Economic Reporting Review, 1/14/02 By Dean Baker You can sign up to receive ERR every week by sending a "subscribe ERR" email request to [EMAIL PROTECTED] You can find the latest ERR at http://www.tompaine.com/news/2000/10/02/index.html . All ERR prior to August 2000 are archived at http://www.fair.org/err/. All ERR after August 2000 are archived at www.tompaine.com Outstanding Stories of the Week Americans, Gradually, Feel Grip of Recession Louis Uchitelle New York Times, January 7, 2002, Page A1 This article examines how the impact of the recession is gradually being felt by an ever larger segment of the population. CBO Reports Rates Bush Economic Proposals Poorly Glenn Kessler Washington Post, January 5, 2002, Page A4 This article reports on a study by the Congressional Budget Office which evaluates the likely impact of various stimulus packages that have been put forward. The study found that the proposal being advanced by President Bush and Republicans in Congress would provide very little stimulus to the economy. All That Easy Credit Haunts Detroit Now Danny Hakim New York Times, January 6, 2002, Section 3 page 1 This article reports on the relatively high delinquency rates on new car loans that have been issued by the financing divisions of the major automobile manufacturers. The article reports that credit losses may significantly reduce profits in the next few years. December Employment Report Joblessness Rises, but Some Positive Signs Seen John M. Berry Washington Post, January 5, 2002, Page E1 Nation's Unemployment Rate Rises to 5.8 Percent Daniel Altman New York Times, January 5, 2002 These articles report on the Labor Department's release of employment data for December. Both articles note that the 124,000 decline in jobs measured by the establishment survey was less than many analysts had expected. Neither article noted that private sector employment fell by 187,000. For many purposes, the private sector jobs numbers probably give a better measure of the current state of the economy. At one point the Times article reported that the rise in the number of workers on temporary layoffs (176,000) was considerably larger than the rise in the number of workers who reported that they had permanently lost their jobs (60,000). It took this as an indication that firms were increasingly using layoffs to trim their workforce, rather than firing workers outright. This data is not seasonally adjusted -- the seasonally adjusted data actually shows a drop in both temporary layoffs and workers who have permanently lost their jobs. More importantly, this data is very erratic (for example, the seasonally adjusted number of workers who were temporarily laid off was reported as falling by 131,000 in November, a month in which close to 400,000 jobs were lost), so monthly changes are almost meaningless. December Retail Sales Sales Exceed Expectations Martha McNeil Hamilton Washington Post, January 11, 2002, Page E3 Data Now In, Retailers Say Merry Holiday Leslie Kaufman New York Times, January 6, 2002, page C1 These articles report on data on December retail sales in chain stores. The articles note that due to a strong last week, chain stores reported an increase of approximately 2.5 percent in year over year sales for the month. It is worth noting that the holiday season in 2000 was an especially weak one, with year over year sales increasing by just 0.3 percentage points. This means that 2002 holiday sales were less than 3.0 percent higher than 1999 sales, before adjusting for inflation. The Euro On the Road, Euros Smooth the Way Alan Cowell New York Times, January 6, 2002, page A8 This article reports on how the euro is facilitating travel across Europe, since people no longer have to change their currency when they cross a border. At one point, it suggests that it may produce a rush of bargain hunting, as consumers now recognize that lower prices are available in nearby regions across the border. The arithmetic needed to make currency conversions is simple division that is taught in most elementary schools in the United States in third and fourth grade. Students in European nations generally perform better on standardized math tests than do students in the United States. Therefore, it is unlikely that major price differences were concealed from European consumers by the use of different currencies. Also, under law, prices in the euro zone nations have been posted in both the national currency and euros since 1999. The Budget President Hits Back at Daschle's Criticism of Cut Mike Allen Washington Post, January 6, 2002, Page A1 Huge Decline Seen in Budget Surplus Over Next Decade Richard W. Stevenson New York Times, January 6, 2002, page A1 Partisan Politics Returns To Capital Dana Milbank Washington Post, January 7, 2002, Page A1 These articles discuss the current state of debate over the national budget. All three articles present partisan claims without giving readers the background information that would be needed to accurately evaluate them. Since very few readers possess the time and expertise to gather this information on their own, they would be unable to assess the claims based on the information presented. For example, the article by Allen reports President Bush's attack that the Democratic Senate refused to pass his stimulus package and adds that this bill provided $30 billion in aid to workers who have recently lost their jobs. It would have been appropriate to add that this bill also contained more than $60 billion in tax cuts for corporations and high income individuals. The article also reports on the Democratic National Committee's new advertising campaign, which claims that President Bush's tax cuts are jeopardizing Social Security and Medicare, since the government is now spending the surplus from these programs. It would have been appropriate to remind readers that these programs are not affected at all by whether the government saves or spends their current surpluses. The programs will hold the exact same amount of government bonds in any case. The article by Stevenson includes an assertion that Democrats and Republicans are facing the painful choice "between cutting the budget and abandoning any pretense of fiscal responsibility." The article does not indicate whose definition of "fiscal responsibility" it is using. Many economists have applied the criterion, that if the government keeps the ratio of debt to GDP from rising, then it is being fiscally responsible, since it can maintain this borrowing stance forever. Applying this standard to the gross debt, which includes the bonds held by Social Security and Medicare, the government would be able to run deficits of more than $100 billion a year. The article's assertion implies that this budgetary rule is fiscally irresponsible, but it provides