"Panel Urges Pause in Spread of Legalized Gambling"
Washington Post, June 19, 1999, page A2
"Commission on Gambling Prescribes Broad Changes"
New York Times, June 19, 1999, page A9
These article discuss the release of a study, sponsored by the National Gambling Impact Study Commission, that looked into the social and economic impact of the spread of legalized gambling. Both articles note the study's claim that gambling has been an important source of economic growth.
According to standard economic theory, the impact of gambling on growth would almost certainly have been minimal. While money spent on gambling does lead to growth and jobs in the gambling industry, if this money had not been spent on gambling, then by definition it would either have been spent elsewhere or saved. If it had been spent elsewhere, then the jobs created in the gambling industry are simply coming at the expense of other jobs in the economy. If it would have been saved, then this money would have led to more investment and economic growth in exactly the same way that saving the government surplus can lead to more investment and growth.
The only way in which gambling may have actually led to increased economic growth is if the opportunity to gamble with one's wages has encouraged people to work more than they would have otherwise. While this may have been the case with some people, many of those who fall into this group are compulsive gamblers. Taking advantage of these people's addictions may not be the best way to promote economic growth.
"Rolling, Rolling, Rolling"
Washington Post, June 22, 1999, page E1
This article reports on a set of earnings forecasts that project corporate profits rising by 15 percent from their year ago levels in the second quarter of 1999, and 20 percent in the third quarter. If these projections are even close to being accurate, it implies that corporations are successfully increasing their profit margins, even though the unemployment rate is hovering near 4.3 percent.
This means that any concern that wage pressures are going to lead to accelerating inflation are completely misplaced. Real wage growth is not exceeding productivity growth; in fact, these numbers imply that it is not even keeping pace with productivity growth. Under such circumstances, there is no reason that inflation should accelerate.
"Will a One-Step Rate Increase Satisfy Fed? "
John M. Berry
Washington Post, June 24, 1999, page E1
"Help Wanted on Inflation Front"
John M. Berry
Washington Post, June 25, 1999, page E1
These articles discuss the factors that the Federal Reserve Board will be considering when it decides whether to raise interest rates next week. Both articles write as though any acceleration in wage growth will necessarily be translated in higher inflation.
There has been a large shift in shares of national income, from labor to capital, over the course of the this business cycle. The share of income going to profits has risen by more than 3.0 percentage points compared with the profit peak of the last business cycle in 1988. It doesn't seem unreasonable to believe that workers might be able to get some portion of this back, now that the unemployment rate is at a 30-year low.
The second article is written as though firms will not be able to get workers if there is not a pool of the unemployed from which to draw. In fact, the most common way that firms generally get workers is by luring them from other firms with offers of better pay and benefits. This may mean that the least productive firms, who cannot afford to pay high wages, will not be able to find workers. But this is the way a capitalist economy advances. Firms that don't keep pace with the economy's overall rate of productivity growth go out of business.
This is precisely the reason that only 2 percent of the U.S. workforce works in agriculture today, compared to more than 15 percent 50 years ago. These workers could be more productively employed outside of agriculture. If the Federal Reserve Board had attempted to slow the economy whenever inefficient farms could not get enough workers, it would have seriously impeded the nation's economic growth.
"White House Tries to Fend Off Push for Steel Quotas"
David E. Sanger
New York Times, June 22, 1999, A1
"Bill to Restrict Steel Imports Fails to Clear Hurdle in Senate"
Washington Post, June 23, 1999, page A6
"Senate Kills Efforts to Impose Tight Limits on Steel Imports"
David E. Sanger
New York Times, June 23, 1999, A1
These article report on the Clinton administration's successful effort to stop a bill that would place a quota on imported steel. The articles contrast this "protectionist" measure with the administration's support for free trade.
Actually, the Clinton administration has not had objections to other protectionist measures. Most recently it has been pursuing protectionist efforts to have U.S.-style patent law apply to South Africa. The administration does not want South African drug manufacturers to be able to produce AIDS drugs that would compete in their market with the drugs that are patented in the United States. If it succeeds, the price of AIDS drugs in South Africa may rise by a factor of 20, making them unaffordable to the bulk of the population. By contrast, it is estimated that this bill would raise the cost of steel in the United States less than 4.0 percent.
