both inflation and real growth.

Readers would get a better picture of the relative
importance of budget deficits over this period if
they were
measured as a share of GDP. This measure would
give a
substantially different picture. Measured in
nominal
dollars, the budget deficit peaked in 1992 at just
under
$300 billion. Measured as a share of GDP, the
deficit
peaked at 6.0 percent in 1983. By this measure the
deficit
fell through most of the eighties, although it did
rise
back to 4.7 percent of GDP in 1992, as a result of
the
recession in 1990-91.


Citing Drop in Surplus, Democrats Plan to Portray
Bush as
Reckless
Richard W. Stevenson
New York Times, August 20, 2001, page A1

Bush Warns Against Delay In Acting on Military
Budget
Frank Bruni
New York Times, August 20, 2001, page A10

These articles report on efforts by Democrats to
attack
President Bush because his tax cut has led the
government
to spend a portion of the Social Security surplus.
Both
articles refer to Democrats' efforts to portray
themselves
as promoters of "fiscal prudence" or "fiscal
responsibility" as they try to prevent the Social
Security
surplus from being spent even as the economy
enters a
downturn.

It is worth noting that the Democrats' actions are
the
exact opposite of what most economists would
regard as
prudent or responsible. The government budget
naturally
moves towards a deficit when the economy slows, as
tax
collections fall and spending on programs like
unemployment
insurance increase. Virtually all economists
consider this
movement towards a deficit a positive development,
since it
helps maintain demand during the downturn. If the
Democrats
insist on cutting spending and/or raising taxes
during a
downturn in order to meet a surplus target, it
will likely
have the effect of making the downturn worse.

It may turn out that this strategy is good
politics.
However, it is unambiguously bad economics.


Bush Backs Tax Cut, Blames Congress
Amy Goldstein
Washington Post, August 21, 2001, Page A2

Byrd Issues Warning on Shrinking Surplus
Glenn Kessler
Washington Post, August 21, 2001, Page A2

Bush Defends Size of Surplus And Tax Cuts
Frank Bruni
New York Times, August 21, 2001, page A1

These articles report on the efforts of President
Bush and
the Democrats in Congress to blame each other over
the fact
that a portion of the Social Security surplus will
be spent
this year, along with the entirety of the Medicare
surplus.
Readers of these articles may wrongly be led to
believe
that there is something of consequence at issue in
this
debate. For example, the Times article asserts
that
spending this money "could influence the nation's
long-term
fiscal health by limiting the money available to
reduce the
debt."

In fact, there is no fiscal or economic reason
that the
United States needs to reduce its debt. Its ratio
of
publicly held debt to GDP is just over 30 percent,
the
lowest it's been in almost 20 years, and one of
the lowest
of any industrialized countries. There is no
reason that
the United States could not maintain this ratio
forever,
which would imply continued borrowing.

The amount currently being spent from the two
trust funds
together is less than $30 billion, or less than
0.3 percent
of GDP. The impact of borrowing of this magnitude
on the
nation's financial health is too small to even be
measured.

Furthermore, as noted above, the immediate reason
for the
nation spending a portion of these surpluses is
the
economic downturn. The fact that the Federal
government is
running a smaller surplus is helping to stimulate
the
economy. Had the surplus remained at the level
projected
earlier, output would be lower and the
unemployment rate
would be higher.


Bush Projections Show Sharp Drop In Budget Surplus
Richard W. Stevenson
New York Times, August 23, 2001, page A1

This article reports on the downward revision of
the budget
surplus in updated projections from the Office of
Management and Budget. At one point the article
refers to
an analysis from the Center for Budget and Policy
Priorities (CBPP), which it describes as a
"liberal
research group." The CBPP has consistently argued
for
paying down the national debt rather than
increasing
spending on social programs. Based on its position
on
budget issues, it would be more accurate to
characterize
CBPP as "fiscally conservative," than "liberal."


Argentina

>From No Aid to Bailout
Joseph Kahn
New York Times, August 22, 2001, page A1

This article reports on the conditions surrounding
the
Treasury Department's decision to support
additional I.M.F.
loans to Argentina. At one point the article
refers to the
possibility that Argentina would "collapse." But
there is
no obvious scenario in which the country would
collapse,
although there is a possibility that the nation
will
devalue its currency and/or default on its debt.
These
actions could prove very beneficial to Argentina.
For
example, after an initial period of instability,
Russia
achieved rapid economic growth after it devalued
its
currency and effectively defaulted on its debt in
1998.

