Central Bank Cuts European Rates
Anne Swardson
Washington Post, April 9, 1999, page E1
Europeans Cut Key Rate More Than Foreseen
Edmund L. Andrews
New York Times, April 9, 1999, page C1
These articles discuss the European Central Bank's half point cut in its key short-term interest rate. Both articles include assertions that this rate cut now places pressure on Europe's political leaders to cut taxes and deregulate their economies, since they can expect no further cuts in interest rates from the European Central Bank.
It is worth noting that the European Central Bank's monetary policy is still quite contractionary compared with the policy pursued by the Federal Reserve Board when the United States was emerging from a recession in the early nineties. In 1992, the Federal Reserve Board set its short-term interest rate at 3.0 percent, approximately the same as the inflation rate, making the real interest rate zero. (The real interest rate is the difference between the nominal interest rate and the inflation rate. It is the only interest rate that economists view as meaningful.) By comparison, even after the half point drop, the short-term rate set by the European Central Bank is 2.5 percent. Since the inflation rate in the European Union is under 1.0 percent, this still leaves the real interest rate above 1.5 percent.
Both the Times and Post articles include quotes from Thomas Mayer, a senior economist at Goldman, Sachs in Frankfurt. While Mayer argues that "growth here was not weak because of high rates," many of the world's most prominent economists disagree with him. This was one of the key points in the Economists Manifesto, which was signed by three Nobel Laureates along with two dozen other prominent economists (see "An Economists' Manifesto on Unemployment in the European Union," BNL Quarterly Review, # 206, September 1998, pp 327-361). In addition to the quotes from Mr. Mayer, both articles include quotes from Wim Duisenberg, the president of the European Central Bank. The only other people quoted or cited in these articles are the French Finance Minister in the Times article, and Allison Cottrell "of Paine Webber Inc. in London" in the Post.
It is worth noting that Denmark and Sweden, which have two of the lowest unemployment rates in Europe, also have heavily regulated economies and relatively high taxes. This suggests that deregulation and tax cuts may not be essential to reducing unemployment in Europe as argued in these articles.
Joblessness is Down. Prices Aren't Up. Go Figure.
Richard W. Stevenson
New York Times, April 11, 1999, Section 4 page 18
This informative article examines the state of economic knowledge after the Federal Reserve Board's open market committee acknowledged that it really doesn't understand the inflationary process. While the article calls attention to the failure of mainstream economic theory to accurately predict the recent drop in the inflation rate, even as the unemployment rate fell to thirty year lows, it ignores the long-time critics of this view, who had disputed the link between inflation and the unemployment rate. The most prominent of these critics was the late Robert Eisner, a former President of the American Economic Association, who produced a significant body of research questioning the link between low unemployment rates and rising inflation. Eisner actively promoted his work in columns in the Wall Street Journal and elsewhere until his death last December. It might have been appropriate for the article to include some reference to Eisner and other critics of the mainstream view on this issue, now that their arguments appear to have been correct.
The article also includes a graph showing the economy growing more than 7.0 percent annually in each of the last seven years. In none of these years did the economy's growth exceed 4.0 percent, and the average has been under 3.0 percent.
Computer Age Gains Respect of Economists
Steve Lohr
New York Times, April 14, 1999, page A1
This article assesses attitudes among economists toward the view that computers have qualitatively changed the pace of productivity growth. The article notes that productivity growth has averaged close to 2.0 percent annually over the last three years, a rate well above the 1.1 percent trend of the previous quarter century.
This comparison is very misleading for two reasons. First, it ignores the impact of recent changes in the methodology used by the Bureau of Labor Statistics to measure productivity. According to most experts, these changes have raised the measured rate of productivity growth by approximately 0.4 percentage points annually, compared with methodology that was in place earlier in the decade. (This issue is discussed in the 1999 Economic Report of the President [p 94] and the 1999 Economic and Budget Outlook, published by the Congressional Budget Office [p 30].)
The second reason the comparison is misleading is that it ignores the cyclical nature of productivity growth. One reason that it has been possible to have above trend productivity growth over the last few years is that productivity growth had been so far below trend earlier in the recovery. When the cycle is examined as a whole (the standard method among economists), and adjustments are made for the recent changes in methodology so that a consistent methodology is applied to the whole period, the annual rate of productivity growth from 1989 to 1998 has been 1.1 percent, exactly the same as the rate from 1973 to 1989.
