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Economic Reporting Review

A project of FAIR and CEPR

July 24, 2000: Social Security Gafs; Labor and the Election; False Aid for AIDS

By Dean Baker

Social Security | Labor and the Election | Federal Budget | Estate taxes | Agriculture | Trade Deficit | Energy | Germany | AIDS in Africa | Ireland | Japan | Outstanding Stories

SOCIAL SECURITY

"Gore and Bush Star in Dueling TV Interviews"
Dan Balz
Washington Post, July 17, 2000, Page A6

"Programs Offer Chance to Compare Bush and Gore"
Katharine Q. Seelye
New York Times, July 17, 2000, page A14

These articles report on television appearances by the four major presidential candidates on news interview shows the previous day. At one point the Post article refers to Gov. George W. Bush's comments about his plans to address Social Security's "long-term financial crisis."

According to the Social Security trustees report, the program will be able to pay all benefits for the next thirty seven years, with no changes whatsoever. The tax increase that would be needed to make the program fully solvent for Social Security's 75-year planning horizon is less than one percent of national income. It is also worth noting that projections for the program's future show Social Security to be stronger now than at any point from its creation until 1983.

The Times article reports that Vice President Al Gore faced "aggressive questioning" from Tim Russert, the host of Meet the Press. According to the account, Mr. Russert repeatedly asserted "that Mr. Gore's proposal was based on rosy assumptions that anticipated budget surpluses for the next 40 years." It is worth noting that the Social Security projections assume that the economy grows at a rate of less than 1.8 percent annually for the next 40 years. This is only slightly more than half of its average growth rate over the last 40 years. Rather than repeat Russert's inaccurate claim that this is a "rosy" scenario, it would have been more appropriate to report that the host of one of the nation's most important news interviews shows is apparently unfamiliar with Social Security's finances.

The article also quotes Bush's assertion that a "safe return--the safest of all investment vehicles--yields about twice what the Social Security trust fund is getting today." Presumably, Bush was referring to government bonds when he said "the safest of all investment vehicles." The trust fund is already invested in government bonds and earns the same rate of return as any other holder of these bonds. Therefore his claim is wrong on its face. This should have been pointed out in the article.

More about Social Security.

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LABOR & THE ELECTION

"After 8 Years in Office, Unfamiliar in Michigan"
Katharine Q. Seelye
New York Times, July 15, 2000, page A9

This article reports on an Al Gore campaign stop in Michigan. It notes that Green Party candidate Ralph Nader has considerable support in Michigan, and then adds: "It may seem odd that Mr. Nader, author of Unsafe At Any Speed and the longtime nemesis of the auto industry, could make a dent in the support of the AFL-CIO-backed Democratic candidate here."

There is no obvious reason that Nader's history as a proponent of auto safety should make him unpopular among autoworkers. Autoworkers have no particular reason to want to produce dangerous cars. It is unlikely that many workers have lost jobs because the cars produced today are safer than those produced prior to Unsafe at Any Speed, although many have undoubtedly been protected from injury or death in car accidents as a result of the safety improvements of the last 35 years.

It also important to note that an explicit goal of the Clinton-Gore trade policy has been to make it easier for manufacturers like the auto industry to employ low-cost labor in Mexico, China and elsewhere in the developing world. This trade policy has had a far more direct and substantial impact on autoworkers' job prospects that any safety regulations advocated by Nader.

More about Labor or Elections.

FEDERAL BUDGET

"Real Surplus May Be in Promises"
Glenn Kessler
Washington Post, July 19, 2000, Page A4

This article discusses factors that might cause future budget surpluses to be smaller than is currently projected by the Congressional Budget Office (CBO). An important factor that was not mentioned is that the CBO projections assume nearly $1 trillion in revenue from capital gains taxes over the next decade. In order to get this much revenue, the stock market would have to continue to rise rapidly, even though CBO projects that during this period profits will fall by nearly 10 percent after adjusting for inflation. This combination of events would imply that the price-to-earnings ratios of stocks, currently at record highs, would continue to rise significantly.

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ESTATE TAXES

"Congress Clears a Bill to Repeal the Estate Tax"
Richard W. Stevenson
New York Times, July 15, 2000, page A1

"Repeal of Estate Tax Is Passed by Senate"
Eric Pianin and Glenn Kessler
Washington Post, July 15, 2000, page A1

These articles report on the Senate's approval of a bill that would repeal the estate tax. Both articles present the amount of revenue at stake in dollar terms. It would be more informative if this amount was expressed as share of federal revenue or in comparison to other federal programs. Expressed as share of a federal revenue, the cost of the tax repeal when it is fully implemented in 2010 will be approximately 1.7 percent.

