Economic Reporting Review: August 7, 2000

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August 7, 2000: Bush's Speech; Savings & Stocks; Tax Cheating

By Dean Baker

"Bush, Accepting GOP Nomination, Pledges to 'Use These Good Times for Great Goals'"
R.W. Apple Jr.
New York Times, August 4, 2000, page A1

This article analyzes Bush's acceptance speech at the Republican national convention. At one point it notes that Bush promised that he would make sure no one had to pay more than one-third of his income to the federal government. The article then adds "considerably less than the 39 percent-plus some now pay."

The article seems to have confused marginal tax rates with an average tax rates. The top marginal federal tax rate is 39.6 percent. For a single individual, this would apply to taxable income over $283,000. Only the income in excess of $283,000 is taxed at the 39.6 percent rate, while the income under this amount is taxed at a lower rate. For example, a single individual with $300,000 in taxable income would pay roughly $90,000 in taxes on the income under $283,000 and $6732 in taxes on the income over $283,000. This would place the total tax bill at approximately $97,000, less than the one-third limit promised by Bush. Fewer than one percent of taxpayers have taxable incomes above this level.

It is also worth noting that most wealthy taxpayers have a significant portion of their income in capital gains, which are taxed at 20 percent rate, so few if any taxpayers currently exceed the tax ceiling promised by Bush.

Readers would have been better served if this article had examined Bush's comments about "threats to our health and retirement security." It could have pointed out that the former stems primarily from rising health care costs in the private sector, which are making insurance unaffordable for a growing segment of the population. Any threats to our retirement security stems primarily from politicians seeking to dismantle a Social Security system that is already fully solvent for nearly four decades into the future. This information would have been more useful than the article's misleading comments about current tax burdens.

SAVINGS

"Bush's Economic Strategy Counts on Change"
Glenn Kessler
Washington Post, August 2, 2000, Page A18

This article examines the main themes of Bush and Gore's economic programs. The article includes an inaccurate assertion from an aide to Bush.

According to the article, Lawrence Lindsey, one of Bush's top economic advisors, attributed the decline in private savings to Clinton's tax increases in 1993. This assertion is contradicted by the actual path of the savings decline. Saving rates in the United States have been declining sharply since the early '80s. The initial decline coincided with the Reagan tax cuts. Saving rates have continued to decline in the late '90s, long after the Clinton tax increase went into effect, and after a series of tax cuts pushed through by the Republican Congress. This pattern shows that the Clinton tax increases can explain little, if any, of the drop in private savings over this period.

By contrast, the surge in the stock market would explain the decline quite well. Economists commonly estimate that a $1 increase in stock prices will lead, through a "wealth effect," to a 3-4 cent drop in annual savings. The value of the stock market at present is approximately $20 trillion. If stocks were priced at their historic levels relative to corporate profits, the market would be valued at approximately $10 trillion. This difference would explain a decline in annual savings of $300 billion-$400 billion, approximately the size of the decline the nation has actually seen.

A box accompanying the article notes that Bush's Social Security proposal calls for placing two percentage points of the Social Security tax into private accounts. It comments that this diversion "could slow efforts to pay down the national debt." The diversion of money away from the federal government by definition would slow down efforts to pay down the national debt.

MINIMUM WAGE

"Clinton Says GOP 'Playing' on Minimum Wage Hike"
Cathy Newman
Washington Post, July 30, 2000, Page A4

This article discusses President Clinton's attack on the Republican Congress for not passing a bill increasing the minimum wage. The article presents both President Clinton's argument, that the wage increase will be an important boost to the income of low income workers, and responses from the Republicans and representatives of business groups that the measure would cost jobs.

In the last decade, there has been a considerable amount of new economic research on this topic, which has found that moderate increases in the minimum wage, such as the one currently being debated, have little or no effect on unemployment. (See David Card and Alan Krueger, Myth and Measurement: The New Economics of the Minimum Wage, Princeton University Press, 1995.) It would have been helpful to readers if the article had mentioned this evidence.

PRODUCTIVITY

"Official Hints Fed Won't Raise Rates"
Noam Neusner and Tammy Williamson
Washington Post, August 3, 2000, Page E2

This article reports on an interview with William Poole, the president of the Federal Reserve Board's St. Louis Bank, and a member of the open market committee which determines monetary policy. At one point the article asserts that "productivity grew in the first three months of this year at the fastest rate in seven years."