The article also includes a misleading discussion about the continuing problems in measuring output in the service sector. The article implies that Alan Greenspan and other economists now believe that the economy may be able to sustain its high rate of recent GDP growth, because productivity growth may be higher than current measurements indicate.
In fact, if productivity growth is being undercounted, then GDP growth is being undercounted by almost exactly the same amount. Productivity is calculated by first measuring output (GDP). If the failure to accurately measure output in the service sector has caused productivity growth to be understated, then it has also caused GDP growth to be understated by approximately the same amount. This means that if productivity growth is actually 0.5 percentage points higher than current data show, then GDP growth is also approximately 0.5 percentage points higher than is presently indicated by official statistics. Therefore, any under-measurement of productivity growth is logically irrelevant to the question of whether the current reported rate of GDP growth can be sustained.
Signs of Stability Are Identified in Russia's Economy
Neela Banerjee
New York Times, April 14, 1999, page C5
Russia Refuses to Extend Deadline on Bonds
Bloomberg News
New York Times, April 15, 1999, page C4
Both of these articles discuss aspects of Russia's current economic situation. The first article discusses an independent assessment of Russia's economic prospects which suggests that the economy has stabilized in recent months and actually begun to recover lost ground. According to the article, Russia's industrial production now exceeds its level just prior to the collapse of the ruble last August.
This progress is striking because the ruble's collapse was generally portrayed as a cataclysmic event at the time (e.g. see "Russian Crisis Saps Companies' Hope" by Sharon LaFraniere, Washington Post, August 29, 1998, page A13; "Russia in Reverse" by David Hoffman, Washington Post, August 30, 1998, page A1; and "Chernomyrdin Tries to Calm Fears of Return to Soviet-Style Economic Policies" by Michael Wines, New York Times, August 30, 1998, Section 1, page 10). It is also noteworthy because the government that took power in the wake of the financial crisis was regularly derided as being economically ignorant (e.g. see "Primakov's Picks Recall Soviet Past" by David Hoffman, Washington Post, September 12, 1998, page A26 or "Economy Shift In Russia Worries U.S., Albright Says" by Steven Erlanger, New York Times, October 3, 1998, page A6). The latter article includes a public statement by Secretary of State Madeleine Albright in which she questioned whether "some members of Primakov's team understand the basic arithmetic of the global economy." Regardless of the level of their understanding of the arithmetic of the global economy, the Russian economy has performed far better under the current government than under the "reformers" who were favored by the United States and the I.M.F..
In spite of Russia's relatively successful economic performance, the article still refers to the "wrenching economic changes needed in industry and banking." The previous government had pushed through many such changes and managed to reduce the economy's size by approximately 50 percent and introduce mass poverty to Russia. The news presented in this article may suggest that "wrenching economic changes" may not be the best path to growth in Russia.
The second article repeats an assertion from the first article, that "Russia urgently needs new financial aid from the International Monetary Fund." This claim is dubious, since most likely the I.M.F. will only lend Russia enough money to meet its current interest obligations on its past loans. This means that Russia will have no more if it gets the loan than if it doesn't.
Brazil's Steep Rates Squeeze Consumers
Simon Romero
New York Times, April 13, 1999, page C8
This article reports on the impact that high interest rates are having on consumers in Brazil. The country is currently maintaining very high interest rates at the insistence of the I.M.F. At one point the article comments: "Although Brazilians have lived with at least double-digit interest rates since the beginning of an economic stabilization program begun by President Fernando Henrique Cardoso in 1994, their patience is waning."
This contrasts sharply with the view of the stabilization program presented in earlier coverage. In these articles, the general availability of consumer credit was portrayed as the greatest success of the stabilization program and the source of Cardoso's popularity (e.g. see "In Brazil, High Times Turn to Hard Times" by Anthony Faiola, Washington Post, October 18, 1998, page A 24 or "Brazil's Economic Half-Steps" by Diana Jean Schemo, New York Times, August 1, 1998, page B1).
