Economic Reporting Review: June 19, 2000

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June 26, 2000:

Social Security and the Elections; Federal Budget; Trade Deficit

By Dean Baker

"Strategists See the New Economy in a New Light"
Alison Mitchell
New York Times, June 18, 2000, Section 1, page 17

This article examines how the Bush and Gore campaigns are trying to frame discussion of the economy. At one point it comments on Governor George W. Bush's proposal to allow workers to invest part of their Social Security taxes in the stock market: "Mr. Bush is gambling that with half of American households now holding stock, voters will not see the stock market as more risky than having a guaranteed Social Security benefit."

Actually, Bush can better be described gambling that the media won't point out that it is impossible to get the stock returns he has assumed in his plan, given the Social Security trustees' profit growth projections and current levels of stock valuations (see "Letter to Martin Feldstein of May 15, 1999" by Dean Baker, http://www.cepr.net/Social_Security/letter_to_feldstein2.htm and "What Stock Market Returns to Expect for the Future?" by MIT professor Peter Diamond, Boston College Retirement Research Center, http://www.bc.edu/bc_org/avp/csom/executive/crr/ib2.htm ). If most people knew that they were virtually guaranteed to get lower payments under the Bush plan than with the current system, it is unlikely that they would support it. Bush is obviously betting that the media will not seriously analyze the stock return assumptions in his proposal.

"Gore to Detail Retirement Savings Plan"
Glenn Kessler
Washington Post, June 19, 2000, page A1

"Gore to Announce $200 Billion Plan to Aid Retirement"
Katharine Q. Seelye
New York Times, June 19, 2000, page A1

These articles report on a proposal by Vice President Al Gore to establish government-subsidized individual savings accounts as a supplement to Social Security. Both articles comment in misleading ways about the proposal, mainly by suggesting that it is very similar to Governor Bush's proposal to cut out a portion of the existing Social Security program and replace it with individual accounts.

For example, the Post article asserts that the proposal "on the surface appears strikingly similar to the central concept of the Social Security plan offered by his Republican rival." Actually, since Bush wants to replace a portion of the core benefit with an individual account, while Gore wants to create an account that facilitates individual savings, as an add on to the Social Security benefit, the two plans are not very similar.

The Post article includes several other misleading comments. It states that Gore is "essentially gambling that future generations would be able to pay the bills when the baby boom generation begins to retire in full force." There is not much of a gamble involved in this assumption, since barring an unprecedented economic collapse the country will have little difficulty paying for the costs of the baby boomers' retirement. Even with the Social Security trustees' rather pessimistic growth projections, the average worker will be more than 35 percent richer in 2030 than at present. The additional cost of Social Security, as a result of the retirement of the baby boomers, would be less than 5 percent of the wage growth over this 30-year period. Therefore, it would require no increase in the Social Security tax, which is already high enough to cover all benefits until 2037.

The article also asserts that the plans put forward by both Gore and Bush are influenced by the "myths and fears" of Social Security. The only myth specified is the purported belief of "many Americans" that "their Social Security benefits are sitting in an individual account with their name on it."

A myth, or fear, that has influenced both candidates' positions much more obviously is that idea that the Social Security program will be unable to pay benefits in the future. It is very clear from all economic projections that the economy will be much better able to pay Social Security benefits in the future than at present. The only reason that future workers may not receive their benefits would be if the public allowed the program to be dismantled.

Finally, the Post article discusses the accumulations that workers could have in the accounts under the Gore plan, assuming a 5.3 percent rate of return after administrative costs. No economist in the country has been able to show how returns of this size are possible, given current market valuations and the profit growth projections from the Social Security trustees. As a result, the numbers included in the article are approximately twice as large as what workers can expect to accumulate using reasonable assumptions on returns.

"House Backs Medicare Plan Similar to Gore 'Lockbox'"
Juliet Eilperin
Washington Post, June 21, 2000, page A8

This article discusses a measure approved by the House of Representatives that will take the Medicare trust fund off budget, separating it from the general federal budget. At one point the article asserts that "last year, lawmakers approved a Social Security lockbox, taking the trust fund off budget." Actually, the Social Security trust fund has been off budget for more than a decade.

"Gore Is Pursuing His Case for Retirement Savings Plan"
Richard W. Stevenson
New York Times, June 21, 2000, page A17

This article discusses Vice President Gore's proposal to establish a national system of subsidized savings accounts as a supplement to Social Security. It reports the Gore campaign's estimate that the plan will cost about $200 billion over 10 years. This number appears to grossly underestimate the true cost of the plan. President Clinton's USA Account proposal was estimated to cost this much, and it is less than half as generous as the plan put forward by Gore.