Both Times articles refer to a study by the Institute for International Economics, which found that the proposed steel quota would cost consumers $800,000 for each job it saves. This figure assumes that any savings on steel costs by firms, such as automobile or aircraft manufacturers, are passed on to consumers in the form of lower prices. This may be a reasonable assumption, if the savings were long-lasting. However, if the savings are the result of a temporary drop in steel prices due to currency fluctuations or economic downturns elsewhere, as seems plausible in this case, then any savings on steel prices will likely fatten the profit margins of other corporations instead of being passed on to consumers.
The study cited in this article shows that quotas can be an expensive form of protectionism, since it allows foreign corporations to charge more for their product. With tariffs, by contrast, the government pockets the revenue and less money flows abroad, improving the trade balance. However, precisely because quotas are expensive to consumers, they are very unlikely to lead to the trade retaliation by other nations. In many cases, a foreign manufacturer subject to a quota on its exports to the United States may actually see an increase in its profits, even if its sales fall. For this reason, foreign manufacturers would be unlikely to press their governments for retaliatory measures against the U.S. These articles include numerous references to the probability that other nations would retaliate if the U.S. implemented the proposed steel quotas.
"Lawsuits Are Prompting Calls for Changes to Clause in Nafta"
New York Times, June 19, 1999, page B2
This article reports on a lawsuit by a Canadian firm against the United States government over a decision by the state of California to ban an environmentally harmful gasoline additive. The article notes that this is one of a growing number of suits being filed under a provision of NAFTA that allows corporations to sue foreign governments over the loss of a potential export market.
It is worth noting, although it is not mentioned in the article, that this issue was a main argument against NAFTA by its opponents, and more recently against the proposed Multilateral Agreement on Investment. This argument was generally treated dismissively by supporters of both treaties. According to the article, "trade experts" say that this part of NAFTA may have to be rewritten.
"Durable-Goods Orders in May Rebounded With a 1.4% Rise"
New York Times, June 25, 1999, page C3
This article reports on a Commerce Department release showing a 1.4 percent jump in durable goods orders in May. The article presents the data as evidence that manufacturing is rebounding in the United States. This may not be accurate, since the report is giving data on orders placed with U.S. manufacturers, not orders that will necessarily be filled with production in the United States. Insofar as U.S. manufacturers either outsource to foreign suppliers, or have items produced by foreign subsidiaries, an increase in orders will not be translated into an increase in domestic production.
"Financially Strapped Russia May Press Summit for Payback"
Washington Post, June 19, 1999, page A20
"Western Powers to Help Russia Cut Debts"
William Drozdiak and Charles Babington
Washington Post, June 20, 1999, page A24
Both of these articles discuss Russia's efforts to get additional economic assistance at the G-8 summit meeting in Cologne, Germany. Both articles portray Russia as being in a desperate situation, where addition Western assistance in repaying its debts is essential to its economic survival.
The first article asserts that Russia "desperately needs to defer some of the debts or it will face distressing alternatives: a sovereign default, which could further hurts its already rock-bottom credit worthiness; pay the debt at the expense of miners, teachers, and nurses; or eat into the remaining hard currency reserves and watch the ruble tumble and hyperinflation take off." It comments further on negotiations for assistance, "Now, Russia is racing the clock."
It is not clear that Russia stands very much to lose by not reaching agreement on repaying its debt, nor that it has more at stake than do western financial interests. In recent months, Russia's economy has actually been growing at a decent pace. It has now largely regained the ground it lost in the wake of its financial crisis last August (see "Signs That Russia's Economy May Be Gradually Reviving," by Neela Banerjee, New York Times, 5/15/99, page B2). Russia has also been quite successful in getting its creditors to accept substantial write-downs of its debt. It recently persuaded its largest private creditor to accept a repayment package under which Russia would pay less than 5 cents on a dollar (see "Bankers Split Over Russian Debt Payment," by Alan Cowell, New York Times, 3/2/99, page C4).
