Economic Reporting Review By Dean Baker You can receive ERR via email every week by sending as "subscribe ERR" email to [EMAIL PROTECTED] You can find the latest ERR at http://www.tompaine.com/news/2000/10/02/index.html and archived since August at www.tompaine.com. All ERR prior to August are archived at http://www.fair.org/err/. ******** OUTSTANDING STORIES OF THE WEEK "Ex-Convicts Seen Straining U.S. Labor Force," by Peter T. Kilborn in the New York Times, March 15, 2001, page A16. This article examines one of the problems created by the surge in incarceration during the last two decades. Each year, hundreds of thousands of people -- many with very limited skills -- will be getting out of prison and looking for jobs. "Yale Pressed to Help Cut Drug Costs in Africa," by Donald G. McNeil, Jr., in the New York Times, March 12, 2001, page A3. This article reports on efforts to force Yale University to use its power as the owner of the patent on an important AIDS drug, d4T, to try to get Bristol-Myers Squibb to lower the price of the drug in developing nations. While the research on the drug was done at Yale, it sold exclusive rights to Bristol-Myers Squibb. Bristol-Myers is currently selling d4T at a price that is more than 20 times higher than the price charged by generic competitors. The drug company is also using its political and legal power to prevent South Africa and other developing nations from buying generic versions of the d4T. "Down Goes the Market, Is the Surplus Next?" by Tom Redburn in the New York Times, March 12, 2001, Section 3, page 4. This article examines the consequences of the market's decline for the federal budget. It notes that the current surplus projections assume that the government will continue to collect large amounts of capital gains tax revenue. This will not happen if the market continues to decline or stays flat, which means these surplus projections may be seriously overstated. "Rules' Repeal Heightens Workplace Safety Battles," by Steven Greenhouse in the New York Times, March 12, 2001, page A12. This article discusses the future prospect of ergonomic regulations at the workplace. While the Congress just voted to repeal standards put into effect at the end of the Clinton Administration, the effort to establish these standards began with the first Bush Administration, and George W. Bush has committed himself to doing something to address workplace injuries. "Bankruptcy Bill Benefits Chosen Few," by Kathleen Day in the Washington Post, March 10, 2001, page A1. This article reports on a provision in a bankruptcy reform bill being debated in the Senate, which would shield a small group of wealthy investors from debts they owe to the English insurance company Lloyd's of London. MEDICARE "Medicare Becomes Critics' Weapon in Tax Cut Battle," by Amy Goldstein in the Washington Post, March 13, 2001, page A5. This article reports on Democratic opposition to President Bush's tax cut. The opposition centers around Bush's decision not to reserve the Medicare surplus to pay down the debt. It is worth noting that Medicare's finances are not at all affected by whether this surplus is placed in a "lockbox" as advocated by the Democrats. It will hold the exact same number of bonds regardless of what is done with the money. This article also asserts, "It is widely accepted that [Medicare] soon will be in precarious condition, unable to withstand the medical expenses of the large baby boom generation once it retires." Ordinarily twenty-five years is not considered "soon." There has never been a twenty- five year period in Medicare's history where the program has not had a significant change in finances. If the program can actually go twenty- five years without any major changes it would be in sounder financial shape now than at any point in its prior history. THE STOCK MARKET "Stock Slide Sinks Hopes in Industrial City," by Peter T. Kilborn in the New York Times, March 15, 2001, page A1. This interesting article examines the attitudes of people towards the stock market in an industrial city in Pennsylvania. At one point, it reports an assertion of a stockbroker that, unlike Japan, the U.S. market has never had a ten year period in which it did not have an increase in value. This is not true. Twice in the last seventy-five years the market took more than ten years to recover its previous peak. The market did not reach its 1929 peak until the early 1950s, and it did not regain its 1968 peak until 1982. "Has Wall St's Bear Market Hit Bottom?" by Steven Pearlstein in the Washington Post, March 14, 2001, page A1. This article examines current assessments of the stock market's prospects. The article asserts that analysts who believe that the stock market reflects rational calculations based on future profits think that the market has hit bottom. It then reports that these analysts expect that profits will grow between 10 to 15 percent annually (in nominal terms) over the next decade. This expectation is completely out of line with other authoritative projections of profit growth, such as those from the Congressional Budget Office (CBO) and historical experience. CBO projects that profit growth will average approximately 4 percent annually (1 percent