The FAIR site has been redesigned! This page is available for archival purposes only and has not been updated since January 2005. Please update your links. To access the new homepage, go to You may also wish to visit the advanced search page or the archives page.

Economic Reporting Review

January 31, 2000:

State of the Union; Profits and the Stock Market; Changing Dollar Policy

By Dean Baker

Federal Budget | Taxes | Stock Market | Copyrights | The Dollar | Japan | Outstanding Stories

Federal Budget

"Grand Ideas, Little Time"
R.W. Apple Jr.
New York Times, January 28, 2000, page A1

"Speech Sweeps From Taxes to Gun Limits"
Marc Lacey
New York Times, January 28, 2000, page A1

"Clinton Challenges Congress to Act on Taxes, Health Care, Gun Control"
Charles Babington
Washington Post, January 28, 2000, page A1

"After a Detour; A Return to Activist Agenda"
John F. Harris
Washington Post, January 28, 2000, page A1

These articles discuss the proposals that President Clinton laid out in his State of the Union address. At several points, including the headlines of the articles by Apple and Harris, these proposals are characterized as being large-scale or "activist."

In fact, most of the proposals that the President described will be relatively inexpensive. For example, the President proposed spending an additional $3 billion on Headstart. This is slightly more 0.01 percent of projected federal spending over the next decade. A proposal to spend $3.7 billion on school modernization over the next five years is under 0.04 percent of projected spending. His proposal to spend $150 million to combat AIDS and other diseases in developing nations is less than 0.001 percent of projected spending over the next decade. (The time period for the spending in this proposal was not clearly specified.)

Since the baseline budget provides for real cuts in many areas of federal spending, such as education and medical research, it is not clear that the president's proposals will even led to real increases in spending in most areas over the next decade. If these measures were presented as percentages of the budget, instead of exclusively in dollar expenditures, readers would be better able to evaluate their significance.

"Federal Budgeteers Ponder a Multiple-Choice Surplus"
Richard W. Stevenson
New York Times, January 23, 2000, Section 3 page 3

"Budget Office Projects Soaring Federal Surplus"
Richard W. Stevenson
New York Times, January 26, 2000, page

These articles discuss the politics and economics surrounding the budget. At one point the first article discusses efforts by the Democrats to have a baseline budget that assumes that spending will remain constant after adjusting for the effects of inflation. Referring to this approach, the article comments: "In essence, Democrats want to bake some increases into the budget pie for the next decade." This comment implies that the appropriate measure of spending would not consider the impact of inflation, and only rely on nominal dollars.

According to this measaure, the United States is currently spending more than three times as much on the military as it did at the height of World War II. Military spending peaked in 1944 at $87.4 billion; currently military spending is approximately $280 billion. There are few economists or policy analysts who would find this comparison meaningful.

The second article discusses the large surpluses projected over the next decade by the Congressional Budget Office (CBO). This article asserts that the surplus in the Social Security system "is projected to turn into a deep deficit within 20 years as the baby boom generation retires." Actually, according to the most recent Social Security trustees report, the Social Security system is projected to run annual surpluses through the year 2022.

It is worth noting the new projections on Social Security from CBO are considerably more optimistic than the projections in the 1999 Social Security trustees report. The CBO projections show that the cumulative surplus in the Social Security trust fund over the next ten years will be more than $600 billion higher than projected by the Social Security trustees. This is largely attributable to the fact that CBO projects considerably more rapid growth over this period: an average annual rate of 2.8 percent compared with 2.0 percent in the trustees report. If the economy continues to follow the more rapid growth path projected by CBO, the annual surpluses in the trust fund could persist past 2030, and the fund would not be depleted until close to 2050.

"Chief GOP Rivals Battle on Tax Plans"
Dan Balz and Ceci Connolly
Washington Post, January 27, 2000, page A1

This article reports on the Republican presidential debate in New Hampshire the previous night. It reports at some length Senator John McCain's comments about "saving" Social Security. The article does not point out that the Social Security trustees project that the Social Security trust fund will be fully solvent for 34 years with no changes whatsoever. The projections from the Congressional Budget Office issued the same day imply that the trust fund will be solvent even longer.

Reporters do often correct candidates factual errors or misrepresentations. For example, an article in the Times last week pointed out that in a previous debate, the Republican candidates had neglected to mention President Clinton's market-opening efforts, as they all pledged to open foreign markets to U.S. agricultural products if elected (see "McCain Leads the Way as Republican Rivals Attack Bush," by Richard L. Berke, New York Times, 1/16/00, Section 1 page 14; see also ERR 1/24/00).

See more on Social Security.

See more on Election 2000.



"GOP Fight Bares Schism on Taxes"
Eric Pianin and Albert B. Crenshaw
Washington Post, January 22, 2000, page A10

This article analyzes the impact of the tax cuts proposed by George W. Bush and John McCain. The article includes a chart prepared by an accounting firm that shows the taxes that families at different income levels would pay under each plan.

The chart presents tax five different income gradations for married couples with incomes over $75,000 a year. It lists only two gradations for couples with incomes below $75,000. Approximately 20 percent of couples have incomes above $75,000, while close to 80 percent have incomes below this level.


Stock Market

"Surging Profits May Indicate Longer Life for Bull Market"
Alex Berenson
New York Times, January 22, 2000, page A1

This article examines corporate profit reports for the 4th quarter of 1999. According to the article, profits in the quarter were up about 21 percent from the 4th quarter of 1998, which were in turn approximately 6.0 percent higher than the profits reported for the 4th quarter of 1997.