The revenue at stake is considerably more than the cost of many programs that have received public attention recently. For example, in his last State of the Union address, President Clinton proposed an increase in spending on Head Start which was less than 0.01 percent of federal revenue; additional spending on school construction, which cost less than 0.04 percent of federal revenue; and assistance to combat AIDS in Africa, which cost less than 0.001 percent of federal revenue. (See ERR, 1/31/00). Though the New York Times referred to these initiatives in a headline at the time as "grand ideas" (1/28/00), the cost of all three together is less than one thirtieth of the revenue which potentially will be lost as a result of the repeal of the inheritance tax.

"Soaking the Rich Isn't What It Used to Be"
Steven Greenhouse
New York Times, July 16, 2000, Section 4 page 5

This article examines the widespread support for the repeal of the inheritance tax found in recent polls. It notes that 17 percent of those polled thought the tax would apply to them. Since the tax actually applies to less than 2 percent of estates (a number which would fall given the rising exemptions in current law), the article attributes the 17 percent figure to optimism. A more plausible explanation is misinformation. It is unlikely that many of those interviewed were aware of the size of current $1.4 million exemption in the estate (per couple), which is scheduled to rise to $2 million by 2006.

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AGRICULTURE

"Fickle Weather Plays With Farmers' Fortunes"
William Claiborne
Washington Post, July 16, 2000, Page A3

This article reports on the bad economic situation that most farmers are facing as a result of a large harvest and low grain prices. At one point, the article comments that assistance for farmers is forecasted to be $32 billion this year, which it compares with the $26 billion peak hit in 1986. Adjusting for inflation, the 1986 spending would be $39 billion in today's dollars. It is worth noting that total spending on farm programs in 2000 is somewhat less than the projected annual revenue losses (adjusting for inflation) from the repeal of the estate tax, which would be approximately $38 billion in today's dollars.

More about Agriculture.

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TRADE DEFICIT

"The U.S. Trade Deficit"
Business Digest
Washington Post, July 20, 2000, Page E1

"Decline in Computer Shipments Lifts Trade Gap to $31 Billion"
Bloomberg News
New York Times, July 20, 2000, page C19

These pieces note that the U.S. trade deficit rose to a new record of $31 billion in May, or $372 billion on an annual basis. It is noteworthy that both papers gave this report almost no attention. The Post mentioned this news only in a four-sentence item in its business digest, while the Times printed a short wire service story at the back of the business section.

The impact of the trade deficit and the current account deficit, the broadest measure of international transactions, is comparable to the impact of a budget deficit on future national income levels. The current account deficit is now running at an annual rate of approximately $450 billion. Both papers have devoted considerable news space to budget deficits, actual or speculative, that were far smaller. There is no economic rationale for giving so much more attention to the budget deficit than the trade deficit.

More about Trade.

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ENERGY

"Utilities Trying New Approaches to Pricing Energy"
Matthew L. Wald
New York Times, July 17, 2000, page A1

This informative article examines new pricing structures that utilities are using to allow them to conserve energy at times of peak demand. The article provides examples where utilities have paid customers not to use electricity at peak hours.

At one point, the article incorrectly implies that this is an outcome of a deregulated market. If the market were actually deregulated, the utilities would simply not provide power at all to some customers when they found themselves short of capacity, or they would charge an exorbitant price. This is what has happened in San Diego, where the state has significantly reduced the extent of regulation in the market (see "Electric Bills Rise Joltingly," San Diego Tribune, 6/26/00). In the examples given in the Times article, the utilities are still required to provide power to customers; they are simply using more flexible means to free up the necessary power at peak times.

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GERMANY

"Radical Tax Plan, a Spur for 'Germany Inc.,' Is Approved"
Edmund L. Andrews
New York Times, July 15, page A3

This article reports on the German parliament's approval of a set of measures that will reduce individual and corporate tax rates. It begins by asserting that in passing this bill, the German parliament was "bowing to competitive pressures." The article never specifies what these pressures were, nor how they made their impact felt on the German parliament.

The article also characterizes the tax burden on Germans as "crushing." According to the article, prior to the passage of this bill, the top tax rate on individuals was 51 percent, and the top tax rate on corporations was 50 percent. By comparison, in the sixties, the top tax rate on individuals in the United States was 70 percent (after being cut from 90 percent in 1964), and 50 percent on corporations. The United States experienced the most rapid economic growth in its history during this decade. This article does not explain how the United States and many other nations have managed to experience extraordinary economic growth with tax rates that were far higher than the ones that it claims were "crushing" Germany.

More about Europe.

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AIDS IN AFRICA

"AIDS Meeting Evokes New Sense of Urgency"
Jon Jeter and David Brown
Washington Post, July 16, 2000, Page A1

This article reflects on the outcome of the AIDS conference in South Africa. At one point, the article notes that the price of AIDS drugs can exceed $12,000 annually, which is several times the income of most households in Sub-Saharan Africa. The article also asks the question, "How do the rich now help the poor confront an epidemic that is sweeping their countries at a pace that threatens to create the worst public health calamity in modern history?"

