"On Hill, Greenspan Defends Rate Hikes"
John M. Berry
Washington Post, February 24, 2000, Page E2
"Tracking the Wealth Effect"
Richard W. Stevenson
New York Times, February 24, 2000, page C1
Both of these articles report on Federal Reserve Board chair Alan Greenspan's testimony before the Senate Banking Committee. Both articles report on Greenspan's discussion of the impact of rising stock prices on consumption. Neither article notes the significance of Greenspan's stated view that stock prices should not rise faster than disposable income.
Disposable income is projected to rise by approximately 5.0 percent annually over the next decade. If stocks rise at the same rate, then it implies that stock prices will on average increase by 5.0 percent a year. The current dividend payout on stocks is a bit over 1.0 percent. This makes the total return from holding stock just over 6.0 percent. This is approximately the same return that one gets from holding government bonds. It is very unlikely that people will choose to take the risk of holding stock if they get no better return than from holding bonds. This implies that the stock market is seriously over-valued. (see ERR, 2/21/00).
The Post article refers without comment to Greenspan's claim that the run-up in stock prices in recent years is justified because rising productivity has led to rising profits. From the third quarter of 1997 to the third quarter of 1999 (the last quarter for which data is available), before-tax corporate profits rose by 1.9 percent. After-tax profits rose by 0.6 percent. Over this period the Dow Jones Industrial Average rose by 36.1 percent, while the S&P 500 rose by 40.6 percent.
"'99 Trade Gap Hit Record $271 Billion"
John Burgess
Washington Post, February 19, 2000, Page E1
"Trade Gap Set Record in '99, but Narrowed in December"
Bloomberg News
New York Times, February 19, 2000, page B14
These articles report on the Commerce Department's release of the trade data for the month of December. The articles include several inaccurate assertions. For example, the Post article quotes Nairiman Behravesh, the chief international economist at DRI/McGraw Hill, attributing the rise in the trade deficit to the more rapid growth in the United States than in its major trading partners. This assertion is implausible.
The $271.3 billion trade deficit in 1999 was a $107 billion increase over the 1998 trade deficit. The difference between the growth rate in the United States and its major trading partners was no more than 2.0 percentage points. This means that if the United States had grown at the same rate as its trading partners, its GDP would have been approximately $185 billion less in 1999. If the additional growth in the United States was the main factor in pushing up the trade deficit, it would imply that the United States imports an additional 58 cents for each dollar of GDP. While the relatively rapid growth in the United States was clearly a factor in the rise in the trade deficit, it cannot explain most of the increase from 1998.
The Times article claims that analysts believe that slower domestic growth and more rapid foreign growth will lead to a lower deficit in 2000 than in 1999. This also is implausible. In the last quarter of 1999, the deficit was running at a $312 billion annual rate. In the fourth quarter, imports were rising at a 15.8 percent annual rate, while exports were increasing at just a 12.4 percent rate. This implies that the trade deficit is likely to be even larger in the first quarter of 2000. Unless the U.S. economy falls into a recession, it is extremely unlikely that the trade figures could be reversed quickly enough to prevent the deficit from being even larger in 2000 than in 1999.
"Cultures Converge in Public Hospitals"
Michael A. Fletcher
Washington Post, February 21, 2000, Page A3
This informative article examines the role that foreign doctors are playing in providing medical care to many inner city areas. It notes that government restrictions allow fewer than half of the qualified foreign trained doctors who apply to obtain residency slots. This protectionist measure has the effect of keeping physicians' wages high. As a result, doctors in the United States are paid on average more than twice as much as doctors in other industrialized nations. While news stories routinely assert that the Clinton administration is promoting a free trade agenda, it has actually reduced the number of foreign doctors who are allowed to practice in the United States (see "AMA and Colleges Assert There Is a Surfeit of Doctors," by Robert Pear, New York Times, 3/1/97, page A7 and "U.S. to Pay Hospitals Not to Train Doctors, Easing Glut," by Elisabeth Rosenthal, New York Times, 2/15/97, page A1.) If doctors in the United States received salaries that were more in line with doctors in other industrialized nations, it would save consumers more than $70 billion a year.
See more on trade.
"Rising Level of Debt Doesn't Alarm Fed"
John M. Berry
Washington Post, February 22, 2000, Page E1
This article, discussing the Federal Reserve Board's attitudes toward household debt burdens, argues that such debt remains at very manageable levels. A chart showing the debt services burdens (interest payments plus repayment of principle) for households and businesses states that they "remained both relatively low and stable."
