Economic Reporting Review: May 15, 2000

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May 15, 2000:

China Trade Bill; Falling Euro; Putin's Russia

By Dean Baker

"All-Star Cast Promotes Trade Bill"
Charles Babington and Matthew Vita
Washington Post, May 10, 2000, page A2

"Power Array Pushes the China Trade Bill"
Eric Schmitt
New York Times, May 10, 2000, page A10

These articles discuss various events intended to influence the congressional vote on granting permanent normal trade relations (PNTR) to China. In each case, these articles give prominence to the events staged by proponents of PNTR, while ignoring or trivializing the efforts of those opposed to PNTR.

For example, the Post article focuses almost exclusively on the efforts by the White House and pro-PNTR members of Congress. The only reference to opponents of the measure is a description of a news conference, which appears in a single paragraph near the end of the article. None of the issues raised in the news conference are mentioned, although the article does point out that actress Goldie Hawn spoke against PNTR at the session.

Neither of these articles mentioned the letters opposing PNTR by three prominent Chinese dissidents who are living in exile, Wei Jingsheng, Harry Wu, and Wang Xizhe, which were released at this news conference. The views of these dissidents, all of whom have been subjected to torture by the Chinese government and spent many years in jail, probably would carry more weight on this issue than those of Goldie Hawn. Opponents of PNTR also revealed evidence of abusive labor practices in China at this news conference. This evidence was also ignored in these articles.

"Dissidents Back China's WTO Entry"
John Pomfret
Washington Post, May 11, 2000, page A1

This article reports on the views of dissidents in China on PNTR. It asserts that "a broad array of dissidents, environmentalists and labor activists in China appear united in support of congressional passage of the permanent normal trade relations act." The article does not indicate how it was able to survey attitudes among this group. It is worth noting that any dissident who openly opposed PNTR would likely face severe punishment from the Chinese government. This fact may be one reason why these individuals "appear united" in support of PNTR.

This article, unlike previous articles on PNTR, does note that prominent dissidents in exile oppose PNTR. However, the anti-PNTR dissidents are only mentioned in criticisms by the dissidents who support PNTR. In one such comment, the anti-PNTR dissidents are contrasted with a pro-PNTR dissident in exile, who the article claims "has a better understanding of international economics." The article makes no effort to directly present the views of dissidents, either inside or outside of China, who opposes PNTR.

"Chinese Offer Deal for Entry Into WTO"
Clay Chandler
Washington Post, May 11, 2000, page A23

This article reports on a speech by Chinese Premier Zhu Rongji, in which he promised a removal of restrictions on trade and investment if China enters the WTO. The article presents the speech as though it signals a significant concession on the part of the Chinese government.

It is not likely that the Chinese government would be making large unilateral concessions in a public announcement. In the past, the Chinese government has engaged in intense trade negotiations, where every item was fought over at length. (See "China and U.S. Straining to Agree on a Trade Pact" by Erik Eckholm, New York Times, 11/15/99, page A12; "At the Last Hour, Down to the Last Trick, and It Worked" by David E. Sanger, New York Times, 11/17/99, page A14; see also ERR, 11/22/99). Given this history, it seems more plausible that this speech was designed as a public relations effort aimed at improving the prospects of PNTR in Congress, rather than an announcement of a new path on trade policy.

"G.M.'s China Bet Hits Snag: WTO"
Clay Chandler
Washington Post, May 10, 2000, page E1

This article discusses the prospects facing a General Motors car factory in China. At one point it notes that as part of a cost-cutting strategy, General Motors has a goal of 80 percent Chinese parts, compared with 40 percent at present. Given the low production costs in China, this is not surprising. However, it is worth noting that the proponents of PNTR have argued that a reduction in Chinese trade barriers on items such as cars and car parts would promote U.S. exports to China. Apparently, the prospect of lower tariff barriers is not affecting General Motors' plans to use more Chinese-made parts for its cars that are manufactured in China.

ELECTION 2000

"Gore Unveils Teacher Proposal"
Terry M. Neal
Washington Post, May 6, 2000, page A4

This article reports on a proposal by Vice President Al Gore to provide incentives for college students to enter teaching as a profession, or for older workers to switch their careers to teaching. According to the article, the proposal would provide $8 billion to "help recruit 1 million new teachers." The article explains that these new teachers could receive $10,000 for tuition or in bonuses. Even if this proposal involved no administrative expenses, $8 billion would only be sufficient to provide an average of $8,000 to 1 million new teachers. The $10,000 figure discussed in the article may be a maximum grant, but it cannot possibly be an average.