This claim is not supported by data from the Bureau of Labor Statistics. According to the most recent BLS data on productivity for the first quarter, business sector productivity increased at a 1.8 percent annual rate, while productivity in the non-farm business sector rose at a 2.4 percent rate. By comparison, in the fourth quarter of 1999, these two sectors reported 6.6 and 6.9 percent growth rates, respectively.

It is also worth noting that it can be misleading to compare current productivity measures with those from earlier years. A large and rapidly growing portion of current output is used to replace computers and software, which quickly become obsolete. GDP growth would have been 0.6 percentage points lower in the second quarter if the increased amount of output used to replace these items were not counted. Such a reduction in output would reduce the measure of productivity growth by approximately the same amount.

ENERGY

"A Spike in Electricity Prices Sets Off Debate in California"
Alex Berenson
New York Times, July 29, 2000, page A7

"California on Edge of Failing to Meet Electricity Needs"
Alex Berenson
New York Times, August 3, 2000, page A1

These articles examine the problems in the electricity market in California as the state moves toward further deregulation. The second article notes that the state is short of electricity-generation capacity, since utilities were reluctant to add capacity in the period leading up to deregulation. The first article reports on the doubling of electricity prices in San Diego since deregulation went into effect there.

Both articles are written as though the only choices are a deregulated electricity market or a regulated one in which utilities are prevented from adopting more innovative approaches. In fact, regulation can be implemented in more flexible ways, thereby both protecting consumers and providing utilities with incentives to innovate. (See "Utilities Trying New Approaches to Pricing Energy," New York Times, July 17, 2000; ERR, 7/24/00.)

"U.S. Seeking a Way Around Greenhouse Gas Reduction Rules"
H. Josef Hebert
Washington Post, August 3, 2000, Page A7

This article reports on a new proposal from the Clinton administration that would allow countries to count the carbon dioxide absorption by their forests and farms against the required reduction in greenhouse gas emissions under the Kyoto agreement. At one point the article notes the opposition of European nations to this proposal, commenting that "most European nations do not want to give sizable credits for such sinks [e.g. forests and farms], in part because they have fewer forests and agricultural land than the United States."

While it is true that this proposal would benefit the United States more than Europe, the European nations may also oppose it because it makes a mockery out of the commitments in the Kyoto agreement. The original targets were set based on an assessment of the damage caused by greenhouse gas emissions and the expected economic costs of curtailing these emissions. The Clinton administration's proposal would drastically increase the targeted emissions levels. If the European nations took the effort to halt global warming seriously, it is understandable that they would object to this proposal.

If the Clinton administration wanted the impact of carbon sinks to be taken into account in the context of the Kyoto agreement's limits, it would have proposed that the net change in carbon absorption by such sinks be counted against a nation's emissions limits. This would mean that if the United States had expanded its forests and farmland so that its carbon sinks are larger in 2008, when the emission limits first apply, than in the 1990 base period, the difference could be added to the nation's emissions limit. On the other hand, if the size of these sinks had shrunk, as it is likely the case, then this amount would be subtracted from the emissions limit for the United States.

FRANCE

"The New Revolution"
Anne Swardson
Washington Post, July 31, 2000, Page A13

This article reports on a supposed revolution in French thinking and attitudes. According to the article's sub-head, "tradition bound France is transforming itself into a more dynamic, risk-taking nation."

The evidence for the existence of this revolution seems to be primarily conversations that the reporter had with a small group of highly educated professionals and businesspeople. Probably the largest change in France's regulatory structure in the last year has been the adoption of a 35-hour work week at the beginning of the year. This move towards tighter labor market regulation was a key plank in the victorious left-center coalition's platform in the last election.

It also is worth noting that, contrary to the claims in the article, France's economy was not stagnating in the years preceding this alleged revolution. According to data from the OECD and the Bureau of Labor Statistics, France regularly enjoyed rates of productivity growth that were close to 2.0 percent annually, far above the rates of growth in the United States, which had been close to 1.0 percent until the last four years. In France, unlike the United States, these gains were widely shared, so that the vast majority of workers experienced consistently rising living standards over the last two decades.

RUSSIA

"Putin, Exerting His Authority, Meets With Russia's Tycoons"
Sabrina Tavernise
New York Times, July 29, 2000, page A3

This article reports on a meeting between Russian President Vladimir Putin and several of the nation's most powerful business leaders. The article describes Putin's efforts to lay out ground rules for their future dealings.

