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Economic Reporting Review

February 1, 1999

By Dean Baker

"Major Changes in Medicare Proposed"
Amy Goldstein
Washington Post, January 23, 1999, page A4

"A Familiar Argument Breaks Out in the Capital"
Associated Press
Washington Post, January 24, 1999, page A4

The first of these articles discusses a plan to substantially alter the Medicare system. The second describes the conflicting views on Social Security expressed by President Clinton and the Republicans in Congress. Both articles assert that these programs are facing crises without any real supporting evidence.

The first article asserts that "both of these programs are forecast to go bankrupt relatively soon." The second article characterizes the Social Security program as "troubled." Social Security is forecast to be able to pay all its bills for the next 33 years with absolutely no changes whatsoever. In policy debates, 33 years is usually viewed as a very long time.

Medicare is projected to be able to pay all its bills for the next 13 years without any changes, still a very long time in politics. Furthermore, the changes that would be needed to keep it from going bankrupt at that time are still very small in terms of the total budget. Since a portion of the program is funded by a tax that is set primarily to meet current expenditures, any rise in the pattern of spending will quickly cause the tax revenue to fall short. Many other areas of public spending, such as the military or the prison system, would also be projected to go bankrupt if their accounts were kept in the same manner as the Medicare trust fund.

"Senator Offers an Income-Based Proposal to Change Medicare"
Robert Pear
New York Times, January 23, 1999, page A13

This article discusses a proposal by Sen. John Breaux (D.-La.) to include an income test for Medicare eligibility. Virtually all economists oppose this type of means testing for programs like Medicare and Social Security. Imposing a means test gives older workers a strong incentive to spend their savings prior to retirement or to hide it through passing it onto their children or by other methods. This was the reason why the President's Advisory Council on Social Security unanimously rejected means-testing for Social Security in its 1997 report. This article would have benefited from including a comment from an economist on this point.

"11th Hour Push Forged Social Security Plan"
John F. Harris
Washington Post, January 25, 1999, page A1

This article discusses the debate within the administration over the proposal for Social Security that Clinton presented in his State of the Union address. The article notes at one point that the proposal will "significantly extend the life of the program but not enough to guarantee its 21st Century solvency."

Clinton claimed that his plan will provide for the full payment of benefits for the next 56 years, somewhat less than the 75-year planning period for the program. Since our knowledge of the state of the economy in years after 2055 is quite limited, it may not seem to be a high priority to have projections showing a balanced fund in those years. This article is apparently insisting on a still higher standard, that projections show a balance over the next 100 years. Since current policy decisions are going to be virtually irrelevant to the people alive in 2075-2100, worrying about the projections for this period, assuming that current policy is still in place, is probably a waste of taxpayers dollars.

"Criticism Mounts on Clinton's Rescue Plan for Social Security"
George Hager and Amy Goldstein
Washington Post, January 27, 1999, page A2

"Social Security: The Basics, With a Tally Sheet"
David E. Rosenbaum
New York Times, January 28, 1999, page A19

Both these articles discuss the President's proposal to reduce the projected long-range shortfall in the Social Security trust fund. Both articles refer to the government bonds held by the trust fund as "IOUs." This characterization of the bonds held by the trust fund implicitly calls into question their value as assets. All government bonds, in fact all debts of any type, are IOUs. These newspapers never refer to other government bonds or the bonds of private corporations as IOUs. There seems to be no reason why the bonds held by the trust fund should be referred to in this manner, unless the intention is to call into question the commitment to repaying this debt.

The Times article assets that "economists and politicians agree that the sooner the problem [the projected shortfall in the Social Security fund] is addressed, the less painful and abrupt the solution will be." Economists do not agree on this point. Many economists note that the projected shortfall in the Social Security trust fund is relatively small and is not expected to appear for more than three decades. By all accounts, the nation will on average be far richer in 2030 than it is at present. Since projections for such a distant future are merely guesses, and the changes that would be needed would not be huge expenses for a much wealthier population, many economists believe it is far better to wait to see what measures are really necessary. This appears more sensible than inflicting real pain on workers and/or retirees at present, which may subsequently prove unnecessary.