after adjusting for inflation). They expect that profits will grow somewhat less rapidly than the economy over the decade because depreciation charges are taking up an increasing share of corporate revenue, and the wage share may rebound slightly from its unusually low levels of recent years. Since nominal GDP growth is projected to average only 5.0 to 6.0 percent annually, if profits actually grew at the 10 to 15 percent annual rate projected by the analysts referred to in this article, it would imply the largest redistribution from wages to profits in the history of the nation. At the low end of the projected range for profit growth, the profit share of corporate income would rise by approximately 8 percentage points to 26 percent. At the high end of the range, the profit share would rise by approximately 25 percentage points to 43 percent. The first assumption would imply that average real wages stagnate over the course of the decade. The second assumption implies a decline in real wages of more than 30 percent in the next ten years. The country has never experienced anything like this phenomenon, and no economists are predicting this sort of precipitous drop in wages. "Fading of Bright Hopes Led to Precipitous Decline," by Carol Vinzant and Robert O'Harrow, Jr., in the Washington Post, March 10, 2001, page E1. This article reports on the decline in the stock market over the last year. At several points, it implies that the downturn in the market was an event that could not have been predicted. In fact, while its exact timing was not predictable, the downturn itself was entirely predictable. Stock prices must ultimately bear some relationship to corporate profits. (The alternative proposition is that stock values are totally arbitrary, so that the stock of a lemonade stand can sell for more than Microsoft.) Unless corporate profits were to grow at a rate that was approximately twice what most forecasters projected, stocks were hugely over valued. Therefore, a sharp decline in stock prices was inevitable and predicted by many economists (e.g. R. Shiller, Irrational Exuberance (Princeton University Press 2000), or D. Baker "After the Fall," In These Times, December 12, 1999; pp. 14-18). JAPAN "For Japan Sunk in Gloom, No Cheer in Growth Data," by Stephanie Strom in the New York Times, March 13, 2001, Section W, page 1. This article reports on the release of new data on economic growth in Japan. The article notes that GDP growth was reported at 0.8 percent for the 4th quarter of 2000. It is important to recognize that this is a quarterly growth rate, not an annualized rate of growth, which is the customary measure in the United States and elsewhere. Japan's annualized rate of growth for the 4th quarter was approximately 3.2 percent, a very healthy rate of growth. The article also asserts that Japan's central bank may be very limited in its ability to help the economy because interest rates are already quite low. As Princeton professor Paul Krugman has repeatedly argued, the bank could help stimulate demand by deliberately creating inflation. This would lower real interest rates, thereby providing a spur to both consumption and investment. (The real interest rate is the nominal rate minus the inflation rate. Because Japan has been experiencing deflation in recent years, real rates remain relatively high.) A moderate rate of inflation would also reduce the debt burden of many firms and the government. CAPITAL GAINS TAX CUTS "GOP Leaders Urge Cuts in Capital Gains Tax Rate," by Mike Allen in the Washington Post, March 12, 2001, page A5. This article reports on efforts by some Republican members of Congress to include a cut in the capital gains tax rate in President Bush's tax cut bill. At one point the article explains that a capital gain "is a gain made on an investment, such as a house or stock, at the time it is sold." It is worth noting that current tax laws almost completely exclude most capital gains on owner-occupied housing from taxation, so that the capital gains in question are almost exclusively those earned on stock and other investments. FEBRUARY EMPLOYMENT REPORT "Jobless Rate Still At 4.2% in February," by John M. Berry in the Washington Post, March 10, 2001, page E1. This article reports on the Labor Department's release of employment data for the month of February. At several points the article cites experts' characterization of the report as providing encouraging news about the economy. Some of these assertions are dubious. For example, it quotes an economist at Wells Fargo Bank, who claims that most sectors outside of manufacturing added jobs in February and "even in autos, where two-thirds of the layoffs in manufacturing have occurred, 13,000 more jobs were created [last month]." The two-thirds figure does not correspond to the Labor Department's data. Since October, the Labor Department reports that manufacturing has lost 258,000 jobs, while the auto industry is reported as losing 44,000 jobs. It is also worth noting that, while the auto industry was reported as adding jobs in February, it also shortened hours. The net effect was that hours worked in the industry were reported to have declined by 0.8 percent in the month. The article quotes