no basis for this assessment. The article also presents the claims of Democrats, that long- term interest rates would be lower if the Republican tax cut had not been passed. It would be helpful to give readers some measure of the likely impact of the tax cuts on interest rates. Most evidence indicates that even very large changes in the budget have only a limited impact in interest rates. For example, real interest rates on mortgages and corporate bonds fell by just 0.8 percentage points from the business cycle peak in 1989 to the 2000. During this time, the budget shifted from a deficit of nearly 3.0 percent of GDP to a surplus of more than 2.0 percentage points -- a total shift of 5 percentage points of GDP, which is more than $500 billion a year at present. Given this history, the much smaller shift to deficits implied by the Republican tax cuts would only be expected to raise interest rates by no more than 0.2- 0.3 percentage points. Argentina Argentine Unlinks Peso From Dollar, Bracing for Devaluation and Even Harder Times Larry Rohter New York Times, January 7, 2002, Page A6 This article discusses Argentina's plan to delink its currency from the dollar. At one point it discusses the fiscal record of Eduardo Dehalde, the country's new president, when he was governor of Buenos Aires Province. It notes that the budget deficit grew tenfold to $1.6 billion. This information tells readers almost nothing about Mr. Duhalde's record. Without knowing the size of the total budget, there is no way for a reader to assess whether a $1.6 billion deficit is large or small. Also, the fact that the deficit increased by a factor of ten is meaningless, if the original size of the deficit is small. The discussion in the article implies that this deficit was irresponsible, but it is impossible to determine this based on the evidence presented. At one point the article asserts that Argentina must borrow from foreign lenders. Actually, it can borrow domestically as well, although it may have to pay a higher interest rate if it is forced to rely exclusively on domestic investors. No Relief for Argentine Exporters Anthony Faiola Washington Post, January 9, 2002, Page E1 This article examines the prospects of Argentina's exporters in the wake of the devaluation of the nation's currency. At one point it presents the view of Hernan Tevez, the head of a major dairy exporter, that his company would greatly benefit from increased access to the U.S. dairy market. It is not clear that Mr. Tevez's view is accurate. Presently, U.S. dairy prices are kept above world market levels by a system of quotas on both imports and domestic production. If this system were relaxed, or eliminated altogether, then dairy prices in the United States would fall. This may allow foreign producers, like Mr. Tevez, to sell more products in the United States, but at a much lower price. On net, this could lead to a fall in profits. A recent paper by three prominent trade economists ("CGE Modeling and Analysis of Multilateral and Regional Negotiating Options," by Drusilla Brown, Alan Deardorff, and Robert Stern) found that most developing nations were net losers from the last round of agricultural trade liberalization. Argentina's Plan Stirs Worries Elsewhere Paul Blustein Washington Post, January 9, 2002, Page E1 Argentina Told of Conditions for Aid Paul Blustein and Anthony Faiola Washington Post, January 10, 2002, Page E1 These articles discuss aspects of Argentina's recovery plan and the reactions it is receiving. The articles indicate that the IMF may not approve of the plan and may refuse to lend Argentina money. The second article makes this point quite explicitly, reporting that the IMF and the Bush Administration will not support new loans to Argentina if it does not adopt. policies that they approve. Recent coverage of the role of the IMF (and Bush and Clinton administrations) in Argentina has often implied that it acted passively in the situation and had no chose but to go along with policies that it recognized as misguided (e.g. "For IMF, Argentina Was an Unsolvable Puzzle, by Steven Pearlstein, Washington Post, January 3, 2002, Page E1). These articles clearly show that the IMF has no problem refusing to assist countries pursuing policies that it considers wrong. Interest Rates Rates Remain High. Blame Bush Or Big Expectations? Daniel Altman New York Times, January 9, 2002, Page C1 This article examines competing explanations for the relatively high long-term interest rates in the United States. It reports that Democrats have pointed to the impact of smaller surplus projections as a result of President Bush's tax cut. Republicans have argued that the main cause is the market's expectation that the economy is about to experience a strong recovery. The article neglects a third obvious explanation. The United States is running an unsustainable trade deficit. If the trade deficit remained at its current share of GDP, the net foreign debt of the U.S. would exceed 60 percent of GDP by the end of the decade -- a level of indebtedness far higher than any industrialized country has ever experienced. In order to reduce the deficit to a sustainable level, the dollar will have to fall by 20 to 30 percent. If investors anticipate that the dollar will fall, then they will demand an interest rate premium to hold debt denominated in dollars, rather than other currencies. This could easily explain the relatively high long-term rates the United States is currently experiencing. Health Care Part Battles Looming Over Costly Old Issue: Health Care Coverage Robin Toner New York Times, January 11, 2002, Page A16 This article discusses prospective debates in Congress on measures designed to extend insurance coverage. It would have been appropriate to note that the United States spends more than 14 percent of its GDP on health care, approximately twice the average for industrialized nations. In spite of this higher level of spending, the United States generally ranks near the bottom of this group in health outcomes, such as life expectancy and infant mortality rates. Japan Bad News Keeps Coming For Japanese Economy James Brooke New York Times, January 10, 2002, Page W1 This article reports on the decision of Merrill Lynch to scale back its operations in Japan, laying off workers and closing most of its offices. At one point it comments that because interest rates are near zero and the government already has a large debt, "the only macroeconomic tool left" is devaluing the currency. Actually, the central bank could deliberately try to produce a modest rate of inflation (2-3 percent), which would lower real interest rates and increase the incentive to invest and consume. Many prominent economists, such as Princeton University professor Paul Krugman have advocated this policy.