The Times article also asserts that the president's proposal to pay down $2 trillion in public debt over the next 15 years "should strengthen the economy by lowering interest rates and opening the way for more productive private investment. A stronger economy would…make it less painful for workers to pay the taxes needed to support Social Security."

The idea that paying down the debt will increase growth and make it easier to support the retirement of the baby boomers has been a repeated theme in reporting on Social Security. The impact that debt repayment can plausibly be expected to have on the size of the economy in 20 or 30 years is minimal. Extrapolating from projections from the Congressional Budget Office (The Economic and Budget Outlook: Fiscal Years 1998-2007, page 90), the proposal to reduce the debt by $2 trillion over the next 15 years can be expected to increase the size of the economy by approximately 0.6 percent by 2015. This is about as much as the economy grew in the first two months of 1998.

The impact of this additional growth will barely be noticeably to people alive at the time and will not make any perceptible difference on their ability to pay Social Security taxes. Virtually all economists agree on the magnitude of the potential impact of debt reduction; however, they differ in the importance they assign to it.

"Administration to Seek $366 Million for Technology Research"
Ceci Connolly
Washington Post, January 24, 1999, page A5

"Legal Immigrants Would Regain Aid in Clinton's Plan"
Michael Janofsky
New York Times, January 25, 1999, page A1

"Gore Proposes Restoring More of Legal Immigrants' Benefits"
Judith Havemann
Washington Post, January 26, 1999, page A7

"Senate Panel Passes Bill to Increase Military Spending"
Elizabeth Becker
New York Times, January 28, 1999, page A16

These articles report on three proposals by the Administration to increase spending. The first article reports on a proposal to increase spending on technology research by $366 million next year. The second and third articles report on a proposal by the Clinton to Administration to restore some of the cuts in benefits to legal immigrants that were part of the 1996 Welfare reform bill.

As was pointed out in ERR last week (1/25/99), most of the population, even among the relatively well-informed readers of these papers, does not have a clear idea of the size of the total budget or the U.S. economy. Therefore, being told that technology research will receive an additional $366 million next year does not inform the reader whether this is significant commitment or a token gesture. It would be far more useful to most readers if articles discussed spending requests as a share of the federal budget as well as in dollar terms. The new spending on technology would be approximately 0.02 percent of the federal budget in 2000. The $1.3 billion that the Administration is requesting in additional aid for legal immigrants over the next five years is equal to approximately 0.014 percent of projected federal spending over this period.

The last article discusses the Senate Armed Services Committee's decision to approve a 4.8 percent increase in the pay of military personnel. Unlike all the other articles on budget items in both the Post and Times this year, this article does not indicate the cost of this measure in dollar terms. The 1999 budget provided $70.5 billion for military personnel. This would imply that the bill approved by the committee will cost $3.4 billion, or $2.3 billion after adjusting for inflation. The latter expenditure would be approximately 0.13 percent of federal spending in 2000.

"South Korea's Mood Swings From Bleak to Bullish"
Sheryl WuDunn
New York Times, January 24, 1999, Section 1 page 3

This article discusses the current economic situation in South Korea. It asserts that "the national mood is shifting from bleak to buoyant." It appears that this assessment is based primarily on the attitudes of "bankers and business executives" who are "getting excited that South Korea may finally be embracing the deep restructuring that could redefine the economic landscape."

As the article notes, the unemployment rate more than tripled in the last two years from 2.0 percent in 1996 to over 7.0 percent in 1998, and is still increasing. It is likely that unemployment or the fear of unemployment weighs far more heavily on the minds of most Koreans than visions of a new economic landscape.