"Bush Offers Health Insurance Lure"
Dan Balz and Ceci Connolly
Washington Post, May 11, 2000, page A11

"Bush Pushes Plan for Long-Term Care"
Frank Bruni
New York Times, May 11, 2000, page A20

These articles report on a proposal by George W. Bush to provide a tax deduction of approximately $2,750 for families that provide long-term care for their parents. While both articles note that President Clinton has proposed a $3,000 tax credit (as opposed to a deduction) for long-term care, only the Times article points out the distinction between the two proposals: Since most families are in the 15 percent tax bracket, the Bush proposal would provide savings of just over $400 annually for a typical family, whereas the tax credit proposed by Clinton would reduce a that family's tax bill by $3,000.

UNEMPLOYMENT

"Jobless Rate Hits 30-Year Low, 3.9%"
John M. Berry
Washington Post, May 6, 2000, page A1

"The Jobless Rate Declines to 3.9%; Lowest Since 1970"
Louis Uchitelle
New York Times, May 6, 2000, page A1

These articles report on the Labor Department's release of employment data for the month of April. This data showed the unemployment rate falling to its lowest level in more than 30 years. Both articles include references to the economy's recent strong rate of productivity growth.

It is worth noting that the measure of hours worked in the first quarter was revised upward in this report. This raised the rate of growth of hours worked from the fourth quarter of 1999 to the first quarter of 2000 by approximately 0.3 percentage points. This increase in the rate of growth of hours worked lowers the rate of productivity growth by approximately the same amount. If there are no other changes to the data, this implies that productivity growth for the first quarter will be revised downward by approximately 0.3 percentage points, to 2.1 percent.

While quarterly productivity numbers are extremely erratic, and this is still a respectable rate of productivity growth, it is well below what many actors in financial markets have come to expect. Proponents of "new economy" theories may be surprised by a downward revision of this magnitude.

THE EURO

"Euro's Status Goes Beyond Mere Monetary Value"
Charles Trueheart
Washington Post, May 6, 2000, page E1

"Falling Euro, a Unity Currency, Instead Bolsters Dollar and Pound"
Edmund L. Andrews
New York Times, May 8, 2000, page A13

These articles discuss the continuing decline in the value of the euro. They include several comments that are misleading or wrong, all of which imply that the weakness of the euro is attributable to the inherent weakness of the European economies.

For example, at one point the Post article states that "analysts describe the recent flight from the euro as a vote of no confidence in European governments slow to make the structural reforms--lightening tax burdens and public payrolls, deregulating, privatizing--needed to create more attractive environments for investment."

Actually, most European countries invest at a considerably higher rate than the United States. According to government data from each nation, Germany and France respectively devoted 20.9 and 19.0 percent of their GDP to investment (including residential housing) in 1999. By comparison, the United States devoted just 17.1 percent of its GDP to investment. These data imply that the "structural reforms" described in this article are not actually needed to create an attractive environment for investment in Europe.

Both articles imply that the relative rates of growth of economies determine the exchange value of their currency. Therefore, since the United States is growing faster than Europe, it is reasonable to expect the dollar to rise against the euro. There is no economic theory that supports this view. Investors care about maximizing the return on their assets. A high rate of growth in a country does not imply a high return on financial assets, particularly if a nation's currency is over-valued. For example, the U.S. dollar fell sharply against European currencies in the late '70s, even though it enjoyed a more rapid rate of growth than most European economies.

If the dollar does not fall significantly at some point in the near future, then the United States will have accumulated a level of foreign debt that is clearly unsustainable. At present, it is accumulating debt at the rate of more than $400 billion a year, or close to 4.5 percent of GDP. The United States already has a net international debt of almost $2 trillion. Given this debt, it is reasonable to believe that at some point investors will anticipate that the U.S. will not be able to continue to borrow at its current rate, and that the dollar will therefore fall in value. When investors anticipate this fall in value, they will sell off dollars, which will actually bring about the fall in value.

In the long run, it is the underlying trade position which will determine the relative value of the dollar and the euro. The United States currently has a huge trade deficit, whereas the European nations have a large surplus. Therefore the dollar will eventually fall against the euro and other currencies. In the short run, currency values can be determined by almost anything at all. There is no reason for the European countries to be concerned about the irrational factors that may be governing investors' decisions at the moment.

RUSSIA

"Putin's Actions Belie Promise on Tycoons"
David Hoffman
Washington Post, May 7, 2000, page A21

This informative article reports that Russian President Vladimir Putin appears to be reneging on campaign pledges to crack down on the clique of well-connected business people who have come to dominate Russia's economy in the last ten years. It presents several specific examples where the government appears to have used its power to intervene on behalf of well-connected business people.

