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Economic Reporting Review

May 10, 1999

By Dean Baker

"U.S. Economy Keeps Surging"
John M. Berry
Washington Post, May 1, 1999, page A1

"Economy's Growth Keeps to Fast Pace, Up 4.5% in Quarter"
Sylvia Nasar
New York Times, May 1, 1999, page A1

These articles report on the release of the data for GDP growth in the first quarter of 1999. Both articles assert that investment spending continues to be a major factor pushing forward growth.

Actually, investment spending has been declining slightly as a share of GDP since the second quarter of 1998, which means that it has been a small drag on economic growth. This fact is often overlooked, in these articles and elsewhere, because investment has been growing quite rapidly when measured in 1992 dollars (inflation adjusted dollars).

The gap between investment demand in actual dollars and investment demand in 1992 dollars is attributable to the Commerce Department's quality adjustments for computers, a major component of investment. Because the Commerce Department shows such a rapid rate of quality improvement in computers, $1,000 spent on computers in 1999 is treated as approximately the same as $1,400 spent on computers in 1998, when these expenditures are converted to 1992 dollars.

"Dow Tops 11,000 Amid Shift From Tech Stocks"
Ianthe Jeanne Dugan
Washington Post, May 4, 1999, page A1

This article reports on the Dow Jones industrial average crossing 11,000 points for the first time. At one point the article notes that the huge run-up in the stock market over the last few years has "fueled a boom in consumer spending that has kept the U.S. economy expanding."

While this statement is clearly true, it is worth noting that the vast majority of economists view this growth in spending, and the implied decline in saving, as being very bad for the economy. (The economic definition of "saving" is simply not spending. If consumers choose to spend more because their stock holdings have risen in value, then by definition, they are saving less.) Most economists argue that savings lead to more investment. From this standpoint, the huge increase in consumer spending in the last few years has had the exact same impact as a huge increase in the government deficit.

"Greenspan Credits Technology"
John M. Berry
Washington Post, May 7, 1999, page A1

"Inflation Remains a Danger, Greenspan Warns"
Richard W. Stevenson
New York Times, May 7, 1999, page C1

These articles report on a speech by Federal Reserve Board Chairman Alan Greenspan, in which he warned that the economy may not maintain its current high rate of productivity growth. Both articles, following Greenspan, discuss the productivity boom of the last three years.

Productivity is a highly cyclical variable, which is why economists typically measure it from the peak of one business cycle to the peak of the next cycle. Using this method, and correcting for changes in measurement, productivity growth has averaged 1.1 percent annually since the last business cycle peak in 1989. This is exactly the same rate of productivity growth the economy has experienced since the slowdown began in 1973. The upturn in recent years has been partially attributable to changes in measurement, and partly a rebound from the extraordinarily slow productivity growth earlier in the '90s.

"Fraud-Fighting Plan Arouses Wall Street Ire"
Gretchen Morgenson
New York Times, May 1, 1999, page B1

This article reports on opposition from brokerage firms to a proposal by the Securities and Exchange Commission which would require them to help screen out fraudulent stock issues by small companies. The article only includes comments from a variety of critics of the proposal, who claim that it will may it harder for small businesses to raise capital. The article also asserts that this proposal will hurt individual investors (as opposed to institutional investors) by reducing the volume of trading in the stock of small companies.

Neither claim is necessarily true. According to economic theory, the existence of some amount of fraudulent issues among the shares of small companies will lead to a larger risk premium, since investors recognize that they may be buying worthless shares of stock. A higher risk premium means that these firms can raise less money by selling stock. If simple regulatory steps can significantly reduce the probability of fraudulent issues being passed off to the public, then it would make it easier for small firms to raise capital by selling stock.

Also, insofar as ill-informed individual investors disproportionately end up holding fraudulent stock issues, these will be the people most helped by regulations that make such fraud more difficult.

"Bradley on a Fast Break In the Role of Anti-Gore"
Dan Balz
Washington Post, May 2, 1999, page A1

This article reports on how former Senator Bill Bradley appears to be gaining considerable support in his campaign for Democratic presidential nomination. At one point, the article discusses Gore and Bradley's relationship with the United Auto Workers. It notes that both candidates have difficulties with the union because they are "free-traders."

Actually, neither Gore nor Bradley has ever taken a consistent free trade position. For example, they have not worked to eliminate restrictions that make it difficult for foreign doctors to practice in the United States. Nor have they attempted to remove most of the other barriers that protect the income of highly paid professionals from foreign competition. They have generally only supported the removal of trade barriers when it facilitated trade in goods primarily produced by less skilled workers.

"Gore Seeks to Tap Voter Concern on `Livability' Issues"
Terry M. Neal
Washington Post, May 5, 1999, page A2

"Gore Pushes Mass Transit in the Heart of Automobile Country"
Keith Bradsher
New York Times, May 5, 1999, page A10

These articles report on Vice President Al Gore's efforts to portray himself as concerned about quality of life issues. The Post article refers to two recent initiatives to promote "sustainable growth" or "smart growth." It indicates that one initiative will provide $10 billion to improve water quality, protect green space, and clean up polluted and abandoned industrial sites. The other initiative will provide $6 billion for mass transit.

The article does not indicate the number of years over which this money will be spent, nor whether these initiatives constitute a net increase in spending or simply replace current environmental programs. Without this information, it is impossible for a reader to determine whether these initiatives will have any meaningful impact on the environment.

