"Dow's Day Ends Under 10,000"
Sandra Sugawara
Washington Post, February 26, 2000, Page A1
This article reports on the downturn in the Dow Jones Industrial Average. At one point it quotes a market analyst commenting on the Dow's decline, "What the Dow is doing is crying out in abject pain."
As the article points out, the price to earnings ratio for the stocks that constitute the Dow is still 23 to 1. This price to earnings ratio is higher than it has been in at any point in the post-war period, prior to the recent market run-up. It is still more than 100 percent above the 15 to 1 average over the last 70 years. If technology stocks grow at the expense of more established companies, as is implied by the much higher price-to-earnings ratios of tech stocks, then the current over-valuation of the Dow would be even larger.
At one point, this article comments that "it appears certain that the Fed will have to tamp down on economic growth." The Fed will never "have to" tamp down on economic growth. If the Fed raises interest rates to slow the economy, then it is a policy decision. It is not forced to make this decision, any more than it is forced to lower interest rates in a period of high unemployment. It is misleading to imply that the decision to raise interest rates is forced on the Fed, whereas the decision to lower interest rates is an option.
This article, like most other reporting on the stock market, appears to accept the view that a rise in the value of the stock market is a good thing for the economy and country. This is not necessarily true. The stock market can rise for three reasons:
Of these three reasons, only the first describes a positive picture for the nation as a whole. Insofar as the stock market is rising due to a redistribution to profits, this is bad news for the vast majority of the population, since most people derive most of their income from wages. In this case, a rising stock market can be seen as a thermometer reporting on the redistribution away from wage earners to owners of capital.
If the market is rising due to a speculative bubble, it will lead to a redistribution of wealth among shareholders. Those who buy into the bubble will have their wealth redistributed to those who sell before the crash. Such a bubble can lead to a massive transfer of wealth. For example, if the current market is over-valued by 100 percent, it implies that everyone who buys and holds stock is effectively giving away an amount of money equal to half of their investment to those selling out. There is no obvious reason why such transfers would be seen as beneficial to the population as a whole.
"House Lifts Earnings Cap for Retirees"
Amy Goldstein and Juliet Eilperin
Washington Post, March 2, 2000, page A1
This article reports on a unanimous vote in the House of Representatives to remove the earnings test for Social Security beneficiaries between the ages of 65 and 69. Unlike the Times article on the vote ("House Backs End to Earnings Limit on Social Security," by Richard W. Stevenson, 3/2/00; A1), the article does not point out that the earnings limit, below which no penalties apply, would have been raised to $30,000 by 2002, even without any Congressional action. This would have reduced the number of workers affected by the limit by approximately 50 percent.
At one point the article refers to the Clinton administration's desire for reforms "to keep the Social Security system strong enough to withstand the retirement of the enormous baby boom generation starting in slightly more than a decade."
Without any reform, the Social Security system is already strong enough to survive the retirement of most baby boomers. The most recent report from the Social Security trustees show that the program will be able to pay all scheduled benefits until the year 2034, with no changes whatsoever. At that point, the youngest baby boomers will be 70 and the oldest will be 88. The projections from the Congressional Budget Office show an even brighter picture. Also, the first baby boomers will begin collecting benefits in 2008, not in "slightly more than a decade."
See more on Social Security.
"Rising Tax Bills Fuel Anger in Canada"
James Brooke
New York Times, February 27, 2000, Section 1 page 12
This article reports on the alleged growth in resentment in Canada over what it claims is a growing tax burden. Most of the claims in the article are contradicted by data from the Canadian government or other sources.
For example, the article asserts that "over the last five years, payroll taxes increased by an average of 26 percent and the government's total take of personal and corporate income jumped by almost 40 percent." Neither of these claims is supported by any evidence presented in the article.
According to a new article by Zhengxi Lin ("Payroll Taxes in Canada Revisited: Structure, Statutory Parameters, and Recent Trends," forthcoming in Canadian Tax Journal, Issue # 3, 6/00), the payroll tax rate in Canada has been stable since 1994. The current average payroll tax rate is 12.2 percent, the lowest of any G-7 country. By comparison, the federal payroll tax rate in the United States is 15.35 percent (the Social Security tax does not apply to wage income above $75,000). Data published in the Canadian budget for fiscal year 2000 show that the total tax burden has actually fallen slightly over the last five years.
The article also reports the assessment of a Canadian economist, David Giles, that taxes have driven a huge amount of economic activity underground. This economist estimated that the underground economy, which does not get counted in official GDP measures, is now almost equal to 20 percent of Canada's GDP. If this assessment is accurate, then Canada is far richer than is generally believed, since its GDP is actually 20 percent larger than the official data indicate. If Giles' assessment is correct, then it would mean that another claim in the article--that per capita disposable income fell by 12 percent in the last decade--is incorrect.
The article includes a reference to a column in a Canadian newspaper which claims that 20 years ago Ireland's per capita income was half of Canada's. But, "after embarking on radical tax cuts, Irish per capita income is now 15 percent higher than Canada's." According to data from the World Bank, in 1997 (the most recent year available), per capita GNP in Canada was $21,750. This is almost 25 percent higher than the $17,420 figure for Ireland (1999 World Development Indicators, Table 1.1). If Giles' estimate of the size of the underground economy is factored into the comparison, Canada's per capita income would still be almost 50 percent higher than Ireland's.
At one point the article presents a quote from a Canadian newspaper which claims that Canadians pay higher taxes than people in the United States, but get generally inferior public services. The vast majority of health care costs for Canadians are paid by the government; by contrast, in the United States most health care costs are paid privately. Private spending on health care in the United States averages close to $2000 per person. If this were paid by the government, it would require a significant increase in taxes.
