"Exchange Controls Lifted; Brazil Stocks Rise by 33%"
Diana Jean Schemo
New York Times, January 16, 1999, page A1
"One Choice Made, More to Come"
Sylvia Nasar
New York Times, January 16, 1999, page B1
"Brazil Is Warned to Clean Up Its Economic Act"
Richard W. Stevenson
New York Times, January 16, 1999, page B1
"Double-Edged Economic Crisis Whipsaws Brazil Workers and Companies"
Larry Rohter
New York Times, January 17, 1999, Section 1 page 8
These articles discuss the current economic crisis in Brazil. The first three cite the failure of the government's efforts at cutting public pensions as a major factor in causing the crisis. These articles include numerous comments about the need for Brazil to pursue sounder economic policies.
It is worth noting that this was not the prevailing view of Brazil's economic policies last summer. For example, an article commenting on the first evidence of instability in Latin America following the collapse of the Russian ruble ("Latin America Is Buffeted, but Seems Stronger Than in '94," by Julia Preston, New York Times, 9/1/98, page A3), asserted that the current crisis in Latin America "originated in Moscow and Tokyo," which it contrasted with the 1994 crisis that was "largely self-inflicted."
Another article ("Analysts Warn of Dangers to Brazil's Economy," by Diana Jean Schemo, New York Times, 9/5/98, page B1) quoted Michael Camdessus, the managing director of the I.M.F., saying that "the problems faced by Brazil and other Latin countries derived from panic elsewhere in the world rather than the lack of will to take tough economic measures."
Another Times article ("Latin Americans Say Russian Bailout Leaves Too Little for Them," by Paul Lewis, 10/ 6/98, page A13) quotes E. Gerald Corrigan, a former president of the Federal Reserve Bank of New York, that "Latin America is being buffeted by external shocks this time. It is not the source of the shocks." An article in the Washington Post ("In Brazil, High Times Turn to Hard Times," by Anthony Faiola, 10/18/98, page A24) characterized Brazil's economy as "the world's economic darling."
The second Times article, by Sylvia Nasar, characterizes a currency devaluation, such as that implemented by Brazil, as "a broken promise." The article does not indicate what sort of promise it views as being broken by a devaluation. While nations often find it a desirable policy to keep their currency at a fixed value, they also often find it desirable to change the value of their currency or allow the market to determine its value. Knowledgeable investors understand this and would have no basis to claim that any promise was being broken by a currency devaluation. In the case of Brazil, investors extracted a very high premium in the form of interest rates that exceeded 40 percent, precisely because they knew that there was a significant risk that the currency would be devalued. In other words, they gambled and lost.
This article further comments that "when Brazil announced its devaluation, investors overseas saw it as a sign that the Government was caving into political pressure from unions and big business to put its anti-inflation strategy on the back burner and to fight unemployment instead." It should not be surprising that a democratically elected government would be more responsive to domestic political forces than political pressure from abroad. It remains to be seen if the Brazilian government will consistently pursue policies that place the needs of the domestic economy over demands from foreign investors.
This article also comments on the problems that Brazil's devaluation will cause Argentina, its largest trading partner. Argentina has created a currency board that holds the value of its currency fixed relative to the dollar. As a result, it cannot easily devalue at this point. Therefore the decline in the value of Brazil's currency will likely place considerable strain on Argentina's economy. While this article presents Argentina's problems as being the fault of Brazil, this situation was a predictable outcome of having a rigidly fixed currency. This is why most economists do not recommend the sort of currency board that Argentina has put in place.
The third article, by Richard W. Stevenson, briefly discusses efforts by European and Japanese officials to set up a new international financial system that would attempt to reduce the volatility in currency values. It notes the Clinton administration's hostility to such proposals, and then comments: "Economists said it was hard to understand why Germany, France and Japan would call for such a system in the immediate aftermath of Brazil's failure to control its exchange rate."
The article does not indicate which economists expressed this view. A very broad range of economists, from Nobel prizewinner James Tobin to M.I.T economist Paul Krugman, have expressed a desire to develop a system that will reduce the volatility in currency values, so the economists referred to in this article face considerable opposition within the discipline. It should also be rather obvious why such calls for reform would come at a time of crisis. There is always more interest in fixing a system that appears to be broken rather than one that appears to be working.