It is interesting to note that this article reported on Putin very differently than much previous coverage in the Times and Post. For example, the article explicitly notes the extreme corruption in post-Soviet Russia, and comments: "It remains to be seen whether today's meeting signals a turning point in rooting out corruption and favoritism. It is not clear whether Mr. Putin is really prepared to challenge vested interests and clean up government or whether his intent is to make the tycoons subservient to himself and punish those who fail to support him." Past articles in both the Times and Post have largely assumed that Putin was committed to a reform agenda (e.g. Washington Post, 3/26/00; New York Times, 7/27/00 ; see ERR, 4/3/00, 7/31/00).

"Russia Eases Taxes, but Businesses Call Deeper Cuts Essential"
Sabrina Tavernise
New York Times, August 1, 2000, page C4

This article reports on the reaction of business executives in Russia to a reduction in a series of taxes. The article notes that tax evasion is currently widespread in Russia, and then quotes several business executives claiming that larger tax reductions will be necessary before they will start paying their taxes. The article does not quote or cite anyone who is not a business executive.

It is understandable that business executives, like anyone else, would prefer lower taxes. It is also understandable that they would not pay them, if they believe that they have a choice, which the article suggests is the case. If business executives can choose with impunity not to pay their taxes, then it is unlikely that many firms will ever pay them, regardless of how low the rate is set. Presumably there are some people in Russia who believe that more serious enforcement of the tax laws should be a priority. It would have been useful if the views of these people were presented in the article.

TURKEY

"A Tax Bite With Gaps in Turkey"
Douglas Frantz
New York Times, July 31, 2000, page A7

This article discusses the problem of tax evasion in Turkey. It points out that professionals, such as doctors and lawyers, report very low incomes on average, since most of their payments are made under the table. At one point the article comments: "As is often the case when governments collect only a fraction of the taxes they are owed, tax rates are high in Turkey." The article then goes on to note that the top marginal income tax rate on individuals is 55 percent and on corporations 40 percent.

These tax rates are actually not particularly high compared to other countries. For example, the top tax rate on individual income in the United States was 70 percent prior to 1981, and 50 percent on corporations. Most European countries still have tax rates that are as high or higher than the ones in Turkey, but have nowhere near as much problem with tax evasion.

It is worth noting that this in not the first time that relatively moderate tax rates have been characterized as being high in the Times. Recently an article referred to the 50 percent top marginal tax rate in Germany as "crushing" (New York Times, 7/16/00; see ERR, 7/24/00).

OUTSTANDING STORIES OF THE WEEK

"Report on Organic Foods Is Challenged"
Jim Rutenberg
New York Times, July 31, 2000, page C11

This article reveals that ABC News correspondent John Stossel apparently invented claims about pesticide residue being found on produce that was sold as "organic." According to the article, the scientists that Stossel claimed performed these tests, denied that they had ever done so. Stossel's claim was made on a news segment in which Stossel questioned whether food that sold as organic is healthier than other food.

"Free Speech Rights for Computer Code"
Amy Harmon
New York Times, July 31, 2000, page C1

This article reports on a court case in which the motion picture industry is trying to prohibit the printing of a computer code which can be used to unlock digital video disks so that they can be copied. The article points out the extent to which the courts will have to restrict normal scientific discourse among computer software designers if the movie industry's request is granted.

"Phone Workers Fight for Place in Wireless Era"
Steven Greenhouse
New York Times, July 31, 2000, page A1

This article examines the situation of the workers at Verizon Communications (formerly Bell Atlantic) as the company expands into new areas. The two largest unions at the company, the Communication Workers of America and the International Brotherhood of Electrical Workers, are threatening a strike at the end of the week. Their main concern is protecting union jobs, as the company increasingly relies on part-time and contract workers.

"Epitaph for a Rule That Just Won't Die"
Louis Uchitelle
New York Times, July 30, 2000, Section 3 page 4

This analysis examines the apparent refutation of the non-accelerating inflation rate of unemployment (NAIRU) doctrine by the economy's recent performance. The NAIRU doctrine held that if the unemployment fell below 6.0 percent lead, it would cause inflation to rise. The analysis points out that Federal Reserve Board Chairman Alan Greenspan stills seems to adhere to a version of this view, although he may place the NAIRU closer to 4.0 percent unemployment.

"Piling on Amazon's Stock, After the Fact"
Gretchen Morgenson
New York Times, July 30, 2000, Section 3 page 1

This article discusses the way stock market analysts assess stocks. It points out that in the case of Amazon.com, all of the major analysts seem to have reached the same conclusion about the company simultaneously. The one exception is the Morgan Stanley analyst Dean Witter, who remains bullish about Amazon.com. As the article notes, Morgan Stanley is Amazon's investment banker.

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.