See more on Canada.
"European Central Bank Holds Interest Rates Steady for Now"
Edmund L. Andrews
New York Times, March 3, 2000, page C4
This article discusses the current economic situation in Europe and the factors that could prompt the European Central Bank to raise interest rates. It presents misleading evidence that could be used to justify an increase in interest rates, which would slow job growth and raise the unemployment rate in Europe.
The article notes that Europe had experienced weak economic growth in recent years, but does not discuss the possibility that the high interest-rate policy pursued by the European Bank and its national predecessors may have been a major factor slowing growth, as has been argued by many of the world's most prominent economists. (See "An Economists' Manifesto on Unemployment in the European Union," BNL Quarterly Review, 9/98.)
The article goes on to assert that the European economies have finally begun to grow more rapidly, but then adds, "however, inflationary pressures are clearly building," noting that inflation rose at a 2.0 percent annual rate in January. The main factor driving the recent acceleration in European inflation has been the rise in world oil prices. This has also increased the rate of inflation in the United States, from 1.6 percent in 1998 to 2.7 percent in 1999.
The article then points out that some of Europe's smaller nations have considerably higher rates of inflation. For example, according to the article, the annual rate of inflation in Ireland is currently 4.4 percent. It is normal for there to be large regional differences in inflation rates. For example, in 1999 the inflation rate in the San-Francisco Bay Area was 4.4 percent. By contrast, it was just 2.2 percent in the New York metropolitan area. It should be expected that some countries would have significantly higher rates of inflation than the European average, while others will have a lower rate; this is not a rationale for raising interest rates and slowing growth across the continent.
"Kohl's Party, Wounded by Scandal, Falls in a State Election"
Roger Cohen
New York Times, February 28, 2000, page A3
This article reports on a state election defeat of the German Christian Democratic Party. At one point the article refers to Germany's Social Democratic Chancellor, Gerhard Schroder, as "wavering over promises to slim down the state and lower taxation."
While Schroder has recently stated his intention to cut taxes and social benefits, and pushed through legislation to this effect, he actually promised the opposite in his election campaign. Prior to his election in the fall of 1998 he had committed his party to raising taxes on corporations and restoring some of the benefit cuts implemented by the previous government.
See more on Europe.
"U.S. Rejects Europe's IMF Pick"
John Burgess
Washington Post, February 29, 2000, page E1
"U.S. Stiffens Opposition to European IMF Choice"
Joseph Kahn
New York Times, February 29, 2000, page C1
"Heavy Posturing Seen in IMF Rift"
Joseph Kahn
New York Times, March 2, 2000, page A1
"IMF Directors Fail to Rally Around Any New Leader in Poll"
Joseph Kahn
New York Times, March 3, 2000, page C1
These articles report on the decision by the Clinton administration to oppose Caio Koch-Weser, the European candidate for managing director of the IMF. At one point, the Post article notes that the IMF has faced serious criticism from both the left and right in recent years, but then adds, "but the impasse over the new managing director has virtually nothing to do with that."
This assertion is dubious. There have been conflicts in the past between the United States, Europe and Japan, but they were always resolved without a public breech, like the one at present. The increased scrutiny to which the IMF is currently being subjected has probably made it more difficult for the industrialized nations to reach a compromise in private.
The first Times article asserts that the IMF "intervened in many of the largest developing countries in the late 1990s to help them grapple with the spread of financial panic that began in Asia." This is a questionable characterization of the IMF's intentions. The IMF insisted that both Russia and Brazil maintain their currency at over-valued levels. While this imposed a significant economic cost on both countries, it did protect the wealth of investors who held the government debt of these nations.
The IMF also imposed conditions requiring the removal of restrictions on foreign control of domestic corporations in South Korea and other East Asian nations. As Nobel Laureate James Tobin has noted, whether or not removing these restrictions was good policy, it had little to do with the immediate financial crisis facing East Asia.
These articles report that the Clinton administration opposes Koch-Weser because he lacks the stature or "gravitas" to be the managing director of the IMF. By contrast, the articles point out that the current deputy director, Stanley Fischer, has sufficient stature, but has been ruled out for the position by the fact that he is a United States citizen.
It is worth noting that under Fischer's leadership the IMF completely failed to foresee the East Asian financial crisis, and then subsequently imposed what it now acknowledges as an inappropriate austerity package for the nations of the region. The IMF also designed a transition program that produced an economic collapse in Russia, and forced Brazil to waste tens of billions of dollars trying to maintain an over-valued currency. Apparently, this record has not had a negative impact on Fischer's stature or gravitas.
"Can Cybershop Explain This to Investors?"
Floyd Norris
New York Times, February 29, 2000, page C1
This article explains how the management at Cybershop.com, an Internet retailer, managed to conceal a decline in revenue until several insiders had an opportunity to sell much of their stock.
"Win Some, Lose Rarely?"
Caroline E Mayer
Washington Post, March 1, 2000, page E1
This article reports on a class action lawsuit against First USA, the nation's second-largest issuer of credit cards, over its requirement that disputes be taken to arbitration rather than litigated in courts. Under this requirement, First USA is allowed to pick the arbiter. According to the article, First USA has won 99.6 percent of all the cases that have been carried through to arbitration.
"Offspring Outweighs Parent as Offering Hits the Market"
Floyd Norris and Lawrence M. Fisher
New York Times, March 3, 2000, page A1
This article reports on the surge in the stock price Palm Inc., the maker of the Palm Pilot, on the first day its shares were issued. The article points out that the market value of its parent corporation, 3Com, was equal to slightly more than half of the market value of its holdings in Palm Inc. This implies that the other components of 3Com have negative value.
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.
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