While this data shows a significant increase in profits over the last two years, the Commerce Department's data show no comparable increase. According to the Commerce Department's data, after tax profits (with inventory valuation and capital consumption adjustment) have been virtually flat over the last two years. Profits in the third quarter of 1999 (the most recent quarter for which data is available) were just 0.6 percent higher than their level in 1997. The Commerce Department data is likely to be the better indicator of actual profitability, since it removes the effect of one-time capital gains from selling off stock or other assets.



"Digital Video Recorders Stuck on Pause"
Rob Pegoraro
Washington Post, January 28, 2000, page E1

This article discusses the entertainment industry's efforts to block the production of digital video recording devices until they can effectively limit their ability to make copies. At one point the article quotes a spokesperson explaining the nature of the opposition of the television industry: "'ER' would run once on NBC [and then] would then be on the Internet in compressed digital form and available for free all over the world. Since 'ER' is a product that doesn't pay for itself in its first run under current economics, this is very threatening."

This quote explains well the distinction between the political power of major corporations and the power of most workers when confronting new technology and globalization. Many workers in the United States have been forced to take large cuts in pay as a result of being placed in competition with low-wage labor in developing nations. In effect, they were forced to adjust to a lower standard of living. In contrast, because of its enormous political power, the entertainment industry is forcing the technology to adjust in order to protect its interests. They are prepared to try to use their power in Congress and the courts to block any technology that makes "ER" unprofitable.

The protectionism demanded by the recording industry imposes an enormous cost to consumers, since music, movies and television shows that could otherwise be available all over the world at no cost will instead carry a significant price tag. By contrast, other forms of protectionism rarely add more than 15 percent to 20 percent to the price of a product.

See more on Trade.


The Dollar

"It Seems to Be U.S. Vs. the Other Six at the Group of 7 Meeting"
Stephanie Strom
New York Times, January 22, 2000, page B2

"Group of 7 Nations Seek Their Own Paths to a Common Goal"
Stephanie Strom
New York Times, January 23, 2000, Section 1 page 4

These articles discuss the meeting of the finance ministers from the Group of Seven industrialized nations. Both articles refer to the desire of the U.S. Treasury officials to see the euro rise relative to the dollar, in order to reduce the size of the U.S. trade deficit. (A rise in the value of the euro would make European exports to the United States more expensive, causing U.S. consumers to import less; and would make U.S. exports cheaper for Europeans, allowing the Europeans to buy more from the U.S.)

If these reports are accurate, it indicates a reversal of the "strong dollar" policy that had been the Clinton administration's doctrine under both current Treasury Secretary Lawrence Summers and his predecessor Robert Rubin. Both had repeatedly asserted that the United States wanted to maintain a highly valued dollar since it increased the purchasing power of people in the United States and helped to restrain domestic inflation. (See "Trade Deficit Rise Provokes Concern of Risk to Dollar," by David E. Sanger, New York Times, 9/22/99, page A1; "Dollar's Slide Spurs Doubts On U.S. Move," by George Hager, Washington Post, 9/23/99, page E1; and "A Key Architect of Prosperity," by Richard W. Stevenson, New York Times, 5/13/99, page C1. See also ERR, 5/17/99, 9/27/99.)

The expected outcome of maintaining an overvalued currency is a growing trade deficit. In the last four years, the United States trade deficit has grown from less than 1.0 percent of GDP to almost 3.5 percent of GDP in the fourth quarter of 1999. It is impossible for a nation to sustain trade deficits of this magnitude for very long. If the Treasury Department has reversed its position on the strong dollar, it apparently believes that it is now necessary to endure the inflationary pressures associated with a declining dollar in order to deal with the long-term problems posed by a large and rapidly rising trade deficit.



"G-7 Officials Give Japan a Lecture on Economics"
Clay Chandler
Washington Post, January 23, 2000, page A26

This article reports on concerns raised by officials of the other G-7 nations about the continued weakness of Japan's economy. At one point the article refers to Japan's reluctance to take steps to restructure its economy, which it characterizes as "politically painful measures Western analysts deem essential to the economy's long-term rehabilitation."

It is worth noting that not all Western analysts share this view. For example, MIT Professor Paul Krugman has argued that Japan's main problem is a lack of demand caused by too much saving. He argued that this can best be countered by deliberately creating a moderate degree of inflation, which would prompt people to spend, rather than save, their money. (See "Japan's Trap," 5/98).

The article goes on to assert that "over the long term, the biggest drag on Japanese growth is the nation's declining birth rate." Insofar as low or negative population growth is the cause of slower economic growth, there is no basis for concern. Per capita GDP is the measure that is relevant to a nation's well being, not total GDP. If Japan could sustain 2.0 percent GDP growth with its population declining at the rate of 1.0 percent annually, while the United States had 3.0 percent GDP growth, with 1.0 percent annual population growth, then the average Japanese person would be seeing a much more rapid improvement in living standards than the average person in the United States (3.0 percent annual growth in per capita GDP in Japan compared with 2.0 percent in the United States). Furthermore, the Japanese population would also be experiencing the beneficial environmental effects associated with a smaller population, which are not captured in GDP.

See more on Asia.


Outstanding Stories of the Week

"Prescription for Trouble?"
Robert O'Harrow Jr.
Washington Post, January 23, 2000, page H1

This article discusses the concerns raised by several analysts of the pharmaceutical industry that the latest round of drug company mergers may lead to higher drug prices and less money being spent on research.


Dean Baker is an economist and the co-director of the Center for Economics and Policy Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.

ERR is edited by Jim Naureckas.

Recent articles can be found on the websites of the New York Times and Washington Post.FAIR's critique of these outlets can be found at and

You can sign up to receive ERR via email every week at ERR is archived at

FAIR | Economic Reporting Review | Last Week | Latest | Search | Mail/Suggest