There are several charts accompanying the article.
These
charts present Argentina's foreign debt and
government
deficit in dollar terms. It would have been more
useful to
readers to show them as a percentage of
Argentina's GDP.
Argentina's government deficit is currently
projected to be
approximately 2.2 percent of GDP, according to the
chart.
By comparison, in each of the last three
recessions the
deficit in the United States peaked at more than 4
percent
of GDP. The I.M.F. is insisting that Argentina
balance its
budget, in spite of the fact that it is in a
recession.


Social Security

Social Security Panel Says Cuts in Benefits Are an
Option
Adam Clymer
New York Times, August 23, 2001, page A12

This article reports on the meetings of sub groups
of
President Bush's Social Security commission. It
includes a
quote from Richard D. Parsons, the commission's
co-chair,
which asserts that some retirees would have higher
benefits
with individual accounts than under the current
system,
"depending on the performance of the securities in
which
you invested."

While it is always possible that individual stocks
will
provide very high returns, President Bush has
insisted that
stock investment in these accounts will be
restricted to
broad indexes, which means their performance will
match the
market's performance. The only projections for the
overall
stock market that are derived from the Social
Security
trustees' profit-growth projections show that the
market
will provide returns that are only marginally
higher than
the government bonds currently held by the trust
fund.
[Click here to read about them.] This means that
workers
will not be able to increase their benefits over
currently
scheduled benefits with individual accounts.


Patents in Brazil

Brazil to Ignore Patent on AIDS Drug
Anthony Faiola
Washington Post, August 23, 2001, Page A20

Brazil Will Defy Patent on AIDS Drug Made by Roche
Jennifer L. Rich with Melody Petersen
New York Times, August 23, 2001, page C6

These articles report on the Brazilian
government's
decision to issue a compulsory license for an AIDS
drug
produced by Roche, a major Swiss pharmaceutical
firm. The
headlines of both articles assert that this
decision is a
violation of Roche's patent rights. Actually, the
TRIPS
agreement, which established international rules
for patent
enforcement, allows for compulsory licensing. The
articles
do not indicate how they determined that Brazil's
actions
do not comply with TRIPS or other laws pertaining
to
Roche's patent.


The World Economy

World's Economy Slows To a Walk In Rare Lock Step
Joseph Kahn and Edmund L. Andrews
New York Times, August 20, 2001, page A1

This article examines the worldwide economic
slowdown. Most
of the experts cited in this article are employees
of
financial institutions. The article predictably
reflects
this perspective, including comments that blame
the
strength of Europe's trade unions for its weak
economy. Had
the article included a broader range of sources,
it might
have noted the contractionary monetary policies
pursued by
the European Central Bank as a major cause of
Europe's slow
growth. (The article does comment on the impact of
high
European interest rates, but it attributes high
rates to "a
perceived inflation threat." It would have been
appropriate
to point out that Europe's inflation rate has
consistently
been lower than the U.S. rate.)

At one point the article presents the view of
"conservative
commentators" that "policy mistakes have caused
investors
to lose faith in many individual currencies ...
like Turkey
and Brazil." It would have been appropriate to
also present
the view of more progressive commentators who
attribute
many of the problems of developing nations to bad
policy
advice from the I.M.F. and World Bank.

The article also includes a comment from former
Treasury
Secretary Robert Rubin (now of Citigroup), that it
is
necessary to defend "free trade, fiscal
discipline, and the
spread of technology." It is not clear what Mr.
Rubin means
by "free trade" and the "spread of technology."
The Clinton
Administration had attempted to impose U.S. type
patent and
copyright restrictions on developing nations.
These are
impediments to both free trade and the spread of
technology.

It also would have been appropriate to include the
views of
an expert, such as Wynne Godley at the Levy
Institute, who
was not surprised by the economic downturn (see
also
"Double Bubble: The Over Valuation of the Stock
Market and
the Dollar" and "The Costs of the Stock Market
Bubble" by
Dean Baker).

A picture accompanying the article shows a German
stockbroker staring at a stock ticker. The caption
asserts
that he "surveyed the damage to the German
economy." The
broker is only surveying the damage to the German
stock
market. The well being of the stock market is
directly
related to the well being of owners of large
amounts of
stock, not the economy as a whole.