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Economic Reporting Review

June 7, 1999

By Dean Baker

Social Security | "Free Trade" | Savings Rate | Europe | Asia | Latin America | Outstanding Stories

Social Security

"Older Voters' Shift to G.O.P. Is Democrats' 2000 Challenge"
Robin Toner
New York Times, May 31, 1999, A1

This article discusses current political dynamics, and asserts that the Social Security program is in financial trouble. The article claims that it needs shoring up "before the baby boom generation retires."

The latest Social Security Trustees Report shows that the program can pay all its scheduled benefits for the next 35 years, with absolutely no changes whatsoever. Such a program would not ordinarily be described as financially troubled. In 2034, when the projections show that the program will no longer be able to meet all its scheduled benefit payments, the first baby boomers will have been retired for 26 years. The youngest baby boomers will already be 70.

"Ad Watch"
Howard Kurtz
Washington Post, June 3, 1999, page A5

This piece gives an assessment of an ad run by Republican presidential candidate Steve Forbes, which implies that the Social Security trust fund has been "raided." The article describes this charge as "accurate."

It is not accurate. 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. See ERR, 5/31/99.


"Free Trade"

"3 Agendas Generating Frustration"
John F. Harris
Washington Post, May 30, 1999, page A1

This article refers to the Clinton administration's "free-trade agenda." While the Clinton Administration has sought freer trade in some areas, such as manufactured goods, it has done little or nothing to promote free trade in other areas, and in some cases sought to expand protectionist measures. For example, the Clinton administration has supported measures that would restrict the number of foreign doctors allowed to practice in the United States, thereby limiting trade in medical services.

It also has worked hard to extend U.S.-style copyright and patent laws throughout the developing world. These are extremely costly forms of protectionism. Copyright protection can raise the price of items like compact disks or videocassettes, which sell for a dollar or two in a free market, as high as thirty dollars. Similar, patent protection can raise the price of pharmaceuticals, which may sell for one or two dollars per prescription in a free market, to hundreds or even thousands of dollars per prescription. It is inaccurate to describe a trade policy that tolerates or promotes this sort of protectionism as "free trade."


Savings Rate

"Consumer Spending Slowed Last Month"
George Hager
Washington Post, May 29, 1999, page E1

This article reports on a new report from the Commerce Department showing a slowdown in the growth of consumption in April. The article goes on to discuss the personal savings rate, which has been negative for the last half year. The article cites a comment from Mickey Levy, an economist at the Bank of America, that the negative savings numbers is misleadingly bleak, because it excludes capital gains on 401(k) plans and other retirement accounts.

While it is true that such gains are excluded from the savings data, losses on such accounts are also excluded. Otherwise, the data would show an enormous amount of negative saving every time the stock market tumbled. The savings rate reflects savings from current consumption. This is the measure of savings that reflects the resources from current production that are being made available for private investment. This measure is relevant for the economy in exactly the same way as the government deficit or surplus, which is a measure of public saving. If the size of the government surplus has meaning for the economy, then the measure of saving reported by the Commerce Department is also significant.



"Euro's Fall Bruising Dreams of Creators"
Anne Swardson
Washington Post, June 3, 1999, page E1

"As the Euro Falls, Some in Europe Fault German Growth and Leadership"
Edmund L. Andrews
New York Times, June 3, 1999, page C6

These articles discuss the decline in the fall of the euro against the dollar. Both articles present the decline in the value of the euro as something of a crisis for the countries in the euro. Both articles imply that the main factor causing the decline is slow European growth attributable to the extensive welfare state protections that exist in most European countries. They imply that Europe must cut back these protections to restore economic growth and maintain the value of its currency.

Virtually every assertion in these articles is at least questionable, if not demonstrably false. For example, the Times article asserts that "the euro's decline undermines its credibility." Currency traders are not interested at all in the past movement of a currency, they care only about its future movement. As a result of having a lower current value, it becomes more likely the euro will rise in the future; therefore the recent decline actually makes it a more attractive currency to hold.

