This story discusses the recent decline in the value of the dollar against the yen. It terms the value of the dollar "a crucial indicator of foreign confidence in the United States government and its economy" and asserts that "by all normal measures it [the decline in the dollar] should not be happening."
In fact, most economic theories to not view the value of the dollar as a measure of foreign confidence in the U.S. government and its economy. Economists usually seek to explain movements in currencies by changes in relative interest rate and patterns of trade. When a nation experiences a rise in its interest rates relative to that of other nations (as Japan has recently), it is expected that its currency will rise in value as investors switch into that currency to take advantage of the higher relative interest rates.
In the long run, it may be expected that trade flows will determine the value of a nation's currency. It is reasonable to believe that a nation like that U.S., that consistently runs large trade deficits, may eventually see a decline in the value of its currency, since the current value of the dollar is too high to allow U.S. goods to compete effectively.
Both of these standard theories of currency value provide simple and straightforward explanations of the dollar's recent decline against the yen. The article's "confidence" theory of dollar valuation does not at all explain recent movements in the dollar against foreign currencies. For example, the dollar fell by almost 50 percent against the yen in the period from 1982 to 1988. These were not years of obvious crisis in the United States. The dollar rose by 13 percent against the yen over the next two years, then plunged another 35 percent from 1990 to 1995 as Japan's economy fell into recession and the U.S. economy began its long expansion. In short, the movements of the two currencies appear to have no relationship whatsoever to the relative strengths of their economies.
Later the article asserts that the "huge budget deficit…once was blamed for undercutting the value of the dollar." Actually, in most years, the budget deficit was not huge by most economic standards. Except for the Reagan-Bush years, the nations' debt to GDP ratio has consistently fallen in years when the economy was not in a recession. Furthermore, standard economic theory holds that a deficit will raise, not lower, the value of the dollar.
According to standard economic theory, a large deficit raises interest rates in the United States. This causes investors to switch into dollars to take advantage of the higher interest rates in the U.S. This is exactly the dynamic that is used to explain the 64 percent rise in the value of the dollar against other currencies in the years from 1980 to 1985, a period when the deficit rose by close to 3.0 percentage points measured as share of GDP (an amount equal to approximately $270 billion in today's economy). Usually, economists argue that one reason to reduce the budget deficit is that a lower deficit will lead to lower interest rates. This will in turn lower the value of the dollar and bring down the trade deficit. For some reason, this article argues that reducing the budget deficit should have the opposite effect.
"The Flip Side of the Strengthening Yen"
Paul Blustein
Washington Post, January 13, 1999, page F1
This article discusses the recent rise in the value of the yen relative to the dollar. It suggests that the rise in the yen is due to the lack of confidence in the Japanese government, as expressed by a recent rise in interest rates on Japanese government bonds: "increasingly, financial markets appear to be unsettled by rumblings that Tokyo is going a little too deeply in debt for comfort."
This claim seems self-contradictory. If financial markets are actually worried about the ability of the Japanese government to repay its debt, then they should be equally worried about the future value of the yen. Ultimately, the government can always repay its debt by simply printing yen. (Since Japan currently has the lowest debt to GDP ratio of any major industrialized nation, this is not likely to occur.) If Japan prints a huge number of yen, it would lead to inflation and a decline in the value of its currency. This inflation would hit holders of yen and Japanese government debt in exactly the same way.
This article reports the release of employment data for December. At one point the article asserts that "after a wave of corporate layoff announcements and a surge in first-time claims for unemployment insurance in the last half of December, economists had expected job growth to weaken and unemployment to edge up."
It is not clear why economists would have expected this. Many of the announced layoffs will not take effect until next year. Workers are counted as being employed until they actually stop working, not the point where the company announces layoffs. Also, the job in jobless claims at the end of the month should not have been expected to affect December's employment survey. The survey of households was taken in the week of December 5-12. The survey of employers referred to payroll period that included December 12. In both surveys, someone who was laid off in the middle or end of the month would have been counted as being employed in December's data. In other words, if the surge in first-time unemployment claims did lead to a rise in unemployment, it would not show up in the December employment numbers.
"4.3% Jobless Rate Lowest Since 1970"
Tim Smart
Washington Post, January 9, 1999, page G1
This article also reports on the Labor Department's release of employment data for December. At one point it comments that "workers are finding the wherewithal to spend from a booming stock market, which has swelled their retirement accounts…."
Actually, for most workers, the rise in the stock market has not been much of a windfall. According to the Federal Reserve Board's most recent survey in 1995, only 43 percent of all households owned stock in any form, including retirement accounts such as 401(k)s. Among this group, the median holding was just $13,000. These figures suggest that typical working families have not benefited much from the stock market's boom over the last three years.
"Medicare Growth In '98 Was Slowest Since Plan's Start"
Robert Pear
New York Times, January 11, 1999, page A1
The first of these articles discusses areas of policy that are not being addressed because of the impeachment trial. The second article reports on data showing that Medicare expenditures rose by just 1.5 percent in 1998.
