This article discusses how the creation of the euro is expected to affect European financial markets. It asserts that "while the return on capital achieved by American companies has drastically improved since the 1970s, the returns of companies in France, Italy and Germany have actually declined." According to data from the OECD, the return to capital at the seventies business cycle peak in France, Italy and Germany was 11.6, 12.3, and 10.6 percent, respectively. By 1997, the returns to capital in these countries had risen to 19.9, 14.8 and 15.3 percent. This rise constitutes a very substantial increase in the return to capital.
The article also notes that many investment managers "believe that Europe could see a period of prosperity not dissimilar to what occurred in the United States in the 1980s and 1990s from American corporate efforts to downsize and restructure themselves to become more competitive." The last two decades have not been a period of prosperity for most people in the United States. Even though wages have been rising broadly for the last three years, the real hourly wage for the typical worker still stands more than 3.0 percent below its 1979 level. By comparison, real hourly compensation for workers in France, Italy, and Germany grew by 20.4, 20.7, and 9.7 percent respectively between 1979 and 1996.
The OECD data also indicates that productivity growth in these nations was approximately twice as fast as in the United States over the last twenty years. Most Europeans will have serious cause for concern if the euro brings them the same sort of prosperity the United States has experienced over the last two decades.
This article discusses the economic and political situation across the European continent as the euro comes into existence. At one point, it comments that "already, the tough fiscal and other criteria set for qualification for the euro have drawn countries like Spain, Italy, and Portugal toward a low-inflation prosperity they have never previously known. The euro, and the 15 nation European Union in general have amounted to a beneficial magnet."
While the contractionary fiscal and monetary policy required to join the euro have resulted in lower inflation rates in Spain, Italy and Portugal, it is not clear that these countries have prospered by any other criteria. For example, the average growth rates for these countries since 1989 has been 2.0, 1.2 and 2.2 percent, respectively. By comparison, their growth rate over the period from 1979 to 1989 averaged 2.2, 2.4 and 2.9 percent. This slower growth has also been accompanied by a large increase in the unemployment rate in two of the three countries. At the peak of the last business cycle in 1989, the unemployment rate in the three countries was 16.7, 10.2 and 5.1 percent, respectively. In 1998, the unemployment rates for the three countries stood at 19.2, 12.1 and 5.1 percent.
In addition to leading to slower growth and higher unemployment in southern Europe, the conditions required for joining the euro also led to slower growth and higher unemployment across northern Europe. Since 1989 the unemployment rate in France has risen by 2.5 percentage points, in western Germany by 2.1 percentage points and in Belgium by 3.0 percentage points. Instead of comparing the euro to a beneficial magnet, this data suggests that the conditions established for joining the euro may be better compared to a depressing sponge.
Later the article asserts that "indeed the very words 'idea' and 'Europe' seem strangely paired because intellectual vitality appears to have migrated elsewhere, and with it the forces now changing the world." The article does not indicate how it has reached this judgment on the state of intellectual vitality in Europe. Unlike the United States, Europe has managed to develop an economic system that produces consistent improvements in living standards for its people and does not require the incarceration of close to 1.5 percent of its adult population. Apparently, such factors are either irrelevant to the article's measure of intellectual vitality, or count negatively.
This article provides an assessment of Russia's economic prospects in the near future. Much of it is written as though Russia's economic problems began with the collapse of the ruble last summer. For example, the article, referring to a comment from a top official that "stagnation is possible," remarks that "a quick snapshot of Russia today suggests something far beyond stagnation. The nation's gross domestic product fell 5 percent in 1998 and experts predict a similar drop in 1999." In fact, the economy had been declining since the collapse of the Soviet Union in 1990. Even before the financial crisis in the summer, the economy had already shrunk by 40-50 percent from its previous levels (see "What on Earth? -- Hardships in Russia." Washington Post, November 14, 1998, page A16 ).
This article also uses non-standard measures of economic prosperity. At one point it comments: "nor is the economic news all bad. Moscow's streets, barren 15 years ago, now are jammed with traffic 18 hours a day; the number of autos has tripled in seven years, and the pollution is horrific. Store shelves are no longer bare, but stocked with foreign consumer goods, although they are often beyond the means of many Russians." Traffic congestion and dangerous levels of air pollution usually are viewed as evidence of poor transportation management, not economic prosperity. Similarly, the value of unsold inventories is not a common measure of national well-being.
This article discusses the economic climate in Europe as the euro is coming into use. At its conclusion, the article notes that Europe's political leaders have hinted at "a readiness to run higher budget deficits, especially, if European unemployment rises beyond its current level of about 10 percent." The article continues "if budget deficits do begin to swell, Mr. Dusenberg [the head of the European central bank] will be under pressure to counterattack with tighter monetary policy – an unpopular job."