For example, Clinton's proposal would give a worker who earns $15,000 a year a $300 subsidy in her account, and match any additional savings dollar for dollar up to $350, for a total potential subsidy of $650. By contrast, Gore's proposal will match any savings for low and moderate income workers on a 3 to 1 basis, which means that a worker who saves $500 would get a subsidy of $1,500 from the government. The potential size of the subsidy is more than twice as large under the Gore plan, and since the incentives are so much greater, it is likely that far more people will take advantage of them. A more realistic estimate of the cost of the Gore proposal over ten years would probably be $600 billion.

"Social Security, That Risky Issue, Is on the Table"
Richard W. Stevenson
New York Times, June 22, 2000, page A18

This article examines the way in which the two major party presidential candidates have been dealing with Social Security. The only person not affiliated with the campaigns who is quoted or cited in the article is Robert L. Bixby, the executive director of the Concord Coalition, which is identified as a "fiscal policy research organization."

The Concord Coalition is frequently cited in the media as an objective source on budget and economic matters, even though it has little claim to either objectivity or expertise. The organization rarely puts out original economic research, and its spokespeople usually are not economists.

It has also frequently engaged in scare tactics to try to promote its agenda of reduced government spending. For example, in December 1996, its Quarterly Deficit Report warned against celebrating the reduction in the deficit "because the deficit is poised to head back up this coming year and continue to climb every year throughout the next decade and beyond. On the present course, by the time the baby boom is fully retired, entitlement programs alone will consume all federal revenue." This sort of commentary is typical of the organization's material. Given the Concord Coalition's explicit agenda to cut government spending, it is improper to use it as a neutral source in budget reporting.

FEDERAL BUDGET

"Republicans Trying Hard to Avert Reprise of Last Year's Budget Battle"
Steven A. Holmes
New York Times, June 17, 2000, page A7

This article analyzes the status of the appropriations bills for the 2001 budget. At one point it notes that Congress eventually approved spending that exceeded the levels specified in the Balanced Budget Act of 1997 by $30 billion. It characterizes this as "an explosion of spending." It is worth noting that even with this additional spending, government outlays for discretionary spending still fell slightly when measured as a share of the GDP, growing by 4.9 percent before adjusting for inflation. Since government spending is not even growing as fast the economy, it seem dubious to assert that there has been "an explosion of spending."

"Bush Puts Emphasis on Science and Math"
Terry M. Neal
Washington Post, June 21, 2000, page A6

"Bush Proposes $2.3 Billion for Math and Science Teaching"
Frank Bruni
New York Times, June 21, 2000, page A17

These articles discuss a series of education proposals put forward by Governor Bush. While they present the amount of money he intends to spend on the programs mentioned, they do not provide any context for readers to assess the significance of the proposals.

For example, when Bush is proposing new spending, it is not even clear what baseline levels of spending he envisions. Congressional Republicans have argued that the correct baseline for spending should be one set by budget caps which do not even allow spending to keep pace with inflation. Currently the federal government spends approximately $40 billion a year on education. This means that spending would have to increase by $1.2 billion annually in order to keep pace with inflation. Governor Bush is proposing an additional $2.3 billion in spending over five years, or $460 million a year. If this proposal assumes the Congressional Republicans' baseline spending levels, then it implies cuts in the real level of education spending.

"Record Budget Surplus Expected"
John M. Berry
Washington Post, June 22, 2000, page E1

This article discusses the predictions for revised budget projections, which are expected to show the surplus increasing by $1 trillion compared with earlier projections. The article notes that the higher projected surplus will make Bush's proposed tax cut appear more affordable. It then presents at length the view of Treasury Secretary Lawrence Summers, that the proposed $1 trillion tax cut would still be a mistake, because it would lower investment and reduce growth. Summers is quoted as saying that "under reasonable assumptions, a tax cut of $1 trillion over 10 years would reduce business investment in equipment and software alone by $350 billion over the same period."

It is worth noting that this would be a reduction of approximately 1.8 percent in the total investment expected over the next decade. According to standard estimates of the impact of investment on growth, the cumulative gain to the economy after ten years would be approximately 0.4 percent of GDP. This is approximately 25 percent of the amount that the economy grew in the first quarter of this year.

The article also included a warning from Ethan Harris, an economist with Lehman Brothers Inc., that because of the looming retirement of the baby boomers, the nation has to build up its productive capacity now "so that resources will be available when there will be fewer workers per retiree than at any time in history."

There are already fewer workers per retiree than at any time in history. As the nation has gotten wealthier, people live longer and enjoy longer retirements. The problem this will create in the future is not qualitatively different than the situation at present.

TRADE

"U.S. Trade Deficit Fell in April"
Associated Press
Washington Post, June 21, 2000, page E

April Trade Gap Narrowed, With Easing of Oil Prices"
Bloomberg News
New York Times, June 21, 2000, page C2

These articles report on a small decline in the size of the nation's trade deficit in April to $30.4 billion. Both articles indicate that the current size of the trade deficit is not a serious problem for the nation. In fact, the Times article asserts that it "has been positive for the economy."