The first article asserts that "Social Security and Medicare need to be overhauled before they are driven into bankruptcy by the aging of the baby boom generation." Actually, the aging of the baby boom generation is a relatively small factor in the long-term problems facing both programs. The main factor in the projected long-term shortfall in the Social Security program is the projected increase in life expectancy. Most of the baby boom generation's retirement is already provided for with the existing schedule of taxes. Only small changes would be needed to extend the program through the entire retirement of the baby boom generation.
Like the first article, the second article also warns that "Medicare will incur immense new costs" due to the baby boom generation. In fact, the bulk of the projected increase in Medicare expenses is attributable to rising per person health care costs, not the projected increase in beneficiaries. These increases in health care costs are projected for both the private and public sector. The Health Care Financing Administration projects that per person private sector spending on health care will rise by $750 a year, after adjusting for inflation, between now and 2007. This increase would amount to $3,000 a year in higher health care expenditures for a typical family of four. By comparison, the tax increase needed to balance the Medicare trust fund for the next 50 years would be just $450 a year for an average worker. These numbers suggest that the growth in health care costs poses a far greater financial threat to future living standards than Medicare expenditures on aging baby boomers.
"As an Economy Sinks, U.S. Sees Painful Choices"
David E. Sanger
New York Times, January 14, 1999, page A1
"Brazil Devalues Currency"
Paul Blustein
Washington Post, January 14, 1999, page A1
These article report on the devaluation of the Brazilian currency and the impact that it is likely to have on the United States and the rest of the world. All three of these articles emphasize the importance of Brazil as a market for U.S. exports. For example, the first Times article comments at one point that "Brazil, the eighth largest economy in the world, is the locomotive for Latin economies, which now absorb a fifth of United States exports." This comment also appears in the article's subhead: "Engine of Latin Nations, Which Buy One-Fifth of Exports by U.S."
While Brazil does have the largest economy in Latin America, and Latin America is the destination of 20 percent of U.S. exports, Brazil itself is actually a very small buyer of U.S. goods. The United States currently exports approximately $10 billion annually to Brazil, about 1.0 percent of total U.S. exports. While U.S. banks and wealthy individuals have invested large amounts of money in Brazil, which is at risk in the current situation, there are relatively few jobs in export industries that would be placed in danger by a downturn in Brazil.
The second Times article implies that the policies designed for Brazil by the Treasury Department and the IMF were going to keep the nation out of recession, and that it was the failure of Brazil to adhere to these policies that led to the current crisis. It comments that "only by slowly decreasing the value of the real, the thinking went, could Brazil keep itself and the rest of Latin America from descending into a nasty recession."
In fact, according to an earlier Times article ("IMF Cuts World Growth Outlook to 2.2%," Bloomberg News, New York Times, 11/ 22/98, page C4), the IMF had been anticipating the Brazil would have a recession in 1999 because of its austerity program. This article comments that IMF's projections "assume a recession next year in Brazil…as the Government there tries to reduce spending and increase taxes to meet conditions of a $41.5 billion international aid package."
It also worth noting that the failure of the IMF policy can be attributed to the decision to force Brazil to maintain an over-valued currency, rather than a failure of the Brazilian government to act responsible. This has been argued by many prominent experts on international finance, such as Harvard Professor Jeffrey Sachs and M.I.T. Professor Rudiger Dornbusch. Comments to this effect from both Sachs and Dornbusch can be found in "Brazil Swallows Another Bitter Pill" by Michael M. Weinstein (New York Times, 1/14/99, page C1).
This article examines how the alternative minimum tax, which was intended to hit wealthy people who used tax shelters to evade taxes, is increasingly hitting middle income families. This is occurring because the maximum allowable deductions, before the alternative minimum tax kicked in, was not indexed to inflation when the tax was put in place in 1986. As a result, middle income people with deductions due to factors such as high medical bills or a large number of kids often end up being subject to the alternative minimum tax.
"For the Fed, a Sideshow Takes Center Ring"
Louis Uchitelle
New York Times, January 10, 1999, Section 3, page 4
This article discusses how the Federal Reserve Board must now carefully consider the impact that its policies on interest rates will have on the stock market, since it is considerably over-valued by conventional measures. For example, it may be prevented from raising interest rates in a situation where it would have otherwise, because of the fear that it would lead to a stock market crash.
"Fever Pitch: Getting Doctors To Prescribe Is Big Business"
Abigail Zuger
New York Times, January 11, 1999, page A1
This article describes the ways in which pharmaceutical companies market their drugs to doctors. For example, it presents an estimate from a consulting firm that the industry spent more than $6.3 billion just through November of last year on visits to doctor's offices and marketing events. It also notes that prescription drugs are the most rapidly growing category of health care spending, costing the nation $78.9 billion in 1997. On a per person basis, this is just under $300 a year. These numbers suggest the current system of developing new drugs is extremely inefficient.
Dean Baker is a senior research fellow at the Preamble Center.
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