Economics Reporting Review
By Dean Baker
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OUTSTANDING STORIES OF THE WEEK
"Energy Industry Raises Production at a Record
Pace,"
by Joseph Kahn and Jeff Gerth in the New York
Times,
May 13, 2001, Section 1, page 1.
This article examines the near term prospects for
the
nation's energy supply. Based on government and
industry statistics, and the assessment of
industry
experts, the article concludes that energy
supplies
are increasing at an extremely rapid pace. The
article indicates that there is little evidence to
support the Bush administration's contention that
environmental regulations are hampering the
ability
of energy companies to meet demand.
"The Wealthy and the Wealth Effect," by John M.
Berry
in the Washington Post, May 13, 2001, page H1.
This article reports on the findings of a new
Federal
Reserve Board study of savings behavior. The study
found that the sharp decline in household savings
over the last decade is entirely attributable to a
drop in savings among the richest 20 percent of
households. In turn, the study attributes the drop
in
savings among this group -- which owns 96 percent
of
individually held shares -- to the wealth effect
created by the soaring stock market. In effect,
the
study shows that the rising stock market has
reduced
national savings in much the same way as a large
federal budget deficit would.
"For the Wealthy, Tax Plan's Benefits Could Vary
Widely," by David Cay Johnston in the New York
Times,
May 15, 2001, page C1.
This article examines some of the main features of
the tax cut proposals approved by the House and
Senate. It points out that there are major
differences between the plans, with the largest
being
the lower top marginal tax rate in the House plan,
which disproportionately benefits a very small
number of extremely wealthy taxpayers, and the
change
in alternative minimum tax in the Senate plan,
which
will benefit many slightly less affluent families.
"The Green Revolution Yields to the Bottom Line,"
by
Andrew Pollack in the New York Times, May 15,
2001,
page D1.
This article examines the impact of the growing
role
of private industry in funding agricultural
research,
as government and university sources of funding
have
been scaled back. The article reports complaints
from
scientists and farmers about access to research
findings, technology and seeds as more firms try
to
profit from research.
"Brown Lungs, Lost Fingers; Now, a Lost Mill," by
Rick Bragg in the New York Times, May 16, 2001,
page
A1.
This article reports on the closing of a cotton
mill
in a small town in Alabama. The article reports
how
the availability of low cost labor in Mexico, as a
result of NAFTA, made the plant unable to compete.
The plant had been the major employer in
Jacksonville, Alabama, for more than a century. As
the article explains, its history is similar to
that
of many other textile factories across the south.
SOCIAL SECURITY
"For the First Time, Nuclear Families Drop Below
25%
of Households," by Eric Schmitt in the New York
Times, May 15, 2001, page A1.
This article discusses some of the data from the
2000
census. It notes the impact of the aging of the
baby
boom generation, and then quotes a demographer at
the
Urban Institute commenting that "20 years from now
they [baby boomers] will cause the Social Security
crisis." It is not clear what crisis this quote
could
refer to. The Greenspan Commission was well aware
of the demographics of the baby boom when it
restructured the program in 1983. As a result, the
program is now projected to be fully solvent until
2038, with no changes whatsoever. At that point,
all
the baby boomers will be long past normal
retirement
age, and most will probably be dead.
CONSUMER SPENDING
"U.S. Consumers Still Spending," by Caroline E.
Mayer
and Sabrina Jones in the Washington Post, May 12,
2001, page E1.
"Consumers Still Spending with Gusto," by Michael
Brick in the New York Times, May 12, 2001, page
B1.
These articles report on the release of data by
the
Commerce Department on April retail sales. Both
articles imply, particularly in their headlines,
that
the data showed a robust rate of spending growth.
This is a dubious assessment. The previously
reported
figures for February and March were both revised
downward, so that the both months now show
significant declines. Therefore, the sales data
reported for April were just 0.2 percent higher in
nominal dollars than the sales reported for
January.
After adjusting for the impact of inflation,
April's
numbers imply that retail sales have actually been
falling in real terms over the period from January
to
April.
ENERGY AND THE ENVIRONMENT
"Energy Policy's Ground Zero," by William Booth in
the Washington Post, May 15, 2001, page A1.
This article discusses the benefits and risks
associated with drilling for the oil in the Arctic
National Wildlife Refuge (ANWR) in Alaska. At
several
points the article frames the question as matter
of
balancing concerns over the environment with the
desire to get cheap energy.
