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Economic Reporting Review

May 31, 1999

By Dean Baker

Social Security "Raiding" | Race and Poverty | Minimum Wage
Falling Euro | British Welfare | Brazil | Russia | Outstanding Stories

"GOP's 'Lock' on Social Security"
Associated Press
Washington Post, May 23, 1999, page A4

"GOP Fears Agenda Drift as 2000 Elections Near"
Helen Dewar and Juliet Eilperin
Washington Post, May 24, 1999, page A3

"House Backs Isolation of Retiree Fund"
Amy Goldstein
Washington Post, May 27, 1999, page A1

"Conservatives Hogtie House Agriculture Bill in Spending Rift"
Eric Pianin and Juliet Eilperin
Washington Post, May 27, 1999, page A10

"House Acts to Protect Social Security Surplus"
Tim Weiner
New York Times, May 27, 1999, A18

"Democrats Leave Stamp on the GOP Congress"
Alison Mitchell
New York Times, May 28, 1999, A17

All of these articles discuss the current budget situation and the relationship between the overall budget and Social Security. These articles all imply or assert that Congress has spent money that was collected for Social Security on other programs. The first article asserts outright that there have been "decades of raids on the Social Security trust fund."

In fact, there has never been a single dollar "raided" from the Social Security trust fund, nor has Congress ever improperly spent money collected for Social Security on other programs. The Social Security trust fund has been building up a large surplus over the last 15 years in order to help defray the cost of the baby boom generation's retirement. According to the law, this surplus is lent to the federal government. In exchange the Social Security fund receives interest bearing government bonds.

Unless the government defaults on these bonds when the trust fund begins to draw on them in approximately 15 years, the Social Security system will have received back every dollar paid into it. Under President Clinton's proposal to put a large portion of projected future surpluses into the trust fund, the trust fund will actually get more back than it lent to the government (even counting interest).

It is true that the government has financed part of its deficits with the money lent by the Social Security trust fund, but this is exactly what the law provides for. This deficit spending has absolutely no impact on the financing of Social Security. If the government had run surpluses every year since Social Security had been in existence, so that it never had to borrow money from Social Security (or anyone else) to meet its annual outlays, the program's finances would be in exactly the same condition as they are at present.

Unless the government is in a position where it may have to default on its debt, something that no serious analyst has suggested, how or whether the government spends the money it borrows from Social Security is irrelevant to the program. In this way, Social Security is just like Chase Manhattan, Ross Perot or anyone else who holds government bonds. Unless the government defaults on its debt, their financial situation is not affected by what the government does with the money it has borrowed.

It is extremely misleading to imply, as these articles do, that government deficits have somehow jeopardized the future health of the Social Security program. A poll recently conducted by National Public Radio, the Kaiser Family Foundation and Harvard University's Kennedy School of Government found widespread confusion in the public about the nature of the financing problem facing Social Security. Given this sort of barrage of misleading reporting produced for even the relatively informed readers of the New York Times and Washington Post, it should not be surprising that the public would be confused about Social Security's financial problems.

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"Booming Job Market Draws Young Black Men Into Fold"
Sylvia Nasar with Kirsten B. Mitchell
New York Times, May 23, 1999, section 1 page 1

This is an insightful and well-researched article that examines the extent to which poor black men have been able to improve their situation as a result of the low overall unemployment rate. The main focus of the article is a new study of these gains by Richard Freeman, one of the nation's most prominent labor economists, and William M. Rodgers 3d, am economist at William and Mary College.

While the article includes comments from many leading experts on poverty and labor markets, it also includes comments from Charles Murray, who is cited for his co-authorship of the book The Bell Curve: Intelligence and Class Structure in American Life. This book argues that African Americans are genetically inferior to whites, in that they possess less intelligence, and that this lower intelligence explains their relatively worse socioeconomic status.

The statistical work that is presented in this book was thoroughly discredited in an article co-authored by Arthur Goldberger, one of the nation's most respected statisticians (see "Review Article: The Bell Curve by Herrnstein and Murray," by Arthur S. Goldberger and Charles F. Manski, Journal of Economic Literature, 6/95). This article argues that The Bell Curve really has no statistical evidence to support its race theories.

There are many credible conservative economists and sociologists who have examined the causes of poverty. It should have been possible to cite a conservative scholar who is not noted primarily for his unsupported racial theories.

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"Time Isn't Money if You Are a Parent Badly in Need of Both"
Michael M. Weinstein
New York Times, May 27, 1999, C2

This informative article analyzes recent evidence on the problems of parents who must work long hours to meet their expenses. At one point, it dismisses a higher minimum wage as a means to address these problems: "A higher minimum wage, for example, might be a dandy anti-poverty measure, but it does little to solve the problem of the time crunch."

Actually, a higher minimum wage may substantially reduce the time pressures facing the poorest workers. A 15 percent increase in the minimum wage would mean that a worker could bring home the same amount of money while working 15 percent fewer hours. For a person working 40 hours per week, this could mean an additional 5 hours each week to spend with his or her family.

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"Euro Is Seen Falling Below the $1 Level"
Jonathan Fuerbringer
New York Times, May 27, 1999, page C1

This article discusses the prospect that euro will fall further against the dollar. At one point the article asserts that "vibrant worker productivity in the United States…helps the dollar."

It is doubtful that the current rate of productivity growth in the United States has much impact on the dollar. Currency prices tend to respond to very short-term factors, as hundreds of billions of dollars cross international borders each day. The impact of the rate of productivity growth on trade is something that would only be felt in the long term. Furthermore, most projections, such as those used by the Social Security Trustees, show much lower productivity growth in the United States than in Europe.