By contrast, the Times article notes that spending on mass transit has been virtually unchanged in real terms since President Clinton took office. This fact provides some real information about the extent of the administration's commitment in this area.

"When Ideology Goes Where Actuaries Tread"
David E. Rosenbaum
New York Times, May 2, 1999, Section 4 page 4

This informative article examines the practical problems confronting proponents of privatizing Social Security. At one point, the article wrongly asserts that the Social Security actuaries had certified that a Republican proposal for partial privatization would make the system solvent over its 75-year planning horizon.

The actuaries cannot make this certification for any plan that relies on the stock market, such as the one discussed, since they have no projections for stock returns. The actuaries can only assess the outcome under various assumptions on stock returns which are suggested to them by the authors of specific plans.

In this case, the actuaries certified that the plan achieves solvency only if the real return in the stock market averages close to 7.0 percent over the next 75 years. No economist in the country has been able to describe a scenario in which stock returns will even be close to this, given the record high level for current stock prices and the slow profit growth projected by the Social Security actuaries.

"A Wrong Turn on the Road to Social Security Reform"
Michael M. Weinstein
New York Times, May 6, 1999, page C2

This informative analysis points out that insofar as private accounts will allow individuals to obtain higher returns than Social Security through investing in the stock market, an even higher return can be obtained by directly investing the Social Security trust fund, thereby saving considerable administrative costs. The article asserts that an individual account invested in a mix of stock and bonds would produce a rate of return at least 4.0 percent above the rate of inflation. This implies that stocks will produce an annual return of at least 5.0 percent.

The current ratio of stock prices to corporate earnings is more than 30 to 1. This is more than twice the average ratio in the past. The rise in the price to earnings ratio has pushed the annual dividend yield below 2.0 percent, compared to an historic average of close to 4.0 percent. The Social Security trustees project that profits will grow at an annual rate of less than 1.5 percent annually, also less than half the historic rate of growth.

No economist has been able to demonstrate how, under these circumstances, stock returns will be as high in the future as in the past. The rate of return that is consistent with current price to earnings ratios and projected profit growth is just 3.5 percent (2.0 percent dividend yield, plus 1.5 percent capital gain).

"Chile: Ranks of Poor Increasing"
New York Times, May 5, 1999, page A8

This brief article notes a new report by the United Nations Economic Commission for Latin America, which shows that poverty has risen significantly across Latin America since 1980. This information appears in a 90 word piece in the "World Briefing" section. This report may have contained much information that would be valuable to Times readers, since it is based on statistical evidence gathered by an independent agency, and therefore may have warranted a more in-depth analysis.

By contrast, reporting on Latin American nations usually relies on impressionistic accounts from government officials, bankers and businesspeople (e.g. see "Crisis in Brazil Has Limited Impact," by Paul Blustein, Washington Post, 2/13/99, page E1; "Exchange Controls Lifted; Brazil Stocks Rise by 33%," by Diana Jean Schemo, New York Times, 1/16/99, page A1; see also ERR, 2/22/99, 1/25/99).

It is worth noting that Post didn't mention the release of this report at all.

Outstanding Stories of the Week

"Tennessee Talks of Rolling Back Health Plan for 'Uninsurables'"
Peter T. Kilborn
New York Times, May 1, 1999, page A1

This article discusses the problems that the state of Tennessee has encountered in trying to implement a universal health care plan similar to the one proposed by President Clinton in 1993. The state is finding the costs unmanageable, because insurers are dumping the sickest and most costly patients onto the state-provided plan. This was exactly the problem that led many health-care analysts to argue that the Clinton plan would prove unworkable.

"Hoping Bear Will Awaken"
Neela Banerjee
New York Times, May 1, 1999, page B1

This article discusses the continuing direct investment by multi-national corporations in Russia. According to the article, the pace of direct investment has remained constant or even increased somewhat in the period since the ruble collapsed last August. This suggests that the financial crisis has not led to the economic disaster that was widely predicted at the time.

"Sales Pitches Tied To Charities Draw States' Scrutiny"
Reed Abelson
New York Times, May 3, 1999, page A1

This article reports on efforts by state governments to restrict advertising practices in which charitable groups, such as the American Cancer Society, appear to be endorsing certain pharmaceuticals or other health care products. In most cases these charities are paid for the use of their name in ads.

According to standard economic theory, these sorts of payoffs and deceptive ads are exactly the sort of practice that would be expected in an industry where the government grants monopolies through its enforcement of patents on drugs. The monopoly provided a patent allows firms to charge prices that can be hundreds of times their actual cost of production. In such circumstances, they have enormous incentive to pursue unethical or illegal tactics to boost sales.

"New System For PC Music Stirs Concern Over Piracy"
John Markoff
New York Times, May 3, 1999, page C1

This article reports on a new product that will facilitate the transfer of music over the Internet. It also documents the efforts that the recording industry is taking to prevent this technology from spreading, including a court suit to have it banned. This again points to the increasing inefficiency of the copyright system as a means to support artistic work in the digital age.

"Retail Boom Isn't Reliant Only on Rich"
Leslie Kaufman
New York Times, May 7, 1999, page A1

This article examines recent trends in wage growth. It points out that moderate and low-income households are rapidly increasing their consumption now that they have finally begun to experience significant real wage gains.

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

Recent articles can be found on the websites of the New York Times and Washington Post.

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