The possibility that the euro will continue to decline for the indefinite future is extremely remote, due to the underlying health of the European economy. The euro nations already have a large trade surplus with the United States. If the euro were to fall much further, it would push the United States trade deficit even higher and have a devastating impact on U.S. manufacturing. The United States would also be borrowing from abroad at a rate that could not be maintained for long. It is already borrowing at a pace of more than $250 billion a year.

Faced with these circumstances, the United States would almost certainly be forced to intervene in currency markets to lower the value of the dollar. For this reason, the prospect of further decline in the value of the euro poses a much greater threat to the United States than to the euro nations.

Contrary to the assertions in these articles, many of the world's most prominent economists believe that the high interest rates set by the European central bank are an important factor impeding economic growth in Europe. (See "An Economists' Manifesto on Unemployment in the European Union," BNL Quarterly Review, # 206, 9/98.) The short-term interest controlled by the central bank is approximately 2.0 percentage points higher, when adjusted for inflation, than the rate set by the Federal Reserve Board when the United States was recovering from its recession in the early '90s. With such high real interest rates, it would be quite surprising if Europe's economy were growing more rapidly.

It is worth noting that all but one of the non-government economists who are quoted in these articles worked for banks or financial firms. The list of firms represented includes the Deutsche Bank Group in Frankfurt; the Credit Lyonnais bank in Paris; HypoVereinsbank in Munich; Goldman, Sachs in New York; and Bank Julius Baer in Germany. The other non-government economist cited was David Lascelles, the co-director of the Centre for Financial Innovation in London. Its website describes the Centre as an "independent London-based think tank, funded by the world's top banks."

"A Peacenik Goes to War"
Josef Joffe
New York Times, May 30, 1999, Magazine Section p 30

This article discusses the political career of Joschka Fischer, Germany's foreign minister and the leader of the Green Party. At one point the article refers to the Greens as "a party of functionaries, teachers and public servants.... Largely sheltered from the 'real' economy, with its permanent double-digit unemployment, many of these 50-somethings are wedded to statism and the status quo: to high government spending, anti-competitive regulations .... "

While Germany as a whole does have double-digit unemployment, this is largely due to unemployment rates near 20 percent in former East Germany. The unemployment rate in the area that was formerly west Germany is near 7.0 percent. This is only slightly above the 5.8-6.5 percent rate that most economists, until recently, had considered to be "full employment" in the United States.

In spite of its "anti-competitive regulations," Germany has averaged productivity growth of nearly 2.0 percent annually, compared to just 1.1 percent in the United States. At present, Germany has a trade surplus of nearly 1.0 percent of GDP. By contrast, the United States has a trade deficit equal to almost 2.5 percent of GDP.



"World Bank Says Poverty Is Increasing"
Paul Lewis
New York Times, June 3, 1999, page C7

This brief article reports on a new World Bank study which found a significant increase in the number of people living in poverty between 1987 and 1993. The study also noted that the number of people living in poverty in East Asia had risen sharply in the last two years as a result of the region's financial crisis and the austerity conditions demanded by the IMF. This study was completely ignored by the Washington Post and given only limited coverage in this article by the Times. Both papers have run many articles touting the end of the East Asian financial crisis (see, e.g., "Global Financial Crisis Eases, but Investor Confidence Is Still Shaky," by Paul Blustein, Washington Post, 4/26/99, page A5; or "Little Urgency on the Eve of World Bankers' Meeting," by David E. Sanger, New York Times, 4/27/99, page E1), it would be appropriate to give some attention to an authoritative study suggesting that the effects of the crisis are still being felt by much of the region's population.

"Support Shrinks for China's Trade Status"
David E. Sanger
New York Times, June 4, 1999, page A13

This article discusses the prospects that China will be admitted into the World Trade Organization this year. The article notes that many object to China's admission based in part on its human rights record. It then presents the argument of proponents of expanding trade, that increased economic contact will itself increase respect for human rights and greater freedom. As evidence to support this view, it notes increasing pressure on China to enforce "international copyright rules."