The article does not indicate who would be applying this pressure to Mr. Dusenberg. Clearly it will not be the public as a whole since the article notes that tighter monetary policy under such circumstances would be unpopular. The pressure is also unlikely to be coming from those familiar with economic theory, since virtually all economists recognize the desirability of larger budget deficits and looser monetary policies during a recession. For example, during the last recession, even George Bush's economists supported stimulatory fiscal policies (i.e. larger budget deficits) and Alan Greenspan allowed the real interest rate on short term loans to fall to zero. The only people who might stand to lose by such policies are large holders of financial assets whose only concern is to minimize inflation, regardless of the impact on economic growth and unemployment.
This article reports on how the introduction of the euro may affect the United States. At one point it compares assessments of the impact of the euro on European economies: "On the one side are those who are optimistic that the euro will prove to be the spur that Europe needs to unshackle its economies from excessive regulation ¼. On the other side are those who think that Europe is doomed to years of under-performance, tinged by protectionism, as left-wing Governments now in power in France, Germany, and Italy stall on long-delayed changes."
It is not clear how the article has determined that Europe suffers from excessive regulation or that there is a need for the long-delayed changes that might be stalled by left-wing governments. It is worth noting that explanations that blame excessive regulation for Europe's high unemployment rates cannot be supported by standard economic evidence. (See Steve Nickell, 1996, "The Low-Skill Low Pay Problem: Lessons from Germany for Britain and the United States," Policy Studies, V. 17 pp. 7-21; David Card, Francis Kramarz and Thomas Lemieux, 1996, "Changes in the Relative Structure of Wages and Employment." National Bureau of Economic Research Working Paper #5487, Cambridge, Mass.)
This article speculates on the prospects for the U.S. and world economy in 1999. At one point it discusses the stock market and comments that it is not likely to rise as much in the coming year as in the past five: "Stock prices no longer look as outrageously high as they did a year ago, somewhat lowering the risk of a plunge." Stock prices are between 15 and 20 percent higher than their levels a year ago, depending on which index is used. Profits are down by 3 to 5 percent from their year-ago levels. It is not clear how the article has determined that current stock prices are more in line with fundamentals than their year-ago levels.
This article reports on economists' views of the stock market. According to the article, few economists currently view the stock market as over-valued, but rather as a "gauge of the real economy."
The economists who hold this view are very much at odds with the economists at the Congressional Budget Office (CBO) and most other government agencies. According to the CBO's most recent projections, corporate profits will grow at a real rate (inflation adjusted) of just 0.3 percent a year for the next decade. At present, the annual dividend payout on shares of stock average less than 2.0 percent of their share price. If the CBO projections are correct, unless the price to earnings ratios continue to hit new records, the real returns to stock will average approximately 2.0 percent a year over the next decade. (The return is equal to the dividend plus the increase in the share price.) This is well below the 3.50 percent real return currently available on government bonds. This discrepancy in returns may be viewed as evidence that stock prices are substantially over-valued.
This article discusses a proposal from the White House and congressional commission on Medicare to raise the age of eligibility for the program from 65 to 67. The article describes the charge of the commission as being to "enable it [Medicare] to withstand devastating financial pressures once the baby-boom generation begins reaching old age in about a decade."
Actually, most of the financial pressures facing Medicare have nothing to do with the baby boom generation. According to the Health Care Financing Administration, less than 40 percent of the projected growth in Medicare expenditures (measured as a share of GDP) is due to an increase in the size of the elderly population. Most of the increase is attributable to a rise in per person health care costs well in excess of the overall inflation rate. These costs increases are projected to occur in both the public and private sector. If health costs are not contained, they will significantly reduce the living standards of workers in the future even if Medicare is eliminated altogether. (See Defusing the Baby Boomer Time Bomb: Income Projections for the 21st Century, by Dean Baker, Economic Policy Institute, 1998.)
This article discusses the impact that deregulation has had on airline service to medium-sized cities such as Caspar, Wyoming and Des Moines, Iowa. The article points out that many of these cities no longer have direct service to other parts of the nation. Instead, it is necessary to fly smaller and more expensive regional carriers to a major airport, where connections can be made to other flights. Maintaining high quality service to smaller cities was one of the goals of the previous system of regulation. The deterioration of service in these cities was a predictable outcome of deregulation.
"Clinton to Seek $110 Billion, 6-Year Defense Spending Boost"
Dana Priest
Washington Post, January 3, 1999, page A12
This article discusses the Clinton administration's plans to increase the military budget. It includes views of critics of this proposal, who note that the U.S. already spends several times as much on the military as all of its possible enemies put together.
"5 Problems Tarnishing a Robust Economy"
Michael M. Weinstein
New York Times, January 3, 1999, page C10
This article presents an insightful analysis of some of the major economic problems that still face the United States during this period of relative prosperity.
Dean Baker is a senior research fellow at the Preamble Center.
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