In fact, the chart for household debt service shows that in the third quarter of 1999 (the last quarter shown), the burden, measured as a share of disposable income, had risen back almost to the record level hit in 1990. Households are actually facing a larger debt burden at present, because these payments don't include car leases. Car leasing arrangements grew rapidly in the '90s so that one-third of new cars are now leased. These lease payments are a substitute for payments on car loans, and in most ways can be seen as the equivalent of debt service.
"McCain's Policy Team: The Few, the Informal"
Dana Milbank
Washington Post, February 25, 2000, Page A1
This article discusses the advisors that Senator McCain relies on in his presidential campaign. At one point it refers to Senator McCain's plan "to secure Social Security," which he believes would "appeal to the young as well as the old." Actually, Senator McCain does not call for securing Social Security. He proposes allowing younger workers to put money into individual accounts instead of paying into the Social Security fund. This could put the program into jeopardy.
Also, there is no obvious reason that a proposal to secure Social Security should appeal to older votes. The program is currently running a surplus of more than $100 billion a year. The most recent projections from the Social Security Trustees show that the program will be able to pay all scheduled benefits through 2034 with no changes whatsoever. The projections from the non-partisan Congressional Budget Office show an even brighter picture. Therefore there is little reason for current retirees to be concerned about the strength of the program.
"President Clinton Announces $223 Million in Job Grants"
Associated Press
New York Times, February 20, 2000, Section 1, page 18
This article reports on President Clinton's weekly radio address, in which he proposed a new jobs program for low-income teenagers and announced his support of a measure that would eliminate the Social Security earnings penalty for people between age 65 and 69. The article asserts that "removing the earnings limit is an issue dear to older Americans." The earnings cap, below which there is no penalty, was scheduled to rise to $30,000 in 2002, even without any new action. Based on current wage patterns, less than 6 percent of the people between age 65 and 69 will be earning enough to be subject to the penalty at that point.
See more on Social Security.
"After Pushing Oil Prices Up, Mexico Has Second Thoughts"
Sam Dillon
New York Times, February 19, 2000, page A1
This article discusses the political battle in Mexico over the government's plans to accommodate the United States by producing more oil, thereby lowering the world price. The article argues that Mexico will actually be better off if it gets less money for its oil, since "lofty oil prices conflict with Mexico's new economy, propelled by exports of cars televisions and other manufactured goods."
In advancing this argument, the article makes several factual and logical errors. For example, the article asserts that "oil production contributed 6 percent to Mexico's total economic output in 1983, but during 15 years of economic modernization, including the passage of the North America Free Trade Agreement, oil's contribution has withered to just 1.7 percent." This statement implies that Mexico has experienced 15 years of rapid growth. In fact, Mexico's GDP growth has barely outpaced its population growth in the last 15 years, as per capita GDP has advanced at a rate of less than 1.0 percent a year, according to IMF data.
Mexico's current oil production is approximately 3.5 million barrels a day, or approximately 1.25 billion barrels a year ( http://www.worldoil.com). The price of Mexican oil averaged just over $18.50 per barrel in the third quarter of 1999. The annual value of Mexico's oil output at this price is $23.2 billion, which is approximately 5.0 percent of Mexico's GDP, nearly three times as important as the article claims.
The article later asserts that high world oil prices "threaten to worsen inflation, drive up interest rates and slow world growth." It then adds "if that happens, economists say, Mexico's losses from forfeited exports will far outweigh the short-term profits from $30-a-barrel oil." Only two economists are explicitly identified as sources for this story, so it is not clear how many economists purport to hold this view, but it is not likely that many would.
The marginal impact of lower oil prices on U.S. inflation, interest rates and economic growth is very modest. Another Times article ("Surge in Oil Prices Is Raising Specter of Inflation Spike," 2/21/00: A1) cites an OECD estimate that a $10 per barrel decline in the price of oil would lower inflation by 0.5 percent and add 0.25 percentage points to world growth. Since the price reduction contemplated in this article is just $5.00-7.50 per barrel, the impact on GDP growth would be between 0.125 and 0.19 percentage points, based on this OECD estimate. This increment in world economic growth could be expected to boost Mexico's annual non-oil exports by $150-300 million. By contrast, the loss in oil revenue on exports from this sort of price reduction is between $2.8-4.2 billion a year. There are few economists who would contend that it is better to export more goods to obtain an additional $150-300 million in export sales then to get an additional $2.8-4.2 billion in revenue from current exports.