An immediate impact of a trade deficit is to displace workers from manufacturing jobs. Since these are relatively high-paying jobs for the 70 percent of the workforce that lacks a college degree, the loss of manufacturing jobs contributes to wage inequality.

The trade deficit, and the resulting current account deficit (a broader measure of foreign transactions), lead to a drain on future living standards in a way that is comparable to a budget deficit, but more direct. In the future the United States will either have to pay back the money borrowed to finance its current account deficit, or pay interest on this money indefinitely.

At present, the nation is running a current account deficit of approximately $410 billion a year. While these newspapers have devoted extensive coverage to budget deficits of less than one-tenth this size, there was no discussion whatsoever of the implications of this current account deficit.

OIL PRICES

"Oil Ministers Might Agree on Small Rise in Production"
Neela Banerjee
New York Times, June 21, 2000, page C1

This article reports on a meeting of oil ministers from the OPEC nations. The article indicates that the ministers are likely to agree to increase production somewhat in order to lower prices. The article claims that such a price reduction would be in the interest of the OPEC nations because if oil prices remain at their current level, it "could hurt the economies of affluent countries and even lead to a recession, which would hurt OPEC as much as anyone else."

As was pointed out earlier in the article, oil prices at present are not at historically high levels. Current prices appear high only because of the extraordinarily low prices of 1997 and 1998. If the economies of the industrialized nations can be pushed into recession simply because oil prices have returned to more normal levels, then it would imply that they are extremely fragile. If that description is accurate, then some shock will inevitably push the economies of the industrialized nations into a recession in the near future, regardless of what OPEC does with oil prices.

ITALY

"Full Moon Haircut Break's Italy Law: Commerce Is Changing, but Some Regulations Remain in Place"
Alessandra Stanley
New York Times, June 18, 2000, Section 1, page 10

This article discusses the erosion of laws that restrict business hours. As the article points out, many business owners favored such laws, since it limited the amount of time they had to work in order to remain in business. Without these laws, if their competitors remained open evenings and weekends, they would also be forced to work longer hours.

At one point, the article asserts that "increasingly, however, Italy's economists and elected officials felt obliged to conform with changes already sweeping not just the United States but other parts of Europe. Chains, supermarkets and shopping malls are competing with small family owned-shops in Italy, though not as fast as elsewhere."

The article then presents a comment from Luca Pellergrini, vice president of the Center for Commercial Studies at Bocconi University in Milan: "We have a humane and pleasant way of life, and we have a hard time adapting to inevitable change."

The article does not indicate why Pellergrini has come to the conclusion that this change is inevitable, nor why economists and elected officials feel obliged to change its laws. Italy is a democracy, and certainly has every right to protect its small business sector if it chooses to do so. This imposes some costs on consumers, in terms of higher prices and less convenience, but is possible that they view these costs as an acceptable price to maintain a way of life that they value. The article refers to this attitude in Italy as a "widespread superstition."

The article does not indicate whether the pressure for change is coming from widespread discontent from consumers or the lobbying efforts of the chains and supermarkets that hope to gain market share. This would be important information for readers, because changes in law are not dictated by nature. If the changes are "inevitable," it is because powerful interest groups are behind them.

OUTSTANDING STORIES OF THE WEEK

"Prices for Medicine Are Exorbitant in Africa, Study Says"
Donald G. McNeil Jr.
New York Times, June 17, 2000, page A6

This article reports on a study showing huge variations in drug prices around the world, with some of the highest prices for many drugs being in poor African nations. The differences in prices was in some cases more than 1000 percent. The study found that a combination of AIDS drugs which sells for $1.44 a dose in Brazil sells for $18.78 in the United States.

"A Million Parents Lost Medicaid, Study Says"
Robert Pear
New York Times, June 20, 2000, page A12

This article reports on a study by Families USA that found that a million poor or near poor families lost Medicaid coverage since the reform of the nation's welfare system in 1996.

"U.S. 15th on Global Index of Health; 1st in Spending"
David Brown
Washington Post, June 21, 2000, page A4

"Europeans Perform Highest in Ranking of World Health"
Philip J. Hilts
New York Times, June 21, 2000, page A12

These articles report on a new study by the World Health Organization. The study ranks 14 nations above the United States in the quality of their health care systems. All of these nations spend much less per person on health care than the United States, in some cases less than half as much. It is worth noting that both Canada and the United Kingdom are higher on the list than the United States, and yet past articles have portrayed these systems as being near collapse. (See "Health Care on the Critical List," by Steven Pearlstein, Washington Post, 12/18/99, page A20; "Full Hospitals Make Canadians Wait and Look South," by James Brooke, New York Times, 1/16/00, Section 1 page 3; ERR, 12/27/99 and 1/24/00.)

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.