Clinton Details Plan for New Retirement Savings Accounts
George Hager and Amy Goldstein
Washington Post, April 15, 1999, page A9
Clinton Proposes Grants as a Way to Encourage Savings
Richard W. Stevenson
New York Times, April 15, 1999, page A18
Both of these articles report on President Clinton's plan to establish a system of individual retirement savings accounts that will supplement Social Security benefits. The Post article repeatedly characterizes Social Security as facing a severe crisis. For example, it asserts that it "is destined to be on life support by early in the next century" and that the public debate is "over how to overhaul the Social Security system." While the article eventually notes that the program can pay all scheduled benefits for the next thirty five years, with no changes whatsoever, it still characterizes the prospect that some changes may eventually be needed as a "crisis," although one that "remains distant in political terms."
It is common for the government to increase its spending on various programs. For example, it increased its spending on the military by an amount equal to 1.8 percent of GDP between 1978 and 1986, approximately the same increase in spending that Social Security will consume over the next thirty years. Between 1966 and 1996 it increased its spending on Medicare by 2.4 percent of GDP. If the prospect of eventually devoting more resources to Social Security constitutes a crisis, by the same logic, the United States must have also faced a crisis in 1950, because 28 years later it would begin to spend more money on its military.
The Times article includes a very misleading statement in an accompanying chart. It states that a person who placed the maximum contribution of $1000 a year in their account would accumulate "$253,680 after 40 years, assuming 5 percent real rate of return." This sum assumes an annual inflation rate of approximately 2.5 percent, which is not mentioned anywhere. In current dollars, the accumulation would be approximately $134,000. It is also important to note that it will not be possible for people to earn 5.0 percent real returns on average if the Social Security Trustees economic projections are correct. The real rate of return that would be consistent with these projections is approximately 3.3 percent. At this rate, the accumulation would be just $87,000, assuming no administrative expenses. When these are factored in, the accumulation would be approximately $69,000.
At one point, the Times article asserts that Clinton "could not make the incentives [for his plan] so appealing that the new accounts would lead people to divert savings from existing 401(k) accounts and other plans." The article does not indicate why this outcome should be viewed as bad. Presently, workers lose an enormous amount of their savings to administrative fees on these accounts. A government plan could be run at a fraction of the cost. There is no obvious public goal served by denying workers the opportunity to obtain low cost retirement accounts, except protecting the profits of the financial industry.
Republicans Seize the Banner on Social Security
Alison Mitchell
New York Times, April 18, 1999, page A18
This article reports on the Republican budget resolution which just passed Congress. At one point the article asserts that "in the past, successive Congresses and Administrations routinely spent Social Security money and used it to mask the true size of the Federal deficit." The article does not explain how Social Security money was used to "mask" the size of the Federal deficit. While Social Security is included in the "unified budget," which is generally the focus of public debate, every year, the Federal government publishes its "on budget" deficit in official documents such as the President's Budget, the Economic Report of the President, and the Congressional Budget Office's Economic and Budget Outlook. The "on budget" budget does not include Social Security revenue or expenditures. Any reporter who considered the "on budget" budget the more meaningful measure of government fiscal policy could have chosen to report the size of the "on budget" deficit, instead of the deficit in the unified budget. Any masking of the true size of the deficit could only have occurred if reporters focused on the wrong budget.
I.R.S. Figures Show Drop In Tax Audits For Big Companies
David Cay Johnston
New York Times, April 12, 1999, page A1
This article reports on new evidence from the I.R.S. that shows a large drop in the number of audits of corporations and high income individuals.
Poor Workers Lose Medicaid Coverage Despite Eligibility
Robert Pear
New York Times, April 12, 1999, page A1
This article reports on evidence that welfare reform measures have led hundreds of thousands of families to be dropped from Medicaid, even though they are still eligible.
Count Corporate America Among NATO's Staunchest Allies
Tim Smart
Washington Post, April 13, 1999, page E1
This article details the lobbying efforts of several major defense contractors during the planned 50th anniversary celebration for NATO. The article notes how various contractors will be hosting a series of events connected with the anniversary.
Government Says H.M.O.'s Mislead Medicare Recipients
Robert Pear
New York Times, April 13, 1999, page A18
This article discusses evidence in a General Accounting Office report that H.M.O.'s routinely mislead elderly people on the services they provide.
Dean Baker is a senior research fellow at the Preamble Center.
Recent articles can be found on the websites of the New York Times and Washington Post.
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