If Russia can continue to negotiate significant debt write-downs with its creditors and maintain a respectable rate of growth without coming to terms with the IMF, it will be very damaging to the prestige and credibility of the IMF. In seven years of running its economy under IMF tutelage, Russia economy's shrank by approximately 50 percent, a collapse without precedent for a nation at peace. Emerging from this catastrophe without reaching terms with the IMF would provide an example for other developing nations, suggesting that they could ignore the IMF as well. To date, the only nations that have been declared in default by the IMF are rogue states like Libya or Iraq. If there is no agreement on rescheduling debt payments, Russia would be the first nation with a democratically elected government to be declared in default by the IMF.
"Taming Currency Crises"
Washington Post, June 20, 1999, page H1
This article discusses various proposals that have been put forward to limit volatility in currency markets. At one point, the article, quoting Israeli Central Bank governor Jacob Frenkel, presented the choices as having stable currency markets and poor economic growth, or having the "rapid growth in living standards that many developing countries can enjoy by remaining open to international lenders and investors." This is an unusual way to characterize the issue, since virtually no one in the debate has advocated closing developing nations off to foreign investment. The only issue is the degree of control over this investment.
The notion that many developing nations stand to experience rapid growth by having uncontrolled flows of capital is contradicted by recent experience. Nations such as Brazil and Mexico, which have freed up capital flows, have experienced per capita GDP growth of less than 1 percent annually since they took this route. By contrast, in the two decades prior to 1980, when significant controls on capital were in place, per capita GDP grew at annuals rate of 4.7 percent and 3.7 percent in Brazil and Mexico, respectively. This experience was typical for developing nations in this period in which capital controls were almost universal.
Later the article comments on the new wisdom among IMF officials, that developing nations should not fix the value of their currency against the dollar. It then cites Russia and Brazil as examples of nations that made this mistake and thereby wasted billions of dollars in reserves trying to support their currency. Actually, both nations attempted to support their currency at the insistence of the IMF, which argued at the time that devaluation would have a devastating impact on these nation's economies. (E.g., see "Tense Times on Front Line of Brazil's Battle on Hyperinflation: Empty Shops," by Diana Jean Schemo, New York Times, 1/20/99, page A8; "Hopes for Russian Economy Fade," by Clay Chandler, Washington Post, 8/28/98, page A16.)
The article also discusses various plans for establishing ranges that limit the extent of currency fluctuations, and includes the assertion that former Treasury Secretary Rubin and his Treasury team "consider them impractical and likely to create more problems than they solved." It is possible that this actually is the view of these officials, but it also possible that they see such proposals as inimical to the interests of the United States financial industry. A previous Times article reported on how Rubin had pushed through policies that were perceived as being in the interests of Wall Street over the objections of senior Clinton administration economists such as Laura Tyson and Joe Stiglitz. (See "How U.S. Wooed Asia To Let Cash Flow In," by Nicholas D. Kristof and David E. Sanger, New York Times, 2/16/99, page A1.)
"Despite the Fears, Inflation Still Refuses to Materialize"
New York Times, June 20, 1999, Section 3 page 4
"Greenspan on Inflation: Wait, Don't Wait. Go Figure"
Michael M. Weinstein
New York Times, June 20, 1999, Section 4 page 3
These articles note the persistent lack of inflationary pressures in the economy in spite of the relatively low rate of unemployment over the last several years. Both articles point out that this development has forced economists to rethink their views on inflation.
"Medicare Overpays HMOs, Report Says"
Washington Post, June 23, 1999, page A3
This article reports on the findings of a study from the General Accounting Office, which has not yet been released, that HMOs are being overpaid for their Medicare patients. The HMO industry has been engaged in a major lobbying campaign to have their payments increased.
"Russian Financial Eclipse Is an Opportunity for Ford"
New York Times, June 23, 1999, page C11
This article reports on plans by Ford to build a new automobile factory in Russia. The article notes that the collapse of Russia's currency last summer has increased its potential as a base for manufacturers.
"Victory for Union at Plant in South Is Labor Milestone"
New York Times, June 25, 1999, page A1
This article reports on the vote by the workers at a major Southern textile manufacturer to join the Union of Needletrades, Industrial and Textile Employees. According to the article, more than 5,200 workers would be represented by the union, making this one of the largest organizing victories for unions in the South in a considerable period of time. This election was not mentioned in the Washington Post.
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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