The first and second articles both discuss the importance of Brazil as a destination for U.S. exports. The fourth article, by Larry Rohter (which is a solid discussion of the impact of the crisis on ordinary Brazilians), also makes this point. Last year, Brazil was the destination of $14 billion in U.S exports. U.S. exports totaled $958.8 billion in 1997. This means that Brazil accounted for less than 1.4 percent of all U.S. exports. Therefore, the impact of a decline in this market on jobs in the United States will be minimal, although the impact of the currency crisis on U.S. banks and other investors may be significant.
"Tense Times on Front Line of Brazil's Battle on Hyperinflation: Empty Shops"
Diana Jean Schemo
New York Times, January 20, 1999, page A8
This article reports on the current economic situation in Brazil. In discussing the country's prospects, it asserts that "the greatest danger is a return to hyperinflation." The article does not indicate how it has made this determination. Currently the I.M.F. is insisting that Brazil pursue extremely contractionary policies in the form of large cuts in government spending and very high interest rates. Such policies can have the effect of throwing the economy into a severe recession or even depression. This would mean a large increase in unemployment, poverty and hunger, which were the results of I.M.F. policies in Indonesia and Thailand. (See "Asia Feels Strain Most at Society's Margins," by Nicholas D. Kristoff, New York Times, 6/7/98, page A1.)
"Turning to the Stock Market"
Amy Goldstein and George Hager
Washington Post, January 20, 1999, page A1
"Unbowed, Clinton Presses Social Security Plan"
James Bennet
New York Times, January 20, 1999, page A1
These articles report on President Clinton's plans to restructure Social Security as presented in his State of the Union address. Both articles assert that, under current projections, the program will "run out of money" to pay benefits in 2032 .
The projections do show that the trust fund will be depleted in that year, and the program will no longer be able to pay out full scheduled benefits. However, most Social Security payments are made from current taxes, not from drawing on the trust fund. The projections show that in 2032, these taxes will still allow Social Security to pay out benefits that are on average larger in real terms (adjusting for inflation) than the benefits received by current retirees. This will be true for the next 75 years, if nothing is ever done to change the program.
"G.O.P. Has Few Options on Social Security"
Richard W. Stevenson
New York Times, January 22, 1999, page A15
This article discusses possible Republican responses to the President's proposal for Social Security. The article notes that the proposal is projected to make the Social Security fund fully solvent until 2055, but not for the full 75-year planning horizon, and then asserts that "the Administration and Congress would still have to make some tough choices about tax increases and benefit cuts to get the job done."
The article does not indicate why it views solving a problem that will not arise for 56 years, if arises at all, as an important or even meaningful task. In fact, if the problem is simply getting projections that show a balanced fund for 75 years, this can be done very easily and painlessly. This president and Congress have no way of binding future congresses. They can easily write into law tax increases or benefit cuts that will take effect at some distant date, such as 2050. Since the structure of the Social Security program is likely to be revisited several times over the next 50 years, these scheduled tax increases or benefit cuts will have no impact and cause no pain to anyone. But they will get the job done, as it is defined in this article.
"Gore Offers Plan to Control Suburban Sprawl"
Michael Janofsky
New York Times, January 12, 1999, page A16
"Clinton Asks for $1 Billion to Buy Land for U.S. Parks"
John H. Cushman Jr.
New York Times, January 13, 1999, page A11
"Proposal Aims at Returning Disabled Workers to Jobs"
Robert Pear
New York Times, January 13, 1999, page A12
"At a Conference on Wall Street Diversity, the President Finds His Own Stock Soaring"
James Bennet
New York Times, January 16, 1999, page A1
"Clinton to Propose Health Plan for Uninsured"
Amy Goldstein
Washington Post, January 18, 1999, page A2
"Clinton to Urge More U.S. Control On Aid To Schools"
John M. Broder
New York Times, January 18, 1999, page A1
"Clinton to Propose More Welfare to Work Funding"
Judith Haveman and Walter Pincus
Washington Post, January 19, 1999, page A1
"Clinton to Propose Tax Break for Parents Who Stay at Home"
Robert Pear
New York Times, January 19, 1999, page A15
"Requests Are to Include More Aid to Russia"
David E. Rosenbaum
New York Times, January 19, 1999, page A15
All of these articles report on various proposals that will appear in President Clinton's budget for the year 2000. In each case, the article reports on the dollar amounts being committed to the program(s) being discussed.