Actually, there is very little evidence to support
the claim that the oil produced from the refuge
would
even have a noticeable effect on energy prices in
the
United States. According to the optimistic
estimates
from people in the oil industry, the region may be
able to produce approximately 1 million barrels a
day
for approximately 20 years (some environmentalists
have lower estimates of the amount of oil in the
refuge). If there were no offsetting supply in
production elsewhere, this would increase the
world
supply by approximately 1.5 percent. Assuming that
demand for oil is extremely unresponsive to
changes
in price (an elasticity of 0.25), this would lead
to
a 6.0 percent reduction in the price of oil.
However, there is certain to be some reduction in
supply elsewhere. A very conservative assumption
would be that oil production elsewhere would
decline by an amount equal to 50 percent of the
production of ANWR, reducing the price effect to 3
percent, and it is entirely possible that the OPEC
nations would fully offset any increased
production
from ANWR, leaving the price of oil unchanged. In
this event, the United States would drain the oil
fields in ANWR, causing environmental damage to
the
region, for no savings in energy costs whatsoever.
"White House Outlines New Energy Policy," by Dana
Milbank and Eric Pianin in the Washington Post,
May
15, 2001, page A1.
"In Energy Plan, Bush Urges New Drilling,
Conservation and Nuclear Power Review," by David
E.
Sanger in the New York Times, May 17, 2001, page
A1.
These articles report on President Bush's new
energy
policy. It would have been appropriate to point
out
that under reasonable assumptions about the amount
of
oil brought to the world market through increased
domestic production, and the supply response
elsewhere, it is unlikely that consumers would see
any noticeable reduction in the price of oil and
gasoline.
TRADE
"Poor Nations May Not Buy Trade Talks," by William
Drozdiak in the Washington Post, May 15, 2001,
page
E1.
This article reports on reasons that many poor
nations may be reluctant to support another round
of
trade negotiations. It focuses on the
industrialized
nations' barriers to exports of manufactured and
agricultural goods from the developing nations.
Some
of this discussion directly contradicts standard
economic theory. The article also neglects other
important barriers to free trade imposed by the
industrialized nations, which could have far
greater
costs to developing nations.
When presenting evidence of barriers to exports
from
developing nations, the article first gives
several
examples of tariffs imposed by the industrialized
nations. It then asserts that the industrialized
nations spend enormous sums on export subsidies
for
agricultural products: "the EU alone spent close
to
$300 billion last year on export subsidies that
reward its farmers for creating surpluses which
are
then dumped in many Third World markets -- at
prices
below production costs." According to standard
trade
theory, the sort of export subsidies to
agricultural
products described in the article would be an
enormous gift to consumers in developing nations.
In
effect European taxpayers are subsidizing food
consumption in the developing world. While this
may be a bad use of European tax money, the effect
of
having low cost food available is exactly the same
to
the developing nations regardless of whether it is
the result of efficient production, low cost
labor,
or huge government subsidies. (It is worth noting
that the $300 billion figure reported in the
article is approximately six times what the
European
Union reports spending on all agricultural
supports,
not just export subsidies.)
There are reasons for questioning whether access
to
low cost food exports is necessarily beneficial to
developing nations, but this would require going
beyond the standard trade theory -- which clearly
provides the basis for the discussion in the
article.
There is a school of thought in development
economics, which argues that it is often important
for developing nations to have substantial
barriers
to trade, and other forms of government
intervention
in the market, in order to allow industries a
chance
to grow and become competitive with the ones that
already exist in the industrialized nations. This
view has been almost completely dismissed by the
economists at the WTO, the World Bank, the IMF,
and
the other major institutions guiding current
international trade and monetary rules. Since this
article clearly starts from the same premises of
these institutions in other areas, to be
consistent
it should accept the implication that subsidized
agricultural exports to developing nations are
effectively gifts from Europe's taxpayers.
Among the forms of protectionism ignored in this
article are obstructions to the supply of
professional services in the industrialized
nations
and the imposition of patent and copyright
protection
in the developing nations. As an example of the
former, three years ago the United States reduced
the
number of foreign doctors that could practice
medicine in the United States in order to protect
doctors salaries (see "A.M.A. and Colleges Assert
There is a Surfeit of Doctors," by Robert Pear,
New
York Times, March 1, 1997, page A7, and "U.S. to
Pay
Hospitals Not to Train Doctors, Easing Glut," by
Elisabeth Rosenthal, New York Times, February 15,
1997, page A1).