Enforcement of copyright laws in China will increase the profits of corporations that hold copyrights; it will not, by itself, enhance freedom. Copyrights, by definition, are actually a restriction on the free flow of information. The enforcement of copyright laws means that the holder of a copyright can rely on the government to limit the reproduction of a book, newspaper, video or other copyrighted material.


Latin America

"Rivals in Argentina Rally Around the Beleaguered Peso"
Clifford Krauss
New York Times, May 30, 1999, Section 1 page 9

"Brazil Devaluation Changes the Trading Bloc Picture"
Larry Rohter
New York Times, June 1, 1999, page C2

These articles discuss how Argentina, Brazil and other Latin American nations have been dealing with the effects of Brazil's recent currency devaluation. The first article reports on how the leading presidential candidates in Argentina have united behind the liberalization policies being pursued by Argentina's current president, Carlos Menem. The article describes this as a politically responsible move to reassure investors, and contrasts it with populist policies, which it implies are irresponsible.

The second article reports on the problems created in Latin America, and particularly in Argentina, by the fact that Brazil's currency devaluation has made its goods far more competitive. Brazil is now running a large trade surplus with the rest of Latin America. Argentina, in particular, has suffered considerable job losses due to Brazilian exports.

This is the predictable outcome of Argentina's decision to link its currency to the dollar, even though it trades extensively with nations with currencies that are not linked as closely to the dollar. As a result of its decision to maintain its currency's tie to the dollar, now confirmed by all major presidential candidates, Argentina's products are far less competitive throughout Latin America. This outcome may reassure investors, as asserted in the first article, but it would not ordinarily be viewed as a good development strategy. Apparently, Argentina's voters will be denied the opportunity to express their views on the merits of this policy in the next election.


Outstanding Stories of the Week

"In Hong Kong, 'Star Wars: The Piracy Menace'"
Mark Landler
New York Times, May 29, 1999, page C1

This article reports on the extensive sales of unauthorized versions of movies on videocassettes or video disks in Hong Kong. The article notes that it's generally possible to buy copies of these unauthorized versions for little more than $2 each. It comments that the effort to evade copyrights by producing these unauthorized copies "is so profitable that it seem defy even the most vigilant efforts" to control it.

This is exactly what economic theory would predict. Copyrights (like patents) create a state-sanctioned monopoly that allows producers to charge a price far above the cost of producing a video cassette or video disk. Under such circumstances, it is not surprising that a large underground economy in such goods would develop.

"Creditors' Money Talks Louder in Bankruptcy Debate"
Dan Morgan
Washington Post, June 1, 1999, page A4

This article details the efforts of the financial industry to use campaign contributions to persuade Congress to pass a much more stringent bankruptcy law. The number of bankruptcies has risen to 1.4 million annually. At this rate, more than a third of the population will have occasion to declare bankruptcy at some point in their lives.

"Russian Arrears Deepening on Debts to Foreign Group"
Neela Banerjee
New York Times, June 1, 1999, page C3

This article discusses the status of Russia's debt to Western banks. It notes that neither Russia nor its creditors seem particularly concerned about the fact that Russia is in default on a large portion of its debt. The perspective presented in this article, that default does not pose any major crisis, directly contradicts the frequently repeated claim that Russia faces grave economic peril if it cannot reach agreement with the IMF on refinancing its debt. (See, e.g., "Russian Economy Gets New Leader," by Sharon LaFraniere, Washington Post, 5/26/99, page A20; or "Reformer Liked by West Will Direct Russian Economic Policy," by Celestine Bohlen, New York Times, 5/26/99, A4; see also ERR, 5/31/99.)

"The New Welfare Rules May Be Tested in the Next Recession"
Michael M. Weinstein
New York Times, June 3, 1999, page C2

This analysis gives a reasoned assessment of the record of welfare reform to date. It notes evidence that many former welfare recipients are now working, but also points out that many have seen a worsening of their financial situation. It points out that the real test will be in the next recession, when jobs become scarce and many recipients run up against state imposed time limits.


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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