It is also worth noting that this article implies that higher oil prices are likely to seriously damage the U.S. economy. There had been a series of articles in the financial press in recent months explaining that oil prices are largely irrelevant to the "new economy." If this article is correct in its assessment of the impact of higher oil prices, then the earlier ones must have been mistaken.
See more on Latin America.
"In Making IMF Choice, U.S. Must Decide Whom to Offend"
David E. Sanger
New York Times, February 25, 2000, page C4
This article discusses the contenders for the position of director of the IMF. It refers to one of the candidates, current deputy director Stanley Fischer, as "highly regarded." In his position as deputy director, Fischer played a large roll in designing the IMF's program for Russia, the largest program in the history of the Fund. Under this program, Russia's economy has contracted by approximately 50 percent, much of the nation's wealth has been turned over to criminals, its health care system has collapsed, and life expectancy has plummeted. Presumably the Russian people who have lived through this experience would not hold Fischer in high regard.
Many other recent IMF policies have also proven to be quite harmful to the countries affected, perhaps most notably the insistence in 1998-1999 that Brazil spend tens of billions of dollars supporting an over-valued currency. This eventually proved to be impossible and the policy had to be abandoned.
The article notes the mistaken policies designed for East Asian countries in the wake of the 1997 financial crisis, but asserts that Fischer "changed gears and the formula he put together for economy recovery ... has brought about results." It then notes the recent economic success of several East Asian countries, most notably South Korea. South Korea has repeatedly been the target of criticism for not following the IMF's program. (E.g., see "Skepticism Over Korean Reform," by Stephanie Strom, New York Times, 7/30/99, page C1; "Asian Rebound Derails Reform as Many Suffer," by David E. Sanger and Mark Landler, New York Times, 7/12/99, page A1; ERR, 7/19/99, 8/2/99, 10/25/99.)
"Brazil Collides With the IMF Over a Plan to Aid the Poor"
Larry Rohter
New York Times, February 21, 2000, page A9
This article reports on a conflict between Brazil's government and the IMF over a government proposal to spend $22 billion over the next decade (approximately $2.2 billion a year) on education, health care and other social programs intended to improve the plight of the poor. According to the article, the IMF is concerned about the impact this spending will have on Brazil's budget deficit.
It is worth noting, that at the insistence of the IMF, Brazil spent tens of billions of dollars in the fall of 1998 and the beginning of 1999, trying to support its currency at an artificially high level. Maintaining an over-valued currency helped to throw the country into a recession. When the government was eventually forced by the markets to devalue, it lost much of the money it had spent supporting its currency. The money Brazil lost in this effort to sustain the value of its currency would have been sufficient to finance several years of the spending in this proposal.
"S.&P. Concerned About Prospects for Recovery in Japan"
Stephanie Strom
New York Times, February 23, 2000, page C4
This article discusses the possibility that Standard & Poor's, a major credit rating agency, may lower its ratings on Japanese debt. At one point the article notes that, in its evaluation, S&P appeared to be criticizing Japan's government for trying to stimulate the economy with government spending while "avoiding the structural adjustments many economists advocate."
It is worth noting that some economists, most notably MIT professor Paul Krugman, have advocated stimulating the economy through more expansionary monetary policy. (See "Japan's Trap," 5/98, http://web.mit.edu/krugman/www/japtrap.html.) While this policy is apparently supported by the Japanese government as well, it recently made the Japanese Central Bank independent. The conservative economists and bankers who control the Central Bank are refusing to go along with the government's desires on monetary policy.
See more on Asia.
"Corporations' Taxes Are Falling Even as Individuals' Burden Rises"
David Cay Johnston
New York Times, February 20, 2000, Section 1, page 1
This article reports on the ways in which corporations have been using loopholes and tax shelters to reduce their tax burden.
"Many in Silicon Valley Cannot Afford Housing, Even at $50,000 a Year"
Evelyn Nieves
New York Times, February 20, 2000, Section 1, page 16
This article examines the situation of low and moderate wage workers in the Silicon valley. Many of these workers find it extremely difficult find housing, and some are even homeless, in spite of relatively well-paying full time jobs.
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 http://www.fair.org/media-outlets/nyt.html and http://www.fair.org/media-outlets/wpost-newsweek.html.
You can sign up to receive ERR via email every week at www.preamble.org/columns/subbaker.htm. ERR is archived at www.fair.org/err/.
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