The imposition of patent and copyright protection
in
developing nations represents an enormous cost,
since
it can raise the price of drugs, recorded music
and
movies, and other items by several hundred or
thousand percent. It is especially surprising that
this article does not mention this issue, since
the developing nations have insisted that the
rules
on patents and copyrights, laid out in the last
WTO
round, be a topic of discussion at the WTO meeting
scheduled to be held in Qatar in the fall.
THE HIGH DOLLAR
"Far From Dead, Subsidies Fuel Big Farms," by
Elizabeth Becker in the New York Times, May 14,
2001,
page A1.
"The Paper Chase: Why Newspapers and Newsprint
Makers
Are at War," by Felicity Barringer in the New York
Times, May 14, 2001, page C1.
These articles present informative accounts of the
problems facing two industries: agriculture and
newsprint. It would have been helpful if the
articles had mentioned the impact of the strong
dollar on both industries. In the case of
agriculture, the high dollar of recent years has
severely depressed agricultural prices. (There is
a
world market for most agricultural goods. If the
price of wheat is held fixed in euros, yen, or
other
currencies, it falls in dollars, if the dollar
rises.)
Similarly, the high dollar has put domestic
newsprint
manufacturers at a competitive disadvantage. The
article briefly alludes to this point, when it
notes that newspapers are considering switching to
lower cost Russian and South Korean manufacturers.
In
both cases, the rise in the dollar --
approximately
25 percent in the last four years - has
significantly
reduced the prices received by domestic producers.
SOCIAL SECURITY IN GERMANY
"German Parliament Votes to Revamp Pension
System,"
by Edmund L. Andrews in the New York Times, May
12,
2001, page A4.
This article reports on the German Parliament's
approval of a bill that would reduce benefits
provided to retirees by Germany's Social Security
system. At one point the article notes that the
German system, like most other European systems,
is
relatively generous compared to the Social
Security
system in the United States. It then adds "but all
of
these systems have been headed toward collapse,
because the pool of younger workers paying in [to
the
system] is being swamped by the retirees
collecting
from it."
Actually, there is no real basis for asserting
that
these systems are heading for collapse. As a
result
of improving medical technology and greater
prosperity, the people in Europe are projected to
live longer in the future than they did in the
past.
This will increase the ratio of retirees to active
workers. If taxes are not increased at some point
(or
benefits cut), then these systems will eventually
lack sufficient money to pay scheduled benefits.
However, lifespans have been increasing throughout
the century, thereby continually raising the costs
of
European Social Security systems. If tax revenues
had
been frozen at any point since these Social
Security
systems were established, then the system would
have
eventually run short of money as the share of
retirees in the population increased. In the past,
the populations of these nations have always
supported tax increases to maintain their
retirement
system. In short, if the Social Security systems
of
European nations are heading toward collapse now,
they have always been heading for collapse in
exactly
the same way.
It is perfectly reasonable to expect that nations
would choose to use a portion of their increasing
affluence to support a longer retirement, through
higher Social Security taxes, as they have in the
past. In other words, increasing productivity will
allow workers to enjoy higher after-tax wages,
even if they pay out more in Social Security taxes
to
support longer retirements. The article presents
no
evidence to support its implicit assertion, that
countries with much higher shares of retirees
among
the voting population, will not support the same
sort
of tax increases as they did in the past, when
their
Social Security systems ran short of revenue.
TURKEY
"Turkish Bailout Is Joined to a Political
Overhaul,"
by Douglas Frantz in the New York Times, May 18,
2001, page A8.
This article examines the prospects for Turkey's
economy after receiving new loans from the IMF. It
reports that the IMF is demanding that the country
dismantle the close ties between government and
various businesses, which it identifies as "crony
capitalism." While these sorts of ties often lead
to
wasteful corruption, it is worth noting that the
countries that are most often characterized as
suffering from crony capitalism are also the ones
that have achieved the highest sustained growth
rates
in the world. For example, from 1960 to 1995 per
capita GDP growth in South Korea, Thailand, and
Malaysia averaged 7.0, 5.2, and 4.2 percent,
respectively. The IMF can point to few, if any,
countries that have followed its advice and
managed
to sustain growth rates that were even half as
fast.