It is worth noting that the perspective in this article is at odds with much recent reporting on Putin, which had portrayed him as being seriously committed to economic reform (see e.g. "Putin Promises Stable Antidote to Yeltsin Years," by David Hoffman, Washington Post, 3/26/00, page A24; ERR, 4/3/00).

This article's perspective on Putin also contradicts recent comments from Stanley Fisher, the IMF's deputy managing director. In a visit to Russia last month, Fisher warmly endorsed Putin's agenda, and indicated that the IMF would resume lending to Russia. The Fund's lending to Russia had been suspended in August of 1998, ostensibly in part because of the extent of corruption in the country.

"Putin Is Made Russia's President in First Free Transfer of Power"
Michael Wines
New York Times, May 8, 2000, page A1

This article reports on the inauguration of Vladimir Putin as Russia's new president. The article suggests that Putin is moving ahead on a reform agenda, commenting at one point that "many expect a quick push to overhaul Russia's inscrutable tax code and economy." This perspective is in direct conflict with the view of Putin as continuing the corrupt practices of the Yeltsin era, which is presented in the Post article.

The one specific example of reform cited in the article is a plan to replace Russia's progressive income tax with a flat income tax. According to Anders Aslund, a Russia expert at the Carnegie Endowment for Peace who is quoted in the article, Putin is likely to move forward with such a proposal. While getting rid of loopholes in the tax code would be a step towards reducing corruption, the impact of shifting from a progressive tax to a flat tax is simply to shift more of the tax burden to middle- and lower-income taxpayers. There is no necessary relationship between eliminating loopholes and a flat tax. If Putin's main focus is on the latter, then this is another indication that he intends to serve the interests of the wealthy.

"Russia's New Prime Minister: A Tested Economic Liberal"
Michael Wines
New York Times, May 11, 2000, page A8

This article discusses the selection of Mikhail M. Kasyanov to be Russia's prime minister. The headline of the article characterizes him as a liberal, and the first paragraph asserts that according to "some experts" his selection "bodes well for efforts to tame Russia's feral style of capitalism."

The article does not make clear which experts it is relying on for this assessment of Kasyanov. Near the end, the article cites a former Russian minister's assessment that Kasyanov's appointment will mean a continuation of the sort of corruption that has wrecked Russia's economy. The article also notes Mr. Kasyanov's nickname in the press: "Misha 2 Percent," a reference to alleged kickbacks in business dealings. While the article also reports these accusations of corruption, it appears to disagree with them, instead viewing Kasyanov as a reformer.

In the years since the collapse of the Soviet Union, the Times has consistently characterized Russia's leaders as reformers. It is now generally accepted that these leaders either participated in, or tolerated, the massive theft of government assets by well-connected businesspeople.

CANADA

"A Crossroads in Canadian Health Care"
James Brooke
New York Times, May 9, 2000, page D8

This article reports on the opposition to a plan by Alberta's provincial government to move toward the private provision of health care. This article highlights problems of the Canadian health care system, but never notes that it costs approximately half as much per person as the U.S. system--even though Canadians have better health care statistics by most measures.

The article characterizes the strong opposition to moving to a privatized health care system as a "big surprise." If the people of Alberta are aware of the price and quality of their health care system relative to the one in the United States, it should not be surprising that they would oppose efforts to move the province in the direction of the U.S. system.

OUTSTANDING STORIES OF THE WEEK

"Bitter 6-Month Strike at Overnite Poses a Test for a Teamsters' Chief"
Steven Greenhouse
New York Times, May 7, 2000, Section 1 page16

This article reports on the status of a strike by the Teamsters against Overnite Transportation Company. Overnite is the largest non-union firm that specializes in carrying less than full truck loads. The strike has been going on for six months.

"Wall Street Slept as Investors Were Fleeced of Millions"
Floyd Norris
New York Times, May 12, 2000, page C1

This article reports on a phony stock tender offer which led to millions of dollars in losses for small investors. The article points out that these tender offers are unregulated, and that the brokerage houses that acted as intermediaries took no responsibility for ensuring the integrity of this particular offer.

"Cyberspace Programmers Confront Copyright Laws"
John Markoff
New York Times, May 10, 2000, page A1

This article examines some of the new software programs that are being developed that will make it more difficult to enforce copyright law on material that is available on the web. The article points out that these new technologies may make copyrights obsolete.

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.