the same economist noting that construction employment has been strong in recent months. While the data does show an increase in construction employment, it also shows a decrease in the length of the average workweek. As a result, total hours worked in the industry were reported to be down 1.7 percent from their October level. At another point, the article presents the assessment of an economist at J.P. Morgan Chase and Company that, "even the 0.5 percent increase in average hourly earnings last month ... should be considered a plus." Since most people in the country get most of their income from wages, they would probably not need to be convinced that a healthy pace of wage growth was positive, as this comment seems to imply. PROGRESSIVE INCOME TAXES "Should the Tax System Redistribute the Wealth," by Steven Pearlstein in the Washington Post, March 12, 2001, page H1. This article assesses public attitudes and the feasibility of a progressive income tax. At one point, it presents the assessment of an expert on public finance. The expert asserts that a 50 percent tax rate is the highest marginal tax rate that could be maintained, without interfering with work incentives or leading to widespread tax evasion. According to standard economic theory, it is after-tax income, not the tax rate, which determines incentives to work. This means that without knowing before-tax incomes, it is impossible to determine at what point incentives Will be significantly affected. For example, even though average wages are comparable, doctors in the United States earn more than twice as much on average as doctors in Europe. This means that if doctors faced a 70 percent marginal tax rate in the United States, they would still have more incentive to work than a doctor in Europe who faced a 40 percent marginal tax rate. Similarly, CEOs in the United States earn more than four times as much as CEOs in Europe. This means that if CEOs in the U.S. faced a marginal tax rate of 80 percent, they would still have more incentive to work than CEOs in Europe who face a 40 percent marginal tax rate. The extent of tax evasion will depend on the harshness of the penalties. If the United States treated large-scale tax evasion in the same way it treated possession of illegal drugs, tax evasion would probably not be a very serious problem. It is unlikely that many people in the top tax bracket would be willing to risk decades in prison in order to raise their after-tax income by 10 to 20 percent. It is worth noting that government has numerous policies that have the intention and/or effect of redistributing income. For example, it has pursued trade policies that have had the effect of depressing the wages of large segments of the working population by placing them in competition with low cost labor around the world. Similarly, when labor shortages have begun to place upward pressure on the wages of many less-skilled workers, the government has been willing to allow large number of immigrants into the country in order to keep wages down. By contrast, when American doctors became concerned that foreign doctors were lowering their wages, they were able to get the government to restrict the supply of foreign doctors (see e.g. "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). U.S. trade negotiators have never sought to standardize education and licensing requirements, which they could do if they wanted to subject professionals to the same sort of foreign competition that manufacturing workers currently experience. In addition, laws that make it very easy to fire workers for unionizing, difficult for unions to stage effective strikes, and create protectionist barriers such as patents and copyrights, all have a large impact on the distribution of income. AIDS DRUGS IN AFRICA "Africa's AIDS War," by Sheryl Gay Stolberg in the New York Times, March 10, 2001, page A1. This article examines the prospects of low cost AIDS drugs being made available to H.I.V. positive people in sub-Saharan Africa. The article presents comments from the pharmaceutical industry's representatives and sympathetic experts about the need for high prices to support research of new AIDS drugs. It is important to note that much of the research that went into the development of the current crop of AIDS drugs was actually funded by the federal government. The industry claims that it costs more than $500 million to develop a new drug, a figure which suggests that government supported research may be a far more effective way to deal with AIDS and other diseases. At one point the article comments that "drug executives say they are also feeling bruised because, no matter what they do, some advocates for AIDS patients say it is not enough." It then adds, "that held true this week," and presented a statement from an activist questioning the sincerity of an offer of low cost AIDS drugs by Merck, a leading manufacturer of AIDS drugs. On previous occasions, the drug industry has made offers of low cost AIDS drugs that turned out to have very limited effect, since they applied stringent conditions on the countries receiving the drugs. The past record of the industry suggests that skepticism towards its newly announced commitments is appropriate.