Recent history also suggest that currency valuations don't bear much relationship to productivity growth. In the five years following the last peak of the dollar in 1986, productivity growth averaged 0.5 percent annually in the United States. By contrast, most European nations had productivity growth of more than 2.0 percent a year.

The article also asserts that the decline of the euro "can be nothing but an embarrassment" to the nations in the euro. Actually, it could be a substantial stimulus to growth, as the price of European goods fall relative to goods produced in the United States. This would make the European trade surplus and United States trade deficit even larger. This could mean substantial job loss for U.S. workers in manufacturing industries, and significant gains for European workers. It would also increase U.S. indebtedness and the net assets of European nations. There is nothing in this scenario that should obviously be embarrassing to the European nations.

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"Blair's Countercultural Plan for Welfare: Get Work"
Sarah Lyall
New York Times, May 23, 1999, section 1 page 2

This article reports on efforts by Britain's Prime Minister Tony Blair to reform its welfare system. The article presents a misleading picture on the magnitude of Britain's welfare system by including retirees receiving government pension benefits as part of Britain's welfare population. If Social Security beneficiaries in the United States were counted as welfare recipients, it would multiply the number of beneficiaries by a factor of four.

The article also notes, correctly, that the United Kingdom's official unemployment rate of 6.2 percent is "artificially low" because many of the long-term unemployed are not counted as part of the labor force. Past articles in the Times have generally failed to note this point when they have chosen to tout the relatively low British unemployment rate as evidence of the success of its flexible labor market policies, compared with the more regulated markets on continental Europe. (See, e.g., "Britain's Leader Hits Out at European Labor Rules." by Youssef M. Ibrahim, New York Times, 2/5/97, D19; "British Premier Instills Family Unity in His Fractious Tories," by Warren Hoge, New York Times, 10/12/96, A4.)

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"Yes, Investors Panicked. But Brazil Didn't"
Larry Rohter
New York Times, May 23, 1999, section 4 page 4

This article examines the current situation in Brazil. At one point it comments on the efforts of Brazil's president, Fernando Cardoso, to cut back on Brazil's social security benefits. The article states that "investors and officials abroad" viewed a reduction in these benefits as "a test of Mr. Cardoso's resolve."

Brazil has one of the most unequal distributions of income in the world. It has a tax system that is notoriously corrupt, with the rich generally evading most of their tax liability. It is interesting to note that foreign officials never viewed cracking down on tax evasion by the rich as a test of Mr. Cardoso's resolve.

This article also asserts that neither Germany, France, Italy and "certainly not the United States" have come to grips the issue of too generous Social Security benefits. The article does not indicate how it has determined that benefits in these countries are too generous. This assessment seems particularly dubious in the case of the United States, since its Social Security program can pay all scheduled benefits for the next 35 years, with no changes whatsoever, even if the economy only grows at half its historic rate.

The article also includes the assertion that in Cardoso's first term, "more Brazilians were lifted from poverty than in the past 50 years." While there is not reliable data on current poverty rates in Brazil, this claim seems implausible on its face. According to data from the IMF, per capita GDP growth grew at an annual rate of less than 1.7 percent during Cardoso's first term. By contrast, it grew at a 4.7 percent annual rate in the years from 1960 to 1980. Nor was Cardoso's first term generally thought to be a period of significant downward redistribution of income. It therefore does not seem likely that Cardoso's first term was a period in which there could have been any significant reduction of poverty.

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"Russian Economy Gets New Leader"
Sharon LaFraniere
Washington Post, May 26, 1999, page A20

"Reformer Liked by West Will Direct Russian Economic Policy"
Celestine Bohlen
New York Times, May 26, 1999, A4

Both of these articles discuss the decision to appoint Mikhail M. Zadornov, a "reformer," as Russia's First Deputy Prime Minister in charge of economic policy. Both articles refer to Russia's current negotiations with the International Monetary Fund to get new loans. Both articles describe these loans as crucial.

It is not clear that new loans from the IMF are very important to Russia at this point. The IMF has already decided to structure the loans in such a way that no new money will actually go to Russia, it will simply be credited against the debt that Russia already has with the IMF.

The Times article argues that the loans are crucial in order to allow Russia to restructure $90 billion in Soviet-era debt. It does not appear that Russia has had very much problem restructuring this debt, even without the help of the IMF. Recently, two of its largest creditors agreed to accept a payment of just 5 cents for each dollar of Soviet-era debt. (See "Banker Split Over Russian Debt Payment," by Alan Cowell, New York Times, 3/2/99, page C4.)

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Outstanding Stories of the Week

"Living Off the Daily Dream Of Winning a Lottery Prize"
Brett Pulley
New York Times, May 22, 1999, page A1

This article presents an in-depth examination of the ticket-buying patterns of people who play the New Jersey state lottery. It includes the results of a New York Times study of ticket-buying patterns across the state. The study found that the most lottery tickets were purchased in the poorest neighborhoods. Since the state takes a large share of lottery proceeds--the payback rates are quite low--this means that the lottery is an extremely regressive form of taxation.

"Most Adults Find Jobs After Leaving Welfare"
Judith Havemann
Washington Post, May 27, 1999, page A1

This article reports on the findings of a new study by the General Accounting Office which examined the impact of welfare reform on beneficiaries. The study found very mixed results. In most cases, former recipients were able to find jobs, but in many cases they were not able to keep them and have ended up considerably worse off than when they were on welfare.

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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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