The article does not point out that most of the cost of AIDS drugs is not attributable to the cost of manufacturing them, but rather the monopoly selling power granted by patent protection. If wealthy nations did not hinder African efforts to address the crisis by trying to impose their drug companies' patent monopolies, it would go far towards solving the problem. If United States and other wealthy nations use the threat of trade sanctions and other measures to protect patents on AIDS drugs in Africa, the negative impact will almost certainly be far larger than the benefits of any humanitarian assistance which might be forthcoming.

"U.S. Offers Africa $1 Billion a Year for Fighting AIDS"
Joseph Kahn
New York Times, July 19, page A1

"U.S. Offers Loans to Fight AIDS in Africa"
Bill Brubaker
Washington Post, July 20, 2000, Page A17

These articles report on a new program under which the United States would offer sub-Saharan African nations $1 billion a year in loans to purchase AIDS drugs. Both articles point out that these loans may not be very beneficial to African nations, since the nations will be expected to pay a 7 percent annual interest rate, and most of these nations are already very heavily indebted. The articles also note that the money will be used to purchase AIDS drugs (at a discount) produced by U.S. manufacturers. Both articles raise the possibility that the main intent of this program may be to keep manufacturers in Brazil and India from gaining a market for their unauthorized versions of the patented U.S. drugs.

Given the limited benefits that the articles suggest this program will have for African AIDS victims, the Times' placement of this story at the top of its front page seems unwarranted. It is also worth noting that the headline of the article is misleading, since the program would lend money to African nations, not give it, as the headline implies.

Polls consistently show that people in the United States grossly overestimate the amount of money that the government spends on foreign aid. The Times' misrepresentation of this program, which really involves almost no aid component whatsoever, is the sort of media coverage which could help to explain the public's confusion on the issue.

More about Africa or Health .

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IRELAND

"Money, Jobs, Big Cars: How's an Irishman to Cope"
Warren Hoge
New York Times, July 17, 2000, page A3

This article discusses the economic boom which Ireland has experienced over the last twenty years. At one point it notes that the inflation rate is relatively high at 5.2 percent, and comments that this concerns union leaders, since they have negotiated wage increases that are only slightly higher at 5.5 percent. The article points out that the Irish central bank is unable to raise interest rates to slow inflation, because Ireland is one of the euro countries, and therefore its interest rate is determined by the European central bank.

It is unlikely that union leaders would be any happier if the Irish central bank had the freedom to raise interest rates to slow inflation. The main mechanism through which higher interest rates can lead to lower inflation is by raising unemployment and putting downward pressure on wages.

More about Europe.

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JAPAN

"Report Urges Japan to Raise Taxes"
Stephanie Strom
New York Times, July 17, 2000, page C2

This article discusses a report by a Japanese government commission which urged the government to raise taxes to reduce its deficit. At one point the article comments that the Japanese has tried to "spend its way out of a decade long economic downturn, rather than adopting more painful structural remedies." There is no evidence that the remedies envisioned in the article, however painful they might be, would have been successful in bringing about an economic recovery in Japan.

Japan, like other nations in East Asia, is often derided for its system of "crony capitalism." This system has produced growth rates that are far more rapid than any nation has ever achieved following a U.S.-style free market system. In the case of Japan, per capita income grew at annual rate of 4.9 percent from 1960 to 1994, more than twice as fast in the U.S. There is not a single example of a country successfully shifting from "crony capitalism" to a U.S.-type system. It is understandable that the Japanese government would not chose to risk the nation's economic health on untested speculation by U.S.-trained economists.

It is worth noting that there were alternative routes that were not followed. MIT professor Paul Krugman has argued that Japan could best stimulate its economy by deliberately bringing on inflation. This would encourage individuals and firms to spend money, since its value would otherwise be eroded by inflation. (See "Japan's Trap," 5/98, http://web.mit.edu/krugman/www/japtrap.html.)

At one point the article asserts that Japan's debt is 18 percent larger than its GDP. This measure of the debt includes government obligations to its Social Security program. Its publicly held debt, the more standard measure, is about 60 percent of its GDP.

More about Asia.

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OUTSTANDING STORIES OF THE WEEK

"Unknown Musicians Find Payoffs Online"
Amy Harmon
New York Times, July 20, 2000, page A1

This article reports on the use of the Internet by relatively unknown artists as a way to distribute their music. In many cases, these musicians are happy to have people to download their music for free, since this provides them with a mechanism for building an audience.

More about the Internet.

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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.


More analysis of the New York Times and Washington Post 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 http://www.cepr.net/columns/subbaker.htm. ERR is archived at http://www.fair.org/err/.


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