It is questionable whether simply listing the dollar amount being proposed is providing readers with sufficiently useful information. A very small percentage of the population, even among the relatively well-informed readers of these papers, have a clear idea of the size of the total budget or the U.S. economy. Therefore being told that a program costs $1 billion or $700 million does not inform the reader whether this is a large commitment or a token gesture.
Polls consistently show that the public has virtually no idea which programs consume the bulk of the federal budget. For example, people regularly list welfare and foreign aid as among the largest items in the budget, when in fact each program accounts for only about 1.0 percent of federal expenditures. The manner in reporters discuss spending items undoubtedly contributes to the public's confusion.
In the year 2000, the government is projected to spend just under $1.8 trillion. This means that the $1 billion in new spending that Gore is recommending to combat suburban sprawl is less than 0.06 percent of total federal spending. It is approximately 0.16 percent of the $630 billion that was spent on construction in the United States in 1998. The $1 billion to purchase park land also less than 0.06 percent of total federal spending.
The president's proposal to assist disabled workers in returning to work is projected to cost $2 billion over five years, or $400 million a year. This would be approximately 0.02 percent of the federal budget. According to article, the White House characterized this proposal as "the most important initiative for people with disabilities since [1990's] passage of the Americans With Disability Act."
The article on Wall Street diversity describes a proposal to encourage investment in low income neighborhoods. The proposal includes $1 billion in tax credits spread over five years and $608 million in guaranteed loans. (The article does not indicate whether this is a one-year program or also a five year program). Tax credits and loan guarantees are not treated as expenditures in the budget, but if they were, and the loans are assumed to be a one year expenditure, these two items together would come to less than 0.05 percent of federal spending in 2000.
The initiative for the uninsured also amounts to less than 0.06 percent of federal spending. Alternatively, since there are 32 million adults without insurance, this program can be viewed as spending $32.25 to provide insurance for each of these people.
The article on schools discusses plans to provide $4 billion for constructing new classrooms over five years and $1 billion for hiring 100,000 teachers. The first request is less than 0.05 percent of federal spending for the year 2000, while the latter proposal is less than 0.06 percent. In 1996, the General Accounting Office estimated that it would be necessary to spend more than $100 billion to bring the physical condition of the nation's schools up to acceptable standards. If the needs have not increased since 1996, the president's proposal would provide 4 percent of the necessary funding. The president's budget proposal will provide $10,000 for each of the teachers it proposes to hire.
The welfare to work proposal calls for $1 billion in new spending, less than 0.06 percent of the federal budget. This is approximately $500 for each of the 200,000 welfare recipients it is claimed will benefit from the program. The President's tax break for parents who stay at home with a child less than 1 year old is projected to cost $250 million, slightly more than 0.01 percent of the budget. It will provide up to $250 to each family.
The President's aid package for Russia, which is intended primarily to dismantle its military, is projected to include an additional $4.2 billion over five years above previously planned spending. The $850 million implied for the year 2000 is less than 0.05 percent of total spending and is about half the cost of buying a new bomber.
"If Ignorance Is Bliss, Why Are Stocks So Shaky?"
Gretchen Morgenson
New York Times, January 17, 1999, Section 3 page 1
This article reports on new study that shows that movements in stock prices are showing less relationship to movements in fundamentals, such as earnings growth or cash flow, than in the past. This suggests that irrational factors are increasingly determining the movement of stock prices.
"Suits Say Unscrupulous Lending Is Taking Homes From the Poor"
Randy Kennedy
New York Times, January 18, 1999, page A1
This article reports on deceptive lending practices that being pursued by some finance companies in low income neighborhoods. These practices have also led people to unwittingly place their home as collateral on new loans, causing them to lose their house when they fell behind in their payments.
Dean Baker is a senior research fellow at the Preamble Center.
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