The article also comments on the Korean system of inter-linked firms, or "chaebols," which operate with close ties to the government, as "the kind of crony capitalism that helped bring the economy to its knees last year." According to data from the United Nations, this kind of crony capitalism produced per capita GDP growth of 7.0 percent a year between 1960 and 1994. This rate of GDP growth transformed Korea from one of the poorest nations on earth to a significant industrial power. No country has ever been able to sustain a growth rate of even half this rate following the more market-oriented policies advocated by the I.M.F.

It is also questionable whether this system should be blamed for the Korean economy's recent collapse. A major factor in this collapse was the high level of foreign debt incurred by Korean firms. It was only possible for Korean firms to borrow freely from foreign banks because of the relaxation of credit restrictions in recent years. This liberalization came about at the insistence of the United States and I.M.F., as they wanted Korea to adopt more market-oriented policies.

"Social Insecurity in Brazil for Its Government Retirees"
Diana Jean Schemo
New York Times, January 24, 1999, Section 1 page 12

This article discusses the decision by the Brazilian government to reduce pensions for retired government workers. According to the article, one of the changes was a provision that required that retirees continue to pay money into the pension system. The article indicates that this and other provisions would not save very much money and then comments that "the plan shatters a cultural taboo against retired Government workers having to continue to pay into the pension system."

The article does not give further information on the status of this "cultural taboo" in Brazil; however, most nations view respect for contracts as an important aspect of a stable business environment. In most nations, like the United States, pensions are treated as part of the employment contract. The employer is obligated to pay the pension that was part of a labor contract in the same way that they are obligated to repay a loan from a bank.

The article also asserts that the vote in Brazil's Congress to cut pensions was important because it showed foreigners that "it can carry out structural changes that strike at vested interests." Brazil is generally recognized to have a very corrupt ruling elite that bribes public officials to get special privileges and avoid taxation (see "Road to Reform Rocky in Brazil," by Anthony Faiola, Washington Post, 10/11/98, page A31). It seems doubtful that cracking down on this "vested interest," for example by land seizures, would have provided as much assurance to foreign investors. It seems more likely that foreign investors were only interested in seeing the government take strong actions against powerful unions, thereby showing that it can be counted on to favor the interests of property owners over workers in the future.

The article also comments that "to many private-sector workers…it was high time for Brazil's governing class to abandon its privileges." The article the presents at length the comments of Levy Kauffman, who is identified as "a former vice-president of the telephone company." This position would have likely placed Mr. Kauffman among the highest paid executives in Brazil. For this reason, it is possible that his sentiments may not be typical of workers in the private sector. It is also worth noting that most of the people facing cuts in pensions were government bureaucrats. People in such positions are not usually referred to as the "governing class."

Outstanding Stories of the Week

"Medicare Safety Nets Fail To Catch Many of the Poor"
Peter T. Kilbourn
New York Times, January 23, 1999, page A7

This article reports on recent research that indicates that 3-4 million poor elderly people are not benefiting from programs that were designed to ensure them access to health care. The research indicates that many of the elderly poor either do not know about these programs or find the necessary paperwork to be a serious obstacle.

"Overtaxed? Depends on the Source"
David Cay Johnston
New York Times, January 24, 1999, Section 4 page 1

This brief article examines a claim made by Republican Rep. Jennifer Dunn in the party's official response to President Clinton's State of the Union address. Dunn claimed that a typical family of four with two working parents paid nearly 40 percent of their income in taxes. This article points out that the Tax Foundation, Dunn's source for this number, had actually revised their earlier estimate of 38.2 percent downward. The article also notes estimates from three other sources that placed the tax burden close to 30 percent.

"Why Firms Prefer High Stock Price to Low Debt"
John M. Berry
Washington Post, January 27, 1999, page E1

This article examines the recent trend among major corporations to borrow money in order to buy back stock. Since stock prices are currently at record highs relative to corporate earnings, this would seem to be a foolish policy. However, as the article notes, many CEOs currently get most of their pay through stock options. If buying stock shares with borrowed money pushes up share prices, they will come out ahead with this strategy, even if it's bad for the company in the long run.

Dean Baker is a senior